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MORTGAGE LOAN RECEIVABLES
 9 Months Ended
Sep. 30, 2017
Mortgage Loans on Real Estate [Abstract]  
MORTGAGE LOAN RECEIVABLES 3. MORTGAGE LOAN RECEIVABLES
 
September 30, 2017 ($ in thousands)
 
 
Outstanding
Face Amount
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Remaining
Maturity
(years)
 
 
 
 
 
 
 
 
Mortgage loans held by consolidated subsidiaries
$
2,862,739

 
$
2,846,940

 
7.06
%
 
1.71
Mortgage loans transferred but not considered sold(2)
600,222

 
598,525

 
4.92
%
 
8.38
Provision for loan losses
N/A

 
(4,000
)
 
 
 
 
Mortgage loan receivables held for investment, net, at amortized cost
3,462,961

 
3,441,465

 
 
 
 
Mortgage loan receivables held for sale
526,085

 
522,961

 
4.79
%
 
8.63
Total
$
3,989,046

 
$
3,964,426

 
5.70
%
 
3.63
 
(1)    September 30, 2017 London Interbank Offered Rate (“LIBOR”) rates are used to calculate weighted average yield for floating rate loans.
(2)     As more fully described below, as of September 30, 2017, included in mortgage loans transferred but not considered sold are 34 loans with a combined outstanding face amount of $548.0 million and a combined carrying value of $546.7 million which were sold to the LCCM 2017-LC26 securitization trust on June 29, 2017. This line also includes one non-controlling loan interest with an outstanding face amount of $52.3 million and a carrying value of $51.8 million that was previously sold to a third party for which the controlling portion was transferred to the LCCM 2017-LC26 securitization trust on June 29, 2017. All of these transactions are considered financings for accounting purposes.

On June 29, 2017, the Company transferred its interests in $625.7 million of loans to the LCCM 2017-LC26 securitization trust. The assets transferred to the trust were comprised of 34 loans to third parties with a combined outstanding face amount of $549.0 million and a combined carrying value of $547.7 million as well as 23 intercompany loans secured by certain of the Company’s real estate assets, with a combined principal balance of $76.7 million (which had not previously been recognized for accounting purposes because they eliminated in consolidation). In connection with this transaction, pursuant to the 5% risk retention requirement of the Dodd-Frank Act described in Part 2, Item 1A “Risk Factors,” in this Quarterly Report, (i) the Company retained a $12.9 million restricted “vertical interest” of approximately 2% in each class of securities issued by the trust, which must be held by the Company until the principal balance of the pool has been reduced to a level prescribed by the risk retention rules and (ii) sold an approximately 3% restricted “horizontal interest” in the form of 98% of the controlling classes (excluding the 2% included in the vertical interest) to a “Third Party Purchaser” (“TPP”), which must be held by the TPP for at least five years. In addition, the Company purchased $62.7 million in securities which are not restricted.

Transfer restrictions placed on the TPP, imposed by the risk retention rules of the Dodd-Frank Act, precluded sale accounting for these loans. Accordingly, the Company continues to recognize these loans to third parties transferred in the transaction on its consolidated balance sheets. Included in interest income on the Company’s consolidated statements of income is $7.2 million and $7.3 million of interest income related to mortgage loans transferred but not considered sales for the three and nine months ended September 30, 2017, respectively. In connection with this transaction, the Company recognized a liability of $580.0 million representing the loan sale proceeds of $655.6 million (net of issue costs) less the $75.6 million of securities purchased discussed above, not reflected in these consolidated financial statements. This liability is effectively a non-recourse borrowing secured by these securitized third party loans and the Company’s real estate collateral pledged under the previously unrecognized intercompany loans. Included in interest expense on the Company’s consolidated statements of income is $6.2 million and $6.3 million of interest expense related to liabilities for transfers not considered sales for the three and nine months ended September 30, 2017, respectively. The securities purchased by the Company are not reflected in these financial statements because the sale of these loans was not recognized for accounting purposes.

