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Use of Special Purpose Entities (SPE) and Variable Interest Entities (VIE) | 9 Months Ended
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Sep. 30, 2019
Variable Interest Entity, Consolidated, Carrying Amount, Assets and Liabilities, Net [Abstract] |
Use of Special Purpose Entities (SPE) and Variable Interest Entities (VIE) | Use of Special Purpose Entities (SPE) and Variable Interest Entities (VIE) The Company uses SPEs to facilitate transactions that involve securitizing financial assets or re-securitizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets on improved terms. Securitization involves transferring assets to an SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business through the SPE’s issuance of debt or equity instruments. Investors in an SPE usually have recourse only to the assets in the SPE and depending on the overall structure of the transaction, may benefit from various forms of credit enhancement, such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement. The Company has entered into re-securitization or financing transactions which required the Company to analyze and determine whether the SPEs that were created to facilitate the transactions are VIEs in accordance with ASC 810, Consolidation, and if so, whether the Company is the primary beneficiary requiring consolidation. As of September 30, 2019, the Company evaluated its Residential CDOs and concluded that the entities created to facilitate each of the financing transactions are VIEs and that the Company is the primary beneficiary of these VIEs. Accordingly, the Company continues to consolidate the Residential CDOs as of September 30, 2019. As of December 31, 2018, the Company evaluated the following re-securitization and financing transactions: 1) its Residential CDOs; 2) its multi-family CMBS re-securitization transaction and 3) its distressed residential mortgage loan securitization transaction (each a “Financing VIE” and collectively, the “Financing VIEs”) and concluded that the entities created to facilitate each of the transactions were VIEs and that the Company was the primary beneficiary of these VIEs. Accordingly, the Company consolidated the Financing VIEs as of December 31, 2018. On March 14, 2019, the Company exercised its right to an optional redemption of its multi-family CMBS re-securitization with an outstanding principal balance of $33.2 million resulting in a loss on extinguishment of debt of $2.9 million. Additionally, on March 25, 2019, the Company repaid outstanding notes from its April 2016 distressed residential mortgage loan securitization with an outstanding principal balance of $6.5 million. Due to the redemptions, the multi-family CMBS held by the re-securitization trust and residential mortgage loans held in securitization trust were returned to the Company. The Company invests in multi-family CMBS consisting of POs that represent the first loss position of the Freddie Mac-sponsored multi-family K-series securitizations from which they were issued, and certain IOs and certain senior and mezzanine CMBS securities issued from the securitization. The Company has evaluated these CMBS investments to determine whether they are VIEs and if so, whether the Company is the primary beneficiary requiring consolidation. The Company has determined that twelve and nine Freddie Mac-sponsored multi-family K-Series securitization trusts are VIEs as of September 30, 2019 and December 31, 2018, respectively. The Company also determined that it is the primary beneficiary of each VIE within the Consolidated K-Series and, accordingly, has consolidated its assets, liabilities, income and expenses in the accompanying condensed consolidated financial statements (see Notes 2 and 6). Of the multi-family CMBS investments owned by the Company that are included in the Consolidated K-Series, twelve and eight of these investments are not included as collateral to any Financing VIE as of September 30, 2019 and December 31, 2018, respectively. In analyzing whether the Company is the primary beneficiary of the Consolidated K-Series and the Financing VIEs, the Company considered its involvement in each of the VIEs, including the design and purpose of each VIE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of the VIEs. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed:
• | whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and
• | whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.
The Company owns 100% of RB Development Holding Company, LLC ("RBDHC"). RBDHC owns 50% of Kiawah River View Investors LLC ("KRVI"), a limited liability company that owns developed land and residential homes under development in Kiawah Island, SC, for which RiverBanc LLC ("RiverBanc", a wholly-owned subsidiary of the Company) is the manager. The Company has evaluated KRVI to determine if it is a VIE and if so, whether the Company is the primary beneficiary requiring consolidation. The Company has determined that KRVI is a VIE for which RBDHC is the primary beneficiary as the Company, collectively through its wholly-owned subsidiaries, RiverBanc and RBDHC, has both the power to direct the activities that most significantly impact the economic performance of KRVI and has a right to receive benefits or absorb losses of KRVI that could be potentially significant to KRVI. Accordingly, the Company has consolidated KRVI in its condensed consolidated financial statements with a non-controlling interest for the third-party ownership of KRVI membership interests. Real estate under development in KRVI as of September 30, 2019 and December 31, 2018 of $13.9 million and $22.0 million, respectively, is included in receivables and other assets on the condensed consolidated balance sheets. In March 2017, the Company reconsidered its evaluation of its variable interests in 200 RHC Hoover, LLC ("Riverchase Landing") and The Clusters, LLC ("The Clusters"), two VIEs that each owned a multi-family apartment community and in each of which the Company held a preferred equity investment. The Company determined that it gained the power to direct the activities, and became primary beneficiary, of Riverchase Landing and The Clusters and consolidated them in its condensed consolidated financial statements. In March 2018, Riverchase Landing completed the sale of its multi-family apartment community and redeemed the Company's preferred equity investment. Also, in February 2019, The Clusters completed the sale of its multi-family apartment community and redeemed the Company's preferred equity investment. The Company de-consolidated Riverchase Landing and The Clusters as of the date of each property's sale. Prior to the sale of the respective properties, the Company did not have any claims to the assets or obligations for the liabilities of Riverchase Landing and The Clusters (other than the preferred equity investments held by the Company). The following table presents a summary of the assets and liabilities of the Residential CDOs, the Consolidated K-Series, and KRVI of as of September 30, 2019 (dollar amounts in thousands). Intercompany balances have been eliminated for purposes of this presentation.
