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Debt Obligations | 6 Months Ended
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Jun. 30, 2015
Debt Obligations |
Debt Obligations | Note 7 — Debt Obligations We utilize various forms of short-term and long-term financing agreements to finance certain of our loans and investments. Borrowings underlying these arrangements are primarily secured by a significant amount of our loans and investments. Credit Facilities and Repurchase Agreements The following table outlines borrowings under our credit facilities and repurchase agreements:
|  | June 30, 2015 |  | December 31, 2014 |
|  | Debt |  | Collateral |  | Weighted |  | Debt |  | Collateral |  | Weighted |
|  | Carrying |  | Carrying |  | Average |  | Carrying |  | Carrying |  | Average |
|  | Value |  | Value |  | Note Rate |  | Value |  | Value |  | Note Rate |
$150 million warehouse repurchase facility |  | $ | 111,680,600 |  | $ | 172,521,052 |  | 2.43 | % | $ | — |  | $ | — |  | — |
$100 million warehousing credit facility |  | 58,643,095 |  | 87,617,486 |  | 2.37 | % | 92,520,637 |  | 128,593,000 |  | 2.45 | %
$75 million warehousing credit facility |  | 68,491,000 |  | 95,390,000 |  | 2.40 | % | 42,975,000 |  | 58,000,000 |  | 2.45 | %
$75 million warehousing credit facility |  | 48,802,500 |  | 70,725,000 |  | 2.22 | % | 29,890,563 |  | 45,422,236 |  | 2.20 | %
$25 million term credit facility |  | 20,120,000 |  | 25,200,000 |  | 2.22 | % | — |  | — |  | — |
$15 million term credit facility |  | 15,000,000 |  | — |  | 7.60 | % | 15,000,000 |  | — |  | 7.50 | %
Total credit facilities and repurchase agreements |  | $ | 322,737,195 |  | $ | 451,453,538 |  | 2.61 | % | $ | 180,386,200 |  | $ | 232,015,236 |  | 2.84 | %
At June 30, 2015 and December 31, 2014, the weighted average interest rate for our credit facilities and repurchase agreements was 2.61% and 2.84%, respectively. Including certain fees and costs, such as structuring, commitment, non-use and warehousing fees, the weighted average interest rate was 2.87% and 3.06% at June 30, 2015 and December 31, 2014, respectively. There were no interest rate swaps on these facilities at June 30, 2015 and December 31, 2014. In January 2015, we entered into a $150.0 million warehouse repurchase facility with a financial institution to finance a significant portion of the unwind of our CDO I and CDO II vehicles. The facility bears interest at a rate of 212.5 basis points over LIBOR on senior mortgage loans, 350.0 basis points over LIBOR on junior mortgage loans, and matures in January 2017 with a one-year extension option. See “Collateralized Debt Obligations” below. In July 2015, we amended the facility to temporarily increase the committed amount to $175.0 million until December 31, 2015. We have a $100.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties that bore interest at a rate of 225 basis points over LIBOR and was to mature in April 2015. In April 2015, we extended the maturity to May 2015. In May 2015, we amended the facility decreasing the rate of interest to 215 basis points over LIBOR and extended the maturity to May 2017 with a one-year extension option subject to certain conditions. The facility has a maximum advance rate of 75% and also has a compensating balance requirement of $50.0 million to be maintained by us and our affiliates. We have a $75.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties that bore interest at a rate of 225 basis points over LIBOR and was to mature in June 2015. In June 2015, we amended the facility, extending the maturity to June 2016, decreasing the rate of interest to 212.5 basis points over LIBOR, and added a new $25.0 million sublimit to finance healthcare related loans. The healthcare related loans will have an interest rate ranging from 225 basis points to 250 basis points over LIBOR depending on the type of facility financed. The facility has a maximum advance rate of 75% of the applicable expected permanent loan amount. We have another $75.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties that bears interest at a rate of 200 basis points over LIBOR and was to mature in April 2015. In April 2015, the facility was increased from $60.0 million to its current $75.0 million and the maturity was extended to April 2016. The facility has a maximum advance rate of 70% or 75%, depending on the property type. In February 2015, we entered into a $25.