Note 3—Loans and Investments

The composition of our Structured Business loan and investment portfolio is as follows ($ in thousands):


									Wtd. Avg.		Wtd. Avg.
								Wtd. Avg.	First		Last
								Remaining	Dollar		Dollar
	December 31,		Percent of		Loan	Wtd. Avg.		Months to	LTV		LTV
	2019		Total		Count	Pay Rate (1)		Maturity	Ratio (2)		Ratio (3)
Bridge loans (4)	$	3,836,832	90	%	217	5.77	%	18.0	0	%	75	%
Mezzanine loans		191,575	4	%	24	9.70	%	36.7	22	%	73	%
Preferred equity investments		181,058	4	%	10	7.62	%	68.8	69	%	89	%
Other (5)		70,146	2	%	21	2.88	%	84.8	0	%	70	%
		4,279,611	100	%	272	5.98	%	22.1	4	%	76	%
Allowance for loan losses		(71,069)
Unearned revenue		(18,582)
Loans and investments, net	$	4,189,960


									Wtd. Avg.		Wtd. Avg.
								Wtd. Avg.	First		Last
								Remaining	Dollar		Dollar
	December 31,		Percent of		Loan	Wtd. Avg.		Months to	LTV		LTV
	2018		Total		Count	Pay Rate (1)		Maturity	Ratio (2)		Ratio (3)
Bridge loans	$	2,992,814	91	%	167	6.84	%	18.5	0	%	74	%
Mezzanine loans		108,867	3	%	13	10.57	%	22.1	28	%	72	%
Preferred equity investments		181,661	6	%	10	7.97	%	78.0	66	%	89	%
		3,283,342	100	%	190	7.02	%	22.0	5	%	75	%
Allowance for loan losses		(71,069)
Unearned revenue		(12,128)
Loans and investments, net	$	3,200,145

(1)“Weighted Average Pay Rate” is a weighted average, based on the UPB of each loan in our portfolio, of the interest rate 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.

(4)Included within bridge loans are 11 single-family rental loans with an aggregate UPB of $66.7 million, of which $30.0 million was funded.

(5)Included within other are 12 single-family rental permanent loans with an aggregate UPB of $41.6 million and 9 purchased loans with an aggregate UPB of $28.6 million .

Concentration of Credit Risk

We are subject to concentration risk in that, at December 31, 2019, the UPB related to 24 loans with five different borrowers represented 13% of total assets. At December 31, 2018, the UPB related to 45 loans with five different borrowers represented 22% of total assets. During both 2019 and 2018, no single loan or investment represented more than 10% of our total assets and no single investor group generated over 10% of our revenue. See Note 19 for details on our concentration of related party loans and investments.

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 December 31, 2019 and 2018, we identified eight loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of $127.6 million and $128.7 million, respectively, and a weighted average last dollar LTV ratio of 98% and 99%, respectively.

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


	December 31, 2019
					Wtd. Avg.	Wtd. Avg.		Wtd. Avg.
			Percentage		Internal	First Dollar		Last Dollar
Asset Class	UPB		of Portfolio		Risk Rating	LTV Ratio		LTV Ratio
Multifamily	$	3,429,278	80	%	pass/watch	4	%	76	%
Land		221,489	5	%	special mention	0	%	87	%
Healthcare		203,694	5	%	pass/watch	0	%	76	%
Hotel		142,300	3	%	pass/watch	10	%	60	%
Office		134,007	3	%	special mention	3	%	67	%
Single-Family Rental		71,592	2	%	pass	0	%	71	%
Retail		49,258	1	%	special mention	6	%	62	%
Self Storage		26,293	1	%	pass/watch	24	%	53	%
Other		1,700	<1	%	doubtful	63	%	63	%
Total	$	4,279,611	100	%	pass/watch	4	%	76	%


	December 31, 2018
Multifamily	$	2,427,920	74	%	pass/watch	5	%	75	%
Land		151,628	5	%	substandard	0	%	90	%
Healthcare		122,775	4	%	pass/watch	0	%	77	%
Hotel		100,075	3	%	pass/watch	13	%	66	%
Office		132,047	4	%	special mention	3	%	68	%
Retail		45,367	1	%	pass/watch	6	%	65	%
Self Storage		301,830	9	%	pass/watch	0	%	72	%
Other		1,700	<1	%	doubtful	63	%	63	%
Total	$	3,283,342	100	%	pass/watch	5	%	75	%

