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Investments | 9 Months Ended
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Sep. 30, 2024
Investments, Debt and Equity Securities [Abstract] |
Investments | Investments The Company holds investments in various debt securities and beneficial interests. Beneficial interests are the residual interest of the Company’s investments in securitization trusts holding pools of mortgage loans. Beneficial interests may be trust certificates and/or subordinated notes depending on the structure of the securitization. The Company designates its investments in debt securities as available-for-sale (“AFS”) or held-to-maturity (“HTM”) based on the intent and ability to hold each security to maturity. The Company carries its residential and commercial AFS debt securities at fair value using prices provided by an external pricing service. The Company adopted the fair value option for its investments in commercial mortgage-backed securities (“CMBS”) and any changes in fair value are recorded in earnings in the period incurred. The Company adopted the fair value option as its New Manager believes it is the appropriate measure of accounting for securities as it transitions the balance sheet away from residential mortgage loans. The Company carries its investments in securities HTM and beneficial interests at amortized cost, net of any required allowance for credit losses. The Company owns a $21.9 million equity investment in Gaea which is held at fair value with any changes in fair value recorded in earnings in the period incurred. The Company previously accounted for the investment in Gaea using the equity method and reflected Gaea as an investment in affiliates but no longer has significant influence over the operations of Gaea. The Company’s investment in HTM securities represents the 5.01% the company is required to retain under the European risk retention rules for our secured borrowings (the “EU Retained Interest”). Article 6(1) of Regulation (EU) 2017/2402 of the European Parliament and of the Council. Pursuant to the terms of these debt securities, the Company must hold at least 5.01% of the nominal value of each class of securities offered or sold to investors and the Company is prohibited from selling, transferring or otherwise surrendering all or part of the EU Retained Interest until all such classes are paid in full or redeemed. Transfers of securities from AFS to HTM are non-cash transactions and are recorded at fair value and on the date of transfer. Any unrealized gains or losses continue to be reported in accumulated other comprehensive loss and amortized into interest income on a level-yield basis over the remaining life of the securities. This amortization will offset the effect on interest income of the amortization of the discount resulting from the transfer recorded at fair value. During the three and nine months ended September 30, 2024, the Company recorded amortization of $0.8 million and $2.3 million, respectively, of unrealized losses in accumulated other comprehensive loss and of unamortized discount related to transfers of securities from AFS to HTM. Comparatively, during the three and nine months ended September 30, 2023, the Company recorded amortization of $1.0 million and $4.2 million, respectively, of unrealized losses in accumulated other comprehensive loss and of unamortized discount related to transfers of securities from AFS to HTM. During the three and nine months ended September 30, 2024 and 2023, the Company reported $0.9 million and zero of fair value gains on securities held at fair value, respectively. The fair value gains are recorded in other income in the consolidated statement of operations. The following table presents information regarding the Company’s investments in debt securities and investments in beneficial interests ($ in thousands):
|  | As of September 30, 2024
|  | Basis(1) |  | Gross unrealized gains |  | Gross unrealized losses |  | Fair value
Debt securities available-for-sale, at fair value |  | $ | 170,883 |  |  | $ | 819 |  |  | $ | (5,052) |  |  | $ | 166,650 |
Debt securities held-to-maturity at amortized cost, net of allowance for credit losses of zero |  | 47,144 |  |  | — |  |  | (2,086) |  |  | 45,058 |
Investment in equity securities at fair value |  | 21,428 |  |  | 490 |  |  | — |  |  | 21,918 |
Investment in beneficial interests at amortized cost, net of allowance for credit losses of $9,082 |  | 88,996 |  |  | 669 |  |  | (25,480) |  |  | 64,185 |
Total investments |  | $ | 328,451 |  |  | $ | 1,978 |  |  | $ | (32,618) |  |  | $ | 297,811 |
(1)Basis amount is net of amortized discount, principal paydowns and interest receivable on securities AFS and HTM before any fair value adjustment.
