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

Loans Held for Investment

The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests held for investment as of September 30, 2018:

	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	$	574,896		$	(546	)	$	574,350			42		6.5	%	Oct. 2018 to Jun. 2025
Mezzanine loans		21,122			164			21,286			2		13.3	%	Jun. 2020 to Mar. 2023
Preferred equity interests		33,279			(1	)		33,278			15		6.7	%	Nov. 2018 to Jan. 2029
Total CRE (2)		629,297			(383	)		628,914			59		6.8	%
Deferred fees and costs, net (3)		(1,004	)		-			(1,004	)
Total	$	628,293		$	(383	)	$	627,910

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

(2)	Includes $100,442 of cash flow loans, of which $49,690 are commercial mortgage loans, $21,122 are mezzanine loans and $29,630 are preferred equity interests. See Note 2: Summary of Significant Accounting Policies, (j) Revenue Recognition, for further discussion of our cash flow loans.

(3)	Includes $3,822 of deferred fees, net of $2,818 of deferred costs.

The following table summarizes our investments in commercial mortgage loans, mezzanine loans and preferred equity interests held for investment as of December 31, 2017:

	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	$	1,194,735		$	(719	)	$	1,194,016			95		6.3	%	Jan. 2018 to Dec. 2025
Mezzanine loans		45,488			164			45,652			13		11.2	%	May 2018 to May 2025
Preferred equity interests		33,284			(1	)		33,283			15		9.1	%	Nov. 2018 to Jan. 2029
Total CRE (2)		1,273,507			(556	)		1,272,951			123		6.5	%
Deferred fees and costs, net (3)		(2,344	)		-			(2,344	)
Total	$	1,271,163		$	(556	)	$	1,270,607

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

(2)	Includes $106,136 of cash flow loans, of which $55,353 are commercial mortgage loans, $21,149 are mezzanine loans and $29,634 are preferred equity interests. See Note 2: Summary of Significant Accounting Policies, (j) Revenue Recognition, for further discussion of our cash flow loans.

(3)

Includes $8,497 of deferred fees, net of $6,153 of deferred costs.

A loan is placed on non-accrual status if it is delinquent for 90 days or more or if there is uncertainty over full collection of principal and interest, which generally includes our impaired loans that have reserves. The following table summarizes the delinquency statistics of our commercial real estate loans held for investment as of September 30, 2018 and December 31, 2017:

	As of September 30, 2018
Delinquency Status	Current		30 to 59 days		60 to 89 days		90 days or more		Total		Non-accrual (1)
Commercial mortgage loans	$	508,978	$	8,892	$	17,466	$	39,560	$	574,896	$	106,860
Mezzanine loans		21,122		—		—		—		21,122		8,253
Preferred equity interests		33,279		—		—		—		33,279		8,350
Total	$	563,379	$	8,892	$	17,466	$	39,560	$	629,297	$	123,463

(1)

Includes six loans that are current, one loan that is 30 to 59 days or more past due, and one loan that is 60 to 89 days or more past due, but are on non-accrual due to uncertainty over whether we will fully collect principal and interest. Also includes one loan that is 90 days or more past due in accordance with its terms.

	As of December 31, 2017
Delinquency Status	Current		30 to 59 days		60 to 89 days		90 days or more		Total		Non-Accrual (1)
Commercial mortgage loans	$	1,149,501	$	—	$	—	$	45,234	$	1,194,735	$	81,443
Mezzanine loans		40,258		—		—		5,230		45,488		13,510
Preferred equity interests		33,284		—		—		—		33,284		3,650
Total	$	1,223,043	$	—	$	—	$	50,464	$	1,273,507	$	98,603

(1) Includes five loans that were current in accordance with their terms, but are on non-accrual due to uncertainty over whether we will fully collect principal and interest, and two loans that are 90 days or more past due in accordance with their terms.

As of September 30, 2018 and December 31, 2017, all of 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. It is noted that as of September 30, 2018, $100,442 of our loans are cash flow loans, which provide for the accrual of interest at specified rates which differ from current payment terms, and in some cases, do not require current payments. See Note 2: Summary of Significant Accounting Policies, (j) Revenue Recognition, for further discussion of our cash flow loans. As of September 30, 2018 and December 31, 2017, $123,463 and $98,603, respectively, of our commercial real estate loans were on non-accrual status and had a weighted-average interest rate of 6.8% and 6.1%, respectively. Also, as of September 30, 2018 and December 31, 2017, two, and three loans with unpaid principal balances of $15,919 and $20,624, respectively, and weighted average interest rate of 13.5% and 12.9%, respectively, were not recognizing interest based on the estimated value of the underlying collateral. Additionally, as of September 30, 2018, one loan, with an unpaid principal balance of $7,948, which had previously been restructured in a troubled debt restricting, or TDR, did not accrue interest in accordance with its restructured terms.

Allowance For Loan Losses And Impaired Loans

During the three and nine months ended September 30, 2018, we recognized provision for loan losses of $7,489 and $30,269. Our provision for loan losses during the three and nine months ended September 30, 2018 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 and credit related impairments recognized on the loans transferred to loans held for sale that are further discussed below.

