MORTGAGE LOANS, NET

Lending Activities

During the year ended December 31, 2018, the Company originated two new loans. The first loan is a $13.1 million construction loan bearing annual interest at 8.5% plus one-month LIBOR, with an original maturity date of July 18, 2020 and a six-month extension option. As of December 31, 2018, the Company had not yet advanced any loan funds pending the borrower’s obligation to meet certain minimum equity requirements. The loan is collateralized by a first lien security interest in certain real and personal property and related improvements thereon located in Phoenix, Arizona. The second loan origination was a mortgage loan for $3.0 million bearing annual interest at 6% plus one-month LIBOR (subject to an 8% interest rate floor), and an exit fee equal to 1% of the principal balance. The loan is collateralized by a first lien security interest in a residential unit located in New York, NY. The loan provides for interest only payments payable monthly during the initial twelve month term with a balloon payment due upon maturity. The borrower has an option to extend the loan by six months.

During the year ended December 31, 2017, the Company purchased two mezzanine loans in the aggregate face amount of $19.9 million from an affiliate of Chase Funding, for $19.3 million. Each loan is collateralized by a pledge of 100% of the equity interests in the entity owning the underlying property. The first loan has an annual interest rate of 9.75% plus one-month LIBOR (12.26% at December 31, 2018) and an original maturity date of September 9, 2016 with three one-year extensions. The borrower exercised the first two extension options to extend the maturity date to September 9, 2018, but is now in default status due to its inability to meet certain restrictive covenants. This investment is not considered impaired since the fair value of the underlying collateral was deemed to exceed the carrying value of the loan which has a carrying value of $7.9 million as of December 31, 2018. The second loan has a maturity date of October 9, 2019 with three one-year extensions, and bears an annual interest rate of 7.25% plus one-month LIBOR (9.71% at December 31, 2018). The respective discount for each loan is being amortized over the term of that loan using the effective interest method.

A roll-forward of loan activity for the years ended December 31, 2018 and 2017 follows (in thousands):



	Principal Outstanding			Interest Receivable			Valuation Allowance			Carrying Value
Balance at December 31, 2016	$	12,601		$	459		$	(12,682	)	$	378
Additions:
Mortgage loan purchased	19,875			—			—			19,875
Accretion of mortgage income	258			—			—			258
Accrued interest revenue	—			686			—			686
Reductions:
Principal and interest repayments	—			(495		)	—			(495		)
Elimination of loan upon consolidation	(289		)	(120		)	—			(409		)
Mortgage loan discount	(625		)	—			—			(625		)
Balance at December 31, 2017	31,820			530			(12,682		)	19,668
Additions:
Mortgage loan originated	3,000			—			—			3,000
Accretion of mortgage income	748			—			(381		)	367
Accretion of origination fees	16			—			—			16
Accrued interest revenue	—			2,190			—			2,190
Reductions:	—
Mortgage loan origination fee	(70		)	—			—			(70		)
Interest repayments	—			(1,937		)	—			(1,937		)
Balance at December 31, 2018	$	35,514		$	783		$	(13,063	)	$	23,234

As of December 31, 2018, the Company had six loans outstanding with an aggregate average principal and interest balance of $6.0 million. Two of these loans were performing loans with an average outstanding principal and accrued interest balance of $7.7 million, bearing a weighted average interest rate of 9.4% as of December 31, 2018. As of December 31, 2017, the Company had four loans outstanding with an aggregate average principal and interest balance of $8.1 million, two of which were performing with an outstanding principal and accrued interest balance of $10.0 million and bearing an interest rate of 9.7%. As of December 31, 2018, the Company had three non-performing loans, two of which have been fully reserved and have a zero carrying value. During the year ended December 31, 2018, one of our loans entered default status upon its maturity, although it was not considered impaired since the fair value of the underlying collateral was deemed to exceed the carrying value of the loan which has a reserve of $0.4 million and a carrying value of $7.9 million as of December 31, 2018. As of December 31, 2017, two non-performing loans have been fully reserved and have a zero carrying value. During the years ended December 31, 2018 and 2017, we recorded mortgage interest income of $2.6 million and $0.9 million, respectively. As of December 31, 2018 and 2017, the valuation allowance was $13.1 million and $12.7 million, respectively and represented 37.11% and 39.20%, respectively, of the total outstanding loan principal and accrued interest balances.

