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FAIR VALUE OF FINANCIAL INSTRUMENTS

3 Months Ended

Mar. 31, 2019

Fair Value Disclosures [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair value is based upon internal models, using market quotations, broker quotations, counterparty quotations or pricing services quotations, which provide valuation estimates based upon reasonable market order indications and are subject to significant variability based on market conditions, such as interest rates, credit spreads and market liquidity. The fair value of the mortgage loan receivables held for sale is based upon a securitization model utilizing market data from recent securitization spreads and pricing.

Fair Value Summary Table

The carrying values and estimated fair values of the Company’s financial instruments, which are both reported at fair value on a recurring basis (as indicated) or amortized cost/par, at March 31, 2019 and December 31, 2018 are as follows ($ in thousands):

March 31, 2019

															Weighted Average
	Outstanding Face Amount				Amortized Cost Basis/Purchase Price				Fair Value				Fair Value Method		Yield %			Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	1,475,469			$	1,475,900			$	1,481,640			Internal model, third-party inputs		3.28	%		2.50
CMBS interest-only(1)	2,436,543			(2)	52,682				53,570				Internal model, third-party inputs		3.56	%		2.60
GNMA interest-only(3)	123,684			(2)	2,694				2,491				Internal model, third-party inputs		9.09	%		2.56
Agency securities(1)	660				673				661				Internal model, third-party inputs		1.81	%		2.24
GNMA permanent securities(1)	32,346				32,592				33,006				Internal model, third-party inputs		3.75	%		4.87
Corporate bonds(1)	36,441				35,682				36,609				Internal model, third-party inputs		5.00	%		1.88
Equity securities(3)	N/A				10,678				11,151				Observable market prices		N/A			N/A
Mortgage loan receivables held for investment, net, at amortized cost:
Mortgage loan receivables held for investment, net, at amortized cost	3,321,828				3,302,753				3,311,885				Discounted Cash Flow(4)		7.68	%		1.20
Mortgage loans transferred but not considered sold	15,350				15,504				15,504				Discounted Cash Flow(4)		5.29	%		9.78
Provision for loan losses	N/A				(18,200		)		(18,200		)		(5)		N/A			N/A
Mortgage loan receivables held for sale	189,334				189,525				202,363				Internal model, third-party inputs(6)		5.53	%		9.56
FHLB stock(7)	61,619				61,619				61,619				(7)		5.50	%		N/A
Nonhedge derivatives(1)(8)	454,571				N/A				1,632				Counterparty quotations		N/A			0.25
Liabilities:
Repurchase agreements - short-term	804,986				804,986				804,986				Discounted Cash Flow(9)		3.30	%		0.24
Repurchase agreements - long-term	225,096				225,096				225,096				Discounted Cash Flow(10)		3.35	%		1.55
Mortgage loan financing	734,319				739,500				740,221				Discounted Cash Flow(10)		5.10	%		2.33
CLO debt	497,334				497,334				497,334				Discounted Cash Flow(9)		4.65	%		8.15
Participation Financing - Mortgage Loan Receivable	2,393				2,393				2,393				Discounted Cash Flow(11)		17.00	%		0.18
Borrowings from the FHLB	1,291,449				1,291,449				1,295,087				Discounted Cash Flow		2.61	%		2.40
Senior unsecured notes	1,166,201				1,155,692				1,167,074				Broker quotations, pricing services		5.39	%		4.03
Liability for transfers not considered sales	15,840				15,840				15,840				Discounted Cash Flow(12)		5.29	%		9.78

(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income (loss) in equity.

(2) Represents notional outstanding balance of underlying collateral.

(3) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings.

(4) Fair value for floating rate mortgage loan receivables, held for investment is estimated to approximate the outstanding face amount given the short interest rate reset risk (30 days) and no significant change in credit risk. Fair value for fixed rate mortgage loan receivables, held for investment is measured using a discounted cash flow model.

(5) Fair value is estimated to equal par value.

(6) Fair value for mortgage loan receivables, held for sale is measured using a hypothetical securitization model utilizing market data from recent securitization spreads and pricing.

(7) Fair value of the FHLB stock approximates outstanding face amount as the Company’s captive insurance subsidiary is restricted from trading the stock and can only put the stock back to the FHLB, at the FHLB’s discretion, at par.

(8) The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts.

