Note 3 — Loans and Investments

The following tables set forth the composition of our Structured Business loan and investment portfolio ($ in thousands):

	March 31, 2018			Percent of Total		Loan Count	Wtd. Avg. Pay Rate (1)		Wtd. Avg. Remaining Months to Maturity	Wtd. Avg. First Dollar LTV Ratio (2)		Wtd. Avg. Last Dollar LTV Ratio (3)

Bridge loans	$	2,502,574		90	%	153	6.41	%	19.6	0	%	72	%
Preferred equity investments	188,872			7	%	13	6.77	%	63.5	58	%	88	%
Mezzanine loans	84,976			3	%	7	10.81	%	19.9	20	%	66	%

	2,776,422			100	%	173	6.57	%	22.6	5	%	73	%

Allowance for loan losses	(63,108		)
Unearned revenue	(11,217		)

Loans and investments, net	$	2,702,097

	December 31, 2017

Bridge loans	$	2,422,105		91	%	150	6.10	%	20.9	0	%	72	%
Preferred equity investments	142,892			6	%	12	6.47	%	68.7	64	%	90	%
Mezzanine loans	87,541			3	%	8	10.78	%	24.8	20	%	63	%

	2,652,538			100	%	170	6.28	%	23.6	4	%	73	%

Allowance for loan losses	(62,783		)
Unearned revenue	(10,628		)

Loans and investments, net	$	2,579,127

(1)

“Weighted Average Pay Rate” is a weighted average, based on the unpaid principal balance (“UPB”) of each loan in our portfolio, of the interest rate that is required to be paid monthly as stated in the individual loan agreements. Certain loans and investments that require an additional rate of interest “Accrual Rate” to be paid at maturity are not included in the weighted average pay rate as shown in the table.

(2)

The “First Dollar Loan-to-Value (“LTV”) Ratio” is calculated by comparing the total of our senior most dollar and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will absorb a total loss of our position.

(3)

The “Last Dollar LTV Ratio” is calculated by comparing the total of the carrying value of our loan and all senior lien positions within the capital stack to the fair value of the underlying collateral to determine the point at which we will initially absorb a loss.

Concentration of Credit Risk

We are subject to concentration risk in that, at March 31, 2018, the UPB related to 41 loans with five different borrowers represented 23% of total assets. At December 31, 2017, the UPB related to 42 loans with five different borrowers represented 24% of total assets. During both the three months ended March 31, 2018 and the year ended December 31, 2017, no single loan or investment represented more than 10% of our total assets and no single investor group generated over 10% of our revenue.

We assign a credit risk rating of pass, pass/watch, special mention, substandard or doubtful to each loan and investment, with a pass rating being the lowest risk and a doubtful rating being the highest risk. Each credit risk rating has benchmark guidelines that pertain to debt-service coverage ratios, LTV ratios, borrower strength, asset quality, and funded cash reserves. Other factors such as guarantees, market strength, and remaining loan term and borrower equity are also reviewed and factored into determining the credit risk rating assigned to each loan. This metric provides a helpful snapshot of portfolio quality and credit risk. All portfolio assets are subject to, at a minimum, a thorough quarterly financial evaluation in which historical operating performance and forward-looking projections are reviewed, however, we maintain a higher level of scrutiny and focus on loans that we consider “high risk” and that possess deteriorating credit quality.

Generally speaking, given our typical loan profile, risk ratings of pass, pass/watch and special mention suggest that we expect the loan to make both principal and interest payments according to the contractual terms of the loan agreement, and is not considered impaired. A risk rating of substandard indicates we anticipate the loan may require a modification of some kind. A risk rating of doubtful indicates we expect the loan to underperform over its term, and there could be loss of interest and/or principal. Further, while the above are the primary guidelines used in determining a certain risk rating, subjective items such as borrower strength, market strength or asset quality may result in a rating that is higher or lower than might be indicated by any risk rating matrix.

As a result of the loan review process, at March 31, 2018 and December 31, 2017, we identified eight loans and investments that we consider higher-risk loans that had a carrying value, before loan loss reserves, of $126.9 million and $126.5 million, respectively, and a weighted average last dollar LTV ratio of 93% for both periods.

A summary of the loan portfolio’s weighted average internal risk ratings and LTV ratios by asset class is as follows ($ in thousands):

	March 31, 2018
Asset Class	UPB		Percentage of Portfolio		Wtd. Avg. Internal Risk Rating	Wtd. Avg. First Dollar LTV Ratio		Wtd. Avg. Last Dollar LTV Ratio

Multifamily	$	2,049,398	74	%	pass/watch	4	%	72	%
Self Storage	301,830		11	%	pass/watch	0	%	71	%
Land	132,903		5	%	substandard	0	%	91	%
Office	107,818		4	%	special mention	1	%	65	%
Hotel	90,725		3	%	pass/watch	35	%	79	%
Healthcare	55,615		2	%	pass/watch	0	%	77	%
Retail	36,433		1	%	pass/watch	8	%	66	%
Commercial	1,700		<1	%	doubtful	63	%	63	%

