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MORTGAGE LOAN RECEIVABLES
 12 Months Ended
Dec. 31, 2018
SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract]  
MORTGAGE LOAN RECEIVABLES
4 MORTGAGE LOAN RECEIVABLES
 
December 31, 2018 ($ in thousands)
 
 
Outstanding
Face Amount
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Remaining
Maturity
(years)
 
 
 
 
 
 
 
 
Mortgage loans held by consolidated subsidiaries(2)
$
3,340,381

 
$
3,318,390

 
7.84
%
 
1.32
Provision for loan losses
N/A

 
(17,900
)
 
 
 
 
Mortgage loan receivables held for investment, net, at amortized cost
3,340,381

 
3,300,490

 
 
 
 
Mortgage loan receivables held for sale
181,905

 
182,439

 
5.46
%
 
9.75
Total
$
3,522,286

 
$
3,482,929

 
7.76
%
 
1.77
 
(1)
December 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.

As of December 31, 2018, $816.8 million, or 24.6%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $2.5 billion, or 75.4%, 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, 2018, $182.4 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, $723.7 million, 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):
 
 
December 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
$
3,192,160

 
$
3,170,788

 
$
3,140,788

 
$
3,123,268

Mezzanine loans
148,221

 
147,602

 
159,921

 
159,194

Mortgage loan receivables held for investment, net, at amortized cost
3,340,381

 
3,318,390

 
3,300,709

 
3,282,462

Mortgage loan receivables held for sale
 

 
 

 
 

 
 

First mortgage loans
181,905

 
182,439

 
232,527

 
230,180

Total mortgage loan receivables held for sale
181,905

 
182,439

 
232,527

 
230,180

 
 
 
 
 
 
 
 
Provision for loan losses
N/A

 
(17,900
)
 
N/A

 
(4,000
)
Total
$
3,522,286

 
$
3,482,929

 
$
3,533,236

 
$
3,508,642



For the years ended December 31, 2018, 2017 and 2016, 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
1,478,771

 
—

 
1,297,221

Repayment of mortgage loan receivables
(1,518,066
)
 
—

 
(14,242
)
Proceeds from sales of mortgage loan receivables
—

 
—

 
(1,291,828
)
Realized gain on sale of mortgage loan receivables(1)
—

 
—

 
16,511

Transfer between held for investment and held for sale(2)
55,403

 
—

 
(55,403
)
Accretion/amortization of discount, premium and other fees
19,820

 
—

 
—

Loan loss provision(3)
—

 
(13,900
)
 
—

Balance, December 31, 2018
$
3,318,390

 
$
(17,900
)
 
$
182,439

 

(1)
Includes $0.5 million of realized losses on loans related to lower of cost or market adjustments for the year ended December 31, 2018.
(2)
During the year ended December 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 year ended December 31, 2018.
(3)
As further discussed below, during the year ended December 31, 2018, the Company recorded asset-specific provisions on collateral dependent loans of $12.7 million. In addition, the Company records a portfolio-based, general loan loss provision to provide reserves for expected losses over the remaining portfolio of mortgage loan receivables held for investment. During the year ended December 31, 2018, the Company recorded an additional general reserve of $1.2 million.

 
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
1,407,669

 
—

 
1,465,635

Purchases of mortgage loan receivables
94,079

 
—

 
—

Repayment of mortgage loan receivables(1)
(384,283
)
 
—

 
(2,569
)
Proceeds from sales of mortgage loan receivables(2)
—

 
—

 
(1,491,092
)
Realized gain on sale of mortgage loan receivables(3)
—

 
—

 
54,046

Transfer between held for investment and held for sale(4)
153,722

 
—

 
(153,722
)
Accretion/amortization of discount, premium and other fees
11,180

 
—

 
—

Balance, December 31, 2017
$
3,282,462

 
$
(4,000
)
 
$
230,180

 
(1)
Includes $0.5 million of non-cash repayment of mortgage loan receivables.
(2)
Includes $115.4 million of non-cash proceeds from sales.
(3)
Includes $1.8 million of realized losses on loans related to lower of cost or market adjustments for the year ended December 31, 2017.
(4)
During the year ended December 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. In addition, during the year ended December 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 and book value of $33.8 million, (fair value at the date of reclassification) and a remaining maturity of 3.5 years. These transfers have been reflected as non-cash items on the consolidated statement of cash flows for the year ended December 31, 2017.

 
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, 2015
$
1,742,345

 
$
(3,700
)
 
$
571,764

Origination of mortgage loan receivables
969,401

(1)
—

 
1,128,651

Purchases of mortgage loan receivables
—

 
—

 
73,421

Repayment of mortgage loan receivables
(720,592
)
(2)
—

 
(1,768
)
Proceeds from sales of mortgage loan receivables(3)
—

 
—

 
(1,440,195
)
Non-cash disposition of loan via foreclosure
—

 
—

 
—

Realized gain on sale of mortgage loan receivables
—

 
—

 
26,009

Transfer between held for investment and held for sale
—

 
—

 
—

Accretion/amortization of discount, premium and other fees
8,941

 
—

 
—

Loan loss provision
—

 
(300
)
 
—

Balance, December 31, 2016
$
2,000,095

 
$
(4,000
)
 
$
357,882

 
(1)
Includes $50.4 million of non-cash originations.
(2)
Includes $70.7 million of non-cash repayments.
(3)
Includes $2.6 million of realized losses on loans related to lower of cost or market adjustments for the year ended December 31, 2016.

