4. MORTGAGE LOAN RECEIVABLES

March 31, 2018 ($ in thousands)



	Outstanding Face Amount		Carrying Value			Weighted Average Yield (1)		Remaining Maturity (years)

Mortgage loans held by consolidated subsidiaries(2)	$	3,550,544	$	3,528,185		7.34	%	1.59
Provision for loan losses	N/A		(7,000		)
Mortgage loan receivables held for investment, net, at amortized cost	3,550,544		3,521,185
Mortgage loan receivables held for sale	274,090		273,636			5.09	%	9.71
Total	$	3,824,634	$	3,794,821		7.19	%	2.18


(1)	March 31, 2018 London Interbank Offered Rate (“LIBOR”) rates are used to calculate weighted average yield for floating rate loans.


(2)	Includes amounts relating to consolidated variable interest entities. See Note 3.

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 having a combined outstanding face amount of $549.0 million and a combined carrying value of $547.7 million as well as 23 former intercompany loans secured by certain of the Company’s real estate assets, having 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 I, Item 1A “Risk Factors,” in the Annual Report, the Company (i) retained a $12.9 million restricted “vertical interest” consisting 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 TPP, which must be held by the TPP for at least five years. In addition, the Company purchased $62.7 million of securities issued by the trust, which are not restricted.

The Company initially concluded that the transfer restrictions placed on the TPP of the risk retention securities, imposed by the risk retention rules of the Dodd-Frank Act, precluded sale accounting under generally accepted accounting principles and, accordingly, the Company originally accounted for the transaction as a financing. As a result of industry discussions, in November 2017, the SEC staff indicated that, despite such restrictions, they would not take exception to a registrant treating such transfers as sales if they otherwise met all the criteria for sale accounting. The Company believes treatment of such transfers as sales is more consistent with the substance of such transaction, and accordingly, changed its accounting principles to treat such transfers as sales in the quarter ended December 31, 2017. In accordance with generally accepted accounting principles, the Company reflected this change in accounting principle retrospectively to prior interim periods within 2017. The retrospective changes will be reflected in the Company’s quarterly reports for the quarters ended June 30, 2018 and September 30, 2018 to the comparable 2017 interim periods.

In connection with the securitization transaction, the former intercompany loans, which are secured by real estate properties still owned by the Company, will continue to be reported as a financing transaction. As a result of the change in accounting principle, the Company recognized a gain of $26.1 million on the transaction when it closed on June 29, 2017. In addition, upon consummation, the Company recognized $12.9 million and $62.7 million in restricted and unrestricted securities, respectively, which are included in real estate securities on the Company’s consolidated balance sheets. The Company also recognized a liability for $78.8 million for 23 intercompany loans with a combined principal balance of $76.7 million.

As of March 31, 2018, $0.8 billion, or 22.8%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $2.7 billion, or 77.2%, 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 March 31, 2018, $273.6 million, or 100.0%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates.

December 31, 2017 ($ in thousands)



	Outstanding Face Amount		Carrying Value			Weighted Average Yield (1)		Remaining Maturity (years)

Mortgage loans held by consolidated subsidiaries	$	3,300,709	$	3,282,462		7.18	%	1.61
Provision for loan losses	N/A		(4,000		)
Mortgage loan receivables held for investment, net, at amortized cost	3,300,709		3,278,462
Mortgage loan receivables held for sale	232,527		230,180			4.88	%	8.17
Total	3,533,236		3,508,642			7.03	%	2.04


(1)	December 31, 2017 LIBOR rates are used to calculate weighted average yield for floating rate loans.

As of December 31, 2017, $0.7 billion, or 22.0%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $2.6 billion, or 78.0%, 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, 2017, $230.2 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):



	March 31, 2018					December 31, 2017
	Outstanding Face Amount		Carrying Value			Outstanding Face Amount		Carrying Value

Mortgage loan receivables held for investment, net, at amortized cost:
First mortgage loans	$	3,391,782	$	3,370,086		$	3,140,788	$	3,123,268
Mezzanine loans	158,762		158,099			159,921		159,194
Mortgage loan receivables held for investment, net, at amortized cost	3,550,544		3,528,185			3,300,709		3,282,462
Mortgage loan receivables held for sale
First mortgage loans	274,090		273,636			232,527		230,180
Total mortgage loan receivables held for sale	274,090		273,636			232,527		230,180

Provision for loan losses	N/A		(7,000		)	N/A		(4,000		)
Total	$	3,824,634	$	3,794,821		$	3,533,236	$	3,508,642

For the three months ended March 31, 2018 and 2017, the activity in our loan portfolio was as follows ($ in thousands):



	Mortgage loan receivables held for investment, net, at amortized cost:
	Mortgage loans held by consolidated subsidiaries			Provision for loan losses			Mortgage loan receivables held for sale