(9) Fair value for repurchase agreement liabilities and CLO debt is estimated to approximate carrying amount primarily due to the short interest rate reset risk (30 days) of the financings and the high credit quality of the assets collateralizing these positions. If the collateral is determined to be impaired, the related financing would be revalued accordingly. There are no impairments on any positions.

(10) For repurchase agreements - long term and mortgage loan financing, the carrying value approximates the fair value discounting the expected cash flows at current market rates. If the collateral is determined to be impaired, the related financing would be revalued accordingly. There are no impairments on any positions.

(11) Fair value for Participation Financing - Mortgage Loan Receivable approximates amortized cost as this is a loan participation to a third party.

(12) Fair value for liability for transfers not considered sales approximates amortized cost basis which represents fair value on the latest pricing date.

December 31, 2018

															Weighted Average
	Outstanding Face Amount				Amortized Cost Basis				Fair Value				Fair Value Method		Yield %			Remaining Maturity/Duration (years)
Assets:
CMBS(1)	$	1,258,819			$	1,257,801			$	1,252,640			Internal model, third-party inputs		3.14	%		2.33
CMBS interest-only(1)	2,373,936			(2)	55,534				55,691				Internal model, third-party inputs		2.80	%		2.69
GNMA interest-only(3)	135,932			(2)	2,862				2,648				Internal model, third-party inputs		6.30	%		4.11
Agency securities(1)	668				682				662				Internal model, third-party inputs		1.83	%		2.36
GNMA permanent securities(1)	32,633				32,889				33,064				Internal model, third-party inputs		3.76	%		5.03
Corporate bonds(1)	55,305				54,257				53,871				Internal model, third-party inputs		5.04	%		2.51
Equity securities(3)	N/A				13,154				11,550				Observable market prices		N/A			N/A
Mortgage loan receivables held for investment, net, at amortized cost:
Mortgage loan receivables held for investment, net, at amortized cost	3,340,381				3,318,390				3,324,588				Discounted Cash Flow(4)		7.84	%		1.32
Provision for loan losses	N/A				(17,900		)		(17,900		)		(5)		N/A			N/A
Mortgage loan receivables held for sale	181,905				182,439				187,870				Internal model, third-party inputs(6)		5.46	%		9.75
FHLB stock(7)	57,915				57,915				57,915				(7)		4.50	%		N/A
Nonhedge derivatives(1)(8)	—				N/A				—				Counterparty quotations		N/A			0.00
Liabilities:
Repurchase agreements - short-term	436,957				436,957				436,957				Discounted Cash Flow(9)		3.42	%		0.23
Repurchase agreements - long-term	226,728				226,728				226,728				Discounted Cash Flow(10)		3.47	%		1.73
Mortgage loan financing	738,825				743,902				735,662				Discounted Cash Flow(10)		5.09	%		2.61
CLO debt	601,543				601,543				601,543				Discounted Cash Flow(9)		4.41	%		9.40
Participation Financing - Mortgage Loan Receivable	2,453				2,453				2,453				Discounted Cash Flow(11)		17.00	%		0.43
Borrowings from the FHLB	1,286,000				1,286,000				1,286,664				Discounted Cash Flow		2.55	%		2.46
Senior unsecured notes	1,166,201				1,154,991				1,111,288				Broker quotations, pricing services		5.39	%		4.28
Nonhedge derivatives(1)(8)	578,971				N/A				975				Counterparty quotations		N/A			0.25

(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income (loss) in equity.

(2) Represents notional outstanding balance of underlying collateral.

(3) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings.

(4) Fair value for floating rate mortgage loan receivables, held for investment is estimated to approximate the outstanding face amount given the short interest rate reset risk (30 days) and no significant change in credit risk. Fair value for fixed rate mortgage loan receivables, held for investment is measured using a discounted cash flow.

(5) Fair value is estimated to equal par value.

(6) Fair value for mortgage loan receivables, held for sale is measured using a hypothetical securitization model utilizing market data from recent securitization spreads and pricing.

(7) Fair value of the FHLB stock approximates outstanding face amount as the Company’s captive insurance subsidiary is restricted from trading the stock and can only put the stock back to the FHLB, at the FHLB’s discretion, at par.

(8) The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts.

(9) Fair value for repurchase agreement liabilities and CLO debt is estimated to approximate carrying amount primarily due to the short interest rate reset risk (30 days) of the financings and the high credit quality of the assets collateralizing these positions. If the collateral is determined to be impaired, the related financing would be revalued accordingly. There are no impairments on any positions.

