

8.	COMMERCIAL REAL ESTATE INVESTMENTS

CRE Debt and Preferred Equity Investments

At December 31, 2017 and 2016, commercial real estate investments held for investment were comprised of the following:



	December 31, 2017						December 31, 2016
	Outstanding Principal		Carrying Value ⁽¹⁾		Percentage of Loan Portfolio ⁽²⁾		Outstanding Principal		Carrying Value ⁽¹⁾		Percentage of Loan Portfolio ⁽²⁾
	(dollars in thousands)
Senior mortgages	$	629,143	$	625,900	60.9	%	$	512,322	$	510,071	52.6	%
Mezzanine loans	395,015		394,442		38.2	%	453,693		451,467		46.5	%
Preferred equity	9,000		8,985		0.9	%	9,000		8,967		0.9	%
Total ⁽³⁾	$	1,033,158	$	1,029,327	100.0	%	$	975,015	$	970,505	100.0	%

(1) Carrying value includes unamortized origination fees of $3.8 million and $4.5 million at December 31, 2017 and 2016, respectively.

(2) Based on outstanding principal.

(3) Excludes loans held for sale, net.



	December 31, 2017
	Senior Mortgages			Mezzanine Loans			Preferred Equity		Total
	(dollars in thousands)
Beginning balance	$	510,071		$	451,467		$	8,967	$	970,505
Originations & advances (principal)	338,242			69,121			—		407,363
Principal payments	(221,421		)	(127,799		)	—		(349,220		)
Amortization & accretion of (premium) discounts	(44		)	28			—		(16		)
Net (increase) decrease in origination fees	(3,317		)	(605		)	—		(3,922		)
Amortization of net origination fees	2,369			2,230			18		4,617
Net carrying value	$	625,900		$	394,442		$	8,985	$	1,029,327



	December 31, 2016
	Senior Mortgages			Senior Securitized Mortgages ⁽¹⁾			Mezzanine Loans			Preferred Equity			Total
	(dollars in thousands)
Beginning balance	$	385,838		$	262,703		$	578,503		$	121,773		$	1,348,817
Originations & advances (principal)	211,318			—			62,390			—			273,708
Principal payments	(86,310		)	(263,072		)	(191,291		)	(113,444		)	(654,117		)
Amortization & accretion of (premium) discounts	(136		)	—			(178		)	—			(314		)
Net (increase) decrease in origination fees	(2,086		)	—			(472		)	—			(2,558		)
Amortization of net origination fees	1,447			369			2,515			638			4,969
Net carrying value ⁽²⁾	$	510,071		$	—		$	451,467		$	8,967		$	970,505

(1) Assets of consolidated VIE.

(2) Excludes loans held for sale, net.

Internal CRE Debt and Preferred Equity Investment Ratings

The Company’s internal loan risk ratings are based on the guidance provided by the Office of the Comptroller of the Currency for commercial real estate lending. The Company’s internal risk rating categories include “Performing”, “Performing - Closely Monitored”, “Performing - Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual obligations. Performing - Closely Monitored loans meet all present contractual obligations, but are transitional or could be exhibiting some weakness in both leverage and liquidity. Performing - Special Mention loans meet all present contractual obligations, but exhibit potential weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. Substandard loans are inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. Doubtful loans are Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. Loss loans are considered uncollectible.

The Company did not have any impaired loans, nonaccrual loans, or loans in default in the commercial loans portfolio as all of the loans were performing at December 31, 2017 and 2016. As such, no provision for loan loss was deemed necessary at December 31, 2017 and 2016.



	December 31, 2017
					Internal Ratings
Investment Type	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio		Performing		Performing - Closely Monitored		Performing - Special Mention		Substandard ⁽¹⁾		Doubtful		Loss		Total
	(dollars in thousands)
Senior mortgages	$	629,143	60.9	%	$	409,878	$	115,075	$	36,800	$	67,390	$	—	$	—	$	629,143
Mezzanine loans	395,015		38.2	%	206,169		66,498		122,348		—		—		—		395,015
Preferred equity	9,000		0.9	%	—		—		9,000		—		—		—		9,000
Total	$	1,033,158	100.0	%	$	616,047	$	181,573	$	168,148	$	67,390	$	—	$	—	$	1,033,158