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties. The facility bears interest at a rate of 200 basis points over LIBOR and matures in February 2016. We had a $15.0 million term facility that bears interest at a fixed rate of 7.5%, matures in August 2015 and is secured by a portion of the bonds originally issued by our CDO III entity that we repurchased. We repaid this facility in full in July 2015. In March 2015, we entered into an $87.0 million warehouse repurchase facility with a financial institution to finance the acquisition of a first mortgage note. The facility bore interest at a rate of 250 basis points over a LIBOR floor of .25% and was to mature in March 2016. The facility was fully repaid in April 2015. Our warehouse credit facilities generally allow for an original warehousing period of up to 24 months from the initial advance on an asset. In addition, our credit facilities and repurchase agreements contain several restrictions including full repayment of an advance if a loan becomes 60 days past due, is in default or is written down by us. Our credit facilities and repurchase agreements also contain representations, warranties, covenants, conditions precedent to funding, events of default and indemnities that are customary for agreements of these types. See “Debt Covenants” below for details. Collateralized Loan Obligations (CLOs) The following table outlines borrowings and the corresponding collateral under our CLOs as of June 30, 2015:
|  | Debt |  | Collateral |  |  |
|  |  |  |  |  | Loans |  | Cash |  |  |
|  | Face |  | Carrying |  | Unpaid |  | Carrying |  | Restricted |  | Collateral |
|  | Value |  | Value |  | Principal |  | Value |  | Cash (1) |  | At-Risk (2) |
CLO III |  | $ | 281,250,000 |  | $ | 281,250,000 |  | $ | 329,677,445 |  | $ | 328,347,258 |  | $ | 40,878,834 |  | $ | — |
CLO IV |  | 219,000,000 |  | 219,000,000 |  | 293,816,979 |  | 292,822,017 |  | 6,183,021 |  | — |
Total CLOs |  | $ | 500,250,000 |  | $ | 500,250,000 |  | $ | 623,494,424 |  | $ | 621,169,275 |  | $ | 47,061,855 |  | $ | — |
The following table outlines borrowings and the corresponding collateral under our CLOs as of December 31, 2014:
|  | Debt |  | Collateral |  |  |
|  |  |  |  |  | Loans |  | Cash |  |  |
|  | Face |  | Carrying |  | Unpaid |  | Carrying |  | Restricted |  | Collateral |
|  | Value |  | Value |  | Principal |  | Value |  | Cash (1) |  | At-Risk (2) |
CLO II |  | $ | 177,000,000 |  | $ | 177,000,000 |  | $ | 252,353,210 |  | $ | 251,658,406 |  | $ | 7,284,919 |  | $ | — |
CLO III |  | 281,250,000 |  | 281,250,000 |  | 315,390,280 |  | 313,932,084 |  | 59,245,183 |  | — |
Total CLOs |  | $ | 458,250,000 |  | $ | 458,250,000 |  | $ | 567,743,490 |  | $ | 565,590,490 |  | $ | 66,530,102 |  | $ | — |
CLO II – Issued two investment grade tranches in January 2013 with a stated maturity date in February 2023. Interest was variable based on three-month LIBOR; the weighted average note rate was 2.56%. CLO III — Issued three investment grade tranches in April 2014 with a replacement period through October 2016 and a stated maturity date in May 2024. Interest is variable based on three-month LIBOR; the weighted average note rate was 2.62% and 2.60% at June 30, 2015 and December 31, 2014, respectively. CLO IV — Issued three investment grade tranches in February 2015 with a replacement period through September 2017 and a stated maturity date in March 2025. Interest is variable based on three-month LIBOR; the weighted average note rate was 2.47% at June 30, 2015.
| (1) |  | Represents restricted cash held for principal repayments as well as for reinvestment in the CLOs. Does not include restricted cash related to interest payments, delayed fundings and expenses.
| (2) |  | Amounts represent the face value of collateral in default, as defined by the CLO indenture, as well as assets deemed to be “credit risk.” Credit risk assets are reported by each of the CLOs and are generally defined as one that, in the CLO collateral manager’s reasonable business judgment, has a significant risk of declining in credit quality or, with a passage of time, becoming a defaulted asset.
