MORTGAGE LOANS, NET

Lending Activities

During the year ended December 31, 2019, the Company funded $4.6 million under a $13.1 million construction loan commitment that was originated in 2018 which was subsequently refinanced by the borrower who repaid the loan in full in the fourth quarter of 2019. In addition, during the year ended December 31, 2019, we sold a $12.3 million mezzanine loan at a discount and recorded a corresponding provision for credit loss of $2.6 million, which is reflected in the accompanying consolidated financial statements.

During the year ended December 31, 2018, the Company originated two new loans. In addition to the construction loan described in the above paragraph, the Company originated 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. This loan was repaid in full during the year ended December 31, 2019.

A roll-forward of loan activity for the years ended December 31, 2019 and 2018 follows (in thousands):



	Principal Outstanding			Interest Receivable			Valuation Allowance			Carrying Value
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		)
Principal and interest repayments	—			(1,937		)	—			(1,937		)
Balance at December 31, 2018	35,514			783			(13,063		)	23,234
Additions:
Construction loan draws	4,639			—			—			4,639
Accretion of mortgage income	55			—			—			55
Accrued interest revenue	—			1,645			—			1,645
Reductions:
Principal foreclosure	(8,006		)	(750		)	381			(8,375		)
Non-cash provision for credit losses	(2,598		)	—			—			(2,598		)
Mortgage loan sale	(9,653		)	—			—			(9,653		)
Principal and interest repayments	(7,639		)	(1,308		)	—			(8,947		)
Balance at December 31, 2019	$	12,312		$	370		$	(12,682	)	$	—

As of December 31, 2019, the Company had two loans outstanding with an aggregate average principal and interest balance of $6.3 million, both of which were non-performing and have been fully reserved with a zero carrying value. As of December 31, 2018, the Company had six loans outstanding with an aggregate average principal and interest balance of $6.0 million, three of which were performing with an aggregate average outstanding principal and accrued interest balance of $7.7 million and bearing an interest rate of 9.4%. As of December 31, 2018, two non-performing loans have been fully reserved and have a zero carrying value. During the years ended December 31, 2019 and 2018, we recorded mortgage interest income of $1.9 million and $2.6 million, respectively. As of December 31, 2019 and 2018, the valuation allowance was $12.7 million and $13.1 million, respectively and represented 100.00% and 37.11%, 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, 2019 and 2018, the geographical concentration of our loan balances by state was as follows (dollar amounts in thousands):



	December 31, 2019										December 31, 2018
	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	)	$	—	100.0	%	2	$	12,682	$	(12,682	)	—		34.9	%	2
Missouri	—		—			—		—	%	—	8,317		(381		)	7,936		22.9	%	1
Texas	—		—			—		—	%	—	12,298		—			12,298		33.9	%	1
New York	—		—			—		—	%	—	3,000		—			3,000		8.3	%	1
Arizona	—		—			—		—	%	—	—		—			—		—	%	1
Total	$	12,682	$	(12,682	)	$	—	100.0	%	2	$	36,297	$	(13,063	)	$	23,234	100.0	%	6

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, 2019 and 2018, the Prime Rate was 4.8% and 5.5%, respectively. As of December 31, 2019 and December 31, 2018, the one-month LIBOR was 1.8% and 2.5%, respectively.

As of December 31, 2019, we had two loans with principal and interest balances totaling $12.7 million and a weighted average interest rate of 12.0% were non-performing loans, of which both were fully reserved.

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.

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, 2019 and 2018, have scheduled maturity dates as follows (dollar amounts in thousands):



December 31, 2019
Quarter	Outstanding Balance			Percent		#
Matured	$	12,682		100.0	%	2
Total principal and interest	12,682			100.0	%	2
Less: valuation allowance	(12,682		)
Mortgage loans, net	$	—



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

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, 2019 or 2018.

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 two mortgage loan payoffs during 2019 totaling $7.6 million and one mortgage loan sale, which was sold at a discount of $2.6 million for net proceeds of $9.7 million during year ended December 31, 2019. There were no mortgage loan payoffs during the year ended December 31, 2018.

Summary of Existing Loans in Default

During the year ended December 31, 2019, we foreclosed on a mezzanine loan investment that went into default during 2018 and had a carrying value of $8.2 million as of the date of foreclosure. In May 2019, we foreclosed on the mezzanine loan collateral consisting of 100% of the membership interests in the limited liability company owning the underlying property. We recorded the acquired assets and assumed liabilities at fair value and consolidated the operations commencing on the foreclosure date. See additional discussion in Notes 5 and 8.

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, 2019 and 2018, respectively, loan principal and interest balances by concentration category (dollars in thousands):



	December 31, 2019						December 31, 2018
	Amount			%		#	Amount			%		#
Entitled Land	$	12,682		100.0	%	2	$	12,682		34.9	%	3
Existing structure	—			—	%	—	23,615			65.1	%	3
Total	12,682			100.0	%	2	36,297			100.0	%	6
Less: Valuation allowance	(12,682		)				(13,063		)
Mortgage loans, net	$	—					$	23,234

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, 2019 and 2018, respectively, outstanding principal and interest loan balances by expected end-use of the underlying collateral, were as follows (dollars in thousands):



	December 31, 2019						December 31, 2018
	Amount			%		#	Amount			%		#
Residential	$	12,682		100.0	%	2	$	13,063		36.0	%	3
Commercial	—			—	%	—	23,234			64.0	%	3
Total	12,682			100.0	%	2	36,297			100.0	%	6
Less: valuation allowance	(12,682		)				(13,063		)
Net carrying value	$	—					$	23,234

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, 2019, we have two outstanding non-performing loans that are fully reserved and had a zero carrying value. As of December 31, 2018, we had six outstanding loans, two of which were performing loans whose aggregate principal and interest carrying value totaled $15.4 million, representing 66% of our total loan portfolio net carrying value. Due to the limited size of our mortgage portfolio, during the year ended December 31, 2019, 3 individual loans, which have been either sold or repaid as of December 31, 2019 accounted for substantially all of total mortgage income for the year. Similarly, during the year ended December 31, 2018, three individual loans with average aggregate principal balances totaling $22.9 million accounted for substantially all of total mortgage loan income for the year.