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MORTGAGE LOAN RECEIVABLES | 3 Months Ended
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Mar. 31, 2019
SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract] |
MORTGAGE LOAN RECEIVABLES | 4. MORTGAGE LOAN RECEIVABLES March 31, 2019 ($ in thousands)
| Outstanding Face Amount |  | Carrying Value |  | Weighted Average Yield (1) |  | Remaining Maturity (years)
Mortgage loans held by consolidated subsidiaries(2) | $ | 3,321,828 |  |  | $ | 3,302,753 |  |  | 7.68 | % |  | 1.20
Mortgage loans transferred but not considered sold(3) | 15,350 |  |  | 15,504 |  |  | 5.29 | % |  | 9.78
Provision for loan losses | N/A |  |  | (18,200 | ) |  |  |  |
Mortgage loan receivables held for investment, net, at amortized cost | 3,337,178 |  |  | 3,300,057 |  |  |  |  |
Mortgage loan receivables held for sale | 189,334 |  |  | 189,525 |  |  | 5.53 | % |  | 9.56
Total | $ | 3,526,512 |  |  | $ | 3,489,582 |  |  | 7.57 | % |  | 1.69
(1) | March 31, 2019 London Interbank Offered Rate (“LIBOR”) rates are used to calculate weighted average yield for floating rate loans.
(2) | Includes amounts relating to consolidated variable interest entities. See Note 3.
(3) | We sell certain loans into securitizations; however, for a transfer of financial assets to be considered a sale, the transfer must meet the sale criteria of ASC 860 under which the Company must surrender control over the transferred assets which must qualify as recognized financial assets at the time of transfer. The assets must be isolated from the Company, even in bankruptcy or other receivership, the purchaser must have the right to pledge or sell the assets transferred and the Company may not have an option or obligation to reacquire the assets. If the sale criteria are not met, the transfer is considered to be a secured borrowing, the assets remain on the Company’s consolidated balance sheets and the sale proceeds are recognized as a liability. As of March 31, 2019, our portfolio included one of these loans with an outstanding face amount of $15.4 million and a carrying value of $15.5 million.
As of March 31, 2019, $798.7 million, or 24.1%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $2.5 billion, or 75.9% of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at variable interest rates, linked to LIBOR, some of which include interest rate floors. As of March 31, 2019, $189.5 million, or 100.0%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates. December 31, 2018 ($ in thousands)
| Outstanding Face Amount |  | Carrying Value |  | Weighted Average Yield (1) |  | Remaining Maturity (years)
Mortgage loans held by consolidated subsidiaries | $ | 3,340,381 |  |  | $ | 3,318,390 |  |  | 7.84 | % |  | 1.32
Provision for loan losses | N/A |  |  | (17,900 | ) |  |  |  |
Mortgage loan receivables held for investment, net, at amortized cost | 3,340,381 |  |  | 3,300,490 |  |  |  |  |
Mortgage loan receivables held for sale | 181,905 |  |  | 182,439 |  |  | 5.46 | % |  | 9.75
Total | 3,522,286 |  |  | 3,482,929 |  |  | 7.76 | % |  | 1.77
(1) | December 31, 2018 LIBOR rates are used to calculate weighted average yield for floating rate loans.
(2) | Includes amounts relating to consolidated variable interest entities. See Note 3.
