Note 3 — Loans and Investments

Our Structured Business loan and investment portfolio consists of ($ in thousands):


								Wtd. Avg.
								Remaining	Wtd. Avg.		Wtd. Avg.
			Percent of		Loan	Wtd. Avg.		Months to	First Dollar		Last Dollar
	September 30, 2018		Total		Count	Pay Rate (1)		Maturity	LTV Ratio (2)		LTV Ratio (3)
Bridge loans	$	2,919,582	92	%	170	6.70	%	19.6	0	%	74	%
Preferred equity investments		154,202	5	%	10	8.18	%	70.5	62	%	87	%
Mezzanine loans		96,333	3	%	11	10.49	%	19.5	25	%	71	%
		3,170,117	100	%	191	6.88	%	22.0	4	%	74	%
Allowance for loan losses		(60,951)
Unearned revenue		(11,477)
Loans and investments, net	$	3,097,689


	December 31, 2017
Bridge loans	$	2,422,105	91	%	150	6.10	%	20.9	0	%	72	%
Preferred equity investments		142,892	6	%	12	6.47	%	68.7	64	%	90	%
Mezzanine loans		87,541	3	%	8	10.78	%	24.8	20	%	63	%
		2,652,538	100	%	170	6.28	%	23.6	4	%	73	%
Allowance for loan losses		(62,783)
Unearned revenue		(10,628)
Loans and investments, net	$	2,579,127

(1)

“Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balance (“UPB”) of each loan in our portfolio, of the interest rate that is required to be paid monthly as stated in the individual loan agreements. Certain loans and investments that require an additional rate of interest “Accrual Rate” to be paid at maturity are not included in the weighted average pay rate as shown in the table.

(2)

The “First Dollar Loan-to-Value (“LTV”) Ratio” is calculated by comparing the total of our senior most dollar and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will absorb a total loss of our position.

(3)

The “Last Dollar LTV Ratio” is calculated by comparing the total of the carrying value of our loan and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will initially absorb a loss.

Concentration of Credit Risk

We are subject to concentration risk in that, at September 30, 2018, the UPB related to 48 loans with five different borrowers represented 23% of total assets. At December 31, 2017, the UPB related to 42 loans with five different borrowers represented 24% of total assets. During both the nine months ended September 30, 2018 and the year ended December 31, 2017, no single loan or investment represented more than 10% of our total assets and no single investor group generated over 10% of our revenue.

We assign a credit risk rating of pass, pass/watch, special mention, substandard or doubtful to each loan and investment, with a pass rating being the lowest risk and a doubtful rating being the highest risk. Each credit risk rating has benchmark guidelines that pertain to debt-service coverage ratios, LTV ratios, borrower strength, asset quality, and funded cash reserves. Other factors such as guarantees, market strength, and remaining loan term and borrower equity are also reviewed and factored into determining the credit risk rating assigned to each loan. This metric provides a helpful snapshot of portfolio quality and credit risk. All portfolio assets are subject to, at a minimum, a thorough quarterly financial evaluation in which historical operating performance and forward-looking projections are reviewed, however, we maintain a higher level of scrutiny and focus on loans that we consider “high risk” and that possess deteriorating credit quality.

Generally speaking, given our typical loan profile, risk ratings of pass, pass/watch and special mention suggest that we expect the loan to make both principal and interest payments according to the contractual terms of the loan agreement, and is not considered impaired. A risk rating of substandard indicates we anticipate the loan may require a modification of some kind. A risk rating of doubtful indicates we expect the loan to underperform over its term, and there could be loss of interest and/or principal. Further, while the above are the primary guidelines used in determining a certain risk rating, subjective items such as borrower strength, market strength or asset quality may result in a rating that is higher or lower than might be indicated by any risk rating matrix.

As a result of the loan review process, at September 30, 2018 and December 31, 2017, we identified eight loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of $128.7 million and $126.5 million, respectively, and a weighted average last dollar LTV ratio of 92% and 93%, respectively.