| Financing VIE |  | Other VIEs |  |
| Residential Mortgage Loan Securitization |  | Consolidated K-Series |  | Other |  | Total
Cash and cash equivalents | $ | — |  |  | $ | — |  |  | $ | 656 |  |  | $ | 656 |
Residential mortgage loans held in securitization trusts, net | 45,672 |  |  | — |  |  | — |  |  | 45,672 |
Multi-family loans held in securitization trusts, at fair value | — |  |  | 15,863,264 |  |  | — |  |  | 15,863,264 |
Receivables and other assets | 1,274 |  |  | 51,950 |  |  | 14,098 |  |  | 67,322 |
Total assets | $ | 46,946 |  |  | $ | 15,915,214 |  |  | $ | 14,754 |  |  | $ | 15,976,914 |
Residential collateralized debt obligations | $ | 42,119 |  |  | $ | — |  |  | $ | — |  |  | $ | 42,119 |
Multi-family collateralized debt obligations, at fair value | — |  |  | 14,978,199 |  |  | — |  |  | 14,978,199 |
Mortgages and notes payable in consolidated variable interest entities | — |  |  | — |  |  | 935 |  |  | 935 |
Accrued expenses and other liabilities | 35 |  |  | 50,783 |  |  | 120 |  |  | 50,938 |
Total liabilities | $ | 42,154 |  |  | $ | 15,028,982 |  |  | $ | 1,055 |  |  | $ | 15,072,191 |
The following table presents a summary of the assets and liabilities of the Financing VIEs, the Consolidated K-Series, KRVI, and The Clusters as of December 31, 2018 (dollar amounts in thousands):
| Financing VIEs |  | Other VIEs |  |
| Multi-family CMBS Re- securitization (1) |  | Distressed Residential Mortgage Loan Securitization (2) |  | Residential Mortgage Loan Securitization |  | Consolidated K-Series (3) |  | Other |  | Total
Cash and cash equivalents | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 708 |  |  | $ | 708 |
Investment securities available for sale, at fair value held in securitization trusts | 52,700 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | 52,700 |
Residential mortgage loans held in securitization trusts, net | — |  |  | — |  |  | 56,795 |  |  | — |  |  | — |  |  | 56,795 |
Distressed residential mortgage loans held in securitization trusts, net | — |  |  | 88,096 |  |  | — |  |  | — |  |  | — |  |  | 88,096 |
Multi-family loans held in securitization trusts, at fair value | 1,107,071 |  |  | — |  |  | — |  |  | 10,572,776 |  |  | — |  |  | 11,679,847 |
Real estate held for sale in consolidated variable interest entities | — |  |  | — |  |  | — |  |  | — |  |  | 29,704 |  |  | 29,704 |
Receivables and other assets | 4,243 |  |  | 10,287 |  |  | 1,061 |  |  | 37,679 |  |  | 23,254 |  |  | 76,524 |
Total assets | $ | 1,164,014 |  |  | $ | 98,383 |  |  | $ | 57,856 |  |  | $ | 10,610,455 |  |  | $ | 53,666 |  |  | $ | 11,984,374 |
Residential collateralized debt obligations | $ | — |  |  | $ | — |  |  | $ | 53,040 |  |  | $ | — |  |  | $ | — |  |  | $ | 53,040 |
Multi-family collateralized debt obligations, at fair value | 1,036,604 |  |  | — |  |  | — |  |  | 9,985,644 |  |  | — |  |  | 11,022,248 |
Securitized debt | 30,121 |  |  | 12,214 |  |  | — |  |  | — |  |  | — |  |  | 42,335 |
Mortgages and notes payable in consolidated variable interest entities | — |  |  | — |  |  | — |  |  | — |  |  | 31,227 |  |  | 31,227 |
Accrued expenses and other liabilities | 4,228 |  |  | 444 |  |  | 26 |  |  | 37,022 |  |  | 1,166 |  |  | 42,886 |
Total liabilities | $ | 1,070,953 |  |  | $ | 12,658 |  |  | $ | 53,066 |  |  | $ | 10,022,666 |  |  | $ | 32,393 |  |  | $ | 11,191,736 |
(1) | The Company classified the multi-family CMBS issued by two securitizations and held by this Financing VIE as available for sale securities. The Financing VIE consolidated one securitization included in the Consolidated K-Series 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 6).
