What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-17 compared with 2022-02-18 · 140 added, 140 removed, 230 unchanged (55% of the section changed)

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You should read the following discussion in conjunction with the sections of this report entitled “Forward-Looking Statements” and”Risk Factors,” along with the historical consolidated financial statements including related notes, included in this report.

Through our Structured Business, we invest in a diversified portfolio of structured finance assets in the multifamily, SFR and commercial real estate markets, primarily consisting of bridge and mezzanine loans, including junior participating interests in first mortgages and preferred and direct equity.

Through our Structured Business, we invest in a diversified portfolio of structured finance assets in the multifamily, SFR and commercial real estate markets, primarily consisting of bridge loans, in addition to mezzanine loans, junior participating interests in first mortgages and preferred and direct equity.

We also invest in real estate-related joint ventures and may directly acquire real property and invest in real estate-related notes and certain mortgage-related securities.

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We also originate and service permanent financing loans underwritten using the guidelines of our existing agency loans sold to the GSEs, which we refer to as “Private Label” loans and originate and sell finance products through CMBS programs.

We pool and securitize the Private Label loans and sell certificates in the securitizations to third-party investors, while retaining the servicing rights and certificates of the securitization.

We pool and securitize the Private Label loans and sell certificates in the securitizations to third-party investors, while retaining the servicing rights and APL certificates of the securitization.

We conduct our operations to qualify as a REIT.

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Operating results from these investments can be difficult to predict and can vary significantly period-to-period.

If interest rates were to rise, it is likely that income from these investments would be significantly and negatively impacted, particularly from our investment in a residential mortgage banking business, since rising interest rates generally decrease the demand for residential real estate loans and the number of loan originations.

When interest rates rise, the income from these investments can be significantly and negatively impacted, particularly from our investment in a residential mortgage banking business, since rising interest rates generally decrease the demand for residential real estate loans.

In addition, we periodically receive distributions from our equity investments.

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COVID-19 Impact.

The global outbreak of COVID-19 has forced many countries, including the U.S., to declare national emergencies, to institute “stay-at-home” orders, to close financial markets and to restrict operations of non-essential businesses.

Such actions have created significant disruptions in global supply chains, and adversely impacted many industries.

COVID-19 could have a continued and prolonged adverse impact on economic and market conditions, which could continue a period of global economic slowdown.

Although we have not been significantly impacted by COVID-19 to-date, the impact of COVID-19 on companies continues to evolve, and the extent and duration of the economic fallout from this pandemic, both globally and to our business, remain unclear and present risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions.

The ongoing effects of COVID-19 created significant disruptions to the U.S.

and global economies, which could continue a period of global economic slowdown.

Although vaccine availability and usage have continued to increase, which has led to less negative short-term effects, such as travel bans, quarantines, layoffs and shutdowns, the ongoing longer-term macroeconomic effects on inflation, interest rates, capital markets, labor shortages, property values and global supply chains continue to negatively impact many industries, including the U.S.

commercial real estate market.

Although we have not been significantly impacted by COVID-19 to-date, the impact of COVID-19 on companies continues to evolve, and the extent and duration of the economic fallout from this pandemic to our business, particularly rising inflation, increasing interest rates and dislocation in capital markets, remains unclear and present risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions.

Significant Developments During 2022

Capital Markets Activity.

● We raised $1.13 billion of capital through issuances of senior unsecured debt and common stock issuances through public offerings and our “At-The-Market” equity offering sales agreement.

We used $55.5 million of the net proceeds to purchase common stock and operating partnership units (“OP Units”) from our chief executive officer, ACM and certain of its members and certain other executive officers of ours;

● We raised $556.4 million of capital through the issuances of Series D, E and F preferred shares with a weighted average rate of 6.34% and we used $93.3 million of the proceeds to fully redeem our Series A, B and C preferred stock which had a weighted average rate of 8.14%.

Financing Activity.

● We closed four collateralized securitization vehicles (CLO 14, 15, 16 and 17) totaling $5.20 billion of real estate related assets and cash, of which $4.28 billion of investment grade notes were issued to third-party investors and $471.3 million of below investment-grade notes and a $447.2 million equity interest in the portfolio were retained by us;

● We closed two Private Label securitizations totaling $985.1 million and retained the most subordinate certificates totaling $85.7 million;

● Completed the unwind of CLO 9 and 11, redeeming $889.2 million of outstanding notes which were repaid from refinancing the remaining assets within our existing financing facilities (including CLO 14 and 17) and cash held by CLO 9 and 11.

Financing and Capital Markets Activity.

● Closed two collateralized securitization vehicles (CLO 18 and 19) totaling $3.10 billion, of which $2.53 billion of investment grade notes were issued to third-party investors and $387.3 million of below investment-grade notes and a $187.1 million equity interest in the portfolio were retained by us;

● Closed a $489.3 million Private Label securitization and retained the most subordinate certificates totaling $43.4 million;

● Closed our first Freddie Mac Q Series securitization totaling $315.8 million and retained certain subordinate and interest-only certificates totaling $79.0 million;

● Raised $485.8 million of capital from the issuances of common stock and an additional issuance of Series F preferred stock;

● Raised $426.9 million from the issuance of our 7.50% convertible notes and 8.50% senior unsecured notes and used a significant portion to repay existing debt;

● Increased our Structured Business warehouse capacity by $1.80 billion;

● Unwound CLO 10, redeeming $441.0 million of outstanding notes, which were repaid from refinancing the remaining assets within CLO 18 and cash held by CLO 10.

Structured Business Activity.

