Note 2—Investments in Debt Securities

The Company’s investments in debt securities primarily consist of multifamily tax-exempt bonds and other real estate-related bond investments. These investments are classified as available-for-sale for reporting purposes and are measured on a fair value basis in our Consolidated Balance Sheets.

Multifamily tax-exempt bonds are issued by state and local governments or their agencies or authorities to finance affordable multifamily rental housing. Generally, the only source of security on these bonds is either a first mortgage or a subordinate mortgage on the underlying properties.

The Company’s investments in other real estate-related bonds consist of one and two municipal bonds at December 31, 2018 and December 31, 2017, respectively, that financed the development of infrastructure for a mixed-use town center development and are secured by incremental tax revenues generated from the development and its landowners.

The weighted-average pay rate on the Company’s bond investments was 6.2% at December 31, 2018 and December 31, 2017. Weighted-average pay rate represents the cash interest payments collected on the bonds (excluding subordinated cash flow bonds) as a percentage of the bonds’ average unpaid principal balance (“UPB”) for the preceding 12 months for the population of bonds at December 31, 2018 and December 31, 2017.

The following tables provide information about the UPB, amortized cost, gross unrealized gains, gross unrealized losses and FV associated with the Company’s investments in bonds that are classified as available-for-sale:


	At
	December 31, 2018
					Gross
			Amortized		Unrealized				FV as a %
(in thousands)	UPB		Cost (1)		Gains		FV		of UPB
Multifamily tax-exempt bonds	$	65,162	$	38,653	$	33,564	$	72,217		111%
Other real estate-related bond investments		27,170		20,912		4,061		24,973		92%
Total	$	92,332	$	59,565	$	37,625	$	97,190		105%


	At
	December 31, 2017
					Gross		Gross
			Amortized		Unrealized		Unrealized				FV as a %
(in thousands)	UPB		Cost (1)		Gains		Losses (2)		FV		of UPB
Multifamily tax-exempt bonds	$	105,472	$	67,982	$	43,587	$	─	$	111,569	106%
Other real estate-related bond investments		37,050		31,163		1,203		(331)		32,035	86%
Total	$	142,522	$	99,145	$	44,790	$	(331)	$	143,604	101%

⁽¹⁾

Amortized cost consists of the UPB, unamortized premiums, discounts and other cost basis adjustments, as well as net OTTI recognized in “Impairments” in our Consolidated Statements of Operations.

⁽²⁾

Includes one bond that was in a gross unrealized loss position for more than 12 consecutive months and that had a fair value of $15.0 million at December 31, 2017.

See Note 8, “Fair Value,” which describes factors that contributed to the $46.4 million decrease in the reported fair value of the Company’s investments in debt securities for the year ended December 31, 2018.

Maturity

Principal payments on the Company’s investments in bonds are based on contractual terms that are set forth in the contractual documents governing such investments. If principal payments are not required to be made prior to the contractual maturity of a bond, its UPB is required to be paid in a lump sum payment at contractual maturity or at such earlier time as may be provided under the governing documents. At December 31, 2018, the majority of the Company’s bond investments amortize on a scheduled basis and have stated maturity dates between August 2033 and December 2048. The Company also had four non-amortizing bonds with principal due in full between November 2044 and August 2048 (the total cost basis and fair value of these bonds were $3.1 million and $17.4 million, respectively, at December 31, 2018).

Investments in Debt Securities with Prepayment Features

The contractual terms of all of the Company’s investments in bonds include provisions that permit such instruments to be prepaid at par after a specified date that is prior to their stated maturity date. The following table provides information about the UPB, amortized cost and fair value of the Company’s investments in bonds that were prepayable at par at December 31, 2018, as well as stratifies such information for the remainder of the Company’s investments based upon the periods in which such instruments become prepayable at par:


(in thousands)	UPB		Amortized Cost		Fair Value
December 31, 2018	$	29,012	$	21,180	$	27,071
2019		5,170		4,079		5,189
2020		─		─		─
2021		27,895		12,943		31,106
2022		30,255		21,363		33,824
Thereafter		─		─		─
Bonds that may not be prepaid		─		─		─
Total	$	92,332	$	59,565	$	97,190

The weighted-average expected maturity of the Company’s investments in bonds that were not currently prepayable at par at December 31, 2018 was 2.8 years.