A summary of the loan portfolio’s weighted average internal risk ratings and LTV ratios by asset class is as follows ($ in thousands):


	September 30, 2018
					Wtd. Avg.	Wtd. Avg.		Wtd. Avg.
			Percentage of		Internal Risk	First Dollar		Last Dollar
Asset Class	UPB		Portfolio		Rating	LTV Ratio		LTV Ratio
Multifamily	$	2,378,771	75	%	pass/watch	4	%	74	%
Self Storage		301,830	10	%	pass/watch	0	%	72	%
Land		151,628	5	%	substandard	0	%	84	%
Office		127,055	4	%	special mention	0	%	66	%
Healthcare		107,775	3	%	pass/watch	0	%	81	%
Hotel		55,975	2	%	pass/watch	23	%	74	%
Retail		45,383	1	%	pass/watch	7	%	66	%
Commercial		1,700	<1	%	doubtful	63	%	63	%
Total	$	3,170,117	100	%	pass/watch	4	%	74	%


	December 31, 2017
Multifamily	$	1,925,529	73	%	pass/watch	4	%	72	%
Self Storage		301,830	11	%	pass	0	%	71	%
Land		132,828	5	%	substandard	0	%	90	%
Office		107,853	4	%	pass/watch	1	%	64	%
Healthcare		55,615	2	%	pass/watch	0	%	74	%
Hotel		90,725	3	%	special mention	37	%	81	%
Retail		36,458	1	%	pass/watch	8	%	66	%
Commercial		1,700	<1	%	doubtful	63	%	63	%
Total	$	2,652,538	100	%	pass/watch	4	%	73	%

Geographic Concentration Risk

As of September 30, 2018, 22% and 19% of the outstanding balance of our loan and investment portfolio had underlying properties in New York and Texas, respectively. As of December 31, 2017, 23%, 21% and 11% of the outstanding balance of our loan and investment portfolio had underlying properties in Texas, New York and California, respectively. No other states represented 10% or more of the total loan and investment portfolio.

Impaired Loans and Allowance for Loan Losses

A summary of the changes in the allowance for loan losses is as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2018		2017		2018		2017
Allowance at beginning of period	$	58,733	$	81,256	$	62,783	$	83,712
Provision for loan losses		2,218		2,000		3,868		2,000
Recoveries of reserves		—		—		(2,527)		(2,456)
Charge-offs		—		—		(3,173)		—
Allowance at end of period	$	60,951	$	83,256	$	60,951	$	83,256

During the three and nine months ended September 30, 2018, we determined that the fair value of the underlying collateral (land development project) securing six loans with a carrying value of $121.4 million was less than the net carrying value of the loans, which resulted in a provision for loan losses of $0.5 million and $2.2 million, respectively. In addition, we fully reserved a bridge loan and recorded a provision for loan loss of $1.7 million during the three and nine months ended September 30, 2018.

During the nine months ended September 30, 2018, we received $31.6 million to settle a non-performing preferred equity investment in a hotel property with a UPB of $34.8 million and a net carrying value of $29.1 million, resulting in a reserve recovery of $2.5 million and a charge-off of $3.2 million. In addition, during the three and nine months ended September 30, 2018, we received payments and recorded reserve recoveries of $1.4 million and $2.3 million, respectively, related to previously written-off loans and investments.

During the three and nine months ended September 30, 2017, we determined that the fair value of the underlying collateral securing a preferred equity investment with an aggregate carrying value of $34.8 million was less than the net carrying value of the investment, resulting in a $2.0 million provision for loan losses. In addition, during the nine months ended September 30, 2017, a fully reserved mezzanine loan with a UPB of $1.8 million paid off in full, which resulted in a $1.8 million reserve recovery, and we recorded a reserve recovery of $0.7 million on a multifamily bridge loan.

The ratio of net recoveries to the average loans and investments outstanding was de minimus for the three months ended September 30, 2018 and 0.1% for all other periods presented.

There were no loans for which the fair value of the collateral securing the loan was less than the carrying value of the loan for which we had not recorded a provision for loan loss as of September 30, 2018 and 2017.