(10) For repurchase agreements - long term and mortgage loan financing, the carrying value approximates the fair value discounting the expected cash flows at current market rates. If the collateral is determined to be impaired, the related financing would be revalued accordingly. There are no impairments on any positions.

(11) Fair value for Participation Financing - Mortgage Loan Receivable approximates amortized cost as this is a loan participation to a third party.

The following table summarizes the Company’s financial assets and liabilities, which are both reported at fair value on a recurring basis (as indicated) or amortized cost/par, at March 31, 2019 and December 31, 2018 ($ in thousands):

March 31, 2019

Financial Instruments Reported at Fair Value on Consolidated Statements of Financial Condition		Outstanding Face Amount				Fair Value
						Level 1				Level 2				Level 3				Total
Assets:
CMBS(1)		$	1,463,281			$	—			$	—			$	1,469,978			$	1,469,978
CMBS interest-only(1)		2,425,377			(2)	—				—				52,664				52,664
GNMA interest-only(3)		123,684			(2)	—				—				2,491				2,491
Agency securities(1)		660				—				—				661				661
GNMA permanent securities(1)		32,346				—				—				33,006				33,006
Corporate bonds(1)		36,441				—				—				36,609				36,609
Equity securities		N/A				11,151				—				—				11,151
Nonhedge derivatives(4)		454,571				—				1,632				—				1,632
						$	11,151			$	1,632			$	1,595,409			$	1,608,192
Financial Instruments Not Reported at Fair Value on Consolidated Statements of Financial Condition		Outstanding Face Amount				Fair Value
						Level 1				Level 2				Level 3				Total
Assets:
Mortgage loan receivable held for investment, net, at amortized cost:
Mortgage loans held by consolidated subsidiaries		$	3,321,828			$	—			$	—			$	3,311,885			$	3,311,885
Mortgage loans transferred but not considered sold		15,350				—				—				15,504				15,504
Provision for loan losses		N/A				—				—				(18,200		)		(18,200		)
Mortgage loan receivable held for sale		189,334				—				—				202,363				202,363
CMBS(5)		12,188				—				—				11,662				11,662
CMBS interest-only(5)		11,166			(2)	—				—				906				906
FHLB stock		61,619				—				—				61,619				61,619
						$	—			$	—			$	3,585,739			$	3,585,739
Liabilities:
Repurchase agreements - short-term		804,986				$	—			$	—			$	804,986			$	804,986
Repurchase agreements - long-term		225,096				—				—				225,096				225,096
Mortgage loan financing		734,319				—				—				740,221				740,221
CLO debt		497,334				—				—				497,334				497,334
Participation Financing - Mortgage Loan Receivable		2,393				—				—				2,393				2,393
Borrowings from the FHLB		1,291,449				—				—				1,295,087				1,295,087
Senior unsecured notes		1,166,201				—				—				1,167,074				1,167,074
Liability for transfers not considered sales		15,840				—				—				15,840				15,840
						$	—			$	—			$	4,748,031			$	4,748,031

(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income (loss) in equity. 

(2) Represents notional outstanding balance of underlying collateral. 

(3) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings. 

(4) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings.  The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts.

(5) Restricted securities which are designated as risk retention securities under the Dodd-Frank Act and are therefore subject to transfer restrictions over the term of the securitization trust, which are classified as held-to-maturity and reported at amortized cost.