In March 2015, we completed the unwinding of CLO II, redeeming $177.0 million of our outstanding notes which were repaid primarily from the refinancing of the remaining assets within our new and existing financing facilities as well as with cash held by the CLO and expensed approximately $1.5 million of deferred fees in the first quarter of 2015 into interest expense on the consolidated statements of income. In February 2015, we completed our fourth collateralized securitization vehicle (“CLO IV”), issuing to third party investors three tranches of investment grade CLOs through two newly-formed wholly-owned subsidiaries totaling $219.0 million. At closing, the notes were secured by a portfolio of loan obligations with a face value of approximately $250.0 million, consisting primarily of bridge loans that were contributed from our existing loan portfolio. The financing has an approximate 2.5 year replacement period from closing that allows the principal proceeds and sale proceeds (if any) of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture. Thereafter, the outstanding debt balance will be reduced as loans are repaid. Initially, the proceeds of the issuance of the securities also included $50.0 million for the purpose of acquiring additional loan obligations for a period of up to 120 days from the closing date of the CLO. In April 2015, the $50.0 million of additional proceeds was fully utilized. The aggregate principal amounts of the three classes of notes are $165.8 million of Class A senior secured floating rate notes, $24.8 million of Class B secured floating rate notes and $28.5 million of Class C secured floating rate notes. We retained a residual interest in the portfolio with a notional amount of approximately $81.0 million. The notes have an initial weighted average interest rate of approximately 2.24% plus one-month LIBOR and interest payments on the notes are payable monthly. Including certain fees and costs, the initial weighted average note rate was 2.96%. At June 30, 2015 and December 31, 2014, the aggregate weighted average note rate for our CLOs was 2.55% and 2.59%, respectively. Including certain fees and costs, the weighted average note rate was 3.12% and 3.14% at June 30, 2015 and December 31, 2014, respectively. Collateralized Debt Obligations (CDOs) The following table outlines borrowings and the corresponding collateral under our CDO as of June 30, 2015:
|  | Debt |  | Collateral |  |  |
|  |  |  | Loans |  | Cash |  |  |
|  | Face |  | Carrying |  | Unpaid |  | Carrying |  | Restricted |  | Collateral |
|  | Value |  | Value |  | Principal (1) |  | Value (1) |  | Cash (2) |  | At-Risk (3) |
CDO III |  | $ | 71,099,881 |  | $ | 79,262,601 |  | $ | 172,349,012 |  | $ | 141,601,623 |  | $ | 22,087,981 |  | $ | 127,683,921 |
The following table outlines borrowings and the corresponding collateral under our CDOs as of December 31, 2014:
|  | Debt |  | Collateral |  |  |
|  |  |  | Loans |  | Cash |  |  |
|  | Face |  | Carrying |  | Unpaid |  | Carrying |  | Restricted |  | Collateral |
|  | Value |  | Value |  | Principal (1) |  | Value (1) |  | Cash (2) |  | At-Risk (3) |
CDO I |  | $ | 69,972,159 |  | $ | 75,402,789 |  | $ | 222,903,486 |  | $ | 174,460,160 |  | $ | 5,232,226 |  | $ | 180,691,292 |
CDO II |  | 97,906,092 |  | 103,484,624 |  | 192,522,685 |  | 143,824,571 |  | 69,412,808 |  | 106,139,494 |
CDO III |  | 144,192,804 |  | 152,507,713 |  | 202,758,120 |  | 171,457,394 |  | 64,771,797 |  | 147,049,346 |
Total CDOs |  | $ | 312,071,055 |  | $ | 331,395,126 |  | $ | 618,184,291 |  | $ | 489,742,125 |  | $ | 139,416,831 |  | $ | 433,880,132 |
CDO I — Issued four investment grade tranches in January 2005 with a stated maturity date in February 2040. Interest was variable based on three-month LIBOR; the weighted average note rate was 3.23% at December 31, 2014. CDO II — Issued nine investment grade tranches in January 2006 with stated maturity date in April 2038. Interest was variable based on three-month LIBOR; the weighted average note rate was 6.22% at December 31, 2014. CDO III — Issued ten investment grade tranches in December 2006 with a stated maturity date in January 2042. Interest is variable based on three-month LIBOR; the weighted average note rate was 1.42% and 0.98% at June 30, 2015 and December 31, 2014, respectively.