Geographic Diversification

Our mortgage loans consist of loans where the primary collateral is located in various states, as presented below. As of December 31, 2018 and 2017, the geographical concentration of our loan balances by state was as follows (dollar amounts in thousands):



	December 31, 2018										December 31, 2017
	Outstanding Principal and Interest		Valuation Allowance			Net Carrying Amount		Percent		#	Outstanding Principal and Interest		Valuation Allowance			Net Carrying Amount		Percent		#
California	$	12,682	$	(12,682	)	$	—	34.9	%	2	$	12,682	$	(12,682	)	$	—	39.2	%	2
Missouri	8,317		(381		)	7,936		22.9	%	1	7,329		—			7,329		22.7	%	1
Texas	12,298		—			12,298		33.9	%	1	12,339		—			12,339		38.1	%	1
New York	3,000		—			3,000		8.3	%	1	—		—			—		—	%	—
Arizona	—		—			—		—	%	1	—		—			—		—	%	—
Total	$	36,297	$	(13,063	)	$	23,234	100.0	%	6	$	32,350	$	(12,682	)	$	19,668	100.0	%	4

Interest Rate Information

Our loan portfolio includes loans that carry variable and fixed interest rates. All variable interest rate loans are indexed to the Prime Rate and one-month LIBOR. As of December 31, 2018 and 2017, the Prime Rate was 5.5% and 4.5%, respectively. As of December 31, 2018 and December 31, 2017, the one-month LIBOR was 2.5% and 1.6%, respectively.

As of December 31, 2018, we had six loans with principal and interest balances totaling $36.3 million and interest rates ranging from 9.7% to 18.0%. Of this total, three loans with principal and interest balances totaling $20.6 million and a weighted average interest rate of 12.1% were non-performing loans, of which two were fully reserved and one is reserved for $0.4 million, while three loans with principal and interest balances totaling $15.4 million and a weighted average interest rate of 9.4% were performing.

As of December 31, 2017, we had four loans with principal and interest balances totaling $32.4 million and interest rates ranging from 8.7% to 12.0%. Of this total, two loans with principal and interest balances totaling $12.7 million and a weighted average interest rate of 12.0% were non-performing loans and fully reserved, while two loan with principal and interest balances totaling $19.7 million and an interest rate of 9.7% was performing.

Changes in the Portfolio Profile — Scheduled Maturities

The outstanding principal and interest balances of mortgage investments, net of the valuation allowance, as of December 31, 2018 and 2017, have scheduled maturity dates within the next several quarters as follows (dollar amounts in thousands):



December 31, 2018
Quarter	Outstanding Balance			Percent		#
Matured	$	20,999		57.9	%	3
Q4 2019	15,298			42.1	%	3
Total principal and interest	36,297			100.0	%	6
Less: valuation allowance	(13,063		)
Mortgage loans, net	$	23,234



December 31, 2017
Quarter	Outstanding Balance			Percent		#
Matured	$	12,682		38.8	%	2
Q3 2018	7,696			23.5	%	1
Q4 2019	12,339			37.7	%	1
Total principal and interest	32,717			100.0	%	4
Less: purchase discount, net of accumulated amortization	(367		)
Less: valuation allowance	(12,682		)
Mortgage loans, net	$	19,668

From time to time, we may modify certain terms of a loan or extend a loan’s maturity date in an effort to preserve our collateral. Accordingly, repayment dates of the loans may vary from their currently scheduled maturity date. If the maturity date of a loan is not extended, we classify and report the loan as matured. We did not modify any loans during the years ended December 31, 2018 or 2017.

