COMMERCIAL REAL ESTATE INVESTMENTS

CRE Debt and Preferred Equity Investments

At March 31, 2018 and December 31, 2017, commercial real estate investments held for investment were comprised of the following:



	March 31, 2018						December 31, 2017
	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	$	685,457	$	681,819	63.2	%	$	629,143	$	625,900	60.9	%
Mezzanine loans	390,976		390,487		36.0	%	395,015		394,442		38.2	%
Preferred equity	9,000		8,989		0.8	%	9,000		8,985		0.9	%
Total	$	1,085,433	$	1,081,295	100.0	%	$	1,033,158	$	1,029,327	100.0	%


(1)	Carrying value includes unamortized origination fees of $4.1 million and $3.8 million at March 31, 2018 and December 31, 2017, respectively.


(2)	Based on outstanding principal.



	Three months ended March 31, 2018
	Senior Mortgages			Mezzanine Loans			Preferred Equity		Total
	(dollars in thousands)
Beginning balance	$	625,900		$	394,442		$	8,985	$	1,029,327
Originations & advances (principal)	56,954			601			—		57,555
Principal payments	(640		)	(4,640		)	—		(5,280		)
Net (increase) decrease in origination fees	(871		)	—			—		(871		)
Amortization of net origination fees	476			84			4		564
Net carrying value	$	681,819		$	390,487		$	8,989	$	1,081,295



	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

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 March 31, 2018 and December 31, 2017. As such, no provision for loan losses was deemed necessary at March 31, 2018 and December 31, 2017.



	March 31, 2018
	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio		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	$	685,457	63.2	%	$	439,992	$	141,275	$	36,800	$	67,390	$	—	$	—	$	685,457
Mezzanine loans	390,976		36.0	%	216,740		56,498		117,738		—		—		—		390,976
Preferred equity	9,000		0.8	%	—		—		9,000		—		—		—		9,000
Total	$	1,085,433	100.0	%	$	656,732	$	197,773	$	163,538	$	67,390	$	—	$	—	$	1,085,433



	December 31, 2017
	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio		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

(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 repayment of contractual amounts due.

At March 31, 2018 and December 31, 2017, approximately 86% 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 real estate holdings during the three months ended March 31, 2018 and 2017. The Company sold one of its wholly-owned triple net leased properties during the three months ended March 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 March 31, 2018 is 4.4 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.



	March 31, 2018			December 31, 2017
	(dollars in thousands)
Real estate held for investment, at amortized cost
Land	$	111,012		$	111,012
Buildings and improvements	331,390			330,959
Subtotal	442,402			441,971
Less: accumulated depreciation	(52,723		)	(48,920		)
Total real estate held for investment, at amortized cost, net	389,679			393,051
Equity in unconsolidated joint ventures	90,384			92,902
Investments in commercial real estate, net	$	480,063		$	485,953

Depreciation expense was $3.7 million and $4.0 million for the three months ended March 31, 2018 and 2017, 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 March 31, 2018 for consolidated investments in real estate are as follows:



	March 31, 2018
	(dollars in thousands)
2018 (remaining)	$	22,306
2019	26,423
2020	21,708
2021	17,302
2022	12,356
Later years	20,687
	$	120,782

Mortgage loans payable at March 31, 2018 and December 31, 2017, were as follows:



March 31, 2018
Property	Mortgage Carrying Value		Mortgage Principal		Interest Rate	Fixed/Floating Rate	Maturity Date	Priority
(dollars in thousands)
Joint Ventures	$	286,471	$	289,125	4.03% - 4.61%	Fixed	2024 and 2025	First liens
Tennessee	12,303		12,350		4.01%	Fixed	9/6/2019	First liens
Virginia	11,020		11,025		3.58%	Fixed	6/6/2019	First liens
Total	$	309,794	$	312,500



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

The following table details future mortgage loan principal payments at March 31, 2018:



	Mortgage Loan Principal Payments
	(dollars in thousands)
2018 (remaining)	$	—
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. During the three months ended March 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.