SEC Staff Issues Comments on Earnings Calls and MD&A Disclosures

In monitoring recent Securities and Exchange Commission (SEC) staff comment letters, we found a letter exchange that serves as a reminder to public companies when preparing their earnings call scripts and answering analysts’ questions: the SEC is, in fact, listening.

As background, in discussing the objective of the Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A), Item 303(a) states the MD&A “must focus specifically on material events and uncertainties known to management that are reasonably likely to cause reported financial information not to be necessarily indicative of future operating results or of future financial condition.”

Moreover, Item 303(b)(2) states, “Describe any known trends or uncertainties that have had or that are reasonably likely to have a material favorable or unfavorable impact on net sales or revenues or income from continuing operations.” Therefore, it is important that the actual MD&A in the periodic filings have synchronization with the tone and direction delivered by management during earnings calls with management and investors. This is why it is customary for SEC staff, when performing a 10-K review, to also conduct a more holistic review of the company’s disclosures on its website, earnings call transcripts, press releases, and analysts reports. This helps the SEC staff “zoom out” to see how management is discussing the company’s results and trends outside of the SEC filings process.

This comment letter exchange is interesting because it demonstrates the holistic review process of a customary 10-K review:

“Management's Discussion and Analysis of Financial Condition and Results of Operations, page 33

1. We note your discussion in your fourth quarter earnings call of your strategy of refinancing loans off your balance sheet through your capital-light agency business, and that you are continuing to focus on working through your loan book and converting your multifamily bridge loans into agency product. You also noted that when you do a bridge loan, it's clearly for the sole purpose of creating an agency loan. Please tell us what consideration you have given to discussing this strategy in detail in your periodic filings.

Company Response:

The Company gives thoughtful consideration to describing its business and strategies in its periodic filings with the SEC. In our most recent filing, the Form 10-K, the Company disclosed its strategy of converting its multifamily bridge loans into agency/GSE loans in multiple locations. Within Item 1. Business, the Company included the following relative disclosures:

• Business Objectives and Strategy section (page 2) – ‘In our Structured Business, our primary focus is on…growing our loan portfolio which also provides a pipeline to growth in our Agency/GSE servicing portfolio.’
• Investment Strategy section, paragraph titled Use Our Relationships with Existing Borrowers (page 3) – ‘Through the expertise of our originators, we offer a wide range of customized financing solutions and benefit from our existing customer base by using existing business to create potential refinancing opportunities.’
• Our Primary Targeted Investments section, second paragraph under title Bridge Financing (page 3) – ‘Borrowers typically use the proceeds of a conventional mortgage, such as our GSE/agency loans, to repay a bridge loan.’

Within Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, Significant Developments During 2023 section, the paragraph titled Agency Business Activity (page 34), the Company included the following statistical disclosure related to its strategy to convert multifamily bridge loans into agency product – ‘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.’

In its future filings, beginning with its quarterly report on Form 10-Q for the quarter ended March 31, 2024, which the Company currently expects to file on or about May 3, 2024, the Company will further clarify its business strategy related to converting multifamily bridge loans into agency loans by including the following disclosure in its Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosures.

‘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.’

In connection with this response, the Company acknowledges that the Company is responsible for the accuracy and adequacy of its disclosures, notwithstanding any review, comments, action or absence of action by the Staff.”

This follows two other recent comment letters from SEC staff related to earnings calls: A January 2024 letter and response that discussed whether metrics mentioned by a company’s CEO on earnings calls two quarters in a row were key performance indicators for the business and another from the same month that asked whether refurbishment revenue that was discussed on the past two quarters’ earnings calls should be broken out separately in the notes to a company’s financial statements.

All in all, it is clear that synchronizing what will be said on the earnings call with what will be disclosed in a company’s SEC filings is a vital consideration for public companies. When preparing an MD&A, it is good practice to pull recent earnings call transcripts to help ensure it is capturing the known trends or uncertainties that have had or are reasonably likely to have a material favorable or unfavorable impact on the company’s financial results.

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