● Grew our structured loan and investment portfolio 19% to $14.46 billion on loan originations totaling $6.15 billion, partially offset by loan runoff totaling $3.82 billion;

● Recorded income of $34.6 million and received $28.0 million of cash distributions from our residential mortgage business joint venture.

● Loan runoff included the sale of four bridge loans at par with an aggregate UPB of $296.9 million;

● Sold a $110.5 million loan at a discount for $102.2 million, releasing $66.3 million of capital for investment and recognized a $9.2 million loss.

We have the potential to recover up to $2.8 million depending on the future performance of the loan;

● Within our equity investments, we received cash distributions totaling $37.4 million, including $23.8 million (recognized as a return of capital) from our residential mortgage venture and $11.1 million (recognized as income) from our Lexford venture.

We also recorded $4.9 million of income from our residential mortgage venture, received a $2.6 million equity participation interest and recorded a $2.4 million other-than-temporary impairment (see Note 8);

● Agreed to a $7.4 million settlement on the Extended Stay litigation (see Note 14).

Agency Business Activity.

● Loan originations and sales totaled $4.77 billion and $5.44 billion, respectively;

● Grew our fee-based servicing portfolio 9% to $26.96 billion.

We raised our quarterly common dividend to $0.37 per share, our seventh consecutive quarterly increase.

Subsequent Events.

During February 2022, we closed the following transactions:

● We closed a collateralized securitization vehicle (CLO 18) totaling $2.05 billion, of which $1.65 billion of investment grade notes were issued to third-party investors and $210.1 million of below investment-grade notes and a $187.1 million equity interest in the portfolio were retained by us;

● We closed a Private Label securitization totaling $489.3 million and retained the most subordinate certificates totaling $43.4 million;

● Raised $72.6 million from the issuance of an additional 3,100,000 shares of our Series F preferred shares.

● Grew our fee-based servicing portfolio 4%, or $1.04 billion, to $28.00 billion.

We raised our quarterly common dividend three times during 2022 to an annual run rate of $1.60 per share, representing an 8% increase over the prior year.

Current Market Conditions, Risks and Recent Trends

As discussed throughout this report, the COVID-19 pandemic continues to impact the global economy in unprecedented ways, swiftly halting activity across many industries, and continuing to cause significant disruption and liquidity constraints in many market segments, including the financial services, real estate and credit markets.

The impact of COVID-19 on companies continues to evolve, the full extent of which will depend on future developments, including, among other factors, the emergence of new variants in the US and abroad, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions and the effectiveness of vaccination programs.

COVID-19 could have a continued and prolonged adverse impact on economic and market conditions, which could continue a period of global economic slowdown.

Although we have not been significantly impacted by COVID-19 to-date, adverse economic conditions have resulted, and may continue to result, in declining real estate values of certain asset classes, increased payment delinquencies and defaults and increased loan modifications and foreclosures, all of which could have a significant impact on our future results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.

Since the beginning of 2020, the pandemic has caused a dislocation in the capital markets resulting in a reduction of available liquidity, with varying degrees of improvement in 2021.

Many commercial mortgage REITs have suffered, and continue to suffer, from the reduction in available liquidity since access to capital is critical to grow their business.

Despite this reduction in liquidity, we continue to raise capital through various vehicles to grow our business.

Our Agency Business requires limited capital to grow, as originations are financed through warehouse facilities for generally up to 60 days before the loans are sold, therefore this lack of liquidity has not and should not, impact our ability to grow this business.

However, our Structured Business is more reliant on the capital markets to grow, and therefore, a lack of liquidity for a prolonged period of time could limit our ability to grow this business.

In our Structured Business, 91% of our portfolio is in multifamily assets with most of these loans containing interest reserves and/or replenishment obligations by our borrowers.

The federal government, Fannie Mae and Freddie Mac have made certain forbearance and non-eviction programs available to borrowers and tenants should they need to counteract any short-term pressure on their properties from COVID-19 and its impact on the economy.

For borrowers, in order to qualify for a forbearance, they need to demonstrate they have been adversely affected by the pandemic and their ability to make their loan payments has been impacted.

All loan and rent payments that are suspended remain the obligations of the borrowers and tenants.

Our Agency Business had approved forbearances related to 0.2% of our Fannie Mae DUS portfolio and 2.6% of our Freddie Mac portfolio as of December 31, 2021.

We are closely monitoring and managing the requests for forbearances and it is likely there will be additional economic stress during 2022.

In December 2021, the federal reserve announced they will likely raise interest rates in 2022 to combat inflation.

However, interest rates currently remain at historically low levels.

While lower interest rates generally have a positive impact on origination volume as borrowers look to refinance loans to take advantage of lower rates, our net interest income may be negatively impacted as higher yielding loans are paid off and replaced with lower yielding loans.

However, we are somewhat insulated from decreasing interest rates, since a large portion of our structured loan portfolio has LIBOR floors, which could increase our net interest income in the future if rates remain at these historically low levels.

Conversely, if interest rates were to rise, it could negatively impact our net interest income.

An increase in rates would cause an increase in interest expense as most of our debt is variable.

However, since a large portion of our structured loan portfolio has LIBOR floors that are in the money, any increase in interest income due to rising

interest rates is not likely to be as substantial as the corresponding increase in interest expense.

As discussed throughout this report, the ongoing COVID-19 pandemic continues to impact the global economy in unprecedented ways, causing significant disruptions and liquidity constraints in many market segments, including the financial services, real estate and credit markets.

commercial real estate market.