Bond Aging Analysis

The following table provides information about the fair value of the Company’s investments in bonds that are classified as available-for-sale and that were current with respect to principal and interest payments, as well as information about the fair value of bonds that were past due with respect to principal or interest payments:


	At		At
	December 31,		December 31,
(in thousands)	2018		2017
Total current	$	84,307	$	135,571
30-59 days past due		─		─
60-89 days past due		─		─
90 days or greater		12,883		8,033
Total	$	97,190	$	143,604

Troubled Debt Restructurings

The Company may periodically agree to modify the contractual terms of its investments in debt securities in the interest of attempting to obtain more cash or other value from a debtor than it otherwise would, or to increase the probability of receipt, by granting a concession to a borrower. If the Company makes an economic concession to a borrower that is experiencing financial difficulty, the Company will typically assess a modification or other form of concession to represent a TDR for reporting purposes.

On August 27, 2018, the Company agreed to extend the scheduled payment date associated with one of its infrastructure bonds from September 1, 2018 to November 1, 2018. This extension provided the debtor and the Company more time to negotiate a comprehensive restructuring of both of the Company’s infrastructure bond investments. On October 30, 2018, the Company restructured the two municipal bonds that financed the development of infrastructure for a mixed-use town center development and that are secured by incremental tax revenues generated from the development. At September 30, 2018, these two bond investments had a combined UPB, amortized cost and fair value of $26.8 million, $20.9 million and $21.6 million, respectively, bore interest at a rate of 6.75% and had a weighted-average maturity of 15.4 years. Under the terms of the restructured bond investment, a single tax-exempt bond was issued, that has a UPB of $27.2 million, bears a coupon of 6.30%, has a contractual term of 30.1 years and, at December 31, 2018, had a fair value of $25.0 million.

As part of this restructuring transaction, the community development district (“CDD”) in which the mixed-use development is located will assess owners of undeveloped land parcels an undeveloped land license fee that will supplement tax revenues that are generated from the mixed-use town center development, thereby increasing the amount of funds available to the CDD to make principal and interest payments to the Company on its infrastructure bond. At the time of restructuring, the real estate venture that owns and operates the mixed-use town center development and in which the Company has an 80% ownership interest, was the owner of all undeveloped land parcels in the CDD. Members of the venture will make capital contributions in order for the venture to satisfy its financial obligations associated with undeveloped land license fees. However, through amendments to the real estate venture’s operating agreement that effectively reimburse the Company’s venture partner for its share of undeveloped land license fees, the Company bears 100% of the economic burden of incremental license fees associated with land that is owned by the venture until such time that the land parcels are sold to third parties.

For reporting purposes, the restructuring of the Company’s infrastructure bond investments was deemed to be a TDR. In this regard, the Company carried forward the amortized cost basis of its infrastructure bond investments as of the date of restructuring and will measure the fair value of its restructured bond investment prospectively based upon its amended terms.

There were no TDRs for the year ended December 31, 2017.

Nonaccrual Bonds

The fair value of the Company’s investments in bonds that were on nonaccrual status was $12.9 million and $8.0 million at December 31, 2018 and December 31, 2017, respectively. The Company recognized interest income on a cash basis of $0.4 million and $0.3 million for the years ended December 31, 2018 and December 31, 2017, respectively. Interest income not recognized on bonds that were on nonaccrual status was $1.0 million and $0.6 million for the years ended December 31, 2018 and December 31, 2017, respectively.

Bond Sales and Redemptions

The Company received cash proceeds in connection with the sale or full redemption of investments in bonds of $12.8 million and $7.4 million for the years ended December 31, 2018 and December 31, 2017, respectively.

The following table provides information about gains or losses that were recognized in the Consolidated Statements of Operations in connection with the Company’s investments in bonds:


	For the year ended
	December 31,
(in thousands)	2018		2017
OTTI losses recognized on bonds held at each period-end	$	(6)	$	(945)
Gains recognized at time of sale or redemption		21,875		620
Total net gains (losses) on bonds	$	21,869	$	(325)