| (1) |  | Amounts include loans to real estate assets consolidated by us that were reclassified to real estate owned and held-for-sale, net on the consolidated financial statements.
| (2) |  | Represents restricted cash held for principal repayments in the CDOs. Does not include restricted cash related to interest payments, delayed fundings and expenses.
| (3) |  | Amounts represent the face value of collateral in default, as defined by the CDO indenture, as well as assets deemed to be “credit risk.” Credit risk assets are reported by each of the CDOs and are generally defined as one that, in the CDO collateral manager’s reasonable business judgment, has a significant risk of declining in credit quality or, with a passage of time, becoming a defaulted asset.
At June 30, 2015 and December 31, 2014, the aggregate weighted average note rate for our CDOs, including the cost of interest rate swaps on assets financed in these facilities, was 1.42% and 3.13%, respectively. Excluding the effect of swaps, the weighted average note rate at June 30, 2015 and December 31, 2014 was 1.00% and 1.07%, respectively. Including certain fees and costs, the weighted average note rate was 1.93% and 3.55% at June 30, 2015 and December 31, 2014, respectively. In January 2015, we completed the unwinding of CDO I and CDO II, redeeming $167.9 million of our outstanding notes. The notes were repaid primarily from proceeds received from the refinancing of CDO I and II’s remaining assets within a new $150.0 million warehouse repurchase facility and our existing financing facilities, as well as with cash held by each CDO. As a result of this transaction, we generated approximately $30.0 million in cash equity and expensed $0.5 million of deferred fees in the first quarter of 2015. We also terminated the related basis and interest rate swaps and incurred a loss of $4.3 million in the first quarter of 2015. See Note 8 — “Derivative Financial Instruments” for additional details. In 2010, we re-issued our own CDO bonds we had acquired throughout 2009 with an aggregate face amount of approximately $42.8 million as part of an exchange for the retirement of $114.1 million of our junior subordinated notes. This transaction resulted in the recording of $65.2 million of additional CDO debt, of which $42.3 million represents the portion of our CDO bonds that were exchanged and $22.9 million represents the estimated interest due on the reissued bonds through their maturity. In the first quarter of 2015, we unwound our CDO I and CDO II vehicles and reduced the balance of estimated interest by $11.0 million, recording a gain on acceleration of deferred income in the consolidated statements of income, and $8.2 million remains at June 30, 2015. As CDO III is past its reinvestment period, investor capital is repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CDO. Proceeds distributed are recorded as a reduction of the CDO liability. CDO III had a $100.0 million revolving note class that provided a revolving note facility, which was paid off in the first quarter of 2015. In July 2015, we completed the unwind of CDO III, redeeming $71.1 million of outstanding notes. The notes were redeemed and repaid primarily from proceeds received from the refinancing of CDO III’s remaining assets within one of our existing financing facilities, as well as cash held by CDO III. As a result of this transaction, we expect to recognize an $8.2 million gain on the acceleration of deferred income and incur $0.5 million of other costs related to this vehicle in the third quarter of 2015. See Note 8 — “Derivative Financial Instruments” for additional information. We account for our CLO and CDO transactions on our consolidated balance sheet as financing facilities. Our CLOs and CDOs are VIEs for which we are the primary beneficiary and are consolidated in our financial statements accordingly. The investment grade tranches are treated as secured financings, and are non-recourse to us. Senior Unsecured Notes During 2014, we issued $90.0 million aggregate principal amount of 7.375% senior unsecured notes due in 2021 in an underwritten public offering for net proceeds of $85.4 million after deducting the issuance and underwriting