December 31, 2018

Financial Instruments Reported at Fair Value on Consolidated Statements of Financial Condition		Outstanding Face Amount				Fair Value
						Level 1				Level 2				Level 3				Total
Assets:
CMBS(1)		$	1,246,609			$	—			$	—			$	1,241,334			$	1,241,334
CMBS interest-only(1)		2,362,747			(2)	—				—				54,789				54,789
GNMA interest-only(3)		135,932			(2)	—				—				2,648				2,648
Agency securities(1)		668				—				—				662				662
GNMA permanent securities(1)		32,633				—				—				33,064				33,064
Corporate bonds(1)		55,305				—				—				53,871				53,871
Equity securities		N/A				11,550				—				—				11,550
						$	11,550			$	—			$	1,386,368			$	1,397,918
Liabilities:
Nonhedge derivatives(4)		$	605,871			$	—			$	975			$	—			$	975
Financial Instruments Not Reported at Fair Value on Consolidated Statements of Financial Condition		Outstanding Face Amount				Fair Value
						Level 1				Level 2				Level 3				Total
Assets:
Mortgage loan receivable held for investment, net, at amortized cost:
Mortgage loans held by consolidated subsidiaries		$	3,340,381			$	—			$	—			$	3,324,588			$	3,324,588
Provision for loan losses		N/A				—				—				(17,900		)		(17,900		)
Mortgage loan receivables held for sale		181,905				—				—				187,870				187,870
CMBS(5)		12,210				—				—				11,306				11,306
CMBS interest-only(5)		11,189			(2)	—				—				902				902
FHLB stock		57,915				—				—				57,915				57,915
						$	—			$	—			$	3,564,681			$	3,564,681
Liabilities:
Repurchase agreements - short-term		436,957				$	—			$	—			$	436,957			$	436,957
Repurchase agreements - long-term		226,728				—				—				226,728				226,728
Mortgage loan financing		738,825				—				—				735,662				735,662
CLO debt		601,543				—				—				601,543				601,543
Participation Financing - Mortgage Loan Receivable		2,453				—				—				2,453				2,453
Borrowings from the FHLB		1,286,000				—				—				1,286,664				1,286,664
Senior unsecured notes		1,166,201				—				—				1,111,288				1,111,288
						$	—			$	—			$	4,401,295			$	4,401,295

(1) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded as a component of other comprehensive income (loss) in equity. 

(2) Represents notional outstanding balance of underlying collateral. 

(3) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings. 

(4) Measured at fair value on a recurring basis with the net unrealized gains or losses recorded in current period earnings.  The outstanding face amount of the nonhedge derivatives represents the notional amount of the underlying contracts.

(5) Restricted securities which are designated as risk retention securities under the Dodd-Frank Act and are therefore subject to transfer restrictions over the term of the securitization trust, which are classified as held-to-maturity and reported at amortized cost.

The following table summarizes changes in Level 3 financial instruments reported at fair value on the consolidated statements of financial condition for the three months ended March 31, 2019 and 2018 ($ in thousands):

		Three Months Ended March 31,
Level 3		2019				2018
Balance at January 1,		$	1,385,957			$	1,106,517
Transfer from level 2		—				—
Purchases		431,107				135,058
Sales		(210,279		)		(122,356		)
Paydowns/maturities		(24,166		)		(2,954		)
Amortization of premium/discount		(3,191		)		(6,407		)
Unrealized gain/(loss)		13,203				(8,654		)
Realized gain/(loss) on sale(1)		2,778				(1,099		)
Balance at March 31,		$	1,595,409			$	1,100,105

(1) Includes realized losses on securities recorded as other than temporary impairments.

The following is quantitative information about significant unobservable inputs in our Level 3 measurements for those assets and liabilities measured at fair value on a recurring basis ($ in thousands):

March 31, 2019

Financial Instrument		Carrying Value				Valuation Technique		Unobservable Input		Minimum			Weighted Average			Maximum
CMBS(1)		$	1,481,640			Discounted cash flow		Yield (4)		—	%		3.38	%		21.32	%
								Duration (years)(5)		0.00			2.16			8.05
CMBS interest-only(1)		53,570			(2)	Discounted cash flow		Yield (4)		0.62	%		4.61	%		7.87	%
								Duration (years)(5)		0.10			2.88			6.67
								Prepayment speed (CPY)(5)		100.00			100.00			100.00
GNMA interest-only(3)		2,491			(2)	Discounted cash flow		Yield (4)		2.11	%		8.30	%		10.13	%
								Duration (years)(5)		0.04			3.07			5.06
								Prepayment speed (CPJ)(5)		5.00			6.64			15.00
Agency securities(1)		661				Discounted cash flow		Yield (4)		—	%		1.89	%		2.51	%
								Duration (years)(5)		0.00			2.71			3.61
GNMA permanent securities(1)		33,006				Discounted cash flow		Yield (4)		—	%		3.38	%		3.92	%
								Duration (years)(5)		0.00			5.46			5.68
Corporate bonds(1)		36,609				Discounted cash flow		Yield (4)		3.54	%		3.58	%		3.82	%
								Duration (years)(5)		1.52			1.62			2.27
Total		$	1,607,977

(1) CMBS, CMBS interest-only securities, Agency securities, GNMA construction securities, GNMA permanent securities and corporate bonds are classified as available-for-sale and reported at fair value with changes in fair value recorded in the current period in other comprehensive income.