Although we have not been significantly impacted by COVID-19 to-date, adverse economic conditions have resulted, and may continue to result, in rising interest rates, dislocation in capital markets, declining real estate values of certain asset classes, increased payment delinquencies and defaults and increased loan modifications and foreclosures, all of which could have a significant impact on our future results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.

The Federal Reserve has raised interest rates throughout 2022 to combat inflation and restore price stability and it is expected that rates will continue to rise throughout the first half of 2023, potentially even longer.

Currently, rising interest rates will positively impact our net interest income since our structured loan portfolio exceeds our corresponding debt balances and the vast majority of our loan portfolio is floating-rate based on SOFR or LIBOR.

In addition, a greater portion of our debt is fixed-rate (convertible and senior unsecured notes), as compared to our structured loan portfolio, and will not reset as interest rates rise.

Therefore, increases in interest income due to rising interest rates is likely to be greater than the corresponding increase in interest expense on our variable rate debt.

Additionally, we earn interest on our escrow balances, so an increasing interest rate environment will increase our earnings on such balances.

See “Quantitative and Qualitative Disclosures about Market Risk” below for additional details.

Conversely, such rising interest rates could negatively impact real estate values and limit a borrower’s ability to make debt service payments, which may limit new mortgage loan originations and increase the likelihood of incurring losses from defaulted loans if the reduction in the collateral value is insufficient to repay their loans in full.

We have been very successful in raising capital through various vehicles to grow our businesses.

The anticipated continual rise in interest rates and unpredictable geopolitical landscape may cause a further dislocation in the capital markets resulting in a continual reduction of available liquidity.

Tightening liquidity conditions in equity and capital markets affect the availability and cost of capital and the increased cost of credit, or degradation in debt financing terms, may impact our ability to identify and execute investments on attractive terms.

Periods of volatility and dislocation in the capital markets, as observed recently, could limit our ability to grow our Structured Business since this business is more reliant on the capital markets to grow, but can also present us with unique avenues to participate in other lower cost financing options and build on existing, and create new, relationships with lenders.

Since our Agency Business requires limited capital to grow, as originations are financed through warehouse facilities for generally up to 60 days before the loans are sold, tightening liquidity conditions in equity and capital markets should not have a substantial impact on our ability to grow this business.

We are a national originator with Fannie Mae and Freddie Mac, and the GSEs remain the most significant providers of capital to the multifamily market.

In October 2021, the FHFA announced that its 2022 loan origination caps for Fannie Mae and Freddie Mac will be $78 billion for each enterprise for a total opportunity of $156 billion (the “2022 Caps”), which has increased from its 2021 loan origination caps of $70 billion for each enterprise.

In November 2022, the FHFA announced that its 2023 Caps for Fannie Mae and Freddie Mac will be $75 billion for each enterprise for a total opportunity of $150 billion, which has decreased from its 2022 loan origination caps of $78 billion for each enterprise.

The FHFA has stated that they will continue to monitor the market and reserves the right to increase the 2023 Caps if warranted, however, they will not reduce the 2023 Caps if the market is smaller than initially projected.

The 2023 Caps will continue to apply to all multifamily business, have no exclusions, and mandate that 50% be directed towards mission driven, affordable housing.

The FHFA will also require at least 25% be affordable to residents at or below 60% of area median income for 2022, up from 20% in 2021.

The FHFA has removed the requirement that at least 25% be affordable to residents at or below 60% of AMI to reduce inconsistencies with their Housing Goals regulation.

Further, the FHFA has changed certain definitions of mission driven affordable housing and also allows loans to finance energy or water efficiency improvements with units affordable at or below 80% of AMI to be classified as mission-driven, up from 60% AMI in 2022.

This increase will allow the GSEs to expand their effort on energy and water conservation measures at workforce housing properties.

Our originations with the GSEs are highly profitable executions as they provide significant gains from the sale of our loans, non-cash gains related to MSRs and servicing revenues.

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Weighted average interest rate

(1) During 2021 and 2020, we committed to fund SFR loans totaling $729.5 million and $261.5 million, respectively.

Loans paid-off / paid-down

(1) We committed to fund SFR loans totaling $1.08 billion and $729.5 million during 2022 and 2021, respectively.

Number of loans

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Number of loans

Loans held-for-sale from the Agency Business increased $106.7 million, primarily from an increase in Private Label loan originations.

Our GSE loans are generally sold within 60 days, while our Private Label loans are generally expected to be sold and

securitized within 180 days from the loan origination date.

Loans held-for-sale from the Agency Business decreased $739.5 million, primarily from loan sales exceeding originations by $670.4 million as noted in the following table, and the payoff of a $55.0 million Private Label loan.

Loan sales included $489.3 million of Private Label loans which were sold in a Private Label loan securitization in the first quarter of 2022.

Our GSE loans are generally sold within 60 days, while our Private Label loans are generally expected to be sold and securitized within 180 days from the loan origination date.

Activity from our Agency Business portfolio is comprised of the following (in thousands):

Loan Originations

Private Label

SFR - Fixed Rate

Capitalized mortgage servicing rights increased $42.8 million, primarily due to MSRs recorded on new loan originations, partially offset by amortization and write-offs.

Capitalized mortgage servicing rights represent the estimated value of our rights to service mortgage loans for others.

At December 31, 2021, the weighted average estimated life remaining of our MSRs was 8.5 years.

Securities held-to-maturity increased $45.0 million, primarily due to the purchase, at a discount, of APL certificates in connection with our Private Label securitizations.

Investments in equity affiliates increased $15.4 million, primarily due to income from our investment in a residential mortgage banking business of $34.6 million and contributions totaling $14.0 million made to AMAC III and a new investment in a private equity fund, partially offset by $31.8 million of distributions received from our residential mortgage banking investment and AMAC III.

