# ARBOR REALTY TRUST INC (ABR) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from ARBOR REALTY TRUST INC's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1253986/000162828024005456/abr-20231231.htm
Accession: 0001628280-24-005456
Filing date: 2024-02-20
Report date: 2023-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/ABR/
All MD&A years: /company/ABR/mda/
Previous year: /company/ABR/mda/fy2022/ (FY 2022)
Next year: /company/ABR/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

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 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 (“APL certificates”).

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.

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. Although vaccine availability and its usage have led to less negative short-term effects, such as travel bans, quarantines, layoffs and shutdowns, the ongoing longer-term macroeconomic effects of the COVID-19 pandemic on inflation, interest

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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. 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 2023

Financing and Capital Markets Activity.

•Raised $193.7 million of capital from issuances of approximately 13.1 million shares of common stock under our “At-The-Market” equity offering sales agreement;

•Unwound CLO 12 and 13, redeeming the remaining outstanding notes, which were repaid primarily from the refinancing of the remaining assets within our other CLO vehicles and credit and repurchase facilities;

•Raised $93.4 million from the issuance of our 7.75% senior unsecured notes and used $70.8 million of the net proceeds to redeem our 8.00% senior unsecured notes; and

•Redeemed $78.9 million of our 5.625% senior unsecured notes at maturity with cash.

Share Repurchase Program. We implemented a $50.0 million share repurchase program and repurchased approximately 3.5 million shares of our common stock at a total cost of $37.4 million and an average cost of $10.56 per share. We subsequently increased the remaining availability under the share repurchase program to $150.0 million.

Structured Business Activity.

•Reduced our structured loan and investment portfolio by 13% to $12.62 billion on loan runoff of $3.35 billion, which outpaced loan originations totaling $983.3 million;

•Received and recorded $26.7 million in income from equity affiliates from equity participation interests on properties that were sold and cash distributions from our Lexford joint venture. We also received cash distributions totaling $15.0 million from our investment in a residential mortgage banking business; and

•Settled the Extended Stay litigation (see Note 14).

Agency Business Activity.

•Loan originations increased 7% to $5.11 billion, and includes $1.69 billion of new agency loans that were recaptured from our Structured Business runoff; and

•Grew our fee-based servicing portfolio 11%, or $2.99 billion, to $30.98 billion.

Dividend. We raised our quarterly common dividend twice during 2023 to an annual run rate of $1.72 per share, representing a 7.5% increase over the prior year.

Current Market Conditions, Risks and Recent Trends

The Federal Reserve raised interest rates throughout 2022 and 2023 to combat inflation and restore price stability. As inflation begins to cool, it is possible that the Federal Reserve will pause on raising interest rates higher and potentially begin to lower rates during 2024.

We have been very successful in raising capital through various vehicles to grow our businesses. Inflation, rising 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. Instability in the banking sector, such as the recent 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.

Additionally, the recent turmoil in the banking sector and financial markets has resulted in multiple regional bank failures and consolidations. 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 could 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. 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.

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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 could have a significant impact on our future results of operations, financial condition, business prospects and our ability to make distributions to our stockholders.

We are currently in a high interest rate environment and some of our borrowers have experienced, and may continue to experience, financial stress that have resulted in an increase to payment delinquencies, loan loss reserves and realized losses on certain loans within our portfolio. 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. Given the current elevated interest rate environment, we cannot guarantee that our loan portfolio will perform under the terms originally established.

Currently, the high interest rate environment positively impacts 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. 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 have negatively impacted real estate values and have limited certain borrowers abilities to make debt service payments, which may limit new mortgage loan originations and increase the likelihood of additional delinquencies and losses incurred on defaulted loans if the reduction in the collateral value is insufficient to repay their loans in full.

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. Therefore, a decline in our GSE originations could negatively impact our financial results. We are unsure whether 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 December 31, 2023 to December 31, 2022:

Our Structured loan and investment portfolio balance was $12.62 billion and $14.46 billion at December 31, 2023 and 2022, respectively. This decrease was primarily due to loan payoffs and paydowns exceeding loan originations by $2.37 billion. See below for details.