We have six loans with a carrying value totaling $121.4 million at September 30, 2018 that are collateralized by a land development project. These loans were scheduled to mature in September 2018 and were extended to September 2019. The loans do not carry a current pay rate of interest, but five of the loans with a carrying value totaling $112.0 million entitle us to a weighted average accrual rate of interest of 8.97%. In 2008, we suspended the recording of the accrual rate of interest on these loans, as they were impaired and we deemed the collection of this interest to be doubtful. At September 30, 2018 and December 31, 2017, we had cumulative allowances for loan losses of $51.2 million and $49.1 million, respectively, related to these loans. The loans are subject to certain risks associated with a development project including, but not limited to, availability of construction financing, increases in projected construction costs, demand for the development's outputs upon completion of the project, and litigation risk. Additionally, these loans were not classified as non-performing as the borrower is in compliance with all of the terms and conditions of the loans.

A summary of our impaired loans by asset class is as follows (in thousands):


	September 30, 2018						Three Months Ended September 30, 2018				Nine Months Ended September 30, 2018
					Allowance for		Average Recorded		Interest Income		Average Recorded		Interest Income
Asset Class	UPB		Carrying Value (1)		Loan Losses		Investment (2)		Recognized		Investment (2)		Recognized
Land	$	134,215	$	127,886	$	57,751	$	133,387	$	26	$	132,651	$	75
Hotel		—		—		—		—		—		17,375		—
Office		2,274		2,274		1,500		2,277		33		2,281		93
Commercial		1,700		1,700		1,700		1,700		—		1,700		—
Total	$	138,189	$	131,860	$	60,951	$	137,364	$	59	$	154,007	$	168


	December 31, 2017						Three Months Ended September 30, 2017				Nine Months Ended September 30, 2017
Land	$	131,086	$	124,812	$	53,883	$	131,086	$	—	$	131,086	$	—
Hotel		34,750		34,750		5,700		34,750		—		34,750		371
Office		2,288		2,288		1,500		27,551		28		27,556		79
Commercial		1,700		1,700		1,700		1,700		—		1,700		—
Multifamily		—		—		—		—		—		1,271		22
Total	$	169,824	$	163,550	$	62,783	$	195,087	$	28	$	196,363	$	472

(1)

Represents the UPB of five and four impaired loans (less unearned revenue and other holdbacks and adjustments) by asset class at September 30, 2018 and December 31, 2017, respectively.

(2)

Represents an average of the beginning and ending UPB of each asset class.

At September 30, 2018, two loans with an aggregate net carrying value of $0.8 million, net of related loan loss reserves of $1.7 million, were classified as non-performing. At December 31, 2017, two loans with an aggregate net carrying value of $29.1 million, net of related loan loss reserves of $7.4 million, were classified as non-performing. Income from non-performing loans is generally recognized on a cash basis when it is received. Full income recognition will resume when the loan becomes contractually current and performance has recommenced.

A summary of our non-performing loans by asset class is as follows (in thousands):


	September 30, 2018						December 31, 2017
					Greater Than						Greater Than
	Carrying		Less Than 90		90 Days Past		Carrying		Less Than 90		90 Days Past
Asset Class	Value		Days Past Due		Due		Value		Days Past Due		Due
Commercial	$	1,700	$	—	$	1,700	$	1,700	$	—	$	1,700
Hotel		—		—		—		34,750		—		34,750
Office		831		—		831		—		—		—
Total	$	2,531	$	—	$	2,531	$	36,450	$	—	$	36,450

At both September 30, 2018 and December 31, 2017, there were no loans contractually past due 90 days or more that were still accruing interest.

There were no loan modifications, refinancing's and/or extensions during the nine months ended September 30, 2018 that were considered troubled debt restructurings. During the nine months ended September 30, 2017, there was a $34.8 million loan to a hotel property that was modified and considered a troubled debt restructuring as a result of a forbearance agreement entered into with the borrower in the second quarter of 2017. This loan was subsequently classified as non-performing. This loan was modified to increase the total recovery of the combined principal and interest. There were no other loans in which we considered the modifications to be troubled debt restructurings and no additional loans considered to be impaired as a result of our troubled debt restructuring analysis performed during the nine months ended September 30, 2018 and 2017.

Given the transitional nature of some of our real estate loans, we may require funds to be placed into an interest reserve, based on contractual requirements, to cover debt service costs. At September 30, 2018, we had total interest reserves of $41.3 million on 98 loans with an aggregate UPB of $2.01 billion. At December 31, 2017, we had total interest reserves of $52.5 million on 81 loans with an aggregate UPB of $1.57 billion.