See Note 8 for details.

Due from related party increased $71.9 million, due to an increase in funds from payoffs to be remitted by our affiliated servicing operations related to real estate transactions at the end of the reporting period.

These amounts were remitted to us in January 2022.

Other assets increased $86.4 million, primarily due to increases in unsecured loan fundings, current tax assets, interest receivables from portfolio growth and the fair value of our interest rate and credit default swaps (“Swaps”).

Securities held-to-maturity increased $16.1 million, primarily due to the purchase, at a discount, of $27.6 million of APL certificates in connection with a Private Label securitization, partially offset by principal payments received from underlying loan payoffs from our B Piece bonds.

Investments in equity affiliates decreased $10.5 million, primarily due to $23.8 million in cash distributions received from our investment in a residential mortgage banking business and a $2.4 million other-than-temporary impairment in our North Vermont Avenue venture, partially offset by net fundings totaling $13.1 million on our Fifth Wall (“Fifth Wall”) and AMAC Holdings III LLC (“AMAC III”) ventures and $4.9 million of income from the residential mortgage business.

Other assets increased $101.5 million, primarily due to increases in interest receivables from portfolio growth and increases in the benchmark index rates, along with the $30.1 million acquisition of a multifamily property for full satisfaction of the underlying debt.

Liabilities – Comparison of balances at December 31, 2022 to December 31, 2021:

Credit and repurchase facilities increased $2.25 billion, primarily due to funding of new structured loan activity.

Collateralized loan obligations increased $3.38 billion, primarily due to the issuances of four new CLOs, where we issued $4.28 billion of notes to third-party investors, partially offset by the unwind of two CLOs totaling $889.2 million.

Senior unsecured notes increased $617.7 million, primarily due to our issuances of $355.0 million of 5.00% notes and $270.0 million of 4.50% notes.

Due to related party was $26.6 million and $2.4 million at December 31, 2021 and 2020, respectively, and consisted of loan payoffs, holdbacks and escrows to be remitted to our affiliated servicing operations related to real estate transactions.

Other liabilities increased $90.2 million, primarily due to increases in accrued compensation, deferred tax liabilities, good faith deposits on new loan originations and the fair value of our rate lock and forward sale commitments.

During 2021, we completed public offerings of our Series D, E and F preferred stock totaling 23,000,000 shares with a weighted average rate of 6.34%.

These offerings generated net proceeds of $556.4 million and we used $93.3 million of the proceeds to fully redeem our Series A, B and C preferred stock which had a weighted average rate of 8.14%.

During 2021, we sold 29,140,369 shares of our common stock through public offerings and our “At-The-Market” agreement, raising net proceeds totaling $514.6 million.

We used $55.5 million of the net proceeds to purchase a total of 3,170,900 of common

stock and OP Units from our chief executive officer, ACM and its members and certain other executive officers of ours.

We also issued 386,459 shares of common stock and cash to fully redeem our remaining 5.25% convertible senior notes (the “5.25% Convertible Notes”).

See Note 16 for the details of our dividends declared and our deferred compensation transactions during 2021.

Credit and repurchase facilities decreased $639.8 million, primarily due to loan sales exceeding originations in our Agency Business as described above.

Securitized debt increased $1.96 billion, primarily due to the issuance of two new CLOs and completion of our first Freddie Mac Q Series securitization, where we issued $2.76 billion of notes and certificates to third-party investors, partially offset by the unwind of a CLO totaling $441.0 million and paydowns on existing CLOs totaling $360.1 million.

Senior unsecured notes increased $105.4 million, primarily due to our issuance of $150.0 million of 8.50% notes, partially offset by the repurchase of $46.2 million of our 5.625% notes.

Convertible senior unsecured notes, net increased $21.0 million, primarily due to the issuance of $287.5 million of 7.50% convertible notes, substantially offset by the redemption of our 4.75% convertible notes totaling $264.0 million.

Due to borrowers decreased $35.4 million, primarily due to the funding of previously committed loan originations, partially offset by unfunded commitments on new originations in our Structured Business.

Other liabilities increased $47.9 million, primarily due to a $34.9 million increase in interest payable from greater debt balances on portfolio growth and higher benchmark interest rates and $20.9 million of financing placed on the multifamily property acquisition described above, partially offset by a decrease in accrued commissions from lower origination volume in 2022 compared to 2021.

During 2022, we sold 26,335,788 shares of our common stock through our “At-The-Market” equity agreement and a public offering, raising net proceeds totaling $408.7 million.

During 2022, we completed a public offering of an additional 3,292,000 shares of our Series F preferred stock, generating net proceeds of $77.1 million.

See Note 16 for details of our dividends declared and our deferred compensation transactions during 2022.

Agency Servicing Portfolio

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Interest Rate Type

as a Percentage

of Portfolio (1)

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Private Label

SFR - Fixed Rate

(1) Prepayments reflect loans repaid prior to six months from loan maturity.

The majority of our loan servicing portfolio has a prepayment protection term and therefore, we may collect a prepayment fee which is included as a component of servicing revenue, net.

See Note 5 for details.

(2) Delinquent loans reflect loans that are contractually 60 days or more past due.

As of December 31, 2021 and 2020, delinquent loans totaled $77.6 million and $91.3 million, respectively, of which $9.8 million and $19.6 million, respectively, were in the foreclosure process.

No loans were in bankruptcy as of December 31, 2021 and 2020.

Our servicing portfolio represents commercial real estate loans originated in our Agency Business, which are generally transferred or sold within 60 days from the date the loan is funded.