Our portfolio had a weighted average current interest pay rate of 8.42% and 8.17% at December 31, 2023 and 2022, respectively. Including certain fees earned and costs associated with the structured portfolio, the weighted average current interest rate was 8.98% and 8.42% at December 31, 2023 and 2022, respectively. Our debt that finances our loans and investment portfolio totaled $11.57 billion and $13.28 billion at December 31, 2023 and 2022, respectively, with a weighted average funding cost of 7.14% and 6.22%, respectively, which excludes financing costs. Including financing costs, the weighted average funding rate was 7.45% and 6.50% at December 31, 2023 and 2022, respectively.

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","","2022"],["Loans originated","$","983,343","","","","$","6,151,647"],["Number of loans","150","","","318"],["Weighted average interest rate","10.03","","%","","5.72","","%"],["Loan runoff","$","3,354,055","","","","$","3,818,554"],["Number of loans","187","","","177"],["Weighted average interest rate","9.21","","%","","7.20","","%"],["Loans extended","$","1,744,127","","","","$","1,684,274"],["Number of loans","64","","","66"]]
[[/GREPCENT_TABLE]]

Loans held-for-sale from the Agency Business increased $197.6 million, primarily from loan originations exceeding sales by $217.6 million as noted in the following table. Our GSE loans are generally sold within 60 days, while our Private Label loans are either sold instantaneously or pooled and securitized, or sold, within 180 days from the loan origination date. Activity from our Agency Business portfolio is comprised of the following (in thousands):

[[GREPCENT_TABLE]]
[["","Loan Originations","","Loan Sales"],["Fannie Mae","$","3,773,532","","","$","3,469,340"],["Freddie Mac","756,827","","","715,530"],["Private Label","299,934","","","441,319"],["FHA","257,199","","","240,079"],["SFR - Fixed Rate","19,328","","","22,931"],["Total","$","5,106,820","","","$","4,889,199"]]
[[/GREPCENT_TABLE]]

Investments in equity affiliates remained relatively flat, primarily due to investments made in two new joint ventures, offset by distributions received on existing joint ventures.

Other assets increased $118.8 million, primarily due to an increase in interest receivable (from increases in benchmark index rates), the acquisition of an office property for full satisfaction of the underlying debt, and an increase in unsecured loan fundings.

Liabilities – Comparison of balances at December 31, 2023 to December 31, 2022:

Credit and repurchase facilities decreased $604.0 million, primarily due to runoff in our structured loan portfolio outpacing new originations.

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Securitized debt decreased $914.3 million, primarily due to the unwind of two CLO vehicles totaling $842.1 million and paydowns on existing securitizations totaling $87.7 million.

Senior unsecured notes decreased $52.0 million, primarily due to the redemption of our 8.00% and 5.625% notes totaling $149.6 million, partially offset by our issuance of $95.0 million of 7.75% notes.

Due to borrowers increased $60.5 million, primarily due to unfunded commitments on new originations in our Structured Business, partially offset by the funding of previously committed loan originations.

Allowance for loss-sharing obligations increased $14.5 million, primarily due to increases in estimated losses under CECL.

Equity

During 2023, we sold 13,113,296 shares of our common stock through our “At-The-Market” equity agreement raising net proceeds totaling $193.7 million. We also repurchased approximately 3.5 million shares of our common stock under our share repurchase program at a total cost of $37.4 million.

See Note 16 for details of our dividends declared and our deferred compensation transactions during 2023.

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):