	December 31, 2016
					Internal Ratings
Investment Type	Outstanding Principal ⁽²⁾		Percentage of CRE Debt and Preferred Equity Portfolio		Performing		Performing - Closely Monitored		Performing - Special Mention		Substandard		Doubtful		Loss		Total
	(dollars in thousands)
Senior mortgages	$	512,322	52.6	%	$	144,434	$	243,448	$	124,440	$	—	$	—	$	—	$	512,322
Mezzanine loans	453,693		46.5	%	254,337		170,039		29,317		—		—		—		453,693
Preferred equity	9,000		0.9	%	—		—		9,000		—		—		—		9,000
Total	$	975,015	100.0	%	$	398,771	$	413,487	$	162,757	$	—	$	—	$	—	$	975,015

(1) The Company transferred one loan to Substandard during the year ended December 31, 2017. The downgrade in risk rating was based on the borrower’s failure to meet originally projected performance targets. The Company evaluated whether an impairment exists and determined that, based on quantitative and qualitative factors, including that the borrower is current, the Company expects timely repayment of contractual amounts due.

(2) Excludes Loans held for sale, net.

At December 31, 2017, and 2016, approximately 86% and 77%, respectively, of the carrying value of the Company’s CRE Debt and Preferred Equity Investments, excluding commercial loans held for sale, were adjustable-rate.

Investments in Commercial Real Estate

There were no acquisitions of new real estate holdings during the year ended December 31, 2017. The company sold one of its wholly-owned triple net leased properties during the year ended December 31, 2017 for $12.0 million and recognized a gain on sale of $5.1 million.

The weighted average amortization period for intangible assets and liabilities at December 31, 2017 is 4.5 years. Above market leases and leasehold intangible assets are included in Intangible assets, net and below market leases are included in Accounts payable and other liabilities in the Consolidated Statements of Financial Condition.



	December 31, 2017			December 31, 2016
	(dollars in thousands)
Real estate held for investment, at amortized cost
Land	$	111,012		$	112,675
Buildings and improvements	330,959			335,945
Subtotal	441,971			448,620
Less: accumulated depreciation	(48,920		)	(34,221		)
Total real estate held for investment, at amortized cost, net	393,051			414,399
Equity in unconsolidated joint ventures	92,902			60,168
Investments in commercial real estate, net	$	485,953		$	474,567

Depreciation expense was $15.8 million and $20.4 million for the years ended December 31, 2017 and 2016, respectively and is included in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

Rental Income

The minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse the Company for certain operating costs. Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at December 31, 2017 for consolidated investments in real estate are as follows:



	December 31, 2017
	(dollars in thousands)
2018	$	29,245
2019	25,845
2020	21,192
2021	17,029
2022	12,141
Later years	20,552
Total	$	126,004

Mortgage loans payable at December 31, 2017 and 2016, were as follows:



December 31, 2017
Property	Mortgage Carrying Value		Mortgage Principal		Interest Rate		Fixed/Floating Rate	Maturity Date	Priority
(dollars in thousands)
Joint Ventures	$	286,373	$	289,125	4.03% - 4.61%		Fixed	2024 and 2025	First liens
Tennessee	12,294		12,350		4.01	%	Fixed	9/6/2019	First liens
Virginia	11,019		11,025		3.58	%	Fixed	6/6/2019	First liens
Total	$	309,686	$	312,500



December 31, 2016
Property	Mortgage Carrying Value		Mortgage Principal		Interest Rate		Fixed/Floating Rate	Maturity Date	Priority
(dollars in thousands)
Joint Ventures	$	285,993	$	289,125	4.03% - 4.61%		Fixed	2024 and 2025	First liens
Tennessee	12,261		12,350		4.01	%	Fixed	9/6/2019	First liens
Virginia	11,015		11,025		3.58	%	Fixed	6/6/2019	First liens
Nevada	2,367		2,365		L + 200		Floating ⁽¹⁾	3/29/2017	First liens
Total	$	311,636	$	314,865

(1) Includes a mortgage with a fixed rate via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200).

The following table details future mortgage loan principal payments at December 31, 2017:



	Mortgage Loan Principal Payments
	(dollars in thousands)
2018	$	—
2019	23,375
2020	—
2021	—
2022	—
Later years	289,125
Total	$	312,500

On December 11, 2015, the Company originated a $335.0 million recapitalization financing with respect to eight class A/B office properties in Orange County California. The Company previously classified the senior mortgage loan as held for sale. The balance of the senior loan held for sale at December 31, 2016 was $115.0 million ($114.4 million, net origination fees). During the year ended December 31, 2017, the Company sold the remaining balance of $115.0 million ($114.4 million, net of origination fees) of the senior loan to unrelated third parties at carrying value. Accordingly, no gain or loss was recorded in connection with the sale.