Primarily all of the loans in our servicing portfolio are collateralized by multifamily properties.

At December 31, 2022 and 2021, delinquent loans totaled $38.7 million and $77.6 million, respectively, of which zero and $9.8 million, respectively, were in the foreclosure process.

No loans were in bankruptcy at December 31, 2022 and 2021.

Our Agency Business servicing portfolio represents commercial real estate loans, which are generally transferred or sold within 60 days from the date the loan is funded.

Primarily all loans in our servicing portfolio are collateralized by multifamily properties.

In addition, we are generally required to share in the risk of any losses associated with loans sold under the Fannie Mae DUS program, see Note 11.

Comparison of Results of Operations for Years Ended 2021 and 2020

Comparison of Results of Operations for Years Ended December 31, 2022 and 2021

The following table provides our consolidated operating results ($ in thousands):

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Property operating income

Loss on derivative instruments, net

Gain (loss) on derivative instruments, net

Other income, net

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Provision for credit losses (net of recoveries)

Litigation settlement

Total other expenses

Income before extinguishment of debt, gain (loss) on real estate, income from equity affiliates and income taxes

Income before extinguishment of debt, sale of real estate, income from equity affiliates and income taxes

Loss on extinguishment of debt

Gain (loss) on real estate

Gain on sale of real estate

Income from equity affiliates

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Structured Business interest-bearing liabilities:

Warehouse lines

Credit and repurchase facilities

Unsecured debt

Trust preferred

Q Series securitization

Total interest-bearing liabilities

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Net Interest Income

The increase in interest income was mainly due to a $121.1 million increase from our Structured Business, primarily due to an increase in our average core interest-earning assets from loan originations exceeding loan runoff, partially offset by a decrease in the average yield on core interest-earning assets.

The decrease in the average yield was primarily due to lower rates on originations, as compared to loan runoff.

The increase in interest expense was mainly due to a $43.5 million increase from our Structured Business, primarily due to an increase in the average balance of our interest-bearing liabilities, due to growth in our loan portfolio and the issuance of additional unsecured debt.

This was partially offset by a decrease in the average cost of our interest-bearing liabilities, mainly from decreases in LIBOR and the issuances of CLOs at lower rates.

The increase in interest income was mainly due to a $476.6 million increase from our Structured Business, primarily due to a significant increase in our average core interest-earning assets from loan originations exceeding loan runoff, along with increases in the average yield on core interest-earning assets.

The increase in the average yield was primarily due to increases in benchmark index rates, partially offset by lower rates on originations, as compared to loan runoff.

The increase in interest expense was mainly due to a $344.2 million increase from our Structured Business, primarily due to an increase in the average balance of our interest-bearing liabilities, due to the significant growth in our loan portfolio and the issuance of additional unsecured debt, along with an increase in the average cost of our interest-bearing liabilities, mainly from increases in benchmark index rates.

Agency Business Revenue

The increase in gain on sales, including fee-based services, net was primarily due to a 33% increase in the sales margin from 1.44% to 1.92%, as a result of the increased mix of Private Label , SFR and FHA loan sales, which carry higher sales margins.

The decrease in income from MSRs was primarily due to a 16% decrease in the MSR rate from 2.43% to 2.05% and a 7% decrease in loan commitment volume.

The decrease in the MSR rate was primarily due to lower Fannie Mae loan commitments, which carry a higher servicing fee.

The increase in servicing revenue, net was primarily due to the growth in our servicing portfolio, as well as an increase in prepayment penalties.

Other Revenue

The losses on derivative instruments in both 2021 and 2020 were primarily from our Agency Business and were predominantly from losses recognized on our Swaps held in connection with our Private Label loans.

The decrease in gain on sales, including fee-based services, net was primarily due to a 30% decrease in the sales margin from 1.92% to 1.34%, along with a 15% decrease ($976.5 million) in loan sales volume.

The decrease in the sales margin was primarily due to lower margins received on our Private Label and SFR loan sales.

The decrease in income from MSRs was primarily due to a 34% decrease in the MSR rate from 2.05% to 1.35% and a 19% decrease ($1.20 billion) in loan commitment volume.

The decrease in the MSR rate was primarily due to lower average servicing fees on Fannie Mae loan commitments, due to a reduction in servicing rates on newer loans and a larger average loan size which carries lower servicing fees.

The increase in servicing revenue, net was primarily due to an increase in earnings on escrow balances as a result of increases in benchmark index rates as well as higher escrow balances during 2022.

The gains and losses on derivative instruments in 2022 and 2021, respectively, were related to changes in the fair values of our Swaps and forward sale commitments held by our Agency Business.

The decrease in other income, net during 2022 was primarily due to $15.7 million of unrealized impairment losses recorded on certain loans held-for sale in our Agency Business and $11.2 million of losses recognized in 2022 related to sales of bridge loans in our Structured Business.

Other Expenses

The increase in employee compensation and benefits expense was primarily due to increases in headcount and incentive compensation as a result of the portfolio growth in both business segments, as well as commissions in our Agency Business in connection with increased Private Label securitization activity and higher sales margins.

The increase in selling and administrative expenses was primarily due to higher professional fees (legal and consulting) and rent expense in both business segments.

Administrative expenses were also lower in 2020 as a result of the COVID-19 pandemic due to travel restrictions and fewer events.

We also recorded a $2.5 million litigation settlement related to a hotel property that we sold in 2020.

The decreases in both provision for loss sharing and provision for credit losses were primarily due to the reversal of CECL reserves in both business segments in connection with improved market conditions and expected future forecasts.

