Use of Special Purpose Entities and Variable Interest Entities (Tables)

9 Months Ended

Sep. 30, 2017

Variable Interest Entity [Line Items]

Schedule of Recognized Identified Assets Acquired and Liabilities Assumed

The following table summarizes the estimated fair values of the assets and liabilities of Riverchase Landing and The Clusters at the Changeover Date (dollar amounts in thousands). The estimated fair values shown below are provisional measurements that are based upon preliminary financial information provided by Riverchase Landing and The Clusters and are subject to change.



Cash	$	112
Operating real estate ⁽¹⁾	62,322
Lease intangibles ⁽¹⁾	5,340
Receivables and other assets	2,260
Total assets	70,034

Mortgages payable	51,570
Accrued expenses and other liabilities	1,519
Total liabilities	53,089

Non-controlling interest ⁽²⁾	4,462
Net assets consolidated	$	12,483


⁽¹⁾	Reclassified to real estate held for sale in consolidated variable interest entities on the condensed consolidated balance sheets (see Note 11).


⁽²⁾	Represents third party ownership of membership interests in Riverchase Landing and The Clusters. The fair value of the non-controlling interests in Riverchase Landing and The Clusters, both private companies, was estimated using assumptions for the timing and amount of expected future cash flows from the underlying multi-family apartment communities and a discount rate.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed by the Company at the Acquisition Date (dollar amounts in thousands). The membership interest purchase agreement for the acquisition of RiverBanc included a post-closing working capital adjustment that was calculated at $20 thousand and settled with the sellers of RiverBanc on July 15, 2016. Additionally, the excess severance holdback amount described above was settled with the sellers of RiverBanc on July 15, 2016. The Company engaged a third party for valuations of certain intangible assets.



Cash	$	4,325
Investment in unconsolidated entities	52,176
Mezzanine loan and preferred equity investments	23,638
Real estate under development ⁽¹⁾	14,922
Receivables and other assets	911
Intangible assets ⁽¹⁾	3,490
Total identifiable assets acquired	99,462

Construction loan payable ⁽²⁾	8,499
Accrued expenses and other liabilities	2,864
Total liabilities assumed	11,363

Preferred equity ⁽³⁾	56,697

Net identifiable assets acquired	31,402

Goodwill ⁽⁴⁾	25,222
Gain on bargain purchase ⁽⁵⁾	(65		)
Non-controlling interest ⁽⁶⁾	(3,078		)
Net assets acquired	$	53,481


⁽¹⁾	Included in receivables and other assets on the condensed consolidated balance sheets.


⁽²⁾	Construction loan payable to the Company is eliminated on the condensed consolidated balance sheets.


⁽³⁾	Includes $40.4 million of preferred equity owned by the Company that is eliminated on the condensed consolidated balance sheets. Remaining $16.3 million of preferred equity owned by third parties was redeemed on June 10, 2016 and June 24, 2016.


⁽⁴⁾	Goodwill recognized in the acquisition of RiverBanc.


⁽⁵⁾	Gain on bargain purchase recognized in the acquisitions of RBMI and RBDHC in the year ended December 31, 2016.

⁽⁶⁾

Represents third-party ownership of KRVI membership interests (see Note 10). The Company consolidates its investment in KRVI. The third-party ownership in KRVI is represented in the condensed consolidated financial statements and the pro forma net income attributable to the Company's common stockholders as non-controlling interests. The fair value of the non-controlling interests in KRVI was estimated to be $3.1 million. The fair value of the non-controlling interests in KRVI, a private company, was estimated using assumptions for the timing and amount of expected future cash flow for income and realization events for the underlying real estate.

Schedule of Assets and Liabilities of Consolidated VIE's

The following table presents the carrying value and estimated fair value of the Company’s financial instruments at September 30, 2017 and December 31, 2016, respectively (dollar amounts in thousands):