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 current performance of the underlying collateral. We have classified our loans held for investment by credit risk category as of September 30, 2018 and December 31, 2017 as follows:

	As of September 30, 2018
Credit Status	Commercial Mortgage Loans		Mezzanine Loans		Preferred Equity		Total
Satisfactory	$	428,646	$	—	$	13,930	$	442,576
Watchlist (1)		146,250		21,122		19,349		186,721
Total	$	574,896	$	21,122	$	33,279	$	629,297

(1)	Includes $154,581 of loans that are considered to be impaired and $32,140 of loans that are not considered to be impaired.

	As of December 31, 2017
Credit Status	Commercial Mortgage Loans		Mezzanine Loans		Preferred Equity		Total
Satisfactory	$	1,083,741	$	19,109	$	21,879	$	1,124,729
Watchlist (1)		110,994		26,379		11,405		148,778
Total	$	1,194,735	$	45,488	$	33,284	$	1,273,507

(1)	Includes $126,478 of loans that are considered to be impaired and $22,300 of loans that are not considered 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 held for investment for the three months ended September 30, 2018 and 2017:

	For the Three Months Ended September 30, 2018
	Commercial Mortgage Loans			Mezzanine Loans		Preferred Equity		Total
Beginning balance	$	11,226		$	5,231	$	242	$	16,699
Provision (benefit) for loan losses		5,506			1,258		725		7,489
Charge-offs, net of recoveries		(571	)		—		—		(571	)
Ending balance	$	16,161		$	6,489	$	967	$	23,617

	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 Nine Months Ended September 30, 2018
	Commercial Mortgage Loans			Mezzanine Loans			Preferred Equity		Total
Beginning balance	$	9,019		$	5,622		$	242	$	14,883
Provision (benefit) for loan losses		25,502			4,042			725		30,269
Charge-offs, net of recoveries (1)		(18,360	)		(3,175	)		—		(21,535	)
Ending balance	$	16,161		$	6,489		$	967	$	23,617

(1)	Includes $5,331 of charge-offs related to loans transferred to held for sale during the nine months ended September 30, 2018.

	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

Information on those loans considered to be impaired as of September 30, 2018 and December 31, 2017 was as follows:

	As of September 30, 2018
Impaired Loans	Commercial Mortgage Loans		Mezzanine Loans		Preferred Equity		Total
Impaired loans expecting full recovery	$	11,164	$	12,869	$	10,999	$	35,032
Impaired loans with reserves		102,946		8,253		8,350		119,549
Total Impaired Loans (1)		114,110		21,122		19,349		154,581
Allowance for loan losses	$	16,161	$	6,489	$	967	$	23,617

(1)	As of September 30, 2018, there was no unpaid principal relating to previously identified TDRs that are on accrual status.

	As of December 31, 2017
Impaired Loans	Commercial Mortgage Loans		Mezzanine Loans		Preferred Equity		Total
Impaired loans expecting full recovery	$	14,321	$	12,869	$	7,756	$	34,946
Impaired loans with reserves		74,372		13,510		3,650		91,532
Total Impaired Loans (1)		88,693		26,379		11,406		126,478
Allowance for loan losses	$	9,019	$	5,622	$	242	$	14,883

(1)

As of December 31, 2017, 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 $141,524 and $157,649 during the three months ended September 30, 2018 and 2017, respectively and $133,201 and $153,707 for the nine months ended September 30, 2018 and 2017, respectively. We recorded interest income from impaired loans of $479 and $138 for the three months ended September 30, 2018 and 2017, respectively. We recorded interest income from impaired loans of $919 and $1,140 for the nine months ended September 30, 2018 and 2017, 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 three months ended September 30, 2018, there were no restructurings of our commercial real estate loans that constituted a TDR. During the nine months ended September 30, 2018, we determined that restructuring of one commercial real estate loan with an unpaid principal balance totaling $7,948 constituted a TDR as the interest payment rate was decreased to zero percent and the maturity date was extended. During the three and nine months ended September 30, 2017, there were no restructurings of our commercial real estate loans that constituted a TDR. During the nine months ended September 30, 2018, and September 30, 2017, there were no TDRs that subsequently defaulted for restructurings that had been entered into within the previous 12 months.

Loans Held for Sale

In February 2018, we began to pursue a sale of certain loans. In March 2018, we sold these loans, which had unpaid principal balance of $90,260 and received proceeds of $43,384 after repayment of $45,850 of secured warehouse facility debt and $349 of interest. We recognized a loss of $930 on the sale of these loans.

During March 2018, we transferred nine additional loans to held for sale as we had the intention and ability to sell these loans. The transfer was made at the lower of cost or fair value for each respective loan. During the nine months ended September 30, 2018, six of these loans were sold or repaid, resulting in a net loss of $3,280. As of September 30, 2018, the three remaining loans held for sale were measured at the lower of cost or fair value, resulting in a loss of $1,524 for three months ended September 30, 2018. As of September 30, 2018, these loans had an unpaid principal balance of $7,015 and a carrying amount of $4,673.

In May 2018, we began to pursue a sale of one additional loan. In June 2018, we sold this loan, which had unpaid principal balance of $13,000 and received proceeds of $11,577. We recognized a provision for loan loss of $1,423 on the transfer of this loan to loans held for sale.

Loan-to-Real Estate Conversion

In October 2018, we completed the conversion of one commercial mortgage loan with a carrying value of $5,096 to real estate owned property.