Total	$	2,776,422	100	%	pass/watch	5	%	73	%

	December 31, 2017

Multifamily	$	1,925,529	73	%	pass/watch	4	%	72	%
Self Storage	301,830		11	%	pass	0	%	71	%
Land	132,828		5	%	substandard	0	%	90	%
Office	107,853		4	%	pass/watch	1	%	64	%
Hotel	90,725		3	%	special mention	37	%	81	%
Healthcare	55,615		2	%	pass/watch	0	%	74	%
Retail	36,458		1	%	pass/watch	8	%	66	%
Commercial	1,700		<1	%	doubtful	63	%	63	%

Total	$	2,652,538	100	%	pass/watch	4	%	73	%

Geographic Concentration Risk

As of March 31, 2018, 21%, 21% and 11% of the outstanding balance of our loan and investment portfolio had underlying properties in New York, Texas and California, respectively. As of December 31, 2017, 23%, 21% and 11% of the outstanding balance of our loan and investment portfolio had underlying properties in Texas, New York and California, respectively.

Impaired Loans and Allowance for Loan Losses

A summary of the changes in the allowance for loan losses is as follows (in thousands):

	Three Months Ended March 31,
	2018		2017

Allowance at beginning of period	$	62,783	$	83,712
Provision for loan losses	325		—
Recoveries of reserves	—		(696		)

Allowance at end of period	$	63,108	$	83,016

The recoveries of reserves recorded in the first quarter of 2017 related to multifamily loans and the ratio of net recoveries to the average loans and investments outstanding was de minimus.

There were no loans for which the fair value of the collateral securing the loan was less than the carrying value of the loan for which we had not recorded a provision for loan loss as of March 31, 2018 and 2017.

We have six loans with a carrying value totaling $120.4 million at March 31, 2018, which mature in September 2018, that are collateralized by a land development project. The loans do not carry a current pay rate of interest, but five of the loans with a carrying value totaling $111.0 million entitle us to a weighted average accrual rate of interest of 8.80%. In 2008, we suspended the recording of the accrual rate of interest on these loans, as they were impaired and we deemed the collection of this interest to be doubtful. At both March 31, 2018 and December 31, 2017, we had cumulative allowances for loan losses of $49.4 million related to these loans. The loans are subject to certain risks associated with a development project including, but not limited to, availability of construction financing, increases in projected construction costs, demand for the development’s outputs upon completion of the project, and litigation risk. Additionally, these loans were not classified as non-performing as the borrower is in compliance with all of the terms and conditions of the loans.

A summary of our impaired loans by asset class is as follows (in thousands):

	March 31, 2018						Three Months Ended March 31, 2018
Asset Class	UPB		Carrying Value (1)		Allowance for Loan Losses		Average Recorded Investment (2)		Interest Income Recognized

Land	$	131,411	$	125,174	$	54,208	$	131,249	$	—
Hotel	34,750		34,750		5,700		34,750		—
Office	2,283		2,283		1,500		2,286		29
Commercial	1,700		1,700		1,700		1,700		—

Total	$	170,144	$	163,907	$	63,108	$	169,985	$	29

	December 31, 2017						Three Months Ended March 31, 2017

Land	$	131,086	$	124,812	$	53,883	$	131,086	$	—
Hotel	34,750		34,750		5,700		34,750		310
Office	2,288		2,288		1,500		27,560		25
Commercial	1,700		1,700		1,700		1,700		—
Multifamily	—		—		—		2,151		22

Total	$	169,824	$	163,550	$	62,783	$	197,247	$	357

(1)

Represents the UPB of five impaired loans (less unearned revenue and other holdbacks and adjustments) by asset class at both March 31, 2018 and December 31, 2017.

(2)

Represents an average of the beginning and ending UPB of each asset class.

At both March 31, 2018 and December 31, 2017, two loans with an aggregate net carrying value of $29.1 million, net of related loan loss reserves of $7.4 million, were classified as non-performing. Income from non-performing loans is generally recognized on a cash basis when it is received. Full income recognition will resume when the loan becomes contractually current and performance has recommenced.

A summary of our non-performing loans by asset class is as follows (in thousands):

	March 31, 2018						December 31, 2017
Asset Class	Carrying Value		Less Than 90 Days Past Due		Greater Than 90 Days Past Due		Carrying Value		Less Than 90 Days Past Due		Greater Than 90 Days Past Due

Hotel	$	34,750	$	—	$	34,750	$	34,750	$	—	$	34,750
Commercial	1,700		—		1,700		1,700		—		1,700

Total	$	36,450	$	—	$	36,450	$	36,450	$	—	$	36,450

At March 31, 2018 and December 31, 2017, we did not have any loans contractually past due 90 days or more that were still accruing interest.

There were no loan modifications, refinancings and/or extensions during the three months ended March 31, 2018 and 2017 that we considered troubled debt restructurings.

Given the transitional nature of some of our real estate loans, we may require funds to be placed into an interest reserve, based on contractual requirements, to cover debt service costs. As of March 31, 2018, we had total interest reserves of $46.3 million on 84 loans with an aggregate UPB of $1.66 billion. As of December 31, 2017, we had total interest reserves of $52.5 million on 81 loans with an aggregate UPB of $1.57 billion.