		September 30, 2017				December 31, 2016
	Fair Value Hierarchy Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial Assets:
Cash and cash equivalents	Level 1	$	101,904	$	101,904	$	83,554	$	83,554
Investment securities available for sale ⁽¹⁾	Level 1, 2 or 3	674,161		674,161		818,976		818,976
Residential mortgage loans held in securitization trusts (net)	Level 3	79,875		77,412		95,144		88,718
Distressed residential mortgage loans, at carrying value ⁽²⁾	Level 3	369,651		374,169		503,094		504,915
Residential mortgage loans, at fair value	Level 3	69,512		69,512		17,769		17,769
Multi-family loans held in securitization trusts	Level 3	8,399,334		8,399,334		6,939,844		6,939,844
Derivative assets	Level 1 or 2	182,115		182,115		150,296		150,296
Mortgage loans held for sale (net) ⁽³⁾	Level 3	6,797		6,899		7,847		7,959
Mortgage loans held for investment ⁽³⁾	Level 3	1,760		1,900		19,529		19,641
Mezzanine loan and preferred equity investments ⁽⁴⁾	Level 3	122,578		124,436		100,150		101,408
Investment in unconsolidated entities ⁽⁵⁾	Level 3	51,268		51,342		79,259		79,390
Receivable for securities sold	Level 1	1,261		1,261		—		—
Financial Liabilities:
Financing arrangements, portfolio investments	Level 2	608,304		608,304		773,142		773,142
Financing arrangements, residential mortgage loans	Level 2	160,562		160,562		192,419		192,419
Residential collateralized debt obligations	Level 3	76,867		72,428		91,663		85,568
Multi-family collateralized debt obligations	Level 3	7,990,619		7,990,619		6,624,896		6,624,896
Securitized debt	Level 3	98,371		105,768		158,867		163,884
Derivative liabilities	Level 1 or 2	467		467		498		498
Payable for securities purchased	Level 1	181,718		181,718		148,015		148,015
Subordinated debentures	Level 3	45,000		44,989		45,000		43,132
Convertible notes	Level 2	128,273		138,697		—		—


⁽¹⁾	Includes $46.6 million and $43.9 million of investment securities for sale held in securitization trusts as of September 30, 2017 and December 31, 2016, respectively.

⁽²⁾

Includes distressed residential mortgage loans held in securitization trusts with a carrying value amounting to approximately $134.0 million and $195.3 million at September 30, 2017 and December 31, 2016, respectively, and distressed residential mortgage loans with a carrying value amounting to approximately $235.7 million and $307.7 million at September 30, 2017 and December 31, 2016, respectively.


⁽³⁾	Included in receivables and other assets in the accompanying condensed consolidated balance sheets.


⁽⁴⁾	Includes mezzanine loan and preferred equity investments accounted for as loans (see Note 9).


⁽⁵⁾	Includes investments in unconsolidated entities accounted for under the fair value option with a carrying value of $41.0 million and $60.3 million at September 30, 2017 and December 31, 2016, respectively (see Note 8).

Summary of Classification and Carrying Value of Unconsolidated VIE's

Mezzanine loan and preferred equity investments consist of the following as of September 30, 2017 and December 31, 2016 (dollar amounts in thousands):



	September 30, 2017			December 31, 2016
Investment amount	$	124,172		$	101,154
Deferred loan fees, net	(1,594		)	(1,004		)
Total	$	122,578		$	100,150

The geographic concentrations of credit risk exceeding 5% of the total mezzanine loan and preferred equity investment amounts as of September 30, 2017 and December 31, 2016 are as follows:



	September 30, 2017		December 31, 2016
Texas	27.5	%	43.3	%
New York	21.6	%	—
Virginia	12.3	%	14.9	%
South Carolina	7.9	%	9.4	%
Kentucky	5.9	%	7.2	%

The following tables present the classification and carrying value of unconsolidated VIEs as of September 30, 2017 and December 31, 2016 (dollar amounts in thousands):



	September 30, 2017
	Investment securities, available for sale, at fair value		Receivables and other assets		Mezzanine loan and preferred equity investments		Investment in unconsolidated entities		Total
Multi-family CMBS	$	46,623	$	73	$	—	$	—	$	46,696
Mezzanine loan on multi-family properties	—		—		6,875		—		6,875
Preferred equity investment on multi-family properties	—		—		115,703		10,242		125,945
Equity investment in entities that invest in multi-family properties	—		—		—		24,056		24,056
Total assets	$	46,623	$	73	$	122,578	$	34,298	$	203,572



	December 31, 2016
	Investment securities, available for sale, at fair value		Receivables and other assets		Mezzanine loan and preferred equity investments		Investment in unconsolidated entities		Total
Multi-family CMBS	$	43,897	$	74	$	—	$	—	$	43,971
Mezzanine loan on multi-family properties	—		—		18,881		—		18,881
Preferred equity investment on multi-family properties	—		—		81,269		18,928		100,197
Equity investment in entities that invest in multi-family properties	—		—		—		22,252		22,252
Total assets	$	43,897	$	74	$	100,150	$	41,180	$	185,301

The following table summarizes the Company’s securitized debt collateralized by multi-family CMBS and distressed residential mortgage loans (dollar amounts in thousands):



	Multi-family CMBS Re-securitization ⁽¹⁾		Distressed Residential Mortgage Loan Securitizations
Principal Amount at September 30, 2017	$	33,399	$	70,374
Principal Amount at December 31, 2016	$	33,553	$	132,319
Carrying Value at September 30, 2017 ⁽²⁾	$	28,946	$	69,425
Carrying Value at December 31, 2016 ⁽²⁾	$	28,332	$	130,535
Pass-through rate of Notes issued	5.35%		4.00%

⁽¹⁾

The Company engaged in the re-securitization transaction primarily for the purpose of obtaining non-recourse financing on a portion of its multi-family CMBS portfolio. As a result of engaging in this transaction, the Company remains economically exposed to the first loss position on the underlying multi-family CMBS transferred to the Consolidated VIE. The holders of the Note issued in this re-securitization transaction have no recourse to the general credit of the Company, but the Company does have the obligation, under certain circumstances, to repurchase assets upon the breach of certain representations and warranties. The Company will receive all remaining cash flow, if any, through its retained ownership.