As of December 31, 2018, $816.8 million, or 24.6%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $2.5 billion, or 75.4%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at variable interest rates, linked to LIBOR, some of which include interest rate floors. As of December 31, 2018, $182.4 million, or 100%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates. The following table summarizes mortgage loan receivables by loan type ($ in thousands):
| March 31, 2019 |  | December 31, 2018
| Outstanding Face Amount |  | Carrying Value |  | Outstanding Face Amount |  | Carrying Value
Mortgage loan receivables held for investment, net, at amortized cost: |  |  |  |  |  |  |  |  |  |  |
First mortgage loans | $ | 3,177,676 |  |  | $ | 3,159,154 |  |  | $ | 3,192,160 |  |  | $ | 3,170,788 |
Mezzanine loans | 144,152 |  |  | 143,599 |  |  | 148,221 |  |  | 147,602 |
Mortgage loans transferred but not considered sold(1)(2) | 15,350 |  |  | 15,504 |  |  | — |  |  | — |
Mortgage loan receivables held for investment, net, at amortized cost | 3,337,178 |  |  | 3,318,257 |  |  | 3,340,381 |  |  | 3,318,390 |
Mortgage loan receivables held for sale |  |  |  |  |  |  |  |  |  |  |
First mortgage loans | 189,334 |  |  | 189,525 |  |  | 181,905 |  |  | 182,439 |
Total mortgage loan receivables held for sale | 189,334 |  |  | 189,525 |  |  | 181,905 |  |  | 182,439 |
Provision for loan losses | N/A |  |  | (18,200 | ) |  | N/A |  |  | (17,900 | )
Total | $ | 3,526,512 |  |  | $ | 3,489,582 |  |  | $ | 3,522,286 |  |  | $ | 3,482,929 |
(1) | As more fully described earlier in this Note, as of March 31, 2019, included in mortgage loans transferred but not considered sold is one non-controlling loan interest with an outstanding face amount of $15.4 million and a carrying value of $15.5 million that was sold to the WFCM 2019-C49 securitization trust. This transaction is considered a financing for accounting purposes.
(2) | First mortgage loans.
For the three months ended March 31, 2019 and 2018, the activity in our loan portfolio was as follows ($ in thousands):
| Mortgage loan receivables held for investment, net, at amortized cost: |  |
| Mortgage loans held by consolidated subsidiaries |  | Mortgage loans transferred but not considered sold |  | Provision for loan losses |  | Mortgage loan receivables held for sale
Balance, December 31, 2018 | $ | 3,318,390 |  |  | $ | — |  |  | $ | (17,900 | ) |  | $ | 182,439 |
Origination of mortgage loan receivables | 224,418 |  |  | — |  |  | — |  |  | 175,256 |
Repayment of mortgage loan receivables | (245,444 | ) |  | — |  |  | — |  |  | (321 | )
Proceeds from sales of mortgage loan receivables | — |  |  | — |  |  | — |  |  | (159,424 | )
Realized gain on sale of mortgage loan receivables | — |  |  | — |  |  | — |  |  | 7,079 |
Transfer between held for investment and held for sale(1) | — |  |  | 15,504 |  |  | — |  |  | (15,504 | )
Accretion/amortization of discount, premium and other fees | 5,389 |  |  | — |  |  | — |  |  | — |
Loan loss provision | — |  |  | — |  |  | (300 | ) |  | — |
Balance, March 31, 2019 | $ | 3,302,753 |  |  | $ | 15,504 |  |  | $ | (18,200 | ) |  | $ | 189,525 |
(1) | As more fully described earlier in this Note, during the three months ended March 31, 2019, the Company reclassified from mortgage loan receivables held for sale to mortgage loan receivables held for investment, net, at amortized cost, one loan with a combined outstanding face amount of $15.4 million, a combined book value of $15.5 million (fair value at date of reclassification) and a remaining maturity of 9.8 years which was sold to the WFCM 2019-C49 securitization trust. This transaction is considered a financing for accounting purposes. This transfer has been reflected as a non-cash item on the consolidated statement of cash flows for the three months ended March 31, 2019.
