Note 2—Investments in Debt Securities

The Company’s investments in debt securities consist of two subordinate multifamily tax-exempt bonds and one other real estate-related bond investment. 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 investment in other real estate-related bonds consists of a single tax-exempt bond at September 30, 2019 and December 31, 2018, that financed the development of infrastructure for a mixed-use town center development and is secured by incremental tax revenues generated from the development and its landowners (this investment is hereinafter referred to as our “Infrastructure Bond”).

The weighted-average pay rate on the Company’s bond investments was 6.3% and 6.2% at September 30, 2019 and December 31, 2018, respectively. 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 September 30, 2019 and December 31, 2018.

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


	At
	September 30, 2019
					Gross
			Amortized		Unrealized				FV as a %
(in thousands)	UPB		Cost (1)		Gains		FV		of UPB
Multifamily tax-exempt bonds	$	6,160	$	576	$	8,145	$	8,721		142%
Infrastructure Bond		27,170		21,038		4,362		25,400		93%
Total	$	33,330	$	21,614	$	12,507	$	34,121		102%


	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%
Infrastructure Bond		27,170		20,912		4,061		24,973	92%
Total	$	92,332	$	59,565	$	37,625	$	97,190	105%

⁽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.

See Note 8, “Fair Value,” which describes factors that contributed to the $63.1 million decrease in the reported fair value of the Company’s investments in debt securities for the nine months ended September 30, 2019.

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 September 30, 2019, one of the Company’s remaining three bond investments amortizes on a scheduled basis and has a stated maturity date of December 2048. The Company’s remaining two bond investments are non-amortizing subordinated cash flow bonds with principal due in full on November 2044 and August 2048 (the total cost basis and fair value of these bonds were $0.6 million and $8.7 million, respectively, at September 30, 2019).

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 troubled debt restructuring (“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.

There were no TDRs for the three and nine months ended September 30, 2019.

Nonaccrual Bonds

On July 23, 2019, the Company’s two remaining non-performing multifamily bond investments were fully redeemed. Upon redemption, the Company reclassified gains of $1.9 million from AOCI into the Company’s Consolidated Statements of Operations.

The fair value of the Company’s investments in bonds that were on nonaccrual status was $12.9 million at December 31, 2018.

Interest income on bonds that was recognized on a cash basis for the three months and nine months ended September 30, 2018 was $0.1 million and $0.3 million, respectively.

Interest income not recognized on bonds that were on nonaccrual status for the three and nine months ended September 30, 2018 was $0.3 million and $0.8 million, respectively.

Bond Sales and Redemptions

The Company received cash proceeds in connection with the sale or redemption in full of investments in bonds of $2.4 million and $26.6 million for the three and nine months ended September 30, 2019, respectively, and received cash proceeds of $0.5 million for the three and nine months ended September 30, 2018.

On November 6, 2019, one of the Company’s unencumbered tax-exempt multifamily bond investments, that had a UPB and fair value of $2.2 million and $2.8 million at September 30, 2019, respectively, was fully redeemed at its reported fair value.

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


	For the three months ended				For the nine months ended
	September 30,				September 30,
(in thousands)	2019		2018		2019		2018
Gains recognized at time of sale or redemption	$	2,156	$	5,080	$	26,420	$	5,080
OTTI losses recognized on bonds held at each period-end		─		─		─		(6)
Total net gains on bonds	$	2,156	$	5,080	$	26,420	$	5,074