We do not expect payoffs to materialize for nonperforming loans past their maturity dates. We may find it necessary to foreclose, modify, extend, make protective advances or sell such loans in order to protect our collateral, maximize our return or generate additional liquidity.

There were no mortgage loan payoffs during the years ended December 31, 2018 or 2017.

Summary of Existing Loans in Default

During the year ended December 31, 2018, one of our loans entered default status upon its maturity, although it was not considered impaired since the fair value of the underlying collateral was deemed to exceed the carrying value of the loan which has a carrying value of $7.9 million as of December 31, 2018.

At December 31, 2018, three of our loans were in default and past their respective scheduled maturity dates with outstanding principal and interest balances totaling $20.6 million, less a valuation allowance of $13.1 million for a carrying value of $7.9 million. We are evaluating the best course of action with respect to the loans in default which could lead to foreclosure or other disposition, but we have not completed foreclosure on any such loans during the year ended December 31, 2018. The timing of foreclosure on these defaulted loans is dependent on several factors, including applicable states statutes, potential bankruptcy filings by the borrowers, the nature and extent of other liens secured by the underlying real estate. At December 31, 2017, two of our loans were in default and past their respective scheduled maturity dates with outstanding principal and interest balances totaling and $12.7 million and were fully reserved.

Concentration by Category based on Collateral Development Status

We have historically classified loans into categories for purposes of identifying and managing loan concentrations. The following table summarizes, as of December 31, 2018 and 2017, respectively, loan principal and interest balances by concentration category (dollars in thousands):



	December 31, 2018						December 31, 2017
	Amount			%		#	Amount			%		#
Entitled Land	$	12,682		34.9	%	3	$	12,682		39.2	%	2
Existing structure	23,615			65.1	%	3	19,668			60.8	%	2
Total	36,297			100.0	%	6	32,350			100.0	%	4
Less: Valuation allowance	(13,063		)				(12,682		)
Mortgage loans, net	$	23,234					$	19,668

Unless loans are modified and additional loan amounts are advanced to allow a borrower’s project to progress to the next phase of the project’s development, the classifications of our loans generally do not change during the loan term. Thus, in the absence of funding new loans, we do not expect material changes between loan categories with the exception of changes resulting from foreclosures or loan sales.

We also classify loans into categories based on the underlying collateral’s projected end-use for purposes of identifying and managing loan concentration and associated risks. As of December 31, 2018 and 2017, respectively, outstanding principal and interest loan balances by expected end-use of the underlying collateral, were as follows (dollars in thousands):



	December 31, 2018						December 31, 2017
	Amount			%		#	Amount			%		#
Residential	$	13,063		36.0	%	3	$	12,682		39.2	%	2
Commercial	23,234			64.0	%	3	19,668			60.8	%	2
Total	36,297			100.0	%	6	32,350			100.0	%	4
Less: valuation allowance	(13,063		)				(12,682		)
Net carrying value	$	23,234					$	19,668

Borrower and Borrower Group Concentrations

Our investment policy generally provides that aggregate loans outstanding to a borrower or affiliated borrowers should not exceed 20% of the total of the Company’s investment portfolio. Following the origination of a loan, however, the aggregate loans outstanding to a borrower or affiliated borrowers may exceed those thresholds as a result of foreclosures, limited lending activities, and changes in the size and composition of our overall portfolio.

As of December 31, 2018, we have six outstanding loans, two of which are performing loans, and which aggregate principal and interest carrying value totaled $15.4 million, which represents 66% of our total loan portfolio net carrying value. As of December 31, 2017, we had four outstanding loans, two of which were performing loans whose aggregate principal and interest carrying value totaled $19.7 million, representing 100% of our total loan portfolio net carrying value. Due to the limited size of our mortgage portfolio, during the year ended December 31, 2018, three individual loans with aggregate principal balances totaling $22.9 million collectively accounted for substantially all of total mortgage income for the year. Similarly, during the year ended December 31, 2017, three individual loans with average aggregate principal balances totaling $19.5 million accounted for substantially all of total mortgage loan income for the year.