|  | As of December 31, 2023
|  | Basis(1) |  | Gross unrealized gains |  | Gross unrealized losses |  | Fair value
Debt securities available-for-sale, at fair value |  | $ | 139,596 |  |  | $ | 637 |  |  | $ | (8,675) |  |  | $ | 131,558 |
Debt securities held-to-maturity at amortized cost, net of allowance for credit losses of zero |  | 59,691 |  |  | 111 |  |  | (629) |  |  | 59,173 |
Investment in beneficial interests at amortized cost, net of allowance for credit losses of $6,880 |  | 104,162 |  |  | 3,631 |  |  | (26,477) |  |  | 81,316 |
Total investments |  | $ | 303,449 |  |  | $ | 4,379 |  |  | $ | (35,781) |  |  | $ | 272,047 |
(1)Basis amount is net of amortized discount, principal paydowns and interest receivable on securities AFS and HTM before any fair value adjustment. The following table presents a breakdown of the Company’s gross unrealized losses on its investments in debt securities AFS ($ in thousands):
|  | As of September 30, 2024
|  | Step-up date(s)(1) |  | Basis(2) |  | Gross unrealized losses |  | Fair value
Debt securities due March 2060(3) |  | February 2025 |  | 3,822 |  |  | (209) |  |  | 3,613 |
Debt securities due December 2060(3) |  | July 2029 |  | 7,450 |  |  | (2,805) |  |  | 4,645 |
Debt securities due January 2061(3) |  | September 2024 |  | 4,886 |  |  | (302) |  |  | 4,584 |
Debt securities due June 2061(4) |  | January 2025/February 2025 |  | 8,675 |  |  | (662) |  |  | 8,013 |
Debt securities due October 2061(3) |  | April 2029 |  | 6,255 |  |  | (226) |  |  | 6,029 |
Debt securities due March 2062(3) |  | May 2029 |  | 9,649 |  |  | (434) |  |  | 9,215 |
Debt securities due July 2062(3) |  | February 2030 |  | 12,197 |  |  | (414) |  |  | 11,783 |
Total |  |  |  | $ | 52,934 |  |  | $ | (5,052) |  |  | $ | 47,882 |
(1)Step-up date is the date at which the coupon interest rate on the security increases. (2)Basis amount is net of any realized amortized costs and principal paydowns. (3)This security has been in an unrealized loss position for 12 months or longer. (4)This line is comprised of two securities that are both due June 2061, and both have been in an unrealized loss position for 12 months or longer.
| As of December 31, 2023
| Step-up date(s)(1) |  | Basis(2) |  | Gross unrealized losses |  | Fair value
Debt securities due February 2028(4) | February 2026 |  | $ | 4,717 |  |  | $ | (6) |  |  | $ | 4,711 |
Debt securities due November 2051(4) | March 2025 |  | 3,764 |  |  | (215) |  |  | 3,549 |
Debt securities due March 2060(4) | February 2025 |  | 5,805 |  |  | (678) |  |  | 5,127 |
Debt securities due December 2060(4) | July 2029 |  | 21,411 |  |  | (4,242) |  |  | 17,169 |
Debt securities due January 2061(4) | September 2024 |  | 4,886 |  |  | (478) |  |  | 4,408 |
Debt securities due June 2061(5) | January 2025/February 2025 |  | 12,992 |  |  | (1,243) |  |  | 11,749 |
Debt securities due October 2061(4) | April 2029 |  | 11,815 |  |  | (842) |  |  | 10,973 |
Debt securities due March 2062(4) | May 2029 |  | 10,315 |  |  | (793) |  |  | 9,522 |
Debt securities due July 2062(3) | February 2030 |  | 12,668 |  |  | (41) |  |  | 12,627 |
Debt securities due October 2062(3) | October 2026 |  | 17,174 |  |  | (137) |  |  | 17,037 |
Total |  |  | $ | 105,547 |  |  | $ | (8,675) |  |  | $ | 96,872 |
(1)Step-up date is the date at which the coupon interest rate on the security increases. (2)Basis amount is net of any realized amortized costs and principal paydowns. (3)This security has been in an unrealized loss position for less than 12 months. (4)This security has been in an unrealized loss position for 12 months or longer. (5)This line is comprised of two securities that are both due June 2061, and both have been in an unrealized loss position for 12 months or longer. During the three months ended September 30, 2024, the Company acquired $110.0 million in unpaid principal balance (“UPB”) of CMBS. The Company has adopted the fair value option for these investments. Comparatively, during the three and nine months ended September 30, 2023, the Company re-securitized several joint ventures and retained $57.9 million and $16.1 million, respectively, of varying classes of agency rated and non-rated securities and beneficial interests. All of the debt securities retained are classified