[[GREPCENT_TABLE]]
[["","","December 31, 2023"],["Product","","Portfolio UPB","","Loan Count","","Wtd. Avg. Age of Portfolio (years)","","Wtd. Avg. Life of Portfolio (years)","","Interest Rate Type","","Wtd. Avg. Note Rate","","Annualized Prepayments as a % of Portfolio (1)","","Delinquencies as a % of Portfolio (2)"],["","","","","","Fixed","","Adjustable"],["Fannie Mae","","$","21,264,578","","","2,559","","3.4","","7.4","","96","%","","4","%","","4.50","%","","5.09","%","","0.86","%"],["Freddie Mac","","5,181,933","","","1,148","","3.2","","8.5","","83","%","","17","%","","4.72","%","","7.92","%","","4.39","%"],["Private Label","","2,510,449","","","160","","2.5","","6.7","","100","%","","\u2014","","","4.02","%","","\u2014","","","\u2014"],["FHA","","1,359,624","","","105","","3.0","","19.2","","100","%","","\u2014","","","3.52","%","","\u2014","","","\u2014"],["Bridge","","379,425","","","4","","1.2","","3.2","","63","%","","37","%","","7.14","%","","\u2014","","","\u2014"],["SFR - Fixed Rate","","287,446","","","59","","2.3","","5.1","","100","%","","\u2014","","","5.20","%","","1.18","%","","\u2014"],["Total","","$","30,983,455","","","4,035","","3.2","","8.0","","94","%","","6","%","","4.49","%","","4.83","%","","1.33","%"],["","","December 31, 2022"],["Fannie Mae","","$","19,038,124","","","2,460","","3.1","","8.0","","96","%","","4","%","","4.20","%","","12.71","%","","0.13","%"],["Freddie Mac","","5,153,207","","","1,214","","2.8","","9.0","","84","%","","16","%","","4.26","%","","19.78","%","","0.27","%"],["Private Label","","2,074,859","","","130","","1.9","","7.6","","100","%","","\u2014","","","3.60","%","","\u2014","","","\u2014"],["FHA","","1,155,893","","","96","","2.5","","19.5","","100","%","","\u2014","","","3.17","%","","1.59","%","","\u2014"],["Bridge","","301,182","","4","","0.9","","1.7","","\u2014","","","100","%","","7.68","%","","\u2014","","","\u2014"],["SFR - Fixed Rate","","274,764","","","53","","1.4","","6.0","","100","%","","\u2014","","","5.04","%","","0.30","%","","\u2014"],["Total","","$","27,998,029","","","3,957","","2.9","","8.6","","93","%","","7","%","","4.17","%","","12.35","%","","0.14","%"]]
[[/GREPCENT_TABLE]]

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(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. At December 31, 2023 and 2022, delinquent loans totaled $411.1 million and $38.7 million, respectively. At December 31, 2023, there were two loans totaling $4.8 million in bankruptcy and at both December 31, 2023 and 2022, there were 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.

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Comparison of Results of Operations for Years Ended December 31, 2023 and 2022

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

[[GREPCENT_TABLE]]
[["","Year Ended December 31,","","Increase / (Decrease)"],["","2023","","2022","","Amount","","Percent"],["Interest income","$","1,331,219","","","$","948,401","","","$","382,818","","","40","%"],["Interest expense","903,228","","","557,617","","","345,611","","","62","%"],["Net interest income","427,991","","","390,784","","","37,207","","","10","%"],["Other revenue:"],["Gain on sales, including fee-based services, net","72,522","","","55,816","","","16,706","","","30","%"],["Mortgage servicing rights","69,912","","","69,346","","","566","","","1","%"],["Servicing revenue, net","130,449","","","92,192","","","38,257","","","41","%"],["Property operating income","5,708","","","1,877","","","3,831","","","nm","%"],["Gain (loss) on derivative instruments, net","6,763","","","26,609","","","(19,846)","","","(75)","%"],["Other income (loss), net","7,667","","","(17,563)","","","25,230","","","nm","%"],["Total other revenue","293,021","","","228,277","","","64,744","","","28","%"],["Other expenses:"],["Employee compensation and benefits","159,788","","","161,825","","","(2,037)","","","(1)","%"],["Selling and administrative","51,260","","","53,990","","","(2,730)","","","(5)","%"],["Property operating expenses","5,897","","","2,136","","","3,761","","","176","%"],["Depreciation and amortization","9,743","","","8,732","","","1,011","","","12","%"],["Provision for loss sharing (net of recoveries)","15,695","","","1,862","","","13,833","","","nm","%"],["Provision for credit losses (net of recoveries)","73,446","","","21,169","","","52,277","","","nm","%"],["Litigation settlement","\u2014","","","7,350","","","(7,350)","","","nm","%"],["Total other expenses","315,829","","","257,064","","","58,765","","","23","%"],["Income before extinguishment of debt, income from equity affiliates and income taxes","405,183","","","361,997","","","43,186","","","12","%"],["Loss on extinguishment of debt","(1,561)","","","(4,933)","","","3,372","","","(68)","%"],["Income from equity affiliates","24,281","","","14,247","","","10,034","","","70","%"],["Provision for income taxes","(27,347)","","","(17,484)","","","(9,863)","","","56","%"],["Net income","400,556","","","353,827","","","46,729","","","13","%"],["Preferred stock dividends","41,369","","","40,954","","","415","","","1","%"],["Net income attributable to noncontrolling interest","29,122","","","28,044","","","1,078","","","4","%"],["Net income attributable to common stockholders","$","330,065","","","$","284,829","","","$","45,236","","","16","%"]]
[[/GREPCENT_TABLE]]