The decrease in employee compensation and benefits expense was primarily due to a decrease in commissions from lower GSE/Agency loan sales volume, partially offset by an increase in headcount as a result of the portfolio growth in both business segments.

The increase in selling and administrative expenses was primarily due to higher professional fees (legal and consulting) in connection with the growth in both business segments, as well as increases in travel and events as travel continues to gain momentum from COVID-19.

We recorded CECL provisions totaling $23.0 million during 2022 and a provision recovery of $27.3 million during 2021.

The CECL provision in 2022 primarily reflects increases in our loans and investments balance, as a result of portfolio growth, along with rising interest rates and inflation in our CECL models for our Structured Business, which predominantly consists of variable rate loans.

The provision recovery during 2021 was primarily due to the reversal of CECL reserves in both business segments in connection with improved market conditions and expected future forecasts.

We recorded an accrual of $7.4 million in 2022 pertaining to the settlement of the Extended Stay litigation as described in Note 14.

Loss on Extinguishment of Debt

The loss on extinguishment of debt in both years was deferred financing fees recognized in connection with the unwind of CLOs, along with a loss recognized in connection with the unwind of the Luxembourg commercial real estate debt fund in 2020.

Gain (Loss) on Real Estate

The loss on extinguishment of debt in 2022 and 2021 represents deferred financing fees recognized in connection with the unwind of CLOs, along with the 2022 repurchase of our 4.75% convertible notes.

Gain on Sale of Real Estate

The gain recorded in 2021 was from our acquisition of an office property (for full satisfaction of the underlying debt) with an appraisal value in excess of the outstanding loan and the sale of a repurchased Fannie Mae loan.

The loss recorded in 2020 was from the sale of a hotel property, substantially offset by a gain on the sale of a repurchased Fannie Mae loan.

Income from Equity Affiliates

Income from equity affiliates in 2021 and 2020 primarily reflects income from our investment in a residential mortgage banking business of $34.6 million and $75.7 million, respectively.

The income from this investment was driven by the historically low interest rates and strength in the residential housing market during COVID-19.

Income from equity affiliates in 2022 primarily reflects $11.1 million in distributions received from our Lexford venture, $4.9 million of income from our investment in a residential mortgage banking business, and $2.6 million from an equity participation interest on a property that was sold.

The income in 2022 was partially offset by a $2.4 million other-than-temporary impairment in our North Vermont Avenue investment.

Income from equity affiliates in 2021 primarily reflects $34.6 million of income from our residential mortgage business.

The higher income in 2021 from the residential mortgage business was driven by the historically low interest rates and strength in the residential housing market during 2021.

Provision for Income Taxes

In 2022, we recorded a tax provision of $17.5 million, which consisted of a current tax provision of $19.2 million and a deferred tax benefit of $1.7 million.

In 2021, we recorded a tax provision of $46.3 million, which consisted of current and deferred tax provisions of $35.4 million and $10.9 million, respectively.

In 2020, we recorded a tax provision of $40.4 million, which consisted of a current and deferred tax provisions of $35.7 million and $4.7 million, respectively.

The increase in the tax provision was primarily due to an increase in pre-tax income from our Agency Business, partially offset by lower income generated from our investment in a residential banking business in 2021, compared to 2020.

The decrease in the tax provision was primarily due to lower income generated from our investment in a residential banking business and a decrease in the pre-tax income from our Agency Business.

Preferred Stock Dividends

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Net Income Attributable to Noncontrolling Interest

The noncontrolling interest relates to the outstanding OP Units issued as part of the 2016 acquisition of ACM’s agency platform (the “Acquisition”).

There were 16,325,095 OP Units and 17,560,633 OP Units outstanding as of December 31, 2021 and 2020, respectively, which represented 9.7% and 12.5% of our outstanding stock at December 31, 2021 and 2020, respectively.

Comparison of Results of Operations for Years Ended 2020 and 2019

For a discussion of our results of operations for the year ended 2020 compared to 2019, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on February 19, 2021, and is available on the SEC’s website at www.sec.gov and the “Investor Relations” section of our website at www.arbor.com.

The noncontrolling interest relates to the outstanding operating partnership units (“OP Units”) issued as part of the 2016 acquisition of ACM’s agency platform (the “Acquisition”).

There were 16,293,589 OP Units and 16,325,095 OP Units outstanding at December 31, 2022 and 2021, respectively, which represented 8.4% and 9.7% of our outstanding stock at December 31, 2022 and 2021, respectively.

Comparison of Results of Operations for Years Ended December 31, 2021 and 2020

For a discussion of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, please refer to Item 7 of Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with the SEC on February 18, 2022, and is available on the SEC’s website at www.sec.gov and the “Investor Relations” section of our website at www.arbor.com.

Liquidity and Capital Resources

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We closely monitor our liquidity position and believe our existing sources of funds and access to additional liquidity will be adequate to meet our liquidity needs.

We are monitoring the COVID-19 pandemic and its impact on our financing sources, borrowers and their tenants, and the economy as a whole.

The magnitude and duration of the pandemic, and its impact on our operations and liquidity, are uncertain and continue to evolve.

The ongoing COVID-19 pandemic has contributed to adverse economic and market conditions, causing significant disruptions and liquidity constraints in many market segments, including the financial services, real estate and credit markets, while adding to ongoing longer-term macroeconomic effects on inflation, interest rates and capital markets.

We are monitoring the COVID-19 pandemic and its impact on our financing sources, borrowers and their tenants, as well as the economy as a whole, including the tightening liquidity conditions in equity and capital markets.

To the extent that our financing sources, borrowers and their tenants continue to be impacted by the pandemic, or by the other risks disclosed in our filings with the SEC, it would have a material adverse effect on our liquidity and capital resources.

