Mortgage Notes Receivable

12 Months Ended

Dec. 31, 2022

Note 3 - Mortgage Notes Receivable

The stated principal amount of mortgage notes receivable in our portfolio represents our interest in loans generally secured by first deeds of trust, security agreements or legal title to real estate located in the United States. Our lending standards typically require that all mortgage notes receivable be secured by a first deed of trust lien on real estate and that the maximum 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 typically 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 December 31, 2022, the weighted average term outstanding of our active loans was 22 months, 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 10.2% as of December 31, 2022. Most loans are structured with an interest reserve holdback that covers the interest payments for 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 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, loan servicing 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 December 31, 2022 and 2021:


(dollars in thousands)	December 31, 2022		December 31, 2021
Total loan commitments	$	1,417,325	$	1,489,055
Less:
Construction holdbacks(1)		452,690		524,462
Interest reserves		33,633		39,880
Total principal outstanding for our mortgage notes receivable		931,002		924,713
Less:
Allowance for credit losses(2)		41,492		10,394
Deferred origination and amendment fees		7,560		12,969
Mortgage notes receivable, net	$	881,950	$	901,350

(1)

As of December 31, 2022 and 2021 this amount includes $22.8 and $17.3 million, respectively, of construction holdbacks for defaulted loans that we are no longer required to pay. These amounts are included in the loan commitment totals.

(2)

As of December 31, 2022 and 2021, $1.5 and $0.9 million, respectively, 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 consolidated balance sheet.

When a loan is deemed collateral dependent or high risk, it is placed on non-accrual status with interest income recognized on a cash-basis where principal collection is not in doubt. As of December 31, 2022 and 2021, the principal outstanding on loans in contractual default status placed on non-accrual status was $217.2 and $101.9 million, respectively.

As of December 31, 2022 and 2021, the principal outstanding on loans in contractual default was $250.4 and $174.0 million, respectively.

The following tables show the carrying value of loans in contractual default status by collateral type and the LTV of the loans in contractual default at the dates indicated:


	December 31, 2022
(dollars in thousands)	Number of Loans		Carrying Value		% of Portfolio
Collateral Type
Residential lots		8	$	71,306		28.5	%
Condos		3		42,237		16.9
Hotel		2		28,919		11.5
Entitled Land		2		22,447		9.0
Townhomes		5		21,175		8.5
Single Family Housing		11		20,335		8.1
Mixed Use		4		14,795		5.9
Unentitled Land		1		10,496		4.2
Apartments		2		6,947		2.8
Offices		1		6,288		2.5
Retail		1		5,443		2.2
Total		40	$	250,388		100.0	%


	December 31, 2022
(dollars in thousands)	Carrying Value		% of Portfolio
LTV(1)
0 - 40%	$	3,969		1.6	%
41 - 60%		91,201		36.4
61 - 80%		139,537		55.7
Above 80%		15,681		6.3
Total	$	250,388		100.0	%

(1)

Represents current LTV as of origination or latest amendment. At December 31, 2022, the weighted average LTV for loans in contractual default using the latest appraisal was 124.8%. The weighted average LTV of our loans in contractual default net of our allowance for credit losses was approximately 84.9%.


	December 31, 2021
(dollars in thousands)	Number of Loans		Carrying Value		% of Portfolio
Collateral Type
Condos		4	$	47,741		27.4	%
Senior Housing		1		25,337		14.6
Residential lots		3		19,541		11.2
Townhomes		6		18,870		10.8
Entitled Land		1		17,335		10.0
Mixed Use		4		15,858		9.1
Hotel		1		14,583		8.4
Unentitled Land		2		5,403		3.1
Apartments		2		5,341		3.1
Single Family Housing		7		3,973		2.3
Total		31	$	173,984		100.0	%


	December 31, 2021
(dollars in thousands)	Carrying Value		% of Portfolio
LTV (1)
0 - 40%	$	22,737		13.1	%
41 - 60%		26,902		15.5
61 - 80%		110,548		63.5
Above 80%		13,797		7.9
Total	$	173,984		100.0	%

(1)

Represents LTV as of origination or latest amendment.

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 its portfolio and the 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 years ended December 31, 2022 and 2021:


	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		5,275			904		6,179
Charge-offs(1)		(5,471	)		—		(5,471	)
CECL allowance as of December 31, 2021		10,394			904		11,298
Provision for credit losses, net		37,696			570		38,266
Charge-offs(1)		(6,598	)		—		(6,598	)
CECL allowance as of December 31, 2022	$	41,492		$	1,474	$	42,966

(1)

Charge-offs result from either loan repayments where the proceeds are less than the principal outstanding or transfers to investment in real property at the time that we take ownership of the property 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 consolidated balance sheet.