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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):

[[GREPCENT_TABLE]]
[["","Year ended December 31,"],["","2023","","2022"],["","Average Carrying Value (1)","","Interest Income / Expense","","W/A Yield / Financing Cost (2)","","Average Carrying Value (1)","","Interest Income / Expense","","W/A Yield / Financing Cost (2)"],["Structured Business interest-earning assets:"],["Bridge loans","$","13,190,889","","","$","1,208,180","","","9.16","%","","$","13,997,117","","","$","859,339","","","6.14","%"],["Mezzanine / junior participation loans","224,784","","","23,939","","","10.65","%","","202,484","","","19,473","","","9.62","%"],["Preferred equity investments","90,960","","","5,892","","","6.48","%","","142,738","","","15,219","","","10.66","%"],["Other","20,635","","","3,370","","","16.33","%","","36,262","","","6,141","","","16.94","%"],["Core interest-earning assets","13,527,268","","","1,241,381","","","9.18","%","","14,378,601","","","900,172","","","6.26","%"],["Cash equivalents","913,382","","","38,052","","","4.17","%","","585,281","","","3,450","","","0.59","%"],["Total interest-earning assets","$","14,440,650","","","$","1,279,433","","","8.86","%","","$","14,963,882","","","$","903,622","","","6.04","%"],["Structured Business interest-bearing liabilities:"],["CLO","$","7,081,594","","","$","496,049","","","7.00","%","","$","7,496,568","","","$","265,560","","","3.54","%"],["Credit and repurchase facilities","3,185,888","","","251,519","","","7.89","%","","3,967,648","","","173,365","","","4.37","%"],["Unsecured debt","1,658,986","","","103,147","","","6.22","%","","1,610,809","","","91,604","","","5.69","%"],["Q Series securitization","229,734","","","17,158","","","7.47","%","","11,033","","","703","","","6.37","%"],["Trust preferred","154,336","","","12,729","","","8.25","%","","154,336","","","7,427","","","4.81","%"],["Total interest-bearing liabilities","$","12,310,538","","","880,602","","","7.15","%","","$","13,240,394","","","538,659","","","4.07","%"],["Net interest income","","","$","398,831","","","","","","","$","364,963"]]
[[/GREPCENT_TABLE]]

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(1)Based on UPB for loans, amortized cost for securities and principal amount for 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 $375.8 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.

The increase in interest expense was mainly due to a $341.9 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.

Agency Business Revenue

The increase in gain on sales, including fee-based services, net was primarily due to a 10% increase in the sales margin from 1.34% (which includes gains recognized on derivative instruments) to 1.48%, partially offset by a 10% decrease in loan sales volume ($549.4 million). The increase in the sales margin was primarily driven by a higher percentage of Fannie Mae loans sold in 2023, which contain higher sales margins.

Overall, the income from MSRs remained relatively flat. The slight increase was primarily due to an increase in Fannie Mae loan commitment volume ($829.6 million), partially offset by a decrease in Freddie Mac loan commitment volume ($596.2 million). The positive impact from the net increase in loan commitment volume was largely offset by a decrease in the Fannie Mae and Freddie Mac MSR rates, as a result of lower servicing rates on newer loans.

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, partially offset by less prepayment penalties received from early runoff.

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Other Income (Loss)

The gain (loss) on derivative instruments in both 2023 and 2022 were related to changes in the fair values of our forward sale commitments and treasury futures held by our Agency Business.

