Mortgage Notes Receivable

3 Months Ended

Mar. 31, 2022

Receivables [Abstract]

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 at origination 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. As of March 31, 2022, the weighted average term of our active loans was 18 months at origination, which we often elect to extend for several months, based on our evaluation of the expected timeline for completion of construction. All loans require monthly interest only payments, with our weighted average interest rate on our portfolio being 10.4% as of March 31, 2022. 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 the outstanding balance of mortgage notes receivable as of March 31, 2022 and December 31, 2021:

(dollars in thousands)	March 31, 2022		December 31, 2021
Total loan commitments	$	1,586,295	$	1,489,055
Less:
Construction holdbacks		591,876		524,462
Interest reserves		41,709		39,880
Total principal outstanding for our mortgage notes receivable		952,710		924,713
Less:
Allowance for credit losses(1)		8,647		10,394
Deferred origination and amendment fees		12,632		12,969
Mortgage notes receivable, net	$	931,431	$	901,350

(1)As of March 31, 2022, $1.1 million of the 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.

In certain instances, where the interest reserve on a current loan has been fully depleted and the interest payment is not expected to be collected from the borrower, we may place a current loan on non-accrual status and recognize interest income on a cash-basis where principal collection is not in doubt. As of March 31, 2022 and December 31, 2021, the principal outstanding on loans in contractual default status placed on non-accrual status was $66.8 and $101.9 million, respectively, and all non-accrual loans had an allowance for credit losses.

As of March 31, 2022 and December 31, 2021, the total commitment on loans in contractual default was $187.8 and $191.4 million, respectively.

Current Expected Credit Losses

In assessing the current expected credit loss (“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, historical loss experience in the commercial real estate industry provided by a third party adjusted to incorporate the risks of construction lending and 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 three months ended March 31, 2022 and 2021:

	CECL Allowance
(dollars in thousands)	Funded			Unfunded (2)		Total
CECL allowance as of December 31, 2021	$	10,394		$	904	$	11,298
Provision for credit losses, net		1,554			193		1,747
Charge-offs(1)		(3,301	)		—		(3,301	)
CECL allowance as of March 31, 2022	$	8,647		$	1,097	$	9,744

	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

(1)Charge-offs result from either loan repayments where the proceeds are less than the principal outstanding or transfers to investment in real property owned upon foreclosure where the fair values of the underlying collateral are less than the principal outstanding.

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

In determining our CECL allowance, we segment loans with similar characteristics. All of our loans are 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 March 31, 2022						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		2018		Prior
Construction Type
Vertical Construction	$	495,037			52.7	%	$	121,566	$	207,032	$	127,173	$	1,334	$	1,247	$	36,685
Horizontal Development		202,100			21.5			48,370		129,316		24,414		—		—		—
Acquisition		98,990			10.5			3,318		95,672		—		—		—		—
Investment		65,962			7.0			8,088		34,306		2,165		—		3,753		17,650
Rehabilitation		31,968			3.4			12,281		8,911		10,776		—		—		—
Land Entitlement		25,350			2.7			1,349		24,001		—		—		—		—
Bridge		20,671			2.2			—		18,740		—		1,931		—		—
Total	$	940,078			100.0	%	$	194,972	$	517,978	$	164,528	$	3,265	$	5,000	$	54,335
CECL allowance(2)		(8,647	)
Carrying value, net	$	931,431

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

(2)Includes $0.9 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral. In addition, $1.1 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 March 31, 2022						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		2018		Prior
Collateral Type
Apartments	$	115,043			12.2	%	$	56,684	$	27,062	$	29,963	$	1,334	$	—	$	—
Residential Lots		110,316			11.8			12,428		71,309		26,579		—		—		—
Single Family Housing		103,128			11.1			50,542		50,117		2,319		—		—		150
Townhomes		84,810			9.0			27,769		43,757		12,691		—		—		593
Commercial		73,113			7.8			5,950		67,163		—		—		—		—
Mixed Use		72,265			7.7			1,104		58,454		10,776		1,931		—		—
Condos		68,059			7.2			4,201		6,330		20,189		—		1,247		36,092
Senior Housing		64,119			6.8			—		38,255		25,864		—		—		—
Storage		56,601			6.0			—		56,601		—		—		—		—
Unentitled Land		48,113			5.1			15,863		28,497		—		—		3,753		—
Entitled Land		47,117			5.0			960		28,657		—		—		—		17,500
Hotel		32,159			3.4			1,241		3,675		27,243		—		—		—
Offices		17,163			1.8			—		9,747		7,416		—		—		—
Quadplex		11,427			1.2			6,407		5,020		—		—		—		—
Commercial Lots		10,353			1.1			3,664		6,689		—		—		—		—
Commercial Other		9,723			1.0			—		9,723		—		—		—		—
Retail		8,410			0.9			—		6,922		1,488		—		—		—
Duplex		7,381			0.8			7,381		—		—		—		—		—
Triplex		778			0.1			778		—		—		—		—		—
Total	$	940,078			100.0	%	$	194,972	$	517,978	$	164,528	$	3,265	$	5,000	$	54,335
CECL allowance(2)		(8,647	)
Carrying value, net	$	931,431