discounts and offering expenses. In connection with this offering, the underwriters exercised a portion of their overallotment option for a $7.8 million aggregate principal amount providing additional net proceeds of $7.4 million. The notes can be redeemed by us after May 15, 2017. The interest is paid quarterly in February, May, August, and November starting in August 2014. Including certain fees and costs, the weighted average note rate was 8.11% and 8.06% at June 30, 2015 and December 31, 2014, respectively. We used the net proceeds to make investments, to repurchase or pay liabilities and for general corporate purposes. Junior Subordinated Notes The carrying value of borrowings under our junior subordinated notes was $160.1 million and $159.8 million at June 30, 2015 and December 31, 2014, respectively, which is net of a deferred amount of $15.7 million and $16.0 million, respectively, that is being amortized into interest expense over the life of the notes. These notes have maturities ranging from March 2034 through April 2037, pay interest quarterly at a fixed or floating rate of interest based on three-month LIBOR and were not redeemable for the first two years. The current weighted average note rate was 3.05% and 3.01% at June 30, 2015 and December 31, 2014. Including certain fees and costs, the weighted average note rate was 3.21% and 3.18% at June 30, 2015 and December 31, 2014, respectively. The entities that issued the junior subordinated notes have been deemed VIEs. See Note 9 — “Variable Interest Entities” for further details. Notes Payable The following table outlines borrowings under our notes payable:
|  | June 30, 2015 |  | December 31, 2014 |
|  | Debt |  | Collateral |  | Debt |  | Collateral |
|  | Carrying |  | Carrying |  | Carrying |  | Carrying |
|  | Value |  | Value |  | Value |  | Value |
Junior loan participation, secured by our interest in a first mortgage loan with a principal balance of $1.3 million, participation interest was based on a portion of the interest received from the loan which has a fixed rate of 9.57% |  | $ | 1,300,000 |  | $ | 1,300,000 |  | $ | 1,300,000 |  | $ | 1,300,000 |
Junior loan participation, secured by our interest in a first mortgage loan with a principal balance of $28.8 million, expiration January 2016, interest is based on a portion of the interest received from the loan which has a fixed rate of 15.0% |  | 1,000,000 |  | 1,000,000 |  | — |  | — |
Total notes payable |  | $ | 2,300,000 |  | $ | 2,300,000 |  | $ | 1,300,000 |  | $ | 1,300,000 |
At June 30, 2015 and December 31, 2014, the weighted average note rate for our notes payable was 6.61%. There were no interest rate swaps on the notes payable at June 30, 2015 and December 31, 2014. Our obligation to pay interest on the junior loan participations is based on the performance of the related loan. Interest expense is based on the portion of the interest received from the loan that is paid to the junior participant. Mortgage Note Payable — Real Estate Owned and Held-For-Sale In the first quarter of 2015, we made required paydowns of $10.3 million and repaid the Multifamily Portfolio mortgage of $20.7 million, replacing it with two new notes payable totaling $27.2 million. At June 30, 2015, the new notes payable consist of a $24.7 million secured loan that bears interest at a fixed rate of 3.00% and matures in December 2017, as well as a $2.5 million, unsecured loan that bears interest at a variable rate of one-month LIBOR plus 2.75% and matures in December 2016. At December 31, 2014, the prior mortgage had an outstanding balance of $31.0 million, bore interest at a variable rate of one-month LIBOR plus 1.23% and was to mature in June 2015. Debt Covenants Our debt facilities contain various financial covenants and restrictions, including a minimum liquidity requirement of $20.0 million, minimum net worth requirement of either $150.0 million or $300.0 million depending on the debt facility and a maximum total liabilities less subordinated debt requirement of $2.0 billion, as well as certain other debt service coverage ratios and debt to equity ratios. We were in compliance with all financial covenants and restrictions at June 30, 2015. Our