Other income (loss), net in 2023 primarily reflects $4.8 million of loan origination fees from our Structured Business and a $2.5 million mark-to-market recovery on Private Label and SFR loans in our Agency Business, while 2022 primarily reflects a $15.7 million unrealized impairment loss 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 decrease in employee compensation and benefits expense was primarily due to a decrease in incentive compensation.

The decrease in selling and administrative expenses was primarily due to lower professional fees as a result of the settlement of the Extended Stay litigation in early 2023.

The increases in our CECL provisions were primarily due to the impact of a continued decline in the macroeconomic outlook for commercial real estate, including specifically identified impaired assets.

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 2023 and 2022 represents deferred financing fees recognized in connection with the unwind of CLOs, along with the 2022 repurchase of our 4.75% convertible notes.

Income from Equity Affiliates

Income from equity affiliates in 2023 primarily reflects $14.5 million received from equity participation interests on properties that were sold and $12.2 million in distributions received from our Lexford joint venture. Income from equity affiliates in 2022 primarily reflects $11.1 million in distributions received from our Lexford joint venture, $4.9 million of income from our investment in a residential mortgage banking business and a $2.6 million equity participation interest on a property that was sold, partially offset by a $2.4 million other-than-temporary impairment in our North Vermont Avenue investment.

Provision for Income Taxes

In 2023, we recorded a tax provision of $27.3 million, which consisted of a current tax provision of $34.6 million and a deferred tax benefit of $7.3 million. 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. The increase in the tax provision was primarily due to an increase in income generated from our equity investments and an increase in the pre-tax income from our Agency Business.

Net Income Attributable to Noncontrolling Interest

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 outstanding at both December 31, 2023 and 2022, which represented 8.0% and 8.4% of our outstanding stock at December 31, 2023 and 2022, respectively.

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

For a discussion of our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021, 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, 2022, which was filed with the SEC on February 17, 2023, 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

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

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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 recent 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 $11.57 billion in total structured debt outstanding at December 31, 2023. Of this total, $8.74 billion, or 76%, 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 2025, or later. The remaining $2.83 billion of debt is in credit and repurchase facilities with several different banks with which we have long-standing relationships. At December 31, 2023, we had $1.65 billion of debt from credit and repurchase facilities that were subject to margin calls related to changes in interest spreads.

As of February 18, 2024, we had approximately $1.00 billion in cash and approximately $600.0 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 $30.98 billion agency servicing portfolio at December 31, 2023, which is mostly prepayment protected and generates approximately $121.1 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 provided by operating activities totaled $235.9 million during 2023 and consisted primarily of net income of $400.6 million, as well as certain other non-cash net income adjustments, partially offset by net cash outflows of $196.4 million as a result of loan originations exceeding loan sales in our Agency Business.

Cash flows provided by investing activities totaled $1.88 billion during 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 $3.36 billion, net of originations of $1.36 billion, resulted in net cash inflows of $2.00 billion.

Cash flows used in financing activities totaled $1.83 billion during 2023 and consisted primarily of $929.8 million of payoffs and paydowns of securitized debt, net cash outflows of $598.8 million from debt facility activities (facility paydowns were greater than financed loan originations), $380.6 million of distributions to our stockholders and OP Unit holders and $54.6 million from senior unsecured notes activity, partially offset by $193.7 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 December 31, 2023. Our restricted liquidity and purchase and loss obligations were satisfied with letters of credit totaling $69.0 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.

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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):

[[GREPCENT_TABLE]]
[["Debt Instruments","","December 31, 2023"],["","","Commitment","","UPB (1)","","Available","","Maturity Dates (2)"],["Structured Business"],["Credit and repurchase facilities","","$","6,576,161","","","$","2,829,341","","","$","3,746,820","","","2024 - 2027"],["Securitized debt (3)","","6,956,284","","","6,956,284","","","\u2014","","","2025 - 2028"],["Senior unsecured notes","","1,345,000","","","1,345,000","","","\u2014","","","2024 - 2028"],["Convertible senior unsecured notes","","287,500","","","287,500","","","\u2014","","","2025"],["Junior subordinated notes","","154,336","","","154,336","","","\u2014","","","2034 - 2037"],["Structured Business total","","15,319,281","","","11,572,461","","","3,746,820"],["Agency Business"],["Credit and repurchase facilities (4)","","2,100,531","","","413,598","","","1,686,933","","","2024 - 2025"],["Consolidated total","","$","17,419,812","","","$","11,986,059","","","$","5,433,753"]]
[[/GREPCENT_TABLE]]

________________________________________

(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 December 31, 2023.

