COMMERCIAL REAL ESTATE INVESTMENTS

CRE Debt and Preferred Equity Investments

At June 30, 2018 and December 31, 2017, commercial real estate investments held for investment were comprised of the following:



	June 30, 2018						December 31, 2017
	Outstanding Principal		Carrying Value ⁽¹⁾		Percentage of Loan Portfolio ⁽²⁾		Outstanding Principal		Carrying Value ⁽¹⁾		Percentage of Loan Portfolio ⁽²⁾
	(dollars in thousands)
Senior mortgages	$	887,728	$	882,570	70.6	%	$	629,143	$	625,900	60.9	%
Mezzanine loans	360,095		359,574		28.7	%	395,015		394,442		38.2	%
Preferred equity	9,000		8,994		0.7	%	9,000		8,985		0.9	%
Total	$	1,256,823	$	1,251,138	100.0	%	$	1,033,158	$	1,029,327	100.0	%


⁽¹⁾	Carrying value includes unamortized origination fees of $5.7 million and $3.8 million at June 30, 2018 and December 31, 2017, respectively.


⁽²⁾	Based on outstanding principal.



	June 30, 2018
	Senior Mortgages			Mezzanine Loans			Preferred Equity		Total
	(dollars in thousands)
Beginning balance (January 1, 2018)	$	625,900		$	394,442		$	8,985	$	1,029,327
Originations & advances (principal)	286,017			24,193			—		310,210
Principal payments	(27,432		)	(59,113		)	—		(86,545		)
Net (increase) decrease in origination fees	(3,130		)	(147		)	—		(3,277		)
Amortization of net origination fees	1,215			199			9		1,423
Net carrying value (June 30, 2018)	$	882,570		$	359,574		$	8,994	$	1,251,138



	December 31, 2017
	Senior Mortgages			Mezzanine Loans			Preferred Equity		Total
	(dollars in thousands)
Beginning balance (January 1, 2017)	$	510,071		$	451,467		$	8,967	$	970,505
Originations & advances (principal)	338,242			69,121			—		407,363
Principal payments	(221,421		)	(127,799		)	—		(349,220		)
Amortization & accretion of (premium) discounts	(44		)	28			—		(16		)
Net (increase) decrease in origination fees	(3,317		)	(605		)	—		(3,922		)
Amortization of net origination fees	2,369			2,230			18		4,617
Net carrying value (December 31, 2017)	$	625,900		$	394,442		$	8,985	$	1,029,327

Internal CRE Debt and Preferred Equity Investment Ratings

The Company’s internal loan risk ratings are based on the guidance provided by the Office of the Comptroller of the Currency for commercial real estate lending. The Company’s internal risk rating categories include “Performing”, “Performing - Closely Monitored”, “Performing - Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual obligations. Performing - Closely Monitored loans meet all present contractual obligations, but are transitional or could be exhibiting some weakness in both leverage and liquidity. Performing - Special Mention loans meet all present contractual obligations, but exhibit potential weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. Substandard loans are inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. Doubtful loans are Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. Loss loans are considered uncollectible. The Company did not have any impaired loans, nonaccrual loans, or loans in default in the commercial loans portfolio as all of the loans were performing at June 30, 2018 and December 31, 2017. As such, no provision for loan losses was deemed necessary at June 30, 2018 and December 31, 2017.



	June 30, 2018
	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio		Internal Ratings
Investment Type	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio		Performing		Performing - Closely Monitored		Performing - Special Mention		Substandard ⁽¹⁾		Doubtful		Loss		Total
	(dollars in thousands)
Senior mortgages	$	887,728	70.6	%	$	513,610	$	272,928	$	36,800	$	64,390	$	—	$	—	$	887,728
Mezzanine loans	360,095		28.7	%	160,173		51,608		111,711		36,603		—		—		360,095
Preferred equity	9,000		0.7	%	—		—		9,000		—		—		—		9,000
Total	$	1,256,823	100.0	%	$	673,783	$	324,536	$	157,511	$	100,993	$	—	$	—	$	1,256,823



