Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion in conjunction with the unaudited consolidated interim financial statements, and related notes and the section entitled “Forward-Looking Statements” included herein.
Overview
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.
Through our Agency Business, we originate, sell and service a range of multifamily finance products through Fannie Mae and Freddie Mac, Ginnie Mae, FHA and HUD. We retain the servicing rights and asset management responsibilities on substantially all loans we originate and sell under the GSE and HUD programs. We are an approved Fannie Mae DUS lender nationally, a Freddie Mac Multifamily Conventional Loan lender, seller/servicer, in New York, New Jersey and Connecticut, a Freddie Mac affordable, manufactured housing, senior housing and SBL lender, seller/servicer, nationally and a HUD MAP and LEAN senior housing/healthcare lender nationally. 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 APL certificates of the securitization.
We conduct our operations to qualify as a REIT. A REIT is generally not subject to federal income tax on its REIT—taxable income that is distributed to its stockholders, provided that at least 90% of its REIT—taxable income is distributed and provided that certain other requirements are met.
Our operating performance is primarily driven by the following factors:
Net interest income earned on our investments. Net interest income represents the amount by which the interest income earned on our assets exceeds the interest expense incurred on our borrowings. If the yield on our assets increases or the cost of borrowings decreases, this will have a positive impact on earnings. However, if the yield earned on our assets decreases or the cost of borrowings increases, this will have a negative impact on earnings. Net interest income is also directly impacted by the size and performance of our asset portfolio. We recognize the bulk of our net interest income from our Structured Business. Additionally, we recognize net interest income from loans originated through our Agency Business, which are generally sold within 60 days of origination.
Fees and other revenues recognized from originating, selling and servicing mortgage loans through the GSE and HUD programs. Revenue recognized from the origination and sale of mortgage loans consists of gains on sale of loans (net of any direct loan origination costs incurred), commitment fees, broker fees, loan assumption fees and loan origination fees. These gains and fees are collectively referred to as gain on sales, including fee-based services, net. We record income from MSRs at the time of commitment to the borrower, which represents the fair value of the expected net future cash flows associated with the rights to service mortgage loans that we originate, with the recognition of a corresponding asset upon sale. We also record servicing revenue which consists of fees received for servicing mortgage loans, net of amortization on the MSR assets recorded. Although we have long-established relationships with the GSE and HUD agencies, our operating performance would be negatively impacted if our business relationships with these agencies deteriorate. Additionally, we also recognize revenue from originating, selling and servicing our Private Label loans.
Income earned from our structured transactions. Our structured transactions are primarily comprised of investments in equity affiliates, which represent unconsolidated joint venture investments formed to acquire, develop and/or sell real estate-related assets. Operating results from these investments can be difficult to predict and can vary significantly period-to-period. 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. It is difficult to forecast the timing of such payments, which can be substantial in any given quarter. We account for structured transactions within our Structured Business.
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Credit quality of our loans and investments, including our servicing portfolio. Effective portfolio management is essential to maximize the performance and value of our loan and investment and servicing portfolios. Maintaining the credit quality of the loans in our portfolios is of critical importance. Loans that do not perform in accordance with their terms may have a negative impact on earnings and liquidity.
COVID-19 Impact. 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 the First Quarter of 2023
Financing and Capital Markets Activity.
● Raised $93.4 million from the issuance of our 7.75% senior unsecured notes and used a significant portion of the net proceeds from such issuance to redeem our 8.00% senior unsecured notes; and
● Raised $82.7 million of capital from the issuances of common stock under our “At-The-Market” equity offering sales agreement.
Share Repurchase Program. In March, we implemented a share repurchase program authorizing the repurchase of up to $50.0 million of our outstanding common stock. As of April 30, 2023, we repurchased 3,545,604 shares of our common stock under this program at a total cost of $37.4 million and an average cost of $10.56 per share.
Structured Business Activity.
● Our structured loan and investment portfolio decreased 6% to $13.64 billion as loan runoff totaling $1.19 billion outpaced loan originations totaling $268.0 million; and
● Received and recorded $15.7 million in income from equity affiliates from an equity participation interest on a property that was sold and a cash distribution from our Lexford joint venture.
Agency Business Activity.
● Loan originations and sales totaled $1.09 billion and $932.7 million, respectively; and
● Grew our fee-based servicing portfolio over 3%, or $914.6 million, to $28.91 billion.
Dividend . We raised our quarterly common dividend $0.02 to $0.42 per share, representing an annual run rate of $1.68 per share.
Current Market Conditions, Risks and Recent Trends
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. 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, 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.
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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 and cash 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 recently witnessed significant volatility in the banking sector as a result of disruptions to the banking system and financial markets resulting from multiple bank failures. Although the majority of our cash is currently on deposit with major financial institutions, our balances often exceed insured limits. We limit the exposure relating to these balances by diversifying them among various counterparties. Generally, deposits may be redeemed upon demand and are maintained with financial institutions with reputable credit and therefore we believe bear minimal credit risk.
We have been very successful in raising capital through various vehicles to grow our businesses. The anticipated continual rise in interest rates, inflation, recent bank failures and unpredictable geopolitical landscape have caused a dislocation and additional volatility in the capital markets, which may result in a continual reduction of available liquidity. Instability in the banking sector, such as the recent bank failures and consolidations, have further contributed to the tightening liquidity conditions in equity and capital markets and has affected the availability and cost of capital. The increased cost of credit, or degradation in debt financing terms, may impact our ability to identify and execute investments on attractive terms, or at all. 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 relationships, or, 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 November 2022, the Federal Housing Finance Agency (“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 (the “2023 Caps”), 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 has removed the requirement that at least 25% be affordable to residents at or below 60% of area median income (“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. Therefore, a decline in our GSE originations could negatively impact our financial results. We are unsure whether the FHFA will impose stricter limitations on GSE multifamily production volume in the future.
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Changes in Financial Condition
Assets — Comparison of balances at March 31, 2023 to December 31, 2022:
Our Structured loan and investment portfolio balance was $13.64 billion and $14.46 billion at March 31, 2023 and December 31, 2022, respectively. This decrease was primarily due to loan runoff exceeding loan originations by $918.6 million. See below for details.
Our portfolio had a weighted average current interest pay rate of 8.60% and 8.17% at March 31, 2023 and December 31, 2022, respectively. Including certain fees earned and costs associated with the structured portfolio, the weighted average current interest rate was 8.83% and 8.42% at March 31, 2023 and December 31, 2022, respectively. Our debt that finances our loans and investment portfolio totaled $12.65 billion and $13.28 billion at March 31, 2023 and December 31, 2022, respectively, with a weighted average funding cost of 6.68% and 6.22%, respectively, which excludes financing costs. Including financing costs, the weighted average funding rate was 6.97% and 6.50% at March 31, 2023 and December 31, 2022, respectively.
Activity from our Structured Business portfolio is comprised of the following ($ in thousands):
Three Months Ended
March 31, 2023
Loans originated
$
268,034
Number of loans
24
Weighted average interest rate
9.62
%
Loan runoff
$
1,186,649
Number of loans
65
Weighted average interest rate
8.86
%
Loans extended
$
360,613
Number of loans
14
Loans held-for-sale from the Agency Business increased $115.5 million, primarily from loan originations exceeding loan sales by $159.2 million as noted in the following table, partially offset by an unfunded construction loan origination totaling $60.4 million. Our GSE loans are generally sold within 60 days, while our Private Label loans are generally expected to be sold to third-parties or securitized within 180 days from the loan origination date. Activity from our Agency Business portfolio is comprised of the following (in thousands):
Three Months Ended
March 31, 2023
Loan
Originations
Loan Sales
Fannie Mae
$
795,021
$
651,758
FHA
148,940
43,475
Freddie Mac
101,332
68,457
Private Label
41,107
159,945
SFR - Fixed Rate
5,461
9,064
Total
$
1,091,861
$
932,699
Due from related party was $113.1 million and $77.4 million at March 31, 2023 and December 31, 2022, respectively, and represents funds received from our affiliated servicing operations related to loan payoffs.
Liabilities – Comparison of balances at March 31, 2023 to December 31, 2022:
Credit and repurchase facilities decreased $190.9 million, primarily due to loan runoff in our Structured Business portfolio, partially offset by loan originations exceeding sales in our Agency Business.
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Securitized debt decreased $340.8 million, primarily due to repayments of debt on CLO 12 and CLO 13 as the replacement period has ended for both CLOs.
Senior unsecured notes increased $23.9 million, primarily due to the issuance of $95.0 million of 7.75% senior notes, partially offset by the repurchase of $70.8 million of our 8.00% senior notes.
Other liabilities decreased $30.2 million, primarily due to payments of accrued commissions and incentive compensation during the first quarter of 2023, related to 2022 performance, and decreases in accrued legal fees, from the payment made to settle the Extended Stay litigation, and accrued interest payable, from payment of the semi-annual interest due on our 7.50% convertible notes.
Equity
During the first quarter of 2023, we sold 5,635,800 shares of our common stock through our “At-The-Market” equity agreement. In addition, through April 30, 2023, we repurchased 3,545,604 shares of our common stock under our share repurchase program.
See Note 15 for details of our dividends declared and deferred compensation transactions.
Agency Servicing Portfolio
The following table sets forth the characteristics of our loan servicing portfolio collateralizing our mortgage servicing rights and servicing revenue ($ in thousands):
March 31, 2023
Wtd. Avg.
Wtd. Avg.
Annualized
Servicing
Age of
Portfolio
Prepayments
Delinquencies
Portfolio
Loan
Portfolio
Maturity
Interest Rate Type
Wtd. Avg.
as a %
as a %
Product
UPB
Count
(years)
(years)
Fixed
Adjustable
Note Rate
of Portfolio (1)
of Portfolio (2)
Fannie Mae
$
19,508,256
2,487
3.2
8.3
94
%
6
%
4.30
%
4.64
%
0.43
%
Freddie Mac
5,180,607
1,201
3.0
10.0
80
%
20
%
4.47
%
4.64
%
2.86
%
Private Label
2,233,500
139
2.1
7.6
100
%
—
3.71
%
—
—
FHA
1,242,669
101
2.5
33.4
100
%
—
3.31
%
—
—
Bridge
467,881
5
0.9
2.6
35
%
65
%
7.42
%
—
—
SFR - Fixed Rate
279,712
56
1.6
6.1
100
%
—
5.09
%
—
—
Total
$
28,912,625
3,989
3.0
9.5
91
%
9
%
4.30
%
3.97
%
0.80
%
December 31, 2022
Fannie Mae
$
19,038,124
2,460
3.1
8.5
96
%
4
%
4.20
%
12.71
%
0.13
%
Freddie Mac
5,153,207
1,214
2.8
10.2
84
%
16
%
4.26
%
19.78
%
0.27
%
Private Label
2,074,859
130
1.9
7.8
100
%
—
3.60
%
—
—
FHA
1,155,893
96
2.5
33.5
100
%
—
3.17
%
1.59
%
—
Bridge
301,182
4
0.9
1.6
—
100
%
7.68
%
—
—
SFR - Fixed Rate
274,764
53
1.4
6.3
100
%
—
5.04
%
0.30
%
—
Total
$
27,998,029
3,957
2.9
9.7
93
%
7
%
4.17
%
12.35
%
0.14
%
(1) Prepayments reflect loans repaid prior to six months from the 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. At March 31, 2023 and December 31, 2022, delinquent loans totaled $232.1 million and $38.7 million, respectively. At March 31, 2023, there were two loans totaling $3.3 million in bankruptcy and a $1.0 million loan in foreclosure. There were no loans in the foreclosure process or in bankruptcy at December 31, 2022.
Our Agency Business servicing portfolio represents commercial real estate loans, which are generally transferred or sold within 60 days from the date the loan is funded. Primarily all loans in our servicing portfolio are collateralized by multifamily properties. In addition, we are generally required to share in the risk of any losses associated with loans sold under the Fannie Mae DUS program, see Note 10.
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Comparison of Results of Operations for the Three Months Ended March 31, 2023 and 2022
The following table provides our consolidated operating results ($ in thousands):
Three Months Ended March 31,
Increase / (Decrease)
2023
2022
Amount
Percent
Interest income
$
327,947
$
166,698
$
161,249
97
%
Interest expense
219,373
82,559
136,814
166
%
Net interest income
108,574
84,139
24,435
29
%
Other revenue:
Gain on sales, including fee-based services, net
14,589
1,656
12,933
nm
Mortgage servicing rights
18,458
15,312
3,146
21
%
Servicing revenue, net
29,565
21,054
8,511
40
%
Property operating income
1,381
295
1,086
nm
Gain on derivative instruments, net
4,223
17,386
(13,163)
(76)
%
Other income, net
4,882
3,200
1,682
53
%
Total other revenue
73,098
58,903
14,195
24
%
Other expenses:
Employee compensation and benefits
42,399
42,025
374
1
%
Selling and administrative
13,623
14,548
(925)
(6)
%
Property operating expenses
1,383
535
848
159
%
Depreciation and amortization
2,624
1,983
641
32
%
Provision for loss sharing (net of recoveries)
3,177
(662)
3,839
nm
Provision for credit losses (net of recoveries)
22,517
2,358
20,159
nm
Total other expenses
85,723
60,787
24,936
41
%
Income before extinguishment of debt, income from equity affiliates and income taxes
95,949
82,255
13,694
17
%
Loss on extinguishment of debt
—
(1,350)
1,350
nm
Income from equity affiliates
14,326
7,212
7,114
99
%
Provision for income taxes
(8,029)
(8,188)
159
(2)
Net income
102,246
79,929
22,317
28
%
Preferred stock dividends
10,342
9,056
1,286
14
%
Net income attributable to noncontrolling interest
7,585
6,816
769
11
%
Net income attributable to common stockholders
$
84,319
$
64,057
$
20,262
32
%
nm — not meaningful
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The following table presents the average balance of our Structured Business interest-earning assets and interest-bearing liabilities, associated interest income (expense) and the corresponding weighted average yields ($ in thousands):
Three Months Ended March 31,
2023
2022
Average
Interest
W/A Yield /
Average
Interest
W/A Yield /
Carrying
Income /
Financing
Carrying
Income /
Financing
Value (1)
Expense
Cost (2)
Value (1)
Expense
Cost (2)
Structured Business interest-earning assets:
Bridge loans
$
13,799,379
$
303,019
8.91
%
$
12,506,401
$
143,483
4.65
%
Mezzanine / junior participation loans
214,971
5,884
11.10
%
222,758
5,078
9.25
%
Preferred equity investments
97,192
1,998
8.34
%
152,761
2,660
7.06
%
Other
34,152
833
9.89
%
140,666
4,926
14.20
%
Core interest-earning assets
14,145,694
311,734
8.94
%
13,022,586
156,147
4.86
%
Cash equivalents
871,105
5,642
2.63
%
758,362
113
0.06
%
Total interest-earning assets
$
15,016,799
$
317,376
8.57
%
$
13,780,948
$
156,260
4.60
%
Structured Business interest-bearing liabilities:
CLO
$
7,480,943
$
119,051
6.45
%
$
6,604,069
$
31,723
1.95
%
Credit and repurchase facilities
3,438,091
62,730
7.40
%
3,668,456
24,121
2.67
%
Unsecured debt
1,713,633
26,289
6.22
%
1,559,751
21,153
5.50
%
Q Series securitization
236,878
3,906
6.69
%
—
—
—
Trust preferred
154,336
2,918
7.67
%
154,336
1,205
3.17
%
Total interest-bearing liabilities
$
13,023,881
214,894
6.69
%
$
11,986,612
78,202
2.65
%
Net interest income
$
102,482
$
78,058
(1) Based on UPB for loans, amortized cost for securities and principal amount of debt.
(2) Weighted average yield calculated based on annualized interest income or expense divided by average carrying value.
Net Interest Income
The increase in interest income was mainly due to a $161.1 million increase from our Structured Business, primarily due to a significant increase in the average yield on core interest-earning assets, as a result of increases in benchmark interest rates, and an increase in our average balance of our core interest-earning assets, mainly from loan originations exceeding loan runoff during 2022.
The increase in interest expense was mainly due to a $136.7 million increase from our Structured Business, primarily due to a significant increase in the average cost of our interest-bearing liabilities, mainly from increases in benchmark index rates, and an increase in the average balance of our interest-bearing liabilities, due to the growth in our loan portfolio during 2022 and the issuance of additional unsecured debt.
Agency Business Revenue
The increase in gain on sales, including fee-based services, net was primarily due to a 32% increase in the sales margin from 1.18% (which includes gains recognized on Swaps) to 1.56%, partially offset by a 41% decrease ($654.0 million) in loan sales volume. The increase in the sales margin was primarily driven by higher margins received on Fannie Mae and Private Label loan sales.
The increase in income from MSRs was primarily due to a 54% increase ($525.0 million) in loan commitment volume, partially offset by a 22% decrease in the MSR rate from 1.57% to 1.23%. The decrease in the MSR rate was primarily due to a reduction in servicing rates on newer loans.
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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 and higher escrow balances, partially offset by less prepayment penalties received.
Other Income
The gain on derivative instruments in both 2023 and 2022 were related to changes in the fair values of our forward sale commitments and Swaps held by our Agency Business.
Other Expenses
The decrease in selling and administrative expenses was primarily due to lower legal fees due to the settlement of the Extended Stay litigation.
The increase in our provisions for loss sharing and credit losses (“CECL provisions”) were primarily due to the impact of an increase in interest rates, higher unemployment rates and rising inflation, along with changes in property values, in our CECL forecast models.
Loss on Extinguishment of Debt
The loss on extinguishment of debt in 2022 represents deferred financing fees recognized in connection with the unwind of CLOs.
Income from Equity Affiliates
Income from equity affiliates in the first quarter of 2023 primarily reflects $11.0 million received from an equity participation interest on a property that was sold and a $4.7 million distribution received from our Lexford joint venture, while income in the first quarter of 2022 primarily reflects income from our investment in a residential mortgage banking business of $5.0 million and a $2.6 million equity participation interest on a property that was sold.
Provision for Income Taxes
In the three months ended March 31, 2023, we recorded a tax provision of $8.0 million, which consisted of a current and deferred tax provision of $4.8 million and $3.2 million, respectively. In the three months ended March 31, 2022, we recorded a tax provision of $8.2 million, which consisted of a current tax provision of $9.9 million and a deferred tax benefit of $1.7 million. The decrease in the tax provision was primarily due to lower income generated from our investment in a residential banking business.
Preferred Stock Dividends
The increase in preferred stock dividends was due to the issuance of an additional 3,292,000 shares of our Series F preferred stock during the first quarter of 2022.
Net Income Attributable to Noncontrolling Interest
The noncontrolling interest relates to the outstanding OP Units (see Note 15). There were 16,293,589 OP Units and 16,325,095 OP Units outstanding at March 31, 2023 and 2022, respectively, which represented 8.1% and 9.2% of our outstanding stock at March 31, 2023 and 2022, respectively.
Liquidity and Capital Resources
Sources of Liquidity. Liquidity is a measure of our ability to meet our potential cash requirements, including ongoing commitments to repay borrowings, satisfaction of collateral requirements under the Fannie Mae DUS risk-sharing agreement and, as an approved designated seller/servicer of Freddie Mac’s SBL program, operational liquidity requirements of the GSE agencies, fund new loans and investments, fund operating costs and distributions to our stockholders, as well as other general business needs. Our primary sources of funds for liquidity consist of proceeds from equity and debt offerings, proceeds from CLOs and securitizations, debt facilities and cash flows from operations. 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.
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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. In addition, the recent bank failures and consolidations have further contributed to a dislocation in capital markets and tightening liquidity conditions affecting the availability and cost of capital. We are monitoring 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 9, 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 $12.65 billion in total structured debt outstanding at March 31, 2023. Of this total, $9.41 billion, or 74%, 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 $3.24 billion of debt is in credit and repurchase facilities with several different banks that we have long-standing relationships with. At March 31, 2023, we had $2.12 billion of debt from credit and repurchase facilities that were subject to margin calls related to changes in interest spreads. 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.
At May 4, 2023, we had approximately $785.0 million in cash and approximately $560.0 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 $28.91 billion agency servicing portfolio at March 31, 2023, which is mostly prepayment protected and generates approximately $117.0 million per year in recurring cash flow.
To maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our REIT-taxable income. These distribution requirements limit our ability to retain earnings and thereby replenish or increase capital for operations. 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. Cash flows used in operating activities totaled $56.8 million during the three months ended March 31, 2023 and consisted primarily of net cash outflows of $111.9 million, due to loan originations exceeding loan sales in our Agency Business, a $30.2 million decrease in other liabilities, primarily due to payments made for commissions, incentive compensation and the settlement of the Extended Stay litigation and a $35.7 million increase in due from related party, partially offset by net income of $102.2 million.
Cash flows provided by investing activities totaled $828.0 million during the three months ended March 31, 2023. Loan and investment activity (originations and payoffs/paydowns) comprise the majority of our investing activities. Loan payoffs and paydowns from our Structured Business totaling $1.19 billion, net of originations of $380.6 million, resulted in net cash inflows of $810.4 million.
Cash flows used in financing activities totaled $540.0 million during the three months ended March 31, 2023 and consisted primarily of $344.5 million of paydowns on CLO 12 and CLO 13 (replacement period ended), net cash outflows of $193.3 million from debt facility activities (facility paydowns were greater than loan originations) and $90.5 million of distributions to our stockholders and OP Unit holders, partially offset by $82.7 million of proceeds from the issuance of common stock.
Agency Business Requirements. The Agency Business is subject to supervision by certain regulatory agencies. 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 at March 31, 2023. Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $69.0 million and $2.5 million of cash. See Note 13 for details about our performance regarding these requirements.
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We also enter into contractual commitments with borrowers providing rate lock commitments while simultaneously entering into forward sale commitments with investors. These commitments are outstanding for short periods of time (generally less than 60 days) and are described in Note 11.
Debt Facilities. We maintain various forms of short-term and long-term financing arrangements. Borrowings underlying these arrangements are primarily secured by a significant amount of our loans and investments and substantially all our loans held-for-sale. The following is a summary of our debt facilities (in thousands):
March 31, 2023
Maturity
Debt Instruments
Commitment
UPB (1)
Available
Dates (2)
Structured Business
Credit and repurchase facilities
$
6,762,047
$
3,239,951
$
3,522,096
2023 - 2026
Securitized debt (3)
7,541,518
7,541,518
—
2023 - 2027
Senior unsecured notes
1,423,850
1,423,850
—
2023 - 2028
Convertible senior unsecured notes
287,500
287,500
—
2025
Junior subordinated notes
154,336
154,336
—
2034 - 2037
Structured Business total
16,169,251
12,647,155
3,522,096
Agency Business
Credit and repurchase facilities (4)
2,150,534
422,805
1,727,729
2023 - 2024
Consolidated total
$
18,319,785
$
13,069,960
$
5,249,825
(1) Excludes the impact of deferred financing costs.
(2) See Note 13 for a breakdown of debt maturities by year.
(3) Maturity dates represent the weighted average remaining maturity based on the underlying collateral at March 31, 2023.
(4) The 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 following table provides additional information regarding the balances of our borrowings (in thousands):
Quarterly Average
End of Period
Maximum UPB at
Quarter Ended
UPB
UPB
Any Month-End
March 31, 2023
$
3,691,191
$
3,662,756
$
3,696,760
December 31, 2022
4,441,774
3,856,009
4,403,368
September 30, 2022
4,534,744
4,642,911
4,642,911
June 30, 2022
4,581,226
4,561,393
4,926,070
March 31, 2022
4,224,503
4,315,388
4,842,785
Our debt facilities, including their restrictive covenants, are described in Note 9.
Off-Balance Sheet Arrangements. At March 31, 2023, we had no off-balance sheet arrangements.
Inflation. 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. See “Quantitative and Qualitative Disclosures about Market Risk” below for additional details.
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Contractual Obligations. During the three months ended March 31, 2023, the following significant changes were made to our contractual obligations disclosed in our 2022 Annual Report:
● issued $95.0 million of 7.75% senior unsecured notes due in 2026, and used $70.8 million of the proceeds to repurchase our 8.00% senior unsecured notes; and
● modified existing debt facilities.
Refer to Note 13 for a description of our debt maturities by year and unfunded commitments at March 31, 2023.
Derivative Financial Instruments
We enter into derivative financial instruments in the normal course of business to manage the potential loss exposure caused by fluctuations of interest rates. See Note 11 for details.
Critical Accounting Policies
Please refer to Note 2 of the Notes to Consolidated Financial Statements in our 2022 Annual Report for a discussion of our critical accounting policies. During the three months ended March 31, 2023, there were no material changes to these policies.
Non-GAAP Financial Measures
Distributable Earnings. We are presenting distributable earnings because we believe it is an important supplemental measure of our operating performance and is useful to investors, analysts and other parties in the evaluation of REITs and their ability to provide dividends to stockholders. Dividends are one of the principal reasons investors invest in REITs. 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 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), 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.
We reduce distributable earnings for realized losses in the period we determine that a loan is deemed nonrecoverable in whole or in part. Loans are deemed nonrecoverable upon the earlier of: (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 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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Distributable earnings are as follows ($ in thousands, except share and per share data):
Three Months Ended March 31,
2023
2022
Net income attributable to common stockholders
$
84,319
$
64,057
Adjustments:
Net income attributable to noncontrolling interest
7,585
6,816
Income from mortgage servicing rights
(18,458)
(15,312)
Deferred tax provision (benefit)
3,164
(1,720)
Amortization and write-offs of MSRs
18,723
27,669
Depreciation and amortization
4,295
2,569
Loss on extinguishment of debt
—
1,350
Provision for credit losses, net
23,704
1,696
Gain on derivative instruments, net
(7,051)
(298)
Stock-based compensation
5,901
6,092
Distributable earnings (1)
$
122,182
$
92,919
Diluted weighted average shares outstanding - GAAP (1)
214,910,974
185,431,404
Less: Convertible notes dilution
(17,230,358)
(15,068,383)
Diluted weighted average shares outstanding - distributable earnings (1)
197,680,616
170,363,021
Diluted distributable earnings per share (1)
$
0.62
$
0.55
(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.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.