Mortgage Notes Receivable

6 Months Ended

Jun. 30, 2021

Mortgage notes receivable

Mortgage Notes Receivable

Note 3 - Mortgage Notes Receivable

The stated principal amount of mortgage notes receivable in our portfolio represents our interest in loans secured by first deeds of trust, security agreements or legal title to real estate located in the United States. Our lending standards require that all mortgage notes receivable be secured by a first deed of trust lien on real estate and that the maximum loan to value ratio (“LTV”) be no greater than 65%. The LTV is calculated on an “as-complete” appraised value of the underlying collateral as determined by an independent appraiser at the time of the loan origination. The lending standards also limit the initial outstanding principal balance of the loan to a maximum LTV of up to 65% of the “as-is” appraised value of the underlying collateral as determined by an independent appraiser at the time of the loan origination. Unless otherwise indicated, LTV is measured by the total commitment amount of the loan divided by the “as-complete” appraisal. LTVs do not reflect interim loan activity such as construction draws or interest payments capitalized to loans, or partial repayments of the loan. The maximum amount of a single loan may not exceed 10% of our total assets and the maximum amount to a single borrower may not exceed 15% of our total assets. We consider the maximum LTV as an indicator for the credit quality of a mortgage note receivable.

Mortgage notes receivable are considered to be short-term financings, with initial terms typically ranging from five to 18 months in duration based on the size of the project and expected timeline for completion of construction, which we often elect to extend for several months based on our evaluation of the project. All loans require monthly interest only payments and interest rates generally range from a fixed annual rate of 10% to 13%. Most loans are structured with an interest reserve holdback that covers the interest payments for most of the initial term of the loan. Once the interest reserve is depleted, borrowers are expected to pay their monthly interest payment within 10 days of month end.

Mortgage notes receivable are presented net of construction holdbacks, interest reserves, allowance for credit losses and deferred origination and amendment fee income in the condensed consolidated balance sheets. The construction holdback represents amounts withheld from the funding of construction loans until we deem construction to be sufficiently completed. The interest reserve represents amounts withheld from the funding of certain mortgage notes receivable for the purpose of satisfying monthly interest payments over all or part of the term of the related note. Accrued interest is paid out of the interest reserve and recognized as interest income at the end of each month. The deferred origination and amendment fee income represents amounts that will be recognized over the contractual life of the underlying mortgage notes receivable.

The following table reconciles outstanding mortgage loan commitments to outstanding balance of mortgage notes receivable as of June 30, 2021 and December 31, 2020:

(dollars in thousands)	June 30, 2021		December 31, 2020
Total loan commitments	$	1,328,556	$	1,245,963
Less:
Construction holdbacks(1)		412,751		356,026
Interest reserves(1)		35,600		29,817
Private REIT participation(2)		41,427		37,729
Total principal outstanding for our mortgage notes receivable		838,778		822,391
Less:
Allowance for credit losses(3)		10,943		10,590
Deferred origination and amendment fees		13,381		13,315
Mortgage notes receivable, net	$	814,454	$	798,486

(1)Includes construction holdbacks of $34.7 and $40.4 million and interest reserves of $2.6 and $4.3 million on participating interests sold to the Private REIT as of June 30, 2021 and December 31, 2020, respectively.

(2)The Private REIT’s participations in loans originated by us meet the characteristics of participating interests and the criterion for sale accounting and therefore, are derecognized from our condensed consolidated financial statements.

(3)As of June 30, 2021, $0.7 million of the CECL Allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

Non-accrual Status

As of June 30, 2021 and December 31, 2020, the principal outstanding on loans in contractual default status placed on non-accrual status was $155.3 and $126.8 million, respectively, and all non-accrual loans had an allowance for credit losses.

Current Expected Credit Losses

In assessing the CECL allowance, we consider historical loss experience, current conditions, and a reasonable and supportable forecast of the macroeconomic environment. We derived an annual historical loss rate based on the Company’s historical loss experience in our portfolio and historical loss experience in the commercial real estate industry provided by a third party adjusted to reflect our expectations of the macroeconomic environment based on forecast data per the Federal Reserve.