⁽²⁾	Classified as securitized debt in the liability section of the Company’s accompanying condensed consolidated balance sheets, net of debt issuance costs.

Schedule of Contractual Maturities of Financing VIE's

The following table presents contractual maturity information about the Financing VIEs’ securitized debt as of September 30, 2017 and December 31, 2016, respectively (dollar amounts in thousands):



Scheduled Maturity (principal amount)	September 30, 2017			December 31, 2016
Within 24 months	$	70,374		$	—
Over 24 months to 36 months	—			132,319
Over 36 months	33,399			33,553
Total outstanding principal	103,773			165,872
Discount	(4,567		)	(5,589		)
Debt Issuance Cost	(835		)	(1,416		)
Carrying value	$	98,371		$	158,867

As of September 30, 2017, maturities for debt on the Company's condensed consolidated balance sheet are as follows (dollar amounts in thousands):



Fiscal Year	Total
2017	$	—
2018	—
2019	6,013
2020	—
2021	—
2022	161,674
Thereafter	72,917
	$	240,604

Financing VIE

Variable Interest Entity [Line Items]

Schedule of Assets and Liabilities of Consolidated VIE's

Assets and Liabilities of Consolidated VIEs as of September 30, 2017 (dollar amounts in thousands):



	Financing VIEs						Other VIEs
	Multi-family CMBS Re- securitization ⁽¹⁾		Distressed Residential Mortgage Loan Securitization ⁽²⁾		Residential Mortgage Loan Securitization		Multi- family CMBS ⁽³⁾		Other		Total
Cash and cash equivalents	$	—	$	—	$	—	$	—	$	1,194	$	1,194
Investment securities available for sale, at fair value held in securitization trusts	46,623		—		—		—		—		46,623
Residential mortgage loans held in securitization trusts (net)	—		—		79,875		—		—		79,875
Distressed residential mortgage loans held in securitization trust (net)	—		133,972		—		—		—		133,972
Multi-family loans held in securitization trusts, at fair value	1,174,341		—		—		7,224,993		—		8,399,334
Real estate held for sale in consolidated variable interest entities	—		—		—		—		64,097		64,097
Receivables and other assets	4,217		19,795		1,585		23,959		24,701		74,257
Total assets	$	1,225,181	$	153,767	$	81,460	$	7,248,952	$	89,992	$	8,799,352

Residential collateralized debt obligations	$	—	$	—	$	76,867	$	—	$	—	$	76,867
Multi-family collateralized debt obligations, at fair value	1,112,651		—		—		6,877,968		—		7,990,619
Securitized debt	28,946		69,425		—		—		—		98,371
Mortgages and notes payable in consolidated variable interest entities	—		—		—		—		57,342		57,342
Accrued expenses and other liabilities	4,200		1,766		22		23,733		2,621		32,342
Total liabilities	$	1,145,797	$	71,191	$	76,889	$	6,901,701	$	59,963	$	8,255,541

⁽¹⁾

The Company classified the multi-family CMBS issued by two K-Series securitizations and held by this Financing VIE as available for sale securities as the purpose is not to trade these securities. The Financing VIE consolidated one K-Series securitization that issued certain of the multi-family CMBS owned by the Company, including its assets, liabilities, income and expenses, in its financial statements, as based on a number of factors, the Company determined that it was the primary beneficiary and has a controlling financial interest in this particular K-Series securitization (see Note 7).

⁽²⁾

The Company engaged in this transaction for the purpose of financing distressed residential mortgage loans acquired by the Company. The distressed residential mortgage loans serving as collateral for the financing are comprised of performing, re-performing and, to a lesser extent, non-performing, fixed and adjustable-rate, fully-amortizing, interest only and balloon, seasoned mortgage loans secured by first liens on one to four family properties. Balances as of September 30, 2017 are related to a securitization transaction that closed in April 2016 that involved the issuance of $177.5 million of Class A Notes representing the beneficial ownership in a pool of performing and re-performing seasoned mortgage loans. The Company holds 5% of the Class A Notes issued as part of the securitization transaction, which were eliminated in consolidation.


⁽³⁾	Five of the Company’s Freddie Mac-sponsored multi-family K-Series securitizations included in the Consolidated K-Series were not held in a Financing VIE as of September 30, 2017.

