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MORTGAGE LOAN RECEIVABLES
 9 Months Ended
Sep. 30, 2019
SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract]  
MORTGAGE LOAN RECEIVABLES
3. MORTGAGE LOAN RECEIVABLES
 
September 30, 2019 ($ in thousands)
 
 
Outstanding
Face Amount
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Remaining
Maturity
(years)
 
 
 
 
 
 
 
 
Mortgage loan receivables held for investment, net, at amortized cost:
 
 
 
 
 
 
 
Mortgage loans held by consolidated subsidiaries:
 
 
 
 
 
 
 
First mortgage loans(2)
$
3,116,050

 
$
3,098,241

 
7.14
%
 
1.27
Mezzanine loans
133,661

 
133,202

 
10.87
%
 
3.76
Total mortgage loans held by consolidated subsidiaries
3,249,711

 
3,231,443

 
7.29
%
 
1.37
Provision for loan losses
N/A

 
(18,500
)
 
 
 
 
Total mortgage loan receivables held for investment, net, at amortized cost
3,249,711

 
3,212,943

 
 
 
 
Mortgage loan receivables held for sale:
 
 
 
 
 
 
 
First mortgage loans
173,957

 
174,214

 
4.59
%
 
9.68
Total
$
3,423,668

 
$
3,387,157

 
7.19
%
 
1.81
 
(1)
September 30, 2019 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 10.

As of September 30, 2019, $2.5 billion, or 78.4% of the outstanding face amount of our mortgage loan receivables held for investment, net, at amortized cost, were at variable interest rates, linked to LIBOR. Of this $2.5 billion, 100% of these variable interest rate mortgage loan receivables were subject to interest rate floors. As of September 30, 2019, $174.0 million, or 100%, of the outstanding face amount of our mortgage loan receivables held for sale were at fixed interest rates.
 
December 31, 2018 ($ in thousands)
 
 
Outstanding
Face Amount
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Remaining
Maturity
(years)
 
 
 
 
 
 
 
 
Mortgage loan receivables held for investment, net, at amortized cost:
 
 
 
 
 
 
 
Mortgage loans held by consolidated subsidiaries:
 
 
 
 
 
 
 
First mortgage loans(2)
$
3,192,160

 
$
3,170,788

 
7.70
%
 
1.18
Mezzanine loans
148,221

 
147,602

 
10.89
%
 
4.35
Total mortgage loans held by consolidated subsidiaries
3,340,381

 
3,318,390

 
7.84
%
 
1.32
Provision for loan losses
N/A

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

 
3,300,490

 
 
 
 
Mortgage loan receivables held for sale:
 
 
 
 
 
 
 
First mortgage loans
181,905

 
182,439

 
5.46
%
 
9.75
Total
$
3,522,286

 
$
3,482,929

 
7.76
%
 
1.77
 
(1)
December 31, 2018 LIBOR rates are used to calculate weighted average yield for floating rate loans.
(2)
Includes amounts relating to consolidated variable interest entities. See Note 10.
 
As of December 31, 2018, $2.5 billion, or 75.4%, of the outstanding principal of our mortgage loan receivables held for investment, net, at amortized cost, were at variable interest rates, linked to LIBOR. Of this $2.5 billion, 100% of these variable rate mortgage loan receivables were subject to interest rate floors. As of December 31, 2018, $182.4 million, or 100%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates.

For the nine months ended September 30, 2019 and 2018, 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
 
Mortgage loans transferred but not considered sold
 
Provision for loan losses
 
Mortgage loan 
receivables held
for sale
 
 
 
 
 
 
 
 
Balance, December 31, 2018
$
3,318,390

 
$
—

 
$
(17,900
)
 
$
182,439

Origination of mortgage loan receivables
985,825

 
—

 
—

 
554,115

Purchases of mortgage loan receivables
—

 
—

 
—

 
9,934

Repayment of mortgage loan receivables
(1,105,506
)
 
—

 
—

 
(620
)
Proceeds from sales of mortgage loan receivables(1)
—

 
(15,504
)
 
—

 
(558,799
)
Non-cash disposition of loans via foreclosure(2)
(17,611
)
 
—

 
—

 
—

Sale of loans, net
—

 
—

 
—

 
38,589

Transfer between held for investment and held for sale(1)
35,940

 
15,504

 
—

 
(51,444
)
Accretion/amortization of discount, premium and other fees
14,405

 
—

 
—

 
—

Provision for loan losses
—

 
—

 
(600
)
 