Geographic Concentration Risk

As of December 31, 2019, 18% and 12% of the outstanding balance of our loan and investment portfolio had underlying properties in New York and Texas, respectively. As of December 31, 2018, 23% and 18% of the outstanding balance of our loan and investment portfolio had underlying properties in New York and Texas, 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):


	Year Ended December 31,
	2019		2018		2017
Allowance at beginning of period	$	71,069	$	62,783	$	83,712
Provision for loan losses		—		13,986		2,000
Charge-offs		—		(3,173)		(20,473)
Recoveries of reserves		—		(2,527)		(2,456)
Allowance at end of period	$	71,069	$	71,069	$	62,783

During 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 $12.3 million. We also fully reserved a bridge loan and recorded a provision for loan loss of $1.7 million.

In addition, during 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 charge-off of $3.2 million and a reserve recovery of $2.5 million. We also received payments and recorded recoveries of $3.1 million related to previously written-off loans and investments, which are included as a component of provision for loan losses (net of recoveries) on the consolidated statements of income.

During 2017, we incurred a $20.5 million charge-off of a fully reserved junior participation loan and 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, which resulted in a $2.0 million provision for loan losses. In addition, 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 (charge-offs) to the average loans and investments outstanding was 0.1% and (0.8)% for 2018 and 2017, respectively.

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 December 31, 2019, 2018 and 2017.

We have six loans with a carrying value totaling $120.3 million at December 31, 2019 that are collateralized by a land development project. These loans were scheduled to mature in September 2019 and were extended to March 2020, with the expectation to further extend these loans. The loans do not carry a current pay rate of interest, however, five of the loans with a carrying value totaling $111.0 million entitle us to a weighted average accrual rate of interest of 8.74%. 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 both December 31, 2019 and 2018, we had cumulative allowances for loan losses of $61.4 million 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):


							Year Ended December 31,
	December 31, 2019						2019
							Average		Interest
			Carrying		Allowance for		Recorded		Income
Asset Class	UPB		Value (1)		Loan Losses		Investment (2)		Recognized
Land	$	134,215	$	126,800	$	67,869	$	134,215	$	107
Office		2,226		2,226		1,500		2,246		132
Commercial		1,700		1,700		1,700		1,700		—
Total	$	138,141	$	130,726	$	71,069	$	138,161	$	239


							Year Ended December 31,
	December 31, 2018						2018
Land	$	134,215	$	127,869	$	67,869	$	132,651	$	103
Hotel		—		—		—		17,375		—
Office		2,266		2,266		1,500		2,277		127
Commercial		1,700		1,700		1,700		1,700		—
Total	$	138,181	$	131,835	$	71,069	$	154,003	$	230

(1)

Represents the UPB of five impaired loans (less unearned revenue and other holdbacks and adjustments) by asset class at both December 31, 2019 and 2018.

(2)

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

At December 31, 2019, three loans with an aggregate net carrying value of $1.8 million, net of related loan loss reserves of $1.7 million, were classified as non-performing. At December 31, 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. 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):


	December 31, 2019						December 31, 2018
			Less Than		Greater Than				Less Than		Greater Than
	Carrying		90 Days		90 Days		Carrying		90 Days		90 Days
Asset Class	Value		Past Due		Past Due		Value		Past Due		Past Due
Commercial	$	1,700	$	—	$	1,700	$	1,700	$	—	$	1,700
Retail		990		—		990		—		—		—
Office		833		—		833		832		—		832
Total	$	3,523	$	—	$	3,523	$	2,532	$	—	$	2,532

At both December 31, 2019 and 2018, we had no loans contractually past due 90 days or more that are still accruing interest.

There were no loan modifications, refinancing’s and/or extensions during 2019 and 2018 that were considered troubled debt restructurings.

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 December 31, 2019 and 2018, we had total interest reserves of $37.0 million and $48.9 million, respectively, on 131 loans and 110 loans, respectively, with an aggregate UPB of $2.43 billion and $2.22 billion, respectively.