As described in Note 10, certain of our repurchase facilities include margin call provisions associated with changes in interest spreads which are designed to limit the lenders credit exposure.

If we experience significant decreases in the value of the properties serving as collateral under these repurchase agreements, which is set by the lenders based on current market conditions, the lenders have the right to require us to repay all, or a portion, of the funds advanced, or provide additional collateral.

We had $13.28 billion in total structured debt outstanding at December 31, 2022.

Of this total, $7.64 billion, or 68%, does not contain mark-to-market provisions and is comprised of non-recourse CLO vehicles, senior unsecured debt and junior subordinated notes, the majority of which have maturity dates in 2023, or later.

Of this total, $9.73 billion, or 73%, does not contain mark-to-market provisions and is comprised of non-recourse securitized debt, senior unsecured debt and junior subordinated notes, the majority of which have maturity dates in 2024, or later.

The remaining $3.55 billion of debt is in credit and repurchase facilities with several different banks that we have long-standing relationships with.

While we expect to extend or renew all of our facilities as they mature, we cannot provide assurance that they will be extended or renewed on as favorable terms.

In addition to our ability to extend our credit and repurchase facilities and raise funds from equity and debt offerings, we have approximately $900 million in cash and available liquidity as well as other liquidity sources, including our $26.96 billion agency servicing portfolio, which is mostly prepayment protected and generates approximately $121 million per year in recurring cash flow.

At December 31, 2021, we had $61.4 million of securities financed with $30.8 million of debt that was subject to margin calls related to changes in interest spreads.

As of February 8, 2023, we had approximately $685.0 million in cash and $420.0 million of replenishable cash available under our CLO vehicles, as well as other liquidity sources.

In addition to our ability to extend our credit and repurchase facilities and raise funds from equity and debt offerings, we also have a $28.00 billion agency servicing portfolio at December 31, 2022, which is mostly prepayment protected and generates approximately $115.0 million per year in recurring cash flow.

At December 31, 2022, we had $2.49 billion of debt that was subject to margin calls related to changes in interest spreads.

To maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT-taxable income.

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However, we believe that our capital resources and access to financing will provide us with financial flexibility and market responsiveness at levels sufficient to meet current and anticipated capital and liquidity requirements.

Cash flows provided by operating activities were $216.8 million during 2021 as net income of $377.8 million was partially offset by cash outflows due to loan originations exceeding loan sales in our Agency Business, increases in unsecured loan fundings and decreases in the fair value of our Swaps, as well as certain other non-cash net income adjustments (increases in interest receivables from portfolio growth in our Structured Business).

Cash flows provided by operating activities totaled $1.10 billion during 2022 and consisted primarily of net cash inflows of $650.4 million as a result of loan sales exceeding loan originations in our Agency Business and net income of $353.8 million, as well as certain other non-cash net income adjustments.

Cash flows used in investing activities totaled $2.32 billion during 2022.

Loan and investment activity (originations and payoffs/paydowns) comprise the majority of our investing activities.

Loan originations from our Structured Business totaling $9.21 billion, net of payoffs and paydowns of $2.37 billion, resulted in net cash outflows of $6.84 billion.

Cash flows provided by financing activities totaled $6.89 billion during 2021 and consisted primarily of net proceeds of $3.39 billion from CLO activity, net cash inflows of $2.25 billion from debt facility activities (financed loan originations were greater than facility paydowns) and $1.70 billion of proceeds from the issuance of common and preferred stock and senior unsecured notes, partially offset by $227.1 million of distributions to our stockholders and OP Unit holders and $92.8 million for the redemption of preferred stock.

Loan originations from our Structured Business totaling $5.96 billion, net of payoffs and paydowns of $3.42 billion and proceeds from the sale of $397.3 million of structured loans, resulted in net cash outflows of $2.13 billion.

Cash flows provided by financing activities totaled $1.57 billion during 2022 and consisted primarily of net proceeds of $1.96 billion from securitized debt activity, $486.3 million of proceeds from the issuance of common and preferred stock and $124.6 million from senior unsecured notes activity, partially offset by net cash outflows of $617.0 million from debt facility activities (facility paydowns were greater than financed loan originations) and $321.7 million of distributions to our stockholders and OP Unit holders.

Agency Business Requirements.

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Among other things, these agencies require us to meet certain minimum net worth, operational liquidity and restricted liquidity collateral requirements, purchase and loss obligations and compliance with reporting requirements.

Our adjusted net worth and operational liquidity exceeded the agencies’ requirements as of December 31, 2021.

Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $50.0 million and $18.7 million of cash collateral.

Our adjusted net worth and operational liquidity exceeded the agencies’ requirements at December 31, 2022.

Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $69.0 million.

See Note 14 for details about our performance regarding these requirements.

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Credit and repurchase facilities

Collateralized loan obligations (3)

Securitized debt (3)

Senior unsecured notes

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(2) See Note 14 for a breakdown of debt maturities by year.

(3) Maturity dates represent the weighted average remaining maturity based on the underlying collateral as of December 31, 2021.

(4) The $750 million Multifamily As Soon as Pooled ® Plus (“ASAP”) agreement we have with Fannie Mae has no expiration date.

(3) Maturity dates represent the weighted average remaining maturity based on the underlying collateral at December 31, 2022.

(4) The $750 million As Soon as Pooled ® Plus (“ASAP”) agreement we have with Fannie Mae has no expiration date.

We utilize our credit and repurchase facilities primarily to finance our loan originations on a short-term basis prior to loan securitizations, including through CLOs.