(2) | The Company engaged in this transaction for the purpose of financing certain distressed residential mortgage loans acquired by the Company. The distressed residential mortgage loans serving as collateral for the financing are comprised of re-performing and, to a lesser extent, non-performing and other delinquent mortgage loans secured by first liens on one- to four- family properties. Balances as of December 31, 2018 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 held 5% of the Class A Notes issued as part of the securitization transaction, which were eliminated in consolidation.
(3) | Eight of the securitizations included in the Consolidated K-Series were not held in a Financing VIE as of December 31, 2018.
As of September 30, 2019, the Company had no securitized debt outstanding. The following table summarizes the Company’s securitized debt collateralized by multi-family CMBS or distressed residential mortgage loans as of December 31, 2018 (dollar amounts in thousands):
| Multi-family CMBS Re-securitization (1) |  | Distressed Residential Mortgage Loan Securitization
Principal Amount at December 31, 2018 | $ | 33,177 |  |  | $ | 12,381 |
Carrying Value at December 31, 2018 (2) | $ | 30,121 |  |  | $ | 12,214 |
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 remained economically exposed to the first loss position on the underlying multi-family CMBS transferred to the Consolidated VIE.
(2) | Presented net of unamortized deferred costs of $0.2 million related to the issuance of the securitized debt, which included underwriting, rating agency, legal, accounting and other fees.
The following table presents contractual maturity information about the Financing VIEs’ securitized debt as of December 31, 2018 (dollar amounts in thousands):
Scheduled Maturity (principal amount) | December 31, 2018
Within 24 months | $ | 12,381 |
Over 24 months to 36 months | — |
Over 36 months | 33,177 |
Total | 45,558 |
Discount | (2,983 | )
Debt issuance cost | (240 | )
Carrying value | $ | 42,335 |
Residential Mortgage Loan Securitization Transaction The Company has completed four residential mortgage loan securitizations (other than the distressed residential mortgage loan securitizations discussed above) since inception; the first three were accounted for as permanent financings and have been included in the Company’s accompanying condensed consolidated financial statements. The fourth was accounted for as a sale and, accordingly, is not included in the Company’s accompanying condensed consolidated financial statements. Unconsolidated VIEs As of September 30, 2019, the Company evaluated its investment securities, mezzanine loan, preferred equity and other equity investments to determine whether they are VIEs and should be consolidated by the Company. Based on a number of factors, the Company determined that, as of September 30, 2019, it does not have a controlling financial interest and is not the primary beneficiary of these VIEs. As of December 31, 2018, the Company evaluated its multi-family CMBS investments in two Freddie Mac-sponsored multi-family loan K-Series securitizations and its mezzanine loan, preferred equity and other equity investments to determine whether they are VIEs and should be consolidated by the Company. Based on a number of factors, the Company determined that, as of December 31, 2018, except for the Clusters, it does not have a controlling financial interest and is not the primary beneficiary of these VIEs. The following tables present the classification and carrying value of unconsolidated VIEs as of September 30, 2019 and December 31, 2018, (dollar amounts in thousands):
| September 30, 2019
| Investment securities, available for sale, at fair value |  | Preferred equity and mezzanine loan investments |  | Investments in unconsolidated entities |  | Total
ABS | $ | 48,254 |  |  | $ | — |  |  | $ | — |  |  | $ | 48,254 |
Preferred equity investments in multi-family properties | — |  |  | 172,826 |  |  | 92,684 |  |  | 265,510 |
Mezzanine loans on multi-family properties | — |  |  | 6,171 |  |  | — |  |  | 6,171 |
Equity investments in entities that invest in residential properties and loans | — |  |  | — |  |  | 61,779 |  |  | 61,779 |
Total assets | $ | 48,254 |  |  | $ | 178,997 |  |  | $ | 154,463 |  |  | $ | 381,714 |
| December 31, 2018
| Investment securities, available for sale, at fair value, held in securitization trusts |  | Receivables and other assets |  | Preferred equity and mezzanine loan investments |  | Investments in unconsolidated entities |  | Total
Multi-family CMBS | $ | 52,700 |  |  | $ | 72 |  |  | $ | — |  |  | $ | — |  |  | $ | 52,772 |
Preferred equity investments in multi-family properties | — |  |  | — |  |  | 154,629 |  |  | 40,472 |  |  | 195,101 |
Mezzanine loans on multi-family properties | — |  |  | — |  |  | 10,926 |  |  | — |  |  | 10,926 |
Equity investments in entities that invest in residential properties | — |  |  | — |  |  | — |  |  | 10,954 |  |  | 10,954 |
Total assets | $ | 52,700 |  |  | $ | 72 |  |  | $ | 165,555 |  |  | $ | 51,426 |  |  | $ | 269,753 |
Our maximum loss exposure on the investment securities available for sale, at fair value, preferred equity and mezzanine loan investments, and investments in unconsolidated entities is approximately $381.7 million at September 30, 2019. Our maximum loss exposure on the investment securities available for sale, at fair value, held in securitization trusts, preferred equity and mezzanine loan investments, and investments in unconsolidated entities was approximately $269.8 million at December 31, 2018. The Company’s maximum exposure does not exceed the carrying value of its investments.

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