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

At December 31, 2018 and 2017, there was $0.5 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. 
    
Provision for Loan Losses and Non-Accrual Status ($ in thousands)

 
Year Ended December 31,
 
2018
 
2017
 
2016
 
 
 
 
 
 
Provision for loan losses at beginning of period
$
4,000

 
$
4,000

 
$
3,700

Provision for loan losses
13,900

 
—

 
300

Provision for loan losses at end of period
$
17,900

 
$
4,000

 
$
4,000

 
 
 
 
 
 
 
December 31, 2018
 
December 31, 2017
 
December 31, 2016
 
 
 
 
 
 
Principal balance of loans on non-accrual status
$
36,850

 
$
26,850

 
$
—



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 three loans discussed below, are individually impaired as of December 31, 2018 and none of its loans are individually impaired as of December 31, 2017. It is probable, however, that Ladder’s loan portfolio as a whole incurred an impairment due to common characteristics and shared inherent risks in the portfolio. The Company determined that an increase in its provision expense for loan losses of $13.9 million was required for the year ended December 31, 2018. This provision consisted of a portfolio-based, general loan loss provision of $1.2 million to provide reserves for expected losses over the remaining portfolio of mortgage loan receivables held for investment, an asset-specific reserve of $2.7 million relating to two of the Company’s loans, discussed below and an asset-specific reserve of $10.0 million relating to one of the Company’s loans, discussed below.

As of December 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. The Company placed these loans on non-accrual status in July 2017. In assessing these collateral dependent loans for impairment, 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 is most significantly affected by the contractual lease payments and the appropriate market capitalization rates, which are driven by the property’s market strength, the general interest rate environment and the retail tenant’s creditworthiness. In view of these considerations, the Company uses a direct capitalization rate valuation methodology to calculate the fair value of the underlying real estate collateral. These non-recurring fair values are considered Level 3 measurements in the fair value hierarchy. Through December 31, 2017, the Company believed no loss provision was necessary as the estimated fair value of the property less the cost to foreclose and sell the property exceeded the combined carrying value of the loans. The Company utilized direct capitalization rates of 4.35% to 4.65% at December 31, 2017.

The on-going bankruptcy proceedings, rising interest rates and retail tenant’s creditworthiness, resulted in a decline in the estimated value of the collateral. As a result, on March 31, 2018, the Company recorded a provision for loss on these loans of $2.7 million to reduce the carrying value of these loans to the fair value of the property less the cost to foreclose and sell the property utilizing direct capitalization rates of 4.70% to 5.00%. As of December 31, 2018, the Company believed no additional loss provision was necessary based on the application of direct capitalization rates of 4.60% to 4.90% utilized by the Company.

During the year ended December 31, 2018, management identified a loan with a carrying value of $45.0 million as potentially impaired, reflecting a decline in collateral value attributable to: (i) recent and near term tenant vacancies at the property; (ii) new information available during the three months ended September 30, 2018 regarding the addition of supply that will increase the submarket vacancy rate in the local market; and (iii) declining market conditions. As of September 30, 2018 this loan was not yet in default but the borrower was not expected to be able to pay off or refinance the loan at maturity. As part of the Company’s evaluation, it obtained an external appraisal of the loan collateral. Based on this review, a reserve of $10.0 million was recorded for this potentially impaired loan in the three months ended September 30, 2018 to reduce the carrying value of the loan to the estimated fair value of the collateral, less the estimated costs to sell. The Company has placed this loan on non-accrual status as of September 30, 2018. During the quarter ended December 31, 2018, this loan experienced a maturity default and its terms were modified in a Troubled Debt Restructuring (“TDR”) on October 17, 2018. The terms of the TDR provided for, among other things, the restructuring of the Company’s existing $45.0 million first mortgage loan into a $35.0 million A-Note and a $10.0 million B-Note and a 19.0% equity interest which is not subject to dilution and that can be increased to 25% under certain conditions. Under certain conditions, the B-Note may be forgiven or reduced. The restructured loan was extended for up to 12 months, including extensions.

Generally when granting concessions, the Company will seek to protect its position by requiring incremental pay downs, additional collateral or guarantees and in some cases lookback features or equity kickers to offset concessions granted should conditions impacting the loan improve. The Company's determination of credit losses is impacted by TDRs whereby loans that have gone through TDRs are considered impaired, assessed for specific reserves, and are not included in the Company's assessment of general loan loss reserves. Loans previously restructured under TDRs that subsequently default are reassessed to incorporate the Company's current assumptions on expected cash flows and additional provision expense is recorded to the extent necessary. As of December 31, 2018, there were no unfunded commitments associated with modified loans considered TDRs.

As of December 31, 2018 there was one other loan in default with a carrying value of $17.6 million, however, based on the underlying collateral, there are no expected losses.

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