As of September 30, 2017, $1.2 billion, or 34.7%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $2.2 billion, or 65.3%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at variable interest rates, linked to LIBOR, some of which include interest rate floors. Included in the $1.2 billion of the carrying value of our mortgage loan receivables held for investment, at amortized cost, at fixed interest rates are $598.5 million of mortgage loans transferred but not considered sold. As of September 30, 2017, $523.0 million, or 100.0%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates.
 
December 31, 2016 ($ in thousands)
 
 
Outstanding
Face Amount
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Remaining
Maturity
(years)
 
 
 
 
 
 
 
 
Mortgage loans held by consolidated subsidiaries
$
2,011,309

 
$
2,000,095

 
7.17
%
 
1.66
Provision for loan losses
N/A

 
(4,000
)
 
 
 
 
Mortgage loan receivables held for investment, net, at amortized cost
2,011,309

 
1,996,095

 
 
 
 
Mortgage loan receivables held for sale
360,518

 
357,882

 
4.20
%
 
4.55
Total
2,371,827

 
2,353,977

 
6.73
%
 
2.10
 
(1)
December 31, 2016 LIBOR rates are used to calculate weighted average yield for floating rate loans.

 
As of December 31, 2016, $205.4 million, or 10.3%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $1.8 billion, or 89.7%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at variable interest rates, linked to LIBOR, some of which include interest rate floors. As of December 31, 2016, $360.5 million, or 100%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates.

The following table summarizes mortgage loan receivables by loan type ($ in thousands):
 
 
September 30, 2017
 
December 31, 2016
 
Outstanding
Face Amount
 
Carrying
Value
 
Outstanding
Face Amount
 
Carrying
Value
 
 
 
 
 
 
 
 
Mortgage loan receivables held for investment, net, at amortized cost:
 

 
 

 
 

 
 

First mortgage loans
$
2,703,936

 
$
2,688,845

 
$
1,843,006

 
$
1,832,626

Mezzanine loans
158,803

 
158,095

 
168,303

 
167,469

Mortgage loans transferred but not considered sold(1)(2)
600,222

 
598,525

 
—

 
—

Mortgage loan receivables held for investment, net, at amortized cost
3,462,961

 
3,445,465

 
2,011,309

 
2,000,095

Mortgage loan receivables held for sale
 

 
 

 
 

 
 

First mortgage loans
526,085

 
522,961

 
360,518

 
357,882

Total mortgage loan receivables held for sale
526,085

 
522,961

 
360,518

 
357,882

 
 
 
 
 
 
 
 
Provision for loan losses
N/A

 
(4,000
)
 
N/A

 
(4,000
)
Total
$
3,989,046

 
$
3,964,426

 
$
2,371,827

 
$
2,353,977


 
(1)
As more fully described earlier in this Note, as of September 30, 2017, included in mortgage loans transferred but not considered sold are 34 loans with a combined outstanding face amount of $548.0 million and a combined carrying value of $546.7 million which were sold to the LCCM 2017-LC26 securitization trust on June 29, 2017. As of September 30, 2017, also included is one non-controlling loan interest with an outstanding face amount of $52.3 million and a carrying value of $51.8 million for which the controlling portion was transferred to the LCCM 2017-LC26 securitization trust on June 29, 2017. All of these transactions are considered financings for accounting purposes.
(2)
First mortgage loans.

 For the nine months ended September 30, 2017 and 2016, the activity in our loan portfolio was as follows ($ in thousands):

 
Mortgage loan
receivables held
for investment, net, at
amortized cost (1)
 
Mortgage loan 
receivables held
for sale
 
 
 
 
Balance, December 31, 2016
$
1,996,095

 
$
357,882

Origination of mortgage loan receivables
869,981

 
887,978

Purchases of mortgage loan receivables
94,079

 
—

Repayment of mortgage loan receivables
(246,060
)
 
(1,655
)
Proceeds from sales of mortgage loan receivables
—

 
(5
)
Realized gain on sale of mortgage loan receivables(2)
—

 
(1,774
)
Transfer between held for investment and held for sale(3)(4)
719,465

 
(719,465
)
Accretion/amortization of discount, premium and other fees
7,905

 
—

Balance, September 30, 2017
$
3,441,465

 
$
522,961


 
Mortgage loan
receivables held
for investment, net, at
amortized cost (1)
 