The following tables summarize the activity in the CECL Allowance during the six months ended June 30, 2021 and 2020:

	CECL Allowance
(dollars in thousands)	Funded			Unfunded (2)			Total
CECL allowance as of December 31, 2020	$	10,590		$	—		$	10,590
Provision for credit losses, net		1,761			947			2,708
Charge-offs(1)		(1,688	)		—			(1,688	)
CECL allowance as of March 31, 2021	$	10,663		$	947		$	11,610
Provision for credit losses (benefit), net		280			(222	)		58
CECL allowance as of June 30, 2021	$	10,943		$	725		$	11,668

(dollars in thousands)	CECL Allowance
Loan loss reserve as of December 31, 2019	$	4,096
Adoption of ASU 2016-13(3)		1,975
Provision for credit losses, net		4,432
Charge-offs(1)		(537	)
CECL allowance as of March 31, 2020	$	9,966
Charge-offs(1)		(696	)
Provision for credit losses, net		4,224
CECL allowance as of June 30, 2020	$	13,494

(1)Represents either loan repayments where the proceeds are less than the principal outstanding or transfers to real property owned upon foreclosure where the fair values of the underlying collateral are less than the principal outstanding.

(2)CECL Allowance relates to unfunded commitments is presented as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

(3)Recorded as a direct charge to stockholders’ equity as a cumulative-effect of change in accounting principle.

In determining our CECL allowance, we segment loans with similar characteristics. All of our loans are construction loans secured by residential or commercial real estate and, in assessing estimated credit losses, we evaluate various metrics, including, but not limited to, construction type, collateral type, LTV, market conditions of property location and borrower experience and financial strength.

The following tables allocate the carrying value of our loan portfolio based on our internal credit quality indicators in assessing estimated credit losses and vintage of origination at the dates indicated:

	At June 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Construction Type
Vertical Construction	$	519,791			63.0	%	$	196,664	$	194,366	$	31,142	$	1,731	$	90,598	$	5,290
Investment		159,089			19.2			68,500		44,474		18,456		4,027		18,193		5,439
Horizontal Development		146,517			17.8			102,106		39,548		—		181		—		4,682
Total	$	825,397			100.0	%	$	367,270	$	278,388	$	49,598	$	5,939	$	108,791	$	15,411
CECL allowance(2)		(10,943	)
Carrying value, net	$	814,454

(1)Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)$0.7 million of the CECL Allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

	At June 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Collateral Type
Apartments	$	178,457			21.6	%	$	55,399	$	68,339	$	23,020	$	—	$	26,667	$	5,032
Residential Lots		88,976			10.8			51,790		27,065		—		—		—		10,121
Single family housing		77,416			9.5			53,171		19,071		—		181		4,993		—
Townhomes		75,268			9.1			23,307		26,667		—		1,384		23,652		258
Unentitled Land		70,960			8.6			50,492		—		—		3,200		17,268		—
Condos		64,359			7.8			9,628		18,271		—		1,174		35,286		—
Senior Housing		53,056			6.4			28,423		24,633		—		—		—		—
Hotel		47,188			5.7			6,325		40,863		—		—		—		—
Mixed Use		39,976			4.8			11,795		26,258		1,923		—		—		—
Offices		33,550			4.1			4,560		6,292		22,698		—		—		—
Entitled Land		29,070			3.5			27,719		1,351		—		—		—		—
Industrial		17,377			2.1			17,377		—		—		—		—		—
Commercial Lots		15,453			1.9			—		15,453		—		—		—		—
Commercial		12,649			1.5			12,649		—		—		—		—		—
Retail		6,668			0.8			3,508		1,203		1,957		—		—		—
Quadplex		6,013			0.7			3,091		2,922		—		—		—		—
Duplex		4,634			0.6			3,709		—		—		—		925		—
Commercial other		4,327			0.5			4,327		—		—		—		—		—
Total	$	825,397			100.0	%	$	367,270	$	278,388	$	49,598	$	5,939	$	108,791	$	15,411
CECL allowance(2)		(10,943	)
Carrying value, net	$	814,454

(1)Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)$0.7 million of the CECL Allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

	At June 30, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
LTV (2)
0 - 40%	$	34,973			4.2	%	$	24,053	$	7,375	$	—	$	3,200	$	345	$	—
41 - 45%		40,800			5.0			35,046		5,754		—		—		—		—
46 - 50%		56,451			6.8			30,013		26,438		—		—		—		—
51 - 55%		84,695			10.3			32,781		33,035		1,957		—		16,922		—
56 - 60%		81,261			9.8			15,854		44,656		—		—		15,312		5,439
61 - 65%		501,182			60.7			228,970		141,255		47,641		2,739		75,287		5,290
66 - 70%		11,300			1.4			553		10,747		—		—		—		—
71 - 75%		—			0.0			—		—		—		—		—		—
76 - 80%		—			0.0			—		—		—		—		—		—
Above 80%		14,735			1.8			—		9,128		—		—		925		4,682
Total	$	825,397			100.0	%	$	367,270	$	278,388	$	49,598	$	5,939	$	108,791	$	15,411
CECL allowance(3)		(10,943	)
Carrying value, net	$	814,454