| Mortgage loan receivables held for investment, net, at amortized cost: |  |
| Mortgage loans held by consolidated subsidiaries |  | Provision for loan losses |  | Mortgage loan receivables held for sale
Balance, December 31, 2017 | $ | 3,282,462 |  |  | $ | (4,000 | ) |  | $ | 230,180 |
Origination of mortgage loan receivables | 434,632 |  |  | — |  |  | 532,878 |
Repayment of mortgage loan receivables(1) | (249,105 | ) |  | — |  |  | (133 | )
Proceeds from sales of mortgage loan receivables(2) | — |  |  | — |  |  | (438,774 | )
Realized gain on sale of mortgage loan receivables(3) | — |  |  | — |  |  | 4,888 |
Transfer between held for investment and held for sale(4) | 55,403 |  |  | — |  |  | (55,403 | )
Accretion/amortization of discount, premium and other fees | 4,794 |  |  | — |  |  | — |
Loan loss provision | — |  |  | (3,000 | ) |  | — |
Balance, March 31, 2018 | $ | 3,528,186 |  |  | $ | (7,000 | ) |  | $ | 273,636 |
(1) | Includes $54.8 million of non-cash repayment of mortgage loan receivables held for investment.
(2) | Includes $11.1 million of non-cash proceeds from sales.
(3) | Includes $0.5 million of realized losses on loans related to lower of cost or market adjustments for the three months ended March 31, 2018.
(4) | During the three months ended March 31, 2018, the Company reclassified from mortgage loan receivables held for sale to mortgage loan receivables held for investment, net, at amortized cost, a loan with an outstanding face amount of $57.6 million, a book value of $55.4 million (fair value at date of reclassification) and a remaining maturity of 2.5 years. The loan had been recorded at lower of cost or market prior to its reclassification. The discount to fair value is the result of an increase in market interest rates since the loan’s origination and not a deterioration in credit of the borrower or collateral coverage and the Company expects to collect all amounts due under the loan.
During the three months ended March 31, 2019, the transfers of financial assets via sales, other than the one non-controlling loan interest that was treated as a financing discussed above, of loans were treated as sales under ASC Topic 860 — Transfers and Servicing. At March 31, 2019 and December 31, 2018, there was $0.5 million and $0.5 million, respectively, of unamortized discounts included in our mortgage loan receivables held for investment, at amortized cost, on our consolidated balance sheets. Provision for Loan Losses and Non-Accrual Status ($ in thousands)
| Three Months Ended March 31,
| 2019 |  | 2018
Provision for loan losses at beginning of period | $ | 17,900 |  |  | $ | 4,000 |
Provision for loan losses | 300 |  |  | 3,000 |
Provision for loan losses at end of period | $ | 18,200 |  |  | $ | 7,000 |
| March 31, 2019 |  | December 31, 2018
Principal balance of loans on non-accrual status | $ | 36,850 |  |  | $ | 36,850 |
The Company evaluates each of its loans for potential losses at least quarterly. Its loans are typically collateralized by real estate directly or indirectly. As a result, the Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan at maturity, and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the Company considers the overall economic environment, real estate sector, and geographic sub-market in which the collateral property is located. Such impairment analyses are completed and reviewed by asset management personnel, who utilize various data sources, including (i) periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, the borrowers’ business plan, and capitalization and discount rates, (ii) site inspections, and (iii) current credit spreads and other market data. As a result of this analysis, the Company has concluded that none of its loans, other than the three loans discussed below, are individually impaired as of March 31, 2019 and December 31, 2018. It is probable, however, that Ladder’s loan portfolio as a whole incurred an impairment due to common characteristics and shared inherent risks in the portfolio. The Company determined that a provision expense for loan losses of $0.3 million was required for the three months ended March 31, 2019. This provision consisted of a portfolio-based, general loan loss provision of $0.3 million to provide reserves for expected losses over the remaining portfolio of mortgage loan receivables held for investment, and no additional asset-specific reserves. As of March 31, 2019, two of the Company’s loans, which were originated simultaneously as part of a single transaction and had a carrying value of $26.9 million, were in default. These loans are directly and indirectly secured by the same property and are considered collateral dependent because repayment is expected to be provided solely by the underlying collateral. The Company placed these loans on non-accrual status in July 2017. In assessing these collateral dependent loans for impairment, the most significant consideration