NOTE 3: INVESTMENTS IN COMMERCIAL MORTGAGE LOANS, MEZZANINE LOANS AND PREFERRED EQUITY INTERESTS

The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests as of September 30, 2017:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates (5)
Commercial Real Estate (CRE)
Commercial mortgage loans (2)	$	1,158,089		$	(774	)	$	1,157,315			91		5.5	%	Oct. 2017 to Dec. 2025
Mezzanine loans		65,512			45			65,557			16		10.1	%	Apr. 2017 to May 2025
Preferred equity interests		40,327			(1	)		40,326			17		8.7	%	Nov. 2018 to Jan. 2029
Total CRE (3)		1,263,928			(730	)		1,263,198			124		5.9	%
Deferred fees and costs, net (4)		(2,852	)		-			(2,852	)
Total	$	1,261,076		$	(730	)	$	1,260,346

(1)	Weighted-average coupon is calculated on the unpaid principal balance, which does not necessarily correspond to the carrying amount.

(2)	Commercial mortgage loans include one conduit loan with an unpaid principal balance and carrying amount of $16,725, a weighted-average coupon of 4.8%, and a maturity date of December 2025. This commercial mortgage loan is accounted for as a loan held for sale.

(3)	Includes $139,007 of cash flow loans, of which $82,055 are commercial mortgage loans, $21,159 are mezzanine loans and $35,793 are preferred equity interests. See Note 2: Summary of Significant Accounting Policies, (j) Revenue Recognition, for further discussion of our cash flow loans.

(4)	Includes $8,482 of deferred fees, net of $5,630 of deferred costs.

(5)	Includes the maturity dates of two loans all of which had maturity dates prior to September 30, 2017 and have been identified as impaired.

The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests as of December 31, 2016:

	Unpaid Principal Balance			Unamortized (Discounts) Premiums			Carrying Amount			Number of Loans		Weighted- Average Coupon (1)			Range of Maturity Dates
Commercial Real Estate (CRE)
Commercial mortgage loans (2)	$	1,162,233		$	(852	)	$	1,161,381			94		5.8	%	Jan. 2017 to Dec. 2025
Mezzanine loans		89,811			45			89,856			23		9.9	%	Feb. 2017 to Jun. 2027
Preferred equity interests		42,830			(1	)		42,829			17		8.2	%	Jan. 2017 to Jan. 2029
Total CRE (3)		1,294,874			(808	)		1,294,066			134		6.1	%
Deferred fees and costs, net (4)		(1,427	)		—			(1,427	)
Total	$	1,293,447		$	(808	)	$	1,292,639

(1)	Weighted-average coupon is calculated on the unpaid principal balance, which does not necessarily correspond to the carrying amount.

(2)	Commercial mortgage loans include two conduit loans with unpaid principal balances and carrying amounts totaling $20,181, a weighted-average coupon of 4.8%, and maturity dates ranging from June 2025 through December 2025. These commercial mortgage loans are accounted for as loans held for sale.

(3)	Includes $155,750 of cash flow loans, of which $98,784 are commercial mortgage loans, $21,171 are mezzanine loans and $35,795 are preferred equity interests. See Note 2: Summary of Significant Accounting Policies, (j) Revenue Recognition, for further discussion of our cash flow loans.

(4)	Includes $5,978 of deferred fees, net of $4,551 of deferred costs.

A loan is placed on non-accrual status if it is delinquent for 90 days or more or if full collection of principal and interest is not probable, which generally includes our impaired loans that have reserves. The following table summarizes the delinquency statistics of our commercial real estate loans as of September 30, 2017 and December 31, 2016:

	As of September 30, 2017
Delinquency Status	Current		30 to 59 days		60 to 89 days		90 days or more		In foreclosure, legal or bankruptcy proceedings		Total		Non-accrual (1)
Commercial mortgage loans	$	1,096,971	$	15,645	$	—	$	45,473	$	—	$	1,158,089	$	98,474
Mezzanine loans		40,293		-		-		6,719		18,500		65,512		33,510
Preferred equity interests		40,327		-		-		-		-		40,327		3,650
Total	$	1,177,591	$	15,645	$	—	$	52,192	$	18,500	$	1,263,928	$	135,634

(1)

Includes four loans that were current, five loans that are 90 days or more past due, and one loan that is 30 to 59 days past due in accordance with their terms, but are on non-accrual due to uncertainty over whether we will fully collect principal and interest. Also includes one mezzanine loan with an unpaid principal balance of $18,500 that has not been accruing interest pursuant to its restructured loan terms as it had the option to be prepaid at par. This loan is now the subject of legal proceedings and has been placed on non-accrual status as full collection of principal and interest is not probable. This loan has been specifically reviewed under the provisions of FASB ASC Topic 310, “Receivables”, in accordance with our accounting policies. As this loan is the subject of legal proceedings, the ultimate outcome may differ significantly from our current estimate.