(2) The amounts presented represent the principal amount of the mortgage loans outstanding in the pool in which the interest-only securities participate.

(3) Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period earnings.

Sensitivity of the Fair Value to Changes in the Unobservable Inputs

(4) Significant increase (decrease) in the unobservable input in isolation would result in significantly lower (higher) fair value measurement.

(5) Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or higher (lower or higher) fair value measurement depending on the structural features of the security in question.

December 31, 2018

Financial Instrument		Carrying Value				Valuation Technique		Unobservable Input		Minimum			Weighted Average			Maximum
CMBS(1)		$	1,252,640			Discounted cash flow		Yield (3)		—	%		3.54	%		21.67	%
								Duration (years)(4)		0.00			2.50			7.78
CMBS interest-only(1)		55,691			(2)	Discounted cash flow		Yield (3)		0.87	%		4.71	%		8.11	%
								Duration (years)(4)		0.14			2.96			6.86
								Prepayment speed (CPY)(4)		100.00			100.00			100.00
GNMA interest-only(3)		2,648			(2)	Discounted cash flow		Yield (4)		1.21	%		5.54	%		10.21	%
								Duration (years)(5)		0.04			3.13			4.77
								Prepayment speed (CPJ)(5)		5.00			6.58			15.00
Agency securities(1)		662				Discounted cash flow		Yield (4)		—	%		2.1	%		2.84	%
								Duration (years)(5)		0.00			2.83			3.82
GNMA permanent securities(1)		33,064				Discounted cash flow		Yield (4)		—	%		3.51	%		4	%
								Duration (years)(5)		0.00			5.62			5.88
Corporate bonds(1)		53,871				Discounted cash flow		Yield (4)		5.3	%		5.35	%		5.46	%
								Duration (years)(5)		1.94			2.19			2.70
Total		$	1,398,576

(1) CMBS, CMBS interest-only securities, Agency securities, GNMA construction securities, GNMA permanent securities and corporate bonds are classified as available-for-sale and reported at fair value with changes in fair value recorded in the current period in other comprehensive income.

(2) The amounts presented represent the principal amount of the mortgage loans outstanding in the pool in which the interest-only securities participate.

(3) Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period earnings.

Sensitivity of the Fair Value to Changes in the Unobservable Inputs

(4) Significant increase (decrease) in the unobservable input in isolation would result in significantly lower (higher) fair value measurement.

(5) Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or higher (lower or higher) fair value measurement depending on the structural features of the security in question.

Nonrecurring Fair Values

The Company measures fair value of certain assets on a nonrecurring basis when events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Adjustments to fair value generally result from the application of lower of amortized cost or fair value accounting for assets held for sale or write-down of assets value due to impairment.

The following table summarizes assets carried at fair value on a nonrecurring basis, measured at the time of impairment ($ in thousands):

	March 31, 2019
	Level 1				Level 2				Level 3				Total
Real estate, net(1)(2)	$	—			$	1,748			$	—			$	1,748

(1) The write down to fair value was recorded based on contracted sales price and classified as Level 2 of the fair valuation hierarchy. On May 1, 2019, the Company completed the sale of the property recognizing $3.9 million of operating lease income, $3.5 million realized loss on sale of real estate, net and $0.4 million of depreciation and amortization expense, resulting in a $20 thousand loss on sale of real estate, net.

(2) There were no assets carried at fair value on a nonrecurring basis at December 31, 2018.

The following table summarizes the fair value write-downs to assets carried at fair value on a nonrecurring basis ($ in thousands):

	Three Months Ended March 31,
	2019				2018
Impairment of real estate
Real estate, net(1)(2)	$	1,350			$	—

(1) The write down to fair value was recorded based on contracted sales price and classified as Level 2 of the fair valuation hierarchy. On May 1, 2019, the Company completed the sale of the property recognizing $3.9 million of operating lease income, $3.5 million realized loss on sale of real estate, net and $0.4 million of depreciation and amortization expense, resulting in a $20 thousand loss on sale of real estate, net.

(2) Impairment is discussed in further detail in Note 6, Real Estate and Related Lease Intangibles, Net.

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- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-URI http://asc.fasb.org/topic&trid=2155941

+ Details

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