CDO and CLO vehicles contain interest coverage and asset overcollateralization covenants that must be met as of the waterfall distribution date in order for us to receive such payments. If we fail these covenants in our CDO or any of our CLOs, all cash flows from the applicable CDO or CLO would be diverted to repay principal and interest on the outstanding CDO or CLO bonds and we would not receive any residual payments until that CDO or CLO regained compliance with such tests. Our CDO and CLOs were in compliance with all such covenants as of June 30, 2015, as well as on the most recent determination dates in July 2015. In the event of a breach of the CDO or CLO covenants that could not be cured in the near-term, we would be required to fund our non-CDO or non-CLO expenses, including management fees and employee costs, distributions required to maintain REIT status, debt costs, and other expenses with (i) cash on hand, (ii) income from any CLO not in breach of a covenant test, (iii) income from real property and loan assets, (iv) sale of assets, or (v) or accessing the equity or debt capital markets, if available. We have the right to cure covenant breaches which would resume normal residual payments to us by purchasing non-performing loans out of the CDO or CLOs. However, we may not have sufficient liquidity available to do so at such time. The chart below is a summary of our CLO compliance tests as of the most recent determination dates in July 2015:
Cash Flow Triggers |  | CLO III |  | CLO IV |
Overcollateralization (1) |  |  |  |  |
Current |  | 133.33 | % | 136.99 | %
Limit |  | 132.33 | % | 135.99 | %
Pass / Fail |  | Pass |  | Pass |
Interest Coverage (2) |  |  |  |  |
Current |  | 266.20 | % | 365.63 | %
Limit |  | 120.00 | % | 120.00 | %
Pass / Fail |  | Pass |  | Pass |
| (1) |  | The overcollateralization ratio divides the total principal balance of all collateral in the CLO by the total principal balance of the bonds associated with the applicable ratio. To the extent an asset is considered a defaulted security, the asset’s principal balance for purposes of the overcollateralization test is the lesser of the asset’s market value or the principal balance of the defaulted asset multiplied by the asset’s recovery rate which is determined by the rating agencies. Rating downgrades of CLO collateral will generally not have a direct impact on the principal balance of a CLO asset for purposes of calculating the CLO overcollateralization test unless the rating downgrade is below a significantly low threshold (e.g. CCC-) as defined in each CLO vehicle.
| (2) |  | The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by us.
The chart below is a summary of our CDO and CLO overcollateralization ratios as of the following determination dates:
Determination Date |  | CDO III |  | CLO III |  | CLO IV |
July 2015 (1) |  | — |  | 133.33 | % | 136.99 | %
April 2015 |  | 115.97 | % | 133.33 | % | 136.99 | %
January 2015 |  | 111.34 | % | 133.33 | % | — |
October 2014 |  | 110.65 | % | 133.33 | % | — |
July 2014 |  | 109.20 | % | 133.33 | % | — |
| (1) |  | CDO III was redeemed in July 2015.
The ratio will fluctuate based on the performance of the underlying assets, transfers of assets into the CDO and CLOs prior to the expiration of their respective replenishment dates, purchase or disposal of other investments, and loan payoffs. No payment due under the junior subordinated indentures may be paid if there is a default under any senior debt and the senior lender has sent notice to the trustee. The junior subordinated indentures are also cross-defaulted with each other.

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- Definition The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 505 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=6928386&loc=d3e21475-112644 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 210 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.5-02.19,20,22) -URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682 Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher SEC -Name Regulation S-X (SX) -Number 210 -Section 02 -Paragraph 19, 20, 22 -Article 5 + Details
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