	As of December 31, 2016
Delinquency Status	Current		30 to 59 days		60 to 89 days		90 days or more		In foreclosure, legal or bankruptcy proceedings		Total		Non-Accrual (1)
Commercial mortgage loans	$	1,111,898	$	50,335	$	—	$	—	$	—	$	1,162,233	$	113,509
Mezzanine loans		88,432		—		—		1,379		—		89,811		1,379
Preferred equity interests		42,830		—		—		—		—		42,830		6,150
Total	$	1,243,160	$	50,335	$	—	$	1,379	$	—	$	1,294,874	$	121,038

(1) Includes five loans that are current and one loan that is 30 to 59 days past due in accordance with their terms, but are on non-accrual due to uncertainty over whether we will fully collect principal and interest.

As of September 30, 2017, and December 31, 2016, all our commercial mortgage loans, mezzanine loans and preferred equity interests that were 90 days or more past due or in foreclosure were on non-accrual status. As of September 30, 2017, and December 31, 2016, $135,634 and $121,038, respectively, of our commercial real estate loans were on non-accrual status and had a weighted-average interest rate of 6.7% and 5.8%, respectively. Also, as of September 30, 2017 and December 31, 2016, three and four loans, respectively, with an unpaid principal balance of $20,624 and $28,930, respectively, and a weighted average interest rate of 12.9% and 12.6%, respectively, were recognizing interest on the cash basis.

Allowance For Loan Losses And Impaired Loans

During the three and nine months ended September 30, 2017, we recognized provision for loan losses of $5,516 and $27,914, which was related to legacy loans. Our provision for loan losses during the three and nine months ended September 30, 2017 was primarily driven by two and seven loans, respectively, where the borrower and/or property experienced an unfavorable event or events during the period, which resulted in probable, incurred losses.

We closely monitor our loans, which require evaluation for loan loss in two categories: satisfactory and watchlist. Loans classified as satisfactory are loans that are performing consistent with our expectations. Loans classified as watchlist are generally loans that have performed below our expectations, have credit weaknesses or in which the credit quality of the collateral has deteriorated. This is determined by evaluating quantitative factors including debt service coverage ratios, net operating income of the underlying collateral and qualitative factors such as recent operating performance of the underlying property and history of the borrower’s ability to provide financial support. We have classified our investments in loans by credit risk category as of September 30, 2017 and December 31, 2016 as follows:

	As of September 30, 2017
Credit Status	Commercial Mortgage Loans		Mezzanine Loans		Preferred Equity		Total
Satisfactory	$	1,030,065	$	19,133	$	33,622	$	1,082,820
Watchlist (1)		128,024		46,379		6,705		181,108
Total	$	1,158,089	$	65,512	$	40,327	$	1,263,928

(1)

Includes $158,808 of loans that are considered to be impaired and $22,300 of loans that are not considered to be impaired.

	As of December 31, 2016
Credit Status	Commercial Mortgage Loans		Mezzanine Loans		Preferred Equity		Total
Satisfactory	$	1,048,724	$	57,063	$	36,680	$	1,142,467
Watchlist (1)		113,509		32,748		6,150		152,407
Total	$	1,162,233	$	89,811	$	42,830	$	1,294,874

(1)

Includes $152,407 of loans that are considered to be impaired.