As of December 31, 2022, the funded and unfunded CECL allowance aggregated $43.0 million, which represents an increase of $38.3 million for the year ended December 31, 2022. This increased allowance reflects increased loan specific allowances for certain high risk and collateral dependent loans where the fair value of the underlying collateral was less than the amortized cost of the loan, as well as increased uncertainty in the macroeconomic outlook, including weakening credit indicators, inflationary pressures, rising interest rates and market volatility.

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:


	December 31, 2022						Year Originated(1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		Prior
Construction Type
Vertical Construction	$	552,468			59.8	%	$	352,355	$	128,130	$	33,895	$	1,928	$	36,160
Horizontal Development		221,078			24.1			144,082		68,201		8,795		—		—
Investment		46,536			5.0			46,536		—		—		—		—
Rehabilitation		39,422			4.3			12,936		15,009		11,477		—		—
Land Entitlement		26,132			2.8			4,146		21,986		—		—		—
Bridge		22,611			2.4			19,450		937		—		2,224		—
Acquisition		15,195			1.6			13,454		1,741		—		—		—
Total		923,442			100.0	%	$	592,959	$	236,004	$	54,167	$	4,152	$	36,160
CECL allowance(2)		(41,492	)
Carrying value, net	$	881,950

(1)

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

(2)

Includes $35.0 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, $1.5 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 consolidated balance sheet.


	December 31, 2022						Year Originated(1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		Prior
Collateral Type
Apartments	$	191,708			20.8	%	$	134,816	$	49,944	$	5,020	$	1,928	$	—
Single Family Housing		133,702			14.5			124,218		9,245		239		—		—
Townhomes		106,888			11.6			81,393		24,701		794		—		—
Residential Lots		104,100			11.3			56,675		38,630		8,795		—		—
Entitled Land		76,251			8.3			54,265		21,986		—		—		—
Condos		71,975			7.8			29,738		2,515		3,562		—		36,160
Commercial		58,515			6.3			13,838		44,677		—		—		—
Mixed Use		50,127			5.4			6,209		30,217		11,477		2,224		—
Hotel		30,221			3.3			14,116		—		16,105		—		—
Offices		18,467			2.0			12,179		—		6,288		—		—
Unentitled Land		17,262			1.9			16,325		937		—		—		—
Senior Housing		16,595			1.8			16,595		—		—		—		—
Duplex		13,639			1.5			13,639		—		—		—		—
Commercial Other		11,411			1.2			—		11,411		—		—		—
Retail		9,071			1.0			5,443		1,741		1,887		—		—
Quadplex		8,932			1.0			8,932		—		—		—		—
Commercial Lots		4,018			0.4			4,018		—		—		—		—
Triplex		560			0.1			560		—		—		—		—
Total		923,442			100.0	%	$	592,959	$	236,004	$	54,167	$	4,152	$	36,160
CECL allowance(2)		(41,492	)
Carrying value, net	$	881,950

(1)

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

(2)


	December 31, 2022						Year Originated(1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		Prior
LTV (2)
0 - 40%	$	26,053			2.8	%	$	22,544	$	3,509	$	—	$	—	$	—
41 - 45%		29,025			3.1			7,039		21,986		—		—		—
46 - 50%		42,267			4.6			22,524		13,455		6,288		—		—
51 - 55%		144,649			15.7			76,978		58,876		8,795		—		—
56 - 60%		107,098			11.6			98,691		8,407		—		—		—
61 - 65%		456,743			49.5			284,722		112,569		21,364		1,928		36,160
66 - 70%		93,104			10.1			71,638		16,561		2,681		2,224		—
71 - 75%		4,280			0.5			4,280		—		—		—		—
76- 80%		2,540			0.3			2,540		—		—		—		—
Above 80%		17,683			1.9			2,003		641		15,039		—		—
Total		923,442			100.0	%	$	592,959	$	236,004	$	54,167	$	4,152	$	36,160
CECL allowance(3)		(41,492	)
Carrying value, net	$	881,950

(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)


	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. In addition, $0.9 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 consolidated balance sheet.


	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)


	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)

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


	December 31, 2022
(dollars in thousands)	Carrying Value		CECL Allowance(1)			Carrying Value, net
Collateral Type
Residential Lots	$	70,664	$	(11,519	)	$	59,145
Condos		42,237		(5,892	)		36,345
Land		21,986		(108	)		21,878
Townhomes		18,296		(1,706	)		16,590
Single Family Housing		16,993		(950	)		16,043
Hotel		16,106		(9,151	)		6,955
Apartments		6,947		(978	)		5,969
Offices		6,288		(5,042	)		1,246
Mixed Use		3,318		(1,320	)		1,998
Total	$	202,835	$	(36,666	)	$	166,169


	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