Mortgage loan
receivables held
for sale
 
 
 
 
Balance, December 31, 2015
$
1,738,645

 
$
571,764

Origination of mortgage loan receivables
531,000

 
887,164

Repayment of mortgage loan receivables
(632,825
)
 
(1,161
)
Proceeds from sales of mortgage loan receivables
—

 
(703,846
)
Realized gain on sale of mortgage loan receivables
—

 
30,265

Accretion/amortization of discount, premium and other fees
6,515

 
—

Loan loss provision
(300
)
 
—

Balance, September 30, 2016
$
1,643,035

 
$
784,186

 
 
 
 
 
(1)
Includes provision for loan losses of $4.0 million as of each of September 30, 2017 and 2016.
(2)
Includes $1.8 million of realized losses on loans related to lower of cost or market adjustments for the nine months ended September 30, 2017.
(3)
During the nine months ended September 30, 2017, the Company reclassified from mortgage loan receivables held for sale to mortgage loan receivables held for investment, net, at amortized cost, a loan with an outstanding face amount of $120.0 million, a book value of $119.9 million (fair value at date of reclassification) and a remaining maturity of three years. The loan had been recorded at lower of cost or market prior to its reclassification. The discount to fair value is the result of an increase in market interest rates since the loan’s origination and not a deterioration in credit of the borrower or collateral coverage and the Company expects to collect all amounts due under the loan. The transfer has been reflected as a non-cash item on the consolidated statement of cash flows for the nine months ended September 30, 2017.
(4)
As discussed earlier in this Note, on June 29, 2017, the Company sold 34 loans with a combined outstanding face amount of $549.0 million and a combined carrying value of $547.7 million to the LCCM 2017-LC26 securitization trust. These loans were previously classified as held for sale, however, because they were transferred in a transaction for which sale accounting was precluded, they have been reclassified to loans held for investment.

At September 30, 2017 and December 31, 2016, there was $2.3 million and $0.6 million, respectively, of unamortized discounts included in our mortgage loan receivables held for investment, at amortized cost, on our consolidated balance sheets. 

The Company evaluates each of its loans for potential losses at least quarterly. Its loans are typically collateralized by real estate directly or indirectly. As a result, the Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan at maturity, and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the Company considers the overall economic environment, real estate sector, and geographic sub-market in which the collateral property is located. Such impairment analyses are completed and reviewed by asset management personnel, who utilize various data sources, including (i) periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, the borrowers’ business plan, and capitalization and discount rates, (ii) site inspections, and (iii) current credit spreads and other market data. As a result of this analysis, the Company has concluded that none of its loans are individually impaired as of September 30, 2017 and December 31, 2016.

However, based on the inherent risks shared among the loans as a group, it is probable that the loans had incurred an impairment due to common characteristics and inherent risks in the portfolio. Therefore, the Company has recorded a reserve, based on a targeted percentage level which it seeks to maintain over the life of the portfolio, as disclosed in the tables below. Historically, the Company has not incurred losses on any originated loans.

As of September 30, 2017, two of the Company’s loans, which were originated simultaneously as part of a single transaction, and had a carrying value of $26.9 million, were in default. The borrower is currently in bankruptcy court; however, the Company determined that no impairment was necessary because of the loans’ liquidation value, however, the Company has placed the loans on non-accrual status as of July 1, 2017. The Company continues to pursue its legal remedies on these loans. As of September 30, 2017, accrued but unpaid interest totaled $4.8 million, which included $3.5 million of default interest. As of December 31, 2016, the same two loans mentioned above were in default. As of December 31, 2016, accrued but unpaid interest totaled $3.5 million, which included $2.2 million of default interest. These loans were placed on non-accrual status as of July 1, 2017. As of September 30, 2017 there were no other loans on non-accrual status. As of December 31, 2016 there were no loans on non-accrual status.
 
Provision for Loan Losses ($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Provision for loan losses at beginning of period
$
4,000

 
$
4,000

 
$
4,000

 
$
3,700

Provision for loan losses
—

 
—

 
—

 
300

Provision for loan losses at end of period
$
4,000

 
$
4,000

 
$
4,000

 
$
4,000