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

(2)Includes $0.9 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral. In addition, $1.1 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 March 31, 2022						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		2018		Prior
LTV (2)
0 - 40%	$	53,404			5.7	%	$	5,003	$	26,818	$	—	$	—	$	3,753	$	17,830
41 - 45%		45,239			4.8			11,667		29,554		4,018		—		—		—
46 - 50%		62,403			6.6			7,714		32,592		22,097		—		—		—
51 - 55%		122,558			13.0			40,419		73,192		8,684		—		—		263
56 - 60%		63,159			6.7			42,455		15,164		5,540		—		—		—
61 - 65%		572,393			61.0			79,008		338,828		113,803		3,265		1,247		36,242
66 - 70%		9,605			1.0			8,706		899		—		—		—		—
71- 80%		—			0.0			—		—		—		—		—		—
Above 80%		11,317			1.2			—		931		10,386		—		—		—
Total	$	940,078			100.0	%	$	194,972	$	517,978	$	164,528	$	3,265	$	5,000	$	54,335
CECL allowance(3)		(8,647	)
Carrying value, net	$	931,431

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

(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)Includes $0.9 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral. In addition, $1.1 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, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Construction Type
Vertical Construction	$	478,475			52.5	%	$	234,861	$	191,896	$	1,177	$	2,491	$	47,789	$	261
Horizontal Development		196,543			21.5			169,041		27,502		—		—		—		—
Acquisition		96,937			10.6			96,937		—		—		—		—		—
Investment		65,703			7.2			42,509		2,101		—		3,608		17,485		—
Rehabilitation		27,023			3.0			11,320		15,703		—		—		—		—
Land Entitlement		24,529			2.7			24,529		—		—		—		—		—
Bridge		22,534			2.5			18,072		2,537		1,925		—		—		—
Total	$	911,744			100.0	%	$	597,269	$	239,739	$	3,102	$	6,099	$	65,274	$	261
CECL allowance(2)		(10,394	)
Carrying value, net	$	901,350

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

(2)Includes $0.7 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral.

	At December 31, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
Collateral Type
Residential Lots	$	111,644			12.2	%	$	85,219	$	26,425	$	—	$	—	$	—	$	—
Apartments		107,765			11.8			38,232		68,356		1,177		—		—		—
Townhomes		93,300			10.2			51,240		28,979		—		1,017		11,803		261
Mixed Use		85,929			9.5			53,530		30,474		1,925		—		—		—
Single Family Housing		87,902			9.6			84,703		3,049		—		—		150		—
Condos		64,492			7.1			8,805		18,227		—		1,474		35,986		—
Commercial		61,592			6.8			61,592		—		—		—		—		—
Senior Housing		61,236			6.7			35,899		25,337		—		—		—		—
Storage		56,481			6.2			56,481		—		—		—		—		—
Unentitled Land		46,019			5.0			42,411		—		—		3,608		—		—
Entitled Land		45,098			4.9			27,763		—		—		—		17,335		—
Hotel		31,665			3.5			4,886		26,779		—		—		—		—
Offices		15,348			1.7			8,280		7,068		—		—		—		—
Commercial Lots		10,227			1.1			6,670		3,557		—		—		—		—
Quadplex		9,769			1.1			9,769		—		—		—		—		—
Commercial Other		9,080			1.0			9,080		—		—		—		—		—
Retail		7,873			0.9			6,385		1,488		—		—		—		—
Duplex		6,324			0.7			6,324		—		—		—		—		—
Total	$	911,744			100.0	%	$	597,269	$	239,739	$	3,102	$	6,099	$	65,274	$	261
CECL allowance(2)		(10,394	)
Carrying value, net	$	901,350

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

(2)Includes $0.7 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral.

	At December 31, 2021						Year Originated (1)
(dollars in thousands)	Carrying Value			% of Portfolio			2021		2020		2019		2018		2017		Prior
LTV (2)
0 - 40%	$	53,907			5.9	%	$	32,634	$	—	$	—	$	3,608	$	17,665	$	—
41 - 45%		48,431			5.3			44,380		4,051		—		—		—		—
46 - 50%		63,690			7.0			41,356		21,317		—		1,017		—		—
51 - 55%		92,238			10.1			74,978		17,260		—		—		—		—
56 - 60%		79,039			8.7			27,115		40,190		—		—		11,473		261
61 - 65%		559,997			61.4			372,645		146,640		3,102		1,474		36,136		—
66 - 70%		645			0.1			645		—		—		—		—		—
71 - 80%		—			0.0			—		—		—		—		—		—
Above 80%		13,797			1.5			3,516		10,281		—		—		—		—
Total	$	911,744			100.0	%	$	597,269	$	239,739	$	3,102	$	6,099	$	65,274	$	261
CECL allowance(3)		(10,394	)
Carrying value, net	$	901,350

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

(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.

(3)Includes $0.7 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral.

The following tables allocate the carrying value of collateral dependent loans in our loan portfolio to the collateral type at the dates indicated:

	At March 31, 2022
(dollars in thousands)	Carrying Value		CECL Allowance(1)			Carrying Value, net
Collateral Type
Senior Housing	$	51,331	$	(1,117	)	$	50,214
Apartments		5,101		(57	)		5,044
Single Family Housing		742		(7	)		735
Condos		1,247		(912	)		335
Townhomes		263		(1	)		262
Total	$	58,684	$	(2,094	)	$	56,590

(1)Includes $0.9 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral and $1.2 million where the fair value was greater than the amortized cost and the allowance is based on the standard CECL methodology.

	At December 31, 2021
(dollars in thousands)	Carrying Value		CECL Allowance(1)			Carrying Value, net
Collateral Type
Senior Housing	$	25,337	$	(1,103	)	$	24,234
Entitled Land		17,335		(42	)		17,293
Single Family Housing		1,730		(15	)		1,715
Condos		1,109		(673	)		436
Townhomes		261		(1	)		260
Total	$	45,772	$	(1,834	)	$	43,938

(1)Includes $0.7 million in loan specific allowances for loans deemed collateral dependent based on the excess amortized cost over the fair value of the underlying collateral and $1.1 million where the fair value was greater than the amortized cost and the allowance is based on the standard CECL methodology.