	December 31, 2017
	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio		Internal Ratings
Investment Type	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio		Performing		Performing - Closely Monitored		Performing - Special Mention		Substandard ⁽¹⁾		Doubtful		Loss		Total
	(dollars in thousands)
Senior mortgages	$	629,143	60.9	%	$	409,878	$	115,075	$	36,800	$	67,390	$	—	$	—	$	629,143
Mezzanine loans	395,015		38.2	%	206,169		66,498		122,348		—		—		—		395,015
Preferred equity	9,000		0.9	%	—		—		9,000		—		—		—		9,000
Total	$	1,033,158	100.0	%	$	616,047	$	181,573	$	168,148	$	67,390	$	—	$	—	$	1,033,158


⁽¹⁾	The Company rated two loans as Substandard as of June 30, 2018. The Company evaluated whether an impairment exists and determined in each case that, based on quantitative and qualitative factors, the Company expects repayment of contractual amounts due.

At June 30, 2018 and December 31, 2017, approximately 85% of the carrying value of the Company’s CRE Debt and Preferred Equity Investments, excluding loans held for sale, was comprised of floating-rate debt investments.

Investments in Commercial Real Estate

There were no acquisitions of real estate holdings during the three and six months ended June 30, 2018 and 2017. The Company sold one of its wholly-owned triple net leased properties during the six months ended June 30, 2017 for $12.0 million and recognized a gain on sale of $5.1 million.

The weighted average amortization period for intangible assets and liabilities at June 30, 2018 is 4.4 years. Above market leases and leasehold intangible assets are included in Intangible assets, net and below market leases are included in Accounts payable and other liabilities in the Consolidated Statements of Financial Condition.



	June 30, 2018			December 31, 2017
	(dollars in thousands)
Real estate held for investment, at amortized cost
Land	$	111,012		$	111,012
Buildings and improvements	331,879			330,959
Subtotal	442,891			441,971
Less: accumulated depreciation	(56,315		)	(48,920		)
Total real estate held for investment, at amortized cost, net	386,576			393,051
Equity in unconsolidated joint ventures	91,311			92,902
Investments in commercial real estate, net	$	477,887		$	485,953

Depreciation expense was $3.6 million and $7.4 million for the three and six months ended June 30, 2018, respectively. Depreciation expense was $3.9 million and $7.8 million for the three and six months ended June 30, 2017, respectively.

Depreciation expense is included in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

Rental Income

The minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse the Company for certain operating costs.

Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at June 30, 2018 for consolidated investments in real estate are as follows:



	June 30, 2018
	(dollars in thousands)
2018 (remaining)	$	14,895
2019	27,384
2020	22,653
2021	18,271
2022	13,278
Later years	22,002
Total	$	118,483

Mortgage loans payable at June 30, 2018 and December 31, 2017, were as follows:



June 30, 2018
Property	Mortgage Carrying Value		Mortgage Principal		Interest Rate	Fixed/Floating Rate	Maturity Date	Priority
(dollars in thousands)
Joint Ventures	$	286,546	$	289,125	4.03% - 4.61%	Fixed	2024 and 2025	First liens
Tennessee	12,311		12,350		4.01%	Fixed	9/6/2019	First liens
Virginia	11,021		11,025		3.58%	Fixed	6/6/2019	First liens
Total	$	309,878	$	312,500



December 31, 2017
Property	Mortgage Carrying Value		Mortgage Principal		Interest Rate	Fixed/Floating Rate	Maturity Date	Priority
(dollars in thousands)
Joint Ventures	$	286,373	$	289,125	4.03% - 4.61%	Fixed	2024 and 2025	First liens
Tennessee	12,294		12,350		4.01%	Fixed	9/6/2019	First liens
Virginia	11,019		11,025		3.58%	Fixed	6/6/2019	First liens
Total	$	309,686	$	312,500

The following table details future mortgage loan principal payments at June 30, 2018:



	Mortgage Loan Principal Payments
	(dollars in thousands)
2018 (remaining)	$	—
2019	23,375
2020	—
2021	—
2022	—
Later years	289,125
Total	$	312,500

On December 11, 2015, the Company originated a $335.0 million recapitalization financing with respect to eight class A/B office properties in Orange County, California. The Company previously classified the senior mortgage loan as held for sale.

During the six months ended June 30, 2017, the Company sold the remaining balance of $115.0 million ($114.4 million, net of origination fees) of the senior loan to unrelated third parties at carrying value. Accordingly, no gain or loss was recorded in connection with the sale.