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

[[GREPCENT_TABLE]]
[["Quarter Ended","","Quarterly Average UPB","","End of Period UPB","","Maximum UPB at Any Month End"],["December 31, 2023","","$","3,274,139","","","$","3,242,938","","","$","3,251,330"],["September 30, 2023","","3,432,725","","","3,398,451","","","3,463,825"],["June 30, 2023","","3,565,377","","","3,588,538","","","3,677,755"],["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"],["December 31, 2021","","3,771,684","","","4,493,699","","","4,493,699"],["September 30, 2021","","3,191,129","","","3,409,598","","","3,409,598"],["June 30, 2021","","2,327,114","","","2,021,412","","","2,588,456"],["March 31, 2021","","2,177,350","","","2,220,307","","","2,262,160"]]
[[/GREPCENT_TABLE]]

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

Off-Balance-Sheet Arrangements. At December 31, 2023, we had no off-balance-sheet arrangements.

Inflation. The Federal Reserve raised interest rates throughout 2022 and 2023 to combat inflation and restore price stability. As inflation begins to cool, it is possible that the Federal Reserve will pause on raising interest rates higher and potentially begin to lower rates during 2024. 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. In addition, a greater portion

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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 have negatively impacted real estate values and have limited certain borrowers abilities to make debt service payments, which may limit new mortgage loan originations and increase the likelihood of additional delinquencies and losses incurred on defaulted loans if the reduction in the collateral value is insufficient to repay their loans in full.

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 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. (“GAAP”). 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. 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. The accounting estimates requiring complex judgement that we consider to be most critical to an investor’s understanding of our financial results and condition are included in our allowance for credit losses and capitalized mortgage servicing rights accounting policies. Each quarter, we assess these estimates and assumptions based on several factors, including historical experience, which we believe to be reasonable under the circumstances. These estimates are subject to change in the future if any of the underlying assumptions or factors change.

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), amortization of the convertible senior notes conversion option (for 2021 only) 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):

[[GREPCENT_TABLE]]
[["","Year Ended December 31,"],["","2023","","2022","","2021"],["Net income attributable to common stockholders","$","330,065","","","$","284,829","","","$","317,412"],["Adjustments:"],["Net income attributable to noncontrolling interest","29,122","","","28,044","","","38,507"],["Income from mortgage servicing rights","(69,912)","","","(69,346)","","","(130,230)"],["Deferred tax (benefit) provision","(7,349)","","","(1,741)","","","10,892"],["Amortization and write-offs of MSRs","77,829","","","104,378","","","91,356"],["Depreciation and amortization","16,425","","","11,069","","","10,900"],["Loss on extinguishment of debt","1,561","","","4,933","","","3,374"],["Provision for credit losses, net","68,642","","","25,077","","","(39,856)"],["(Gain) loss on derivative instruments, net","(8,844)","","","3,480","","","432"],["Stock-based compensation","14,940","","","14,973","","","9,929"],["Loss on redemption of preferred stock","\u2014","","","\u2014","","","3,479"],["Gain on real estate from settlement of loan","\u2014","","","\u2014","","","(2,466)"],["Distributable earnings (1)","$","452,479","","","$","405,696","","","$","313,729"],["Diluted weighted average shares outstanding - GAAP (1)","218,843,613","","199,112,630","","156,089,595"],["Less: Convertible notes dilution (2)","(17,294,392)","","(16,888,226)","","\u2014"],["Diluted weighted average shares outstanding - distributable earnings (1)","201,549,221","","182,224,404","","156,089,595"],["Diluted distributable earnings per share (1)","$","2.25","","","$","2.23","","","$","2.01"]]
[[/GREPCENT_TABLE]]

________________________________________

(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.