is the fair value of the underlying real estate collateral, which includes an in-place long-dated retail lease. The value of such properties is most significantly affected by the contractual lease payments and the appropriate market capitalization rates, which are driven by the property’s market strength, the general interest rate environment and the retail tenant’s creditworthiness. In view of these considerations, the Company uses a direct capitalization rate valuation methodology to calculate the fair value of the underlying real estate collateral. These non-recurring fair values are considered Level 3 measurements in the fair value hierarchy. Through December 31, 2017, the Company believed no loss provision was necessary as the estimated fair value of the property less the cost to foreclose and sell the property exceeded the combined carrying value of the loans. The Company utilized direct capitalization rates of 4.35% to 4.65% at December 31, 2017. The on-going bankruptcy proceedings, rising interest rates and retail tenant’s creditworthiness, resulted in a decline in the estimated value of the collateral. As a result, on March 31, 2018, the Company recorded a provision for loss on these loans of $2.7 million to reduce the carrying value of these loans to the fair value of the property less the cost to foreclose and sell the property utilizing direct capitalization rates of 4.70% to 5.00%. As of March 31, 2019, the Company believed no additional loss provision was necessary based on the application of direct capitalization rates of 4.60% to 4.90% utilized by the Company. During the year ended December 31, 2018, management identified a loan with a carrying value of $45.0 million as potentially impaired, reflecting a decline in collateral value attributable to: (i) recent and near term tenant vacancies at the property; (ii) new information available during the three months ended September 30, 2018 regarding the addition of supply that will increase the submarket vacancy rate in the local market; and (iii) declining market conditions. As of September 30, 2018 this loan was not yet in default but the borrower was not expected to be able to pay off or refinance the loan at maturity. As part of the Company’s evaluation, it obtained an external appraisal of the loan collateral. Based on this review, a reserve of $10.0 million was recorded for this potentially impaired loan in the three months ended September 30, 2018 to reduce the carrying value of the loan to the estimated fair value of the collateral, less the estimated costs to sell. The Company has placed this loan on non-accrual status as of September 30, 2018. During the quarter ended December 31, 2018, this loan experienced a maturity default and its terms were modified in a Troubled Debt Restructuring (“TDR”) on October 17, 2018. The terms of the TDR provided for, among other things, the restructuring of the Company’s existing $45.0 million first mortgage loan into a $35.0 million A-Note and a $10.0 million B-Note and a 19.0% equity interest which is not subject to dilution and that can be increased to 25% under certain conditions. Under certain conditions, the B-Note may be forgiven or reduced. The restructured loan was extended for up to 12 months, including extensions. There have been no additional changes during the three months ended March 31, 2019. Generally when granting concessions, the Company will seek to protect its position by requiring incremental pay downs, additional collateral or guarantees and in some cases lookback features or equity kickers to offset concessions granted should conditions impacting the loan improve. The Company's determination of credit losses is impacted by TDRs whereby loans that have gone through TDRs are considered impaired, assessed for specific reserves, and are not included in the Company's assessment of general loan loss reserves. Loans previously restructured under TDRs that subsequently default are reassessed to incorporate the Company's current assumptions on expected cash flows and additional provision expense is recorded to the extent necessary. As of March 31, 2019, there were no unfunded commitments associated with modified loans considered TDRs. As of March 31, 2019 and December 31, 2018 there were no other loans on non-accrual status. During the three months ended March 31, 2019, the Company acquired title to real estate in a foreclosure. The real estate had a fair value of $18.2 million and previously served as collateral for a mortgage loan receivable held for investment, which was previously on non-accrual status. This loan had an amortized cost of $17.8 million, accrued interest of $0.2 million and an unamortized discount of $0.1 million. The acquisition was accounted for in real estate, net, at fair value on the date of foreclosure. There was no gain or loss resulting from the disposition of the loan.

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