The timing, size and frequency of our securitizations impact the balances of these borrowings

and produce some fluctuations.

The timing, size and frequency of our securitizations impact the balances of these borrowings and produce some fluctuations.

The following table provides additional information regarding the balances of our borrowings (in thousands):

Quarterly Average

End of Period

Maximum UPB at

Quarter Ended

Any Month-End

December 31, 2022

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At December 31, 2022, we had no off-balance-sheet arrangements.

In December 2021, the federal reserve announced they will likely raise interest rates in 2022 to combat inflation.

If interest rates were to rise, it could negatively impact our net interest income.

An increase in rates would cause an increase in interest expense as most of our debt is variable.

However, since a large portion of our structured loan portfolio has LIBOR floors that are above index rates, any increase in interest income due to rising interest rates is not likely to be as substantial as the corresponding increase in interest expense.

In addition, a greater portion of our debt is fixed-rate (convertible and senior unsecured notes), as compared to our structured loan portfolio, and will not reset as interest rates rise.

Therefore, increases in interest income due to rising interest rates is likely to be greater than the corresponding increase in interest expense on our variable rate debt.

See “Quantitative and Qualitative Disclosures about Market Risk” below for additional details.

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See Note 12 for details.

Significant Accounting Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification™, the authoritative reference for accounting principles generally accepted in the U.S.

Critical Accounting Estimates

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification(TM), the authoritative reference for accounting principles generally accepted in the U.S.

The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that could affect the reported amounts in our consolidated financial statements.

Actual results could differ from these estimates.

A summary of our significant accounting policies is presented in Note 2.

A summary of our critical accounting policies is presented in Note 2.

Many of these accounting policies require judgment and the use of estimates and assumptions when applying these policies in the preparation of our consolidated financial statements.

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To maintain REIT status, REITs are required to distribute at least 90% of their REIT-taxable income.

We consider distributable earnings in determining our quarterly dividend and believe that, over time, distributable earnings are a useful indicator of our dividends per share.

We define distributable earnings as net income (loss) attributable to common stockholders computed in accordance with GAAP, adjusted for accounting items such as depreciation and amortization (adjusted for unconsolidated joint ventures), non-cash stock-based compensation expense, income from MSRs, amortization and write-offs of MSRs, gains/losses on derivative instruments primarily associated with Private Label loans not yet sold and securitized, the tax impact on cumulative gains/losses on derivative instruments associated with Private Label loans sold during the periods presented, changes in fair value of GSE-related derivatives that temporarily flow through earnings, deferred tax provision (benefit), CECL provisions for credit losses (adjusted for realized losses as described below), amortization of the convertible senior notes conversion option gains/losses on the receipt of real estate from the settlement of loans (prior to the sale of the real estate).

We consider distributable earnings in determining our quarterly dividend and believe that, over time, distributable earnings is a useful indicator of our dividends per share.

We define distributable earnings as net income (loss) attributable to common stockholders computed in accordance with GAAP, adjusted for accounting items such as depreciation and amortization (adjusted for unconsolidated joint ventures), non-cash stock-based compensation expense, income from MSRs, amortization and write-offs of MSRs, gains/losses on derivative instruments primarily associated with Private Label loans not yet sold and securitized, changes in fair value of GSE-related derivatives that temporarily flow through earnings (net of any tax impact), deferred tax provision (benefit), CECL provisions for credit losses (adjusted for realized losses as described below), amortization of the convertible senior notes conversion option (in comparative periods prior to 2022) and gains/losses on the receipt of real estate from the settlement of loans (prior to the sale of the real estate).

We also add back one-time charges such as acquisition costs and one-time gains/losses on the early extinguishment of debt and redemption of preferred stock.

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Loans are deemed nonrecoverable upon the earlier of:

(i) when the loan receivable is settled (i.e., when the loan is repaid, or in the case of foreclosure, when the underlying asset is sold);

or (ii) when we determine that it is nearly certain that all amounts due will not be collected.

(1) when the loan receivable is settled (i.e., when the loan is repaid, or in the case of foreclosure, when the underlying asset is sold);

or (2) when we determine that it is nearly certain that all amounts due will not be collected.

The realized loss amount is equal to the difference between the cash received, or expected to be received, and the book value of the asset.

Distributable earnings are not intended to be an indication of our cash flows from operating activities (determined in accordance with GAAP) or a measure of our liquidity, nor is it entirely indicative of funding our cash needs, including our ability to make cash distributions.

Distributable earnings is not intended to be an indication of our cash flows from operating activities (determined in accordance with GAAP) or a measure of our liquidity, nor is it entirely indicative of funding our cash needs, including our ability to make cash distributions.

Our calculation of distributable earnings may be different from the calculations used by other companies and, therefore, comparability may be limited.

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Income from mortgage servicing rights

Deferred tax provision

Deferred tax (benefit) provision

Amortization and write-offs of MSRs

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Distributable earnings (1)

Diluted weighted average shares outstanding - GAAP (1)

Convertible notes dilution (2)

Diluted weighted average shares outstanding - distributable earnings (1)

Diluted distributable earnings per share (1)

Diluted weighted average shares outstanding (1)

(1) Amounts are attributable to common stockholders and OP Unit holders.

The OP Units are redeemable for cash, or at our option for shares of our common stock on a one-for-one basis.

(2) Beginning in the first quarter of 2022, the diluted weighted average shares outstanding were adjusted to exclude the potential shares issuable upon conversion and settlement of our convertible senior notes principal balance.

Excluding the effect of a potential conversion in shares until a conversion occurs is consistent with past treatment and other unrealized adjustments to distributable earnings.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis