Arbor Realty Trust Inc: Form 10-Q for the period ended Sep 30, 2024

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 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 retain the servicing rights on 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 either sell the Private Label loans instantaneously or pool and securitize them and sell certificates in the securitizations to third party investors, while retaining the highest risk bottom tranche certificate of the securitization.

We conduct our operations to qualify as a REIT. A REIT is generally not subject to federal income tax on its taxable income that is distributed to its stockholders, provided that at least 90% of its 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.

One of our core business strategies is to generate additional agency lending opportunities by refinancing our multifamily balance sheet bridge loan portfolio when it is practical and appropriate to do so. We execute this strategy by underwriting the multifamily bridge loans we originate to a potential future agency financing. We then continue to work with our borrowers on this execution through the life cycle of the multifamily bridge loan. When effective, this strategy allows us to recapture refinancing opportunities, delever our balance sheet, and generate additional income streams through our capital-light Agency Business.

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.

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.

Significant Developments During the Third Quarter of 2024

Financing and Capital Markets Activity. We entered into two new Structured Business debt facilities totaling $650.0 million of warehouse capacity.

Structured Business Activity.

• We reduced our balance sheet portfolio by 3% to $11.57 billion, as loan runoff of $521.3 million outpaced loan originations totaling $258.5 million; and
• We modified twenty-four loans with a total UPB of $1.15 billion. Borrowers of eighteen of these loans with a total UPB of $710.7 million invested additional capital to recapitalize their deals in exchange for temporary rate relief, which we provided through a pay and accrual feature. See Note 3 for details.

Agency Business Activity.

• Loan originations totaled $1.10 billion and includes $383.1 million of new Agency loans that were recaptured from our Structured Business runoff; and
• Grew our fee-based servicing portfolio $733.1 million, or 2%, to $33.01 billion.

Recent Developments in October 2024. Raised $100.0 million from the issuance of our 9.00% senior unsecured notes due 2027, and redeemed our 4.75% senior unsecured notes.

Current Market Conditions, Risks and Recent Trends

The Federal Reserve lowered the federal funds rate by 50 basis points in September 2024, which marks the first rate cut since 2020, and it is possible that rates will continue to decline during the remainder of 2024 and 2025. Although rates have started to decline, we currently remain in a high interest rate environment which could remain higher for longer than expected if inflation and other economic indicators do not continue to meet the Federal Reserve’s expectations.

Inflation, high interest rates, bank failures, and geopolitical uncertainty has caused significant disruptions in many market segments, including the financial services, real estate and credit markets, which has, and may continue, to result in a further dislocation in capital markets and a continual reduction of available liquidity. Despite these periodic disruptions, we have been successful in raising capital through various vehicles, when needed, to continue to operate and grow our business.

Instability in the banking sector, such as the multiple regional bank failures and consolidations, further contributed to the tightening liquidity conditions in the equity and capital markets and has affected the availability, and increased the cost of, capital. The increased cost of credit, or degradation in debt financing terms, has impacted, and may continue to impact, our ability to identify and execute investments on attractive terms, or at all. Additionally, 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 at financial institutions with reputable credit and therefore we believe bear minimal credit risk.

These current market conditions may continue to 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 options to build on existing relationships or create new relationships with lenders. Runoff in our Structured Business also provides an opportunity to refinance these loans with new Agency loans, when practical and appropriate to do so. 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 sustain this business.

These adverse economic conditions have resulted in, and may continue to result in, a 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 has impacted, and may continue to impact, our future results of operations, financial condition, business prospects and our ability to make distributions to our stockholders. We employ rigorous risk management and underwriting practices to proactively maintain the quality of our loan portfolio and work very closely with borrowers to mitigate potential losses, while safeguarding the integrity of our portfolio, which may include modifying original loan terms. Given the current elevated interest rate environment, we cannot guarantee that our loan portfolio will perform under the terms originally established.

Historically, the high interest rate environment has positively impacted 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. Additionally, since a greater portion of our debt consists of fixed-rate instruments (such as convertible and senior unsecured notes), as compared to our structured loan portfolio, the increase in interest income from high interest rates tends to outpace the rise in interest expense on our debt. Furthermore, our earnings on escrows and cash balances also benefit from an elevated rate environment. However, the prolonged period of elevated interest rates has led to an increase in loan delinquencies, a decrease in loan originations and lower cash and escrow balances, which is having, and may continue to have, a negative impact on our net interest income. Additionally, the prolonged high interest rate environment has contributed to a decline in certain commercial real estate values, leading to increased reserves, as the collateral value is insufficient to fully repay the loans.

As discussed earlier, the Federal Reserve began lowering interest rates in September 2024 and may continue to cut interest rates during the remainder of 2024 and 2025. If these rate reductions continue, this would likely lead to immediate decreases in net interest income on our floating rate loan book and reduce earnings on our cash and escrow balances. However, the prolonged rate reductions could also lead to increases in our loan originations and improved credit, resulting in decreases in delinquencies and potential future losses. For additional details, please see “Quantitative and Qualitative Disclosures about Market Risk” below.

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 2023, FHFA set its 2024 Caps for Fannie Mae and Freddie Mac at $70 billion for each enterprise for a total opportunity of $140 billion, which is a decrease from its 2023 Caps of $75 billion for each enterprise. FHFA stated they will continue to monitor the market and reserves the right to increase the 2024 Caps if warranted, however, they will not reduce the 2024 Caps if the market is smaller than initially projected. To promote affordable housing preservation, loans classified as supporting workforce housing properties will be exempt from the 2024 Caps. Workforce housing loans preserve rents at affordable levels in multifamily properties, typically without the use of public subsidies. The 2024 Caps will continue to mandate that at least 50% be directed towards mission driven, affordable housing, with affordability levels corresponding to 80%-120% of area median income, depending on the market. 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. The current high interest rate environment could lead to a decline in our GSE originations, which could negatively impact our financial results. We are unsure whether FHFA will impose stricter limitations on GSE multifamily production volume in the future.

Changes in Financial Condition

Assets — Comparison of balances at September 30, 2024 to December 31, 2023:

Our Structured loan and investment portfolio balance was $11.57 billion and $12.62 billion at September 30, 2024 and December 31, 2023, respectively. This decrease was primarily due to loan runoff exceeding loan originations by $1.05 billion. See below for details.

The portfolio had a weighted average current interest pay rate of 7.25% and 8.42% at September 30, 2024 and December 31, 2023, respectively. Including certain fees earned and costs, the weighted average current interest rate was 8.16% and 8.98% at September 30, 2024 and December 31, 2023, respectively. Our debt that finances our Structured loan and investment portfolio totaled $9.97 billion and $11.57 billion at September 30, 2024 and December 31, 2023, respectively, with a weighted average funding cost of 6.86% and 7.14%, respectively, which excludes financing costs. Including financing costs, the weighted average funding rate was 7.18% and 7.45% at September 30, 2024 and December 31, 2023, respectively.

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

54

Loans held-for-sale from the Agency Business decreased $225.6 million, primarily from loan sales exceeding loan originations by $247.5 million as noted in the following table. Activity from our Agency Business portfolio is comprised of the following (in thousands):

Capitalized mortgage servicing rights decreased $14.9 million, primarily due to amortization and prepayment write-downs exceeding additions from new originations, as a result of a decline in the weighted average servicing fee rate.

Investments in equity affiliates decreased $3.0 million, primarily due to distributions received from our investments in AWC and a residential mortgage banking business totaling $19.0 million, substantially offset by contributions made in our investments in AWC and AMAC III totaling $16.3 million.

Real estate owned increased $40.9 million, primarily due to the foreclosure of two multifamily bridge loans, which we took back the underlying collateral, partially offset by the sale of an office property.

Due from related party increased $32.4 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, which were remitted to us subsequent to quarter end.

Other assets increased $70.0 million, primarily due to additional fundings of unsecured line of credit loans totaling $39.6 million, an increase in interest receivables from fundings on existing loans and an increase in deferred interest on modified loans.

Liabilities – Comparison of balances at September 30, 2024 to December 31, 2023:

Credit and repurchase facilities increased $19.9 million, primarily due to refinancing loans from the unwind of CLOs in our Structured Business, substantially offset by loan sales exceeding originations in our Agency Business.

Securitized debt decreased $1.62 billion, primarily due to the unwind of CLO 15 and paydowns on our remaining securitizations.

Senior unsecured notes decreased $87.1 million, due to the repayment at maturity of our 5.75% notes.

Due to related party increased $11.7 million, due to the timing of loan payoffs, holdbacks and escrows to be remitted to our affiliated servicing operations.

Due to borrowers decreased $64.7 million, primarily due to the funding of previously committed originations in our Structured Business.

Other liabilities decreased $28.4 million, primarily due to a decrease in accrued interest payable as a result of the unwind of CLO 15, paydowns on remaining securitizations and interest payments made on our convertible notes, along with a decrease in deferred tax liabilities.

Equity

See Note 16 for details of our share repurchases, 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):

(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 September 30, 2024 and December 31, 2023, delinquent loans totaled $427.0 million and $411.1 million, respectively. At September 30, 2024, there were two loans totaling $4.8 million in bankruptcy and three loans totaling $21.4 million have been foreclosed. At December 31, 2023, there were two loans totaling $4.8 million in bankruptcy and no loans in foreclosure.

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 the Three Months Ended September 30, 2024 and 2023

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

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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):

Structured Business interest-earning assets:

(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 decrease in interest income was mainly due to a $48.7 million decrease from our Structured Business. The decline was primarily from a decrease in the average balance of our core interest-earning assets as loan runoff exceeds loan originations, a decrease in the average yield on core interest-earning assets from a rise in non-performing and other non-accrued loans and a reduction in interest earned on cash balances due to lower average bank balances.

The decrease in interest expense was mainly due to a $30.1 million decrease from our Structured Business, primarily due to a decline in the average balance of our interest-bearing liabilities from loan runoff and note paydowns in our securitizations and senior unsecured notes, partially offset by an increase in the average cost of interest-bearing liabilities, mainly from increases in SOFR.

Agency Business Revenue

The decrease in income from MSRs was primarily due to a 13% decrease in loan commitment volume ($154.9 million), partially offset by an 8% increase in the MSR rate from 1.16% to 1.25%. The increase in the MSR rate was primarily due to higher rates on Fannie Mae loan volume from an increase in servicing fees retained.

The decrease in servicing revenue, net was primarily due to a decrease in the average escrow balances largely due to runoff, partially offset by an increase in interest rates.

Other Income (Loss)

The gains and losses on derivative instruments relate to changes in the fair values of forward sale commitments and swaps held by our Agency Business as a result of changes in market interest rates as well as from the timing of GSE Agency loan sales.

Other income, net in 2024 primarily reflects loan origination and modification fees from our Structured Business and reserve recoveries on SFR and Private Label loans from our Agency Business.

Other Expenses

The increase in employee compensation and benefits expense was primarily due to increases in incentive compensation and commissions from higher bonus allocation targets, annual merit increases and commission rates.

The increase in selling and administrative expenses was primarily due to increases in professional and legal costs.

The increase in the provision for loss sharing (net of recoveries) primarily reflects an increase in reserves related to general economic and market conditions.

The provision for credit losses (net of recoveries) in 2024 includes $13.9 million in specific loan reserves and a $1.4 million increase related to forecasted economic and market conditions, while 2023 includes $12.8 million in specific loan reserves and a $4.5 million increase related to forecasted economic and market conditions.

Income from Equity Affiliates

Income from equity affiliates in 2024 primarily reflects a $4.9 million distribution received from our Lexford joint venture, partially offset by losses from our investments in a residential mortgage banking business and our AMAC III investment totaling $1.5 million, while income in 2023 primarily reflects $3.5 million received from an equity participation interest on a property that was sold, substantially offset by an aggregate loss of $2.7 million from our ongoing equity investments.

Provision for Income Taxes

In the three months ended September 30, 2024, we recorded a tax provision of $5.2 million, which consisted of a current tax provision of $7.2 million and a deferred tax benefit of $2.0 million. In the three months ended September 30, 2023, we recorded a tax provision of $5.9 million, which consisted of a current tax provision of $8.3 million and a deferred tax benefit of $2.4 million.

Net Income Attributable to Noncontrolling Interest

The noncontrolling interest relates to the outstanding OP Units (see Note 16). There were 16,293,589 OP Units outstanding at both September 30, 2024 and 2023, which represented 8.0% of our outstanding stock at both September 30, 2024 and 2023.

Comparison of Results of Operations for the Nine Months Ended September 30, 2024 and 2023

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

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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):

Structured Business interest-earning assets:

(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 decrease in interest income was mainly due to a $98.2 million decrease from our Structured Business. The decline was primarily from a decrease in the average balance of our core interest-earning assets as loan runoff exceeded loan originations, slightly offset by an increase in the average yield on core interest-earning assets from an increase in SOFR, partially offset by a rise in non-performing and other non-accrued loans.

The decrease in interest expense was mainly due to a $50.2 million decrease from our Structured Business, primarily due to a decline in the average balance of our interest-bearing liabilities from loan runoff and note paydowns in our securitizations and senior unsecured notes, partially offset by an increase in the average cost of interest-bearing liabilities, mainly from increases in SOFR.

Agency Business Revenue

The decrease in gain on sales, including fee-based services, net was primarily due to an 8% decrease in loan sales volume ($279.2 million), partially offset by a 3% increase in the sales margin from 1.54% to 1.58%.

The decrease in income from MSRs was primarily due to a 20% decrease in loan commitment volume ($754.3 million) and a 3% decrease in the MSR rate from 1.27% to 1.23%. The decrease in the MSR rate was primarily due to a higher percentage of Freddie Mac loan commitments, which contain lower servicing fees.

The decrease in servicing revenue, net was primarily due to a decrease in average escrow balances largely due to runoff, partially offset by an increase in interest rates.

Other Income (Loss)

The losses on derivative instruments in 2024 and 2023 were related to changes in the fair values of our forward sale commitments and swaps held by our Agency Business as a result of changes in market interest rates as well as from the timing of GSE Agency loan sales.

The increase in other income, net was primarily from an increase in loan origination and modification fees from our Structured Business

Other Expenses

The increase in employee compensation and benefits expense was primarily due to increases in incentive compensation and commissions from higher bonus allocation targets, annual merit increases and commission rates.

The decrease in the provision for loss sharing (net of recoveries) reflects less specific loan impairment reserves taken in the current year period as well as a decrease in general reserves.

The increase in the provision for credit losses (net of recoveries) primarily reflects an increase in reserves on specifically impaired loans due to a decline in general economic and market conditions.

Loss on Extinguishment of Debt

The loss on extinguishment of debt in both 2024 and 2023 reflects deferred financing fees recognized in connection with the unwind of CLOs.

Gain on Sale of Real Estate

In 2024, we sold a real estate owned asset for $14.2 million and recognized a $3.8 million gain.

Income from Equity Affiliates

Income from equity affiliates in 2024 primarily reflects $9.0 million in distributions received from our Lexford joint venture, partially offset by a $1.7 million loss from our AMAC III investment, while income in 2023 primarily reflects $14.5 million received from equity participation interests on properties that were sold and $7.2 million in distributions received from our Lexford joint venture.

Provision for Income Taxes

In the nine months ended September 30, 2024, we recorded a tax provision of $12.7 million, which consisted of a current tax provision of $21.6 million and a deferred tax benefit of $8.9 million. In the nine months ended September 30, 2023, we recorded a tax provision of $19.4 million, which consisted of a current tax provision of $26.0 million and a deferred tax benefit of $6.6 million.

Net Income Attributable to Noncontrolling Interest

The noncontrolling interest relates to the outstanding OP Units (see Note 16). There were 16,293,589 OP Units outstanding at both September 30, 2024 and 2023, which represented 8.0% of our outstanding stock at both September 30, 2024 and 2023.

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.

The ongoing adverse economic and market conditions, including inflation, high interest rate environment, bank failures and geopolitical uncertainty, continues to cause significant disruptions and liquidity constraints in many market segments, including the financial services, real estate and credit markets. These conditions have created, and may continue to create, a dislocation in capital markets and a continual reduction of available liquidity. Instability in the banking sector, such as the regional bank failures and consolidations, further contributed to the tightening liquidity conditions in the equity and capital markets and has affected the availability and increased the 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. If our financing sources, borrowers and their tenants continue to be impacted by these adverse economic and market conditions, 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. 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.

We had $9.97 billion in total structured debt outstanding at September 30, 2024. Of this total, $7.02 billion, or 70%, does not contain mark-to-market provisions and is comprised of non-recourse securitized debt, senior unsecured debt and junior subordinated notes. The remaining $2.95 billion of debt is in credit and repurchase facilities with several different banks that we have long-standing relationships with. At September 30, 2024, we had $1.51 billion of debt from credit and repurchase facilities that were subject to margin calls related to changes in interest spreads.

At October 30, 2024, we had approximately $600 million in cash and liquidity. In addition to our ability to extend our credit and repurchase facilities and raise funds from equity and debt offerings, we also have a $33.01 billion agency servicing portfolio at September 30, 2024, which is mostly prepayment protected and generates approximately $125.4 million per year in recurring gross cash flow.

To maintain our status as a REIT under the Internal Revenue Code, we must distribute annually at least 90% of our 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 provided by operating activities totaled $414.8 million during the nine months ended September 30, 2024 and consisted primarily of net cash inflows of $220.3 million from loan sales exceeding loan originations in our Agency Business and net income (adjusted for the increase in CECL reserves of $72.7 million) of $281.3 million, partially offset by a $32.4 million increase in funds from payoffs due from our affiliated servicing operations.

Cash flows provided by investing activities totaled $946.1 million during the nine months ended September 30, 2024. Loan and investment activity (originations and payoffs/paydowns) comprise the majority of our investing activities. Loan payoffs and paydowns from our Structured Business totaling $1.87 billion, net of originations of $912.5 million, resulted in net cash inflows of $961.4 million.

Cash flows used in financing activities totaled $2.03 billion during the nine months ended September 30, 2024 and consisted primarily of $1.63 billion of payoffs and paydowns on existing securitizations, $295.9 million of distributions to our stockholders and OP Unit holders and $90.0 million from the repayment at maturity of our 5.75% senior unsecured notes.

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 September 30, 2024. Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $75.0 million and cash. See Note 14 for details about our performance regarding these requirements.

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 12.

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):

(1) Excludes the impact of deferred financing costs.

(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 at September 30, 2024.

(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):

Our debt facilities, including their restrictive covenants, are described in Note 10.

Off-Balance Sheet Arrangements. At September 30, 2024, we had no off-balance sheet arrangements.

Inflation. The Federal Reserve lowered the federal funds rate by 50 basis points in September 2024, which marks the first rate cut since 2020, and it is possible that rates will continue to decline during the remainder of 2024 and 2025. Although rates have started to decline, we currently remain in a high interest rate environment which could remain higher for longer than expected if inflation and other economic indicators do not continue to meet the Federal Reserve’s expectations. If these rate reductions continue, this would likely lead to immediate decreases in net interest income on our floating rate loan book and reduce earnings on our cash and escrow balances. However, if a prolonged rate cut occurs, this could lead to increases in our loan origination business and improved credit, resulting in decreases in delinquencies and potential future losses. For additional details, please see “Current Market Conditions, Risks and Recent Trends” above and “Quantitative and Qualitative Disclosures about Market Risk” below.

Contractual Obligations. During the nine months ended September 30, 2024, the following significant changes were made to our contractual obligations disclosed in our 2023 Annual Report:

• Modified existing debt facilities, resulting in a net $350.0 million increase in the committed amount of these facilities;
• Entered into three new debt facilities totaling $900.0 million;
• Unwound CLO 15 repaying $674.4 million of outstanding notes;
• Paid down outstanding notes on CLOs 14 and 16 and Q Series securitization totaling $954.6 million; and
• Repaid at maturity the remaining $90.0 million of our 5.75% senior notes.

Refer to Note 14 for a description of our debt maturities by year and unfunded commitments at September 30, 2024.

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 12 for details.

Critical Accounting Policies

Please refer to Note 2 of the Notes to Consolidated Financial Statements in our 2023 Annual Report for a discussion of our critical accounting policies. During the nine months ended September 30, 2024, 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 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, 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.

Distributable earnings are as follows ($ in thousands, except share and per share data):

(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.

We disclosed a quantitative and qualitative analysis regarding market risk in Item 7A of our 2023 Annual Report. That information is supplemented by the information included above in Item 2 of this report. Other than the developments described thereunder, there have been no material changes in our exposure to market risk since December 31, 2023.

The following table projects the potential impact on interest (in thousands) for a 12-month period, assuming a hypothetical instantaneous increase or decrease of 50 basis points and a decrease of 100 basis points in corresponding interest rates. Since it is unlikely that interest rates will significantly increase in the near future as a result of the current high interest rate environment, we have excluded the impact of a 100 basis point increase in corresponding interest rates.

(1) Represents the UPB of our structured loan portfolio, the principal balance of our debt and the account balances of our cash, restricted cash and escrows at September 30, 2024.

(2) Our cash, restricted cash and escrows are currently earning interest at a weighted average blended rate of approximately 4.6%, or approximately $110 million annually. Interest income earned on our cash and restricted cash is included as a component of interest income and interest income earned on escrows is included as a component of servicing revenue, net in the consolidated statements of income. The interest earned on our cash, restricted cash and escrows is based on an average daily balance and may be different from the end of period balance.

We entered into treasury futures to hedge our exposure to changes in interest rates inherent in (1) our held-for-sale Agency Business Private Label loans from the time the loans are rate locked until sale and securitization, and (2) our Agency Business SFR – fixed rate loans from the time the loans are originated until the time they can be financed with match term fixed rate securitized debt. Our treasury futures are tied to the five-year and ten-year treasury rates and hedge our exposure to Private Label loans, until the time they are securitized, and changes in the fair value of our held-for-sale Agency Business SFR – fixed rate loans. A 50 basis point and a 100 basis point increase to the five-year and ten-year treasury rates on our treasury futures held at September 30, 2024 would have resulted in a gain of $0.2 million and $0.5 million, respectively, in the nine months ended September 30, 2024, while a 50 basis point and a 100 basis point decrease in the rates would have resulted in a loss of $0.4 million and $0.8 million, respectively.

Our Agency Business originates, sells and services a range of multifamily finance products with Fannie Mae, Freddie Mac and HUD. Our loans held-for-sale to these agencies are not currently exposed to interest rate risk during the loan commitment, closing and delivery process. The sale or placement of each loan to an investor is negotiated prior to closing on the loan with the borrower, and the sale or placement is generally effectuated within 60 days of closing. The coupon rate for the loan is set after we establish the interest rate with the investor.

In addition, the fair value of our MSRs is subject to market risk since a significant driver of the fair value of these assets is the discount rates. A 100 basis point increase in the weighted average discount rate would decrease the fair value of our MSRs by $15.0 million at September 30, 2024, while a 100 basis point decrease would increase the fair value by $15.8 million.

Management, with the participation of our chief executive officer and chief financial officer, has evaluated the effectiveness of our disclosure controls and procedures at September 30, 2024. Based on this evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures were effective at September 30, 2024.

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2024 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.