(1)Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)Represents LTV as of origination or latest amendment. LTVs above 65% generally represent loans in contractual default status where we have agreed to extend funds to the borrower above 65% in order to facilitate successful completion of the construction and return of capital.

(3)$0.7 million of the CECL Allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under accounts payable and accrued liabilities in our condensed consolidated balance sheet.

	At December 31, 2020						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2020		2019		2018		2017		2016		Prior
Construction Type
Vertical Construction	$	514,136			63.5	%	$	354,012	$	57,090	$	6,853	$	88,655	$	7,526	$	—
Horizontal Development		153,345			19.0			129,607		15,028		283		—		8,427		—
Investment		141,595			17.5			98,146		18,657		7,259		16,444		—		1,089
Total	$	809,076			100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance		(10,590	)
Carrying value, net	$	798,486

(1)Represents the year of origination or amendment where the loan incurred a full re-underwriting.

	At December 31, 2020						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2020		2019		2018		2017		2016		Prior
Collateral Type
Apartments	$	129,588			16.0	%	$	79,931	$	18,953	$	—	$	24,232	$	6,472	$	—
Residential Lots		124,548			15.4			105,830		10,291		—		—		8,427		—
Condos		92,245			11.4			52,714		3,106		4,405		32,020		—		—
Single family housing		90,131			11.1			69,438		8,839		1,028		10,103		—		723
Townhomes		72,773			9.0			47,391		1,061		1,703		21,564		1,054		—
Unentitled Land		71,796			8.9			47,727		—		7,259		16,444		—		366
Mixed Use		66,092			8.2			60,232		5,860		—		—		—		—
Hotel		51,115			6.3			42,874		8,241		—		—		—		—
Senior Housing		34,283			4.2			34,283		—		—		—		—		—
Offices		29,540			3.7			8,495		21,045		—		—		—		—
Commercial Lots		15,683			1.9			15,683		—		—		—		—		—
Retail		11,397			1.4			9,500		1,897		—		—		—		—
Industrial		11,309			1.4			704		10,605		—		—		—		—
Quadplex		5,592			0.7			5,592		—		—		—		—		—
Entitled Land		1,116			0.1			1,116		—		—		—		—		—
Commercial		877			0.1			—		877		—		—		—		—
Duplex		736			0.1			—		—		—		736		—		—
Commercial other		254			0.1			254		—		—		—		—		—
Total	$	809,076			100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance		(10,590	)
Carrying value, net	$	798,486

(1)Represents the year of origination or amendment where the loan incurred a full re-underwriting.

	At December 31, 2020						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2020		2019		2018		2017		2016		Prior
LTV (2)
0 - 40%	$	22,601			2.8	%	$	18,112	$	—	$	3,862	$	261	$	—	$	366
41 - 45%		68,263			8.4			44,683		20,183		3,397		—		—		—
46 - 50%		23,864			2.9			15,917		7,224		—		—		—		723
51 - 55%		76,539			9.5			57,583		2,774		—		16,182		—		—
56 - 60%		135,170			16.7			117,309		3,106		—		9,639		5,116		—
61 - 65%		450,253			55.7			301,964		57,488		7,136		76,139		7,526		—
66 - 70%		9,416			1.2			9,416		—		—		—		—		—
71 - 75%		1,983			0.2			1,983		—		—		—		—		—
76 - 80%		14,544			1.8			14,544		—		—		—		—		—
Above 80%		6,443			0.8			254		—		—		2,878		3,311		—
Total	$	809,076			100.0	%	$	581,765	$	90,775	$	14,395	$	105,099	$	15,953	$	1,089
CECL allowance		(10,590	)
Carrying value, net	$	798,486

(1)Represents the year of origination or amendment where the loan incurred a full re-underwriting.

(2)Represents LTV as of origination or latest amendment. LTVs above 65% generally represent loans in contractual default status where we have agreed to extend funds to the borrower above 65% in order to ensure successful completion of the construction and return of capital.