as AFS while the beneficial interests are held at amortized cost net of any allowance for credit losses. During the three months ended September 30, 2024, the Company sold debt securities AFS with a UPB of $62.7 million and recorded a loss of $2.4 million, the majority of which was reclassified from other comprehensive loss to the consolidated statement of operations. Comparatively, during the three and nine ended September 30, 2023, the Company sold senior notes issued by certain joint ventures and recognized a loss of $0.4 million and $3.3 million, respectively, which was similarly a reclassification from other comprehensive loss. As of September 30, 2024 and December 31, 2023, the Company had no debt securities that were past due. The following table presents a reconciliation between the purchase price and par value for the Company’s beneficial interest acquisitions for the three and nine months ended September 30, 2024 and 2023 ($ in thousands):
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2024 |  | 2023 |  | 2024 |  | 2023
Par |  | $ | — |  |  | $ | 11,962 |  |  | $ | — |  |  | $ | 14,013 |
Premium |  | — |  |  | (3,225) |  |  | — |  |  | (2,262) |
Purchase price |  | $ | — |  |  | $ | 8,737 |  |  | $ | — |  |  | $ | 11,751 |
The Company generally recognizes accretable yield on its beneficial interests and increases and decreases in the net present value of expected cash flows in earnings in the period they occur. For the three and nine months ended September 30, 2024, the Company recognized accretable yield of $2.4 million and $3.8 million, respectively, on its beneficial interests. Comparatively, for the three and nine months ended September 30, 2023, the Company recognized accretable yield of $1.9 million and $6.0 million, respectively, on its beneficial interests. For the three and nine months ended September 30, 2024, the Company recognized interest income of $0.3 million and $1.1 million, respectively, on its investments in securities HTM. Comparatively, for the three and nine months ended September 30, 2023, the Company recognized interest income of $0.5 million and $1.7 million, respectively, on its investments in securities HTM. Under CECL, an expense is recorded to increase the allowance for expected credit losses when there is a reduction in the Company’s expected future cash flows compared to contractual amounts due. Income is recognized if there is an increase in expected future cash flows to the extent an allowance has been recorded against the beneficial interest or investments in securities HTM. If there is no allowance for expected credit losses recorded against a beneficial interest or investments in securities HTM, any increase in expected cash flows is recognized prospectively as a change in yield. A decrease in the allowance for expected credit losses is generally facilitated by reclassifying amounts to non-credit discount from the allowance and then recording the reduction to the allowance through the income statement. Management assesses the credit quality of the portfolio and the adequacy of loss reserves on a quarterly basis, or more frequently as necessary. During the three and nine months ended September 30, 2024 and 2023, the Company had no activity and balance related to the allowance for expected credit losses for investments in securities HTM. During the three and nine months ended September 30, 2024, the Company recorded reclassifications to non-credit discount from the allowance for changes in payment expectations. An analysis of the balance in the allowance for expected credit losses for beneficial interests account follows ($ in thousands):
|  | Three months ended September 30, |  | Nine months ended September 30,
|  | 2024 |  | 2023 |  | 2024 |  | 2023
Allowance for expected credit losses, beginning balance |  | $ | (9,082) |  |  | $ | — |  |  | $ | (6,880) |  |  | $ | — |
Reclassification to non-credit discount from the allowance for changes in payment expectations |  | 857 |  |  | — |  |  | 1,773 |  |  | — |
Net change in the allowance for credit losses |  | (857) |  |  | — |  |  | (3,975) |  |  | — |
Allowance for expected credit losses, ending balance |  | $ | (9,082) |  |  | $ | — |  |  | $ | (9,082) |  |  | $ | — |

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