The following tables provide a roll-forward of our allowance for loan losses for our commercial mortgage loans, mezzanine loans and preferred equity interests for the three months ended September 30, 2017 and 2016:

	For the Three Months Ended September 30, 2017
	Commercial Mortgage Loans		Mezzanine Loans			Preferred Equity		Total
Beginning balance	$	12,722	$	9,092		$	1,700	$	23,514
Provision (benefit) for loan losses		3,368		2,148			—		5,516
Charge-offs, net of recoveries		—		(3,890	)		—		(3,890	)
Ending balance	$	16,090	$	7,350		$	1,700	$	25,140

	For the Three Months Ended September 30, 2016
	Commercial Mortgage Loans			Mezzanine Loans			Preferred Equity			Total
Beginning balance	$	4,397		$	10,861		$	2,979		$	18,237
Provision (benefit) for loan losses		1,957			(394	)		(30	)		1,533
Charge-offs, net of recoveries		(10	)		(1,105	)		—			(1,115	)
Ending balance	$	6,344		$	9,362		$	2,949		$	18,655

The following tables provide a roll-forward of our allowance for loan losses for our commercial mortgage loans, mezzanine loans and preferred equity interests for the nine months ended September 30, 2017 and 2016:

	For the Nine Months Ended September 30, 2017
	Commercial Mortgage Loans			Mezzanine Loans			Preferred Equity			Total
Beginning balance	$	10,640		$	—		$	1,714		$	12,354
Provision (benefit) for loan losses		16,690			11,238			(14	)		27,914
Charge-offs, net of recoveries		(11,240	)		(3,888	)		-			(15,128	)
Ending balance	$	16,090		$	7,350		$	1,700		$	25,140

	For the Nine Months Ended September 30, 2016
	Commercial Mortgage Loans			Mezzanine Loans			Preferred Equity		Total
Beginning balance	$	3,154		$	12,139		$	1,804	$	17,097
Provision (benefit) for loan losses		3,200			(143	)		1,145		4,202
Charge-offs, net of recoveries		(10	)		(2,634	)		—		(2,644	)
Ending balance	$	6,344		$	9,362		$	2,949	$	18,655

Information on those loans considered to be impaired as of September 30, 2017 and December 31, 2016 was as follows:

	As of September 30, 2017
Impaired Loans	Commercial Mortgage Loans		Mezzanine Loans		Preferred Equity		Total
Impaired loans expecting full recovery	$	7,250	$	14,248	$	3,055	$	24,554
Impaired loans with reserves		98,474		32,130		3,650		134,254
Total Impaired Loans (1)		105,724		46,379		6,705		158,808
Allowance for loan losses	$	16,090	$	7,350	$	1,700	$	25,140

(1)	As of September 30, 2017, there was no unpaid principal relating to previously identified TDRs that are on accrual status.

	As of December 31, 2016
Impaired Loans	Commercial Mortgage Loans		Mezzanine Loans		Preferred Equity		Total
Impaired loans expecting full recovery	$	—	$	32,748	$	—	$	32,748
Impaired loans with reserves		113,509		—		6,150		119,659
Total Impaired Loans (1)		113,509		32,748		6,150		152,407
Allowance for loan losses	$	10,640	$	—	$	1,714	$	12,354

(1)

As of December 31, 2016, there was no unpaid principal relating to previously identified TDRs that are on accrual status.

The average unpaid principal balance and recorded investment of total impaired loans was $157,649 and $128,485 during the three months ended September 30, 2017 and 2016, respectively and $153,707 and $130,299 for the nine months ended September 30, 2017 and 2016, respectively. We recorded interest income from impaired loans of $138 and $193 for the three months ended September 30, 2017 and 2016, respectively. We recorded interest income from impaired loans of $1,140 and $2,715 for the nine months ended September 30, 2017 and 2016, respectively.

We have evaluated modifications to our commercial real estate loans to determine if the modification constitutes a troubled debt restructuring, or TDR, under FASB ASC Topic 310, “Receivables”. During the nine months ended September 30, 2017, we determined that restructuring of two commercial real estate loans with unpaid principal balances totaling of $13,259 constituted TDRs as the maturity date of the loans were extended and the borrowers were determined to be experiencing financial difficulty. During the nine months ended September 30, 2016, we determined that a restructuring of one commercial real estate loan with an unpaid principal balance of $15,645 constituted a TDR as the interest payment rate was decreased, although interest will continue to accrue on the original contractual rate, subject to management’s determination that it is collectible, and will be owed upon maturity. As of September 30, 2017, there was one TDR that subsequently defaulted for restructurings that had been entered into within the previous 12 months. This loan has an unpaid principal balance of $45,474 and is greater than 90 days past due.

Loan-to-Real Estate Conversion

During the nine months ended September 30, 2017, we completed the conversion of one commercial mortgage loan with a carrying value of $1,590 to real estate owned property. See Note 4: Investments in Real Estate for further information. We recognized a charge off of $360 upon conversion.