Balance, December 31, 2017	$	3,282,462		$	(4,000	)	$	230,180
Origination of mortgage loan receivables	434,632			—			532,878
Purchases of mortgage loan receivables	—			—			—
Repayment of mortgage loan receivables	(249,106		)	—			(133		)
Proceeds from sales of mortgage loan receivables	—			—			(438,774		)
Realized gain on sale of mortgage loan receivables(1)	—			—			4,888
Transfer between held for investment and held for sale(2)	55,403			—			(55,403		)
Accretion/amortization of discount, premium and other fees	4,794			—			—
Loan loss provision	—			(3,000		)	—
Balance, March 31, 2018	$	3,528,185		$	(7,000	)	$	273,636


(1)	Includes $0.5 million of realized losses on loans related to lower of cost or market adjustments for the three months ended March 31, 2018.

(2)

During the three months ended March 31, 2018, the Company reclassified from mortgage loan receivables held for sale to mortgage loan receivables held for investment, net, at amortized cost, three loans with a combined outstanding face amount of $57.6 million, a combined book value of $55.4 million (fair value at date of reclassification) and a remaining maturity of 2.5 years. The loans had been recorded at lower of cost or market prior to their 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. These transfers have been reflected as non-cash items on the consolidated statement of cash flows for the three months ended March 31, 2018.



	Mortgage loan receivables held for investment, net, at amortized cost:
	Mortgage loans held by consolidated subsidiaries			Provision for loan losses			Mortgage loan receivables held for sale

Balance, December 31, 2016	$	2,000,095		$	(4,000	)	$	357,882
Origination of mortgage loan receivables	249,829			—			279,898
Repayment of mortgage loan receivables	(68,251		)	—			(247		)
Realized gain on sale of mortgage loan receivables(1)	—			—			(999		)
Transfer between held for investment and held for sale(2)	119,952			—			(119,952		)
Accretion/amortization of discount, premium and other fees	2,468			—			—
Balance, March 31, 2017	$	2,304,093		$	(4,000	)	$	516,582


(1)	Includes $1.0 million of realized losses on loans related to lower of cost or market adjustments for the three months ended March 31, 2017.

(2)

During the three months ended March 31, 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. This transfer has been reflected as a non-cash item on the consolidated statement of cash flows for the three months ended March 31, 2017.

During the three months ended March 31, 2018, the transfers of financial assets via sales of loans were treated as sales under ASC Topic 860 — Transfers and Servicing.

At March 31, 2018 and December 31, 2017, there was $0.4 million and $0.2 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, other than the two loans discussed below, are individually impaired as of March 31, 2018 and none of its loans are individually impaired as of December 31, 2017.

In addition, 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 of $0.3 million, based on a targeted percentage level which it seeks to maintain over the life of the portfolio, as disclosed in the tables below. Historically, with the exception of the two loans discussed below, the Company has not incurred losses on any originated loans.

As of March 31, 2018, 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. These loans are directly and indirectly secured by the same property and are considered collateral dependent because repayment is expected to be provided solely by the underlying collateral. At the time of the initial loan funding in July 2015, the borrowers faced an uncertain situation as the parent company of the sole tenant of the underlying retail property had just filed for bankruptcy protection. The tenant subsequently vacated the property and the original lease was terminated by the tenant as part of their bankruptcy proceedings. In response to default by the borrowers, the loans were accelerated in March 2016. Subsequently, in August 2016, the borrowers filed for bankruptcy protection. In September 2017, the bankruptcy court approved a replacement lease proposed by the mortgage borrower for the property. That tenant commenced paying rent in September 2017, retroactive to August 2017 as ordered by the bankruptcy court.

The Company placed these loans on non-accrual status in July 2017. In assessing these collateral dependent loans for collectability, the most significant consideration is the fair value of the underlying real estate collateral, which includes an in-place long-dated retail lease. The value of such properties are most significantly affected by the contractual lease payments and the appropriate market discount rates, which are driven by the general interest environment and the retail tenant’s credit worthiness. Through December 31, 2017, the Company believed no loss provision was necessary as the estimated fair value of the property less the cost to sell the same exceeded the combined carrying value of the loans.

During the three months ended March 31, 2018, after considering the status of the on-going bankruptcy proceedings, rising interest rates and credit spreads for retail lease properties, the Company recorded a provision for loss on these loans of $2.7 million. The Company continues to pursue all of its legal remedies on these loans.

As of March 31, 2018 and December 31, 2017 there were no other loans on non-accrual status.

Provision for Loan Losses ($ in thousands)



	Three Months Ended March 31,
	2018		2017

Provision for loan losses at beginning of period	$	4,000	$	4,000
Provision for loan losses	3,000		—
Provision for loan losses at end of period	$	7,000	$	4,000