—

Balance, September 30, 2019
$
3,231,443

 
$
—

 
$
(18,500
)
 
$
174,214

 
(1)
During the three months ended March 31, 2019, the Company reclassified from mortgage loan receivables held for sale to mortgage loan receivables held for investment, net, at amortized cost, one loan with an outstanding face amount of $15.4 million, a book value of $15.5 million (fair value at the date of reclassification) and a remaining maturity of 9.8 years, which was sold to the WFCM 2019-C49 securitization trust. Subsequently, the controlling loan interest was sold to the UBS 2019-C16 securitization trust, and as a result, the loan previously sold during the three months ended March 31, 2019 was accounted for as a sale during the six months ended June 30, 2019.
(2)
Refer to Note 5 Real Estate and Related Lease Intangibles, Net for further detail on foreclosure of real estate.

 
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
1,240,894

 
—

 
1,115,218

Repayment of mortgage loan receivables
(787,167
)
 
—

 
(1,324
)
Proceeds from sales of mortgage loan receivables
—

 
—

 
(926,402
)
Sale of loans, net(1)
—

 
—

 
12,893

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

 
—

 
(55,403
)
Accretion/amortization of discount, premium and other fees
13,795

 
—

 
—

Provision for loan losses(3)
—

 
(13,600
)
 
—

Balance, September 30, 2018
$
3,805,387

 
$
(17,600
)
 
$
375,162

 
(1)
Includes $0.5 million of realized losses on loans related to lower of cost or market adjustments for the nine months ended September 30, 2018.
(2)
During the nine months ended September 30, 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 loans’ origination and not a deterioration in credit of the borrowers or collateral coverage and the Company expects to collect all amounts due under the loans.
(3)
As further discussed below, during the three and nine months ended September 30, 2018, the Company recorded asset-specific provisions on collateral dependent loans of $10.0 million and $12.7 million, respectively. 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 three and nine months ended September 30, 2018, the Company recorded an additional general reserve of $0.3 million and $0.9 million, respectively.

During the nine months ended September 30, 2019 and September 30, 2018, the transfers of financial assets via sales of loans were treated as sales under ASC Topic 860 — Transfers and Servicing.

As of September 30, 2019 and December 31, 2018, there was $0.1 million and $0.5 million, respectively, of unamortized discounts included in our mortgage loan receivables held for investment, net, at amortized cost, on our consolidated balance sheets. 
    
Provision for Loan Losses and Non-Accrual Status ($ in thousands)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2019
 
2018
 
2019
 
2018
 
 
 
 
 
 
 
 
Allowance for loan losses at beginning of period
$
18,500

 
$
7,300

 
$
17,900

 
$
4,000

Provision for loan losses
—

 
10,300

 
600

 
13,600

Allowance for loan losses at end of period
$
18,500

 
$
17,600

 
$
18,500

 
$
17,600

 
 
 
 
 
 
 
 
 
 
 
 
 
September 30, 2019
 
December 31, 2018
 
 
 
 
 
 
 
 
Principal balance of loans on non-accrual status(1)
 
 
 
 
$
37,161

 
$
36,850


 
(1)
Represents 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 and one loan with a carrying value of $45.0 million, as further discussed below.

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 September 30, 2019 and December 31, 2018. 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 a provision expense for loan losses of $0.6 million was required for the nine months ended September 30, 2019. This provision consisted of a portfolio-based, general loan loss provision of $0.6 million to provide reserves for expected losses over the remaining portfolio of mortgage loan receivables held for investment, and no additional asset-specific reserves.

As of September 30, 2019, 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 property is most significantly affected by the contractual lease terms 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. During the three months ended March 31, 2018, management believed these loans to be potentially impaired, reflecting a decline in collateral value attributable to: (i) on-going bankruptcy proceedings; (ii) rising interest rates; and (iii) the retail tenant’s creditworthiness. 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 September 30, 2019, the Company believed no additional loss provision was necessary based on the application of direct capitalization rates of 4.60% to 4.90%.

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 local submarket vacancy rate; and (iii) declining market conditions. 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. There have been no additional changes during the nine months ended September 30, 2019. On October 4, 2019, the loan was extended for an additional one month period with a November 6, 2019 maturity. On November 6, 2019 the loan was extended for an additional three month period with a February 6, 2020 maturity.

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 September 30, 2019, there were no unfunded commitments associated with modified loans considered TDRs.

As of September 30, 2019 and December 31, 2018 there were no other loans on non-accrual status.