Assets and Liabilities of Consolidated VIEs as of December 31, 2016 (dollar amounts in thousands):



	Financing VIEs						Other VIEs
	Multi-family CMBS Re- securitization ⁽¹⁾		Distressed Residential Mortgage Loan Securitization ⁽²⁾		Residential Mortgage Loan Securitization		Multi- family CMBS ⁽³⁾		Other		Total
Cash and cash equivalents	$	—	$	—	$	—	$	—	$	186	$	186
Investment securities available for sale, at fair value held in securitization trusts	43,897		—		—		—		—		43,897
Residential mortgage loans held in securitization trusts (net)	—		—		95,144		—		—		95,144
Distressed residential mortgage loans held in securitization trust (net)	—		195,347		—		—		—		195,347
Multi-family loans held in securitization trusts, at fair value	1,196,835		—		—		5,743,009		—		6,939,844
Receivables and other assets	4,420		13,610		912		19,753		17,759		56,454
Total assets	$	1,245,152	$	208,957	$	96,056	$	5,762,762	$	17,945	$	7,330,872

Residential collateralized debt obligations	$	—	$	—	$	91,663	$	—	$	—	$	91,663
Multi-family collateralized debt obligations, at fair value	1,137,002		—		—		5,487,894		—		6,624,896
Securitized debt	28,332		130,535		—		—		—		158,867
Mortgages and notes payable in consolidated variable interest entities	—		—		—		—		1,588		1,588
Accrued expenses and other liabilities	4,400		1,336		20		19,753		13		25,522
Total liabilities	$	1,169,734	$	131,871	$	91,683	$	5,507,647	$	1,601	$	6,902,536

⁽¹⁾

⁽²⁾

The Company engaged in this transaction for the purpose of financing distressed residential mortgage loans acquired by the Company. The distressed residential mortgage loans serving as collateral for the financing are comprised of performing, re-performing and, to a lesser extent, non-performing, fixed and adjustable-rate, fully-amortizing, interest only and balloon, seasoned mortgage loans secured by first liens on one to four family properties. Balances as of December 31, 2016 are related to a securitization transaction that closed in April 2016 that involved the issuance of $177.5 million of Class A Notes representing the beneficial ownership in a pool of performing and re-performing seasoned mortgage loans. The Company holds 5% of the Class A Notes issued as part of the securitization transaction, which have been eliminated in consolidation.

⁽³⁾

Four of the Company’s Freddie Mac-sponsored multi-family K-Series securitizations included in the Consolidated K-Series were not held in a Financing VIE as of December 31, 2016. In October 2016, the Company repaid $55.9 million of outstanding notes from its November 2013 collateralized recourse financing, which was comprised of securities issued from three separate Freddie Mac-sponsored multi-family K-Series securitizations. In connection with the repayment of the notes, the Company terminated and de-consolidated the Financing VIE that facilitated this financing transaction and securities serving as collateral on the notes were transferred back to the Company.

- Definition

Tabular disclosure of the significant judgments and assumptions made in determining whether a variable interest (as defined) held by the entity requires the variable interest entity (VIE) (as defined) to be consolidated and (or) disclose information about its involvement with the VIE, individually or in aggregate (as applicable); the nature of restrictions, if any, on the consolidated VIE's assets and on the settlement of its liabilities reported by an entity in its statement of financial position, including the carrying amounts of such assets and liabilities; the nature of, and changes in, the risks associated with involvement in the VIE; how involvement with the VIE affects the entity's financial position, financial performance, and cash flows; the lack of recourse if creditors (or beneficial interest holders) of the consolidated VIE have no recourse to the general credit of the primary beneficiary (if applicable); the terms of arrangements, giving consideration to both explicit arrangements and implicit variable interests, if any, that could require the entity to provide financial support to the VIE, including events or circumstances that could expose the entity to a loss; the methodology used by the entity for determining whether or not it is the primary beneficiary of the variable interest entity; the significant factors considered and judgments made in determining that the power to direct the activities of a VIE that most significantly impact the VIE's economic performance are shared (as defined); the carrying amounts and classification of assets and liabilities of the VIE included in the statement of financial position; the entity's maximum exposure to loss, if any, as a result of its involvement with the VIE, including how the maximum exposure is determined and significant sources of the entity's exposure to the VIE; a comparison of the carrying amounts of the assets and liabilities and the entity's maximum exposure to loss; information about any liquidity arrangements, guarantees, and (or) other commitments by third parties that may affect the fair value or risk of the entity's variable interest in the VIE; whether or not the entity has provided financial support or other support (explicitly or implicitly) to the VIE that it was not previously contractually required to provide or whether the entity intends to provide that support, including the type and amount of the support and the primary reasons for providing the support; and supplemental information the entity determines necessary to provide.

+ References + Details