FAIR VALUE OF FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2019

Fair Value Disclosures [Abstract]

FAIR VALUE OF FINANCIAL INSTRUMENTS

NOTE 6: FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value of Financial Instruments

FASB ASC Topic 825, “Financial Instruments” requires disclosure of the fair value of financial instruments for which it is practicable to estimate that value. The fair value of investments in mortgage loans, mezzanine loans, preferred equity interests, CDO notes payable, convertible senior notes, junior subordinated notes, and derivative assets and liabilities is based on significant observable and unobservable inputs. The fair value of cash and cash equivalents and restricted cash approximates their carrying amount or unpaid principal balance due to the nature of these instruments.

Fair Value of Investment in Mortgage Loans, Held for Investment

The fair value of mortgage loans held for investment is determined using an exit price notion. Prior to adopting the January 2016 amendment to FASB ASC Topic 825, we measured the fair value of mortgage loans held for investment under an entry price notion. The entry price notion previously applied used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk, and market factors. We determined the fair value on substantially all of our loans for disclosure purposes, on an individual loan basis. The discount rates reflect current market rates for loans with similar terms to borrowers having similar credit quality on an exit price basis.

The following table summarizes the carrying amount and the fair value of our financial instruments as of June 30, 2019:

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Total investment in mortgage loans, held for investment, net	$	361,134	$	333,668
Investment in mortgage loans, held for sale		4,973		4,973
Cash and cash equivalents		46,705		46,705
Restricted cash		29,282		29,282
Liabilities
Recourse indebtedness:
7.625% Senior Notes		55,217		38,300
7.125% Senior Notes		65,264		56,834
Junior subordinated notes, at fair value		5,090		5,090
Junior subordinated notes, at amortized cost		25,100		5,780
Non-recourse indebtedness:
CDO notes payable, at amortized cost		99,875		75,063
CMBS securitizations		195,239		195,765
Loans payable on real estate		40,166		40,911

The following table summarizes the carrying amount and the fair value of our financial instruments as of December 31, 2018:

Financial Instrument	Carrying Amount		Estimated Fair Value
Assets
Total investment in mortgage loans, held for investment, net	$	480,061	$	444,962
Investment in mortgage loans, held for sale		4,873		4,873
Cash and cash equivalents		42,453		42,453
Restricted cash		63,067		63,067
Liabilities
Recourse indebtedness:
7.625% Senior Notes		55,100		41,229
7.125% Senior Notes		64,997		58,010
Junior subordinated notes, at fair value		6,110		6,110
Junior subordinated notes, at amortized cost		25,100		6,550
Non-recourse indebtedness:
CDO notes payable, at amortized cost		116,102		94,513
CMBS securitizations		318,008		320,711
Loans payable on real estate		40,499		40,608

Fair Value Measurements

The following table summarizes information about our liabilities measured at fair value on a recurring basis as of June 30, 2019, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (1)		Significant Other Observable Inputs (Level 2) (1)		Significant Unobservable Inputs (Level 3) (1)		Balance as of June 30, 2019
Junior subordinated notes, at fair value	$	—	$	—	$	5,090	$	5,090
Total liabilities	$	—	$	—	$	5,090	$	5,090

(1) During the six months ended June 30, 2019, there were no transfers between Level 1 and Level 2, and there were no transfers into and/or out of Level 3.

The following table summarizes information about our liabilities measured at fair value on a recurring basis as of December 31, 2018, and indicates the fair value hierarchy of the valuation techniques utilized to determine such fair value:

Liabilities:	Quoted Prices in Active Markets for Identical Assets (Level 1) (1)		Significant Other Observable Inputs (Level 2) (1)		Significant Unobservable Inputs (Level 3) (1)		Balance as of December 31, 2018
Junior subordinated notes, at fair value	$	—	$	—	$	6,110	$	6,110
Total liabilities	$	—	$	—	$	6,110	$	6,110

(1) During the year ended December 31, 2018, there were no transfers between Level 1 and Level 2, and there were no transfers into and/or out of Level 3.

When estimating the fair value of our Level 3 financial instruments, management uses various observable and unobservable inputs. These inputs include yields, credit spreads, duration, effective dollar prices and overall market conditions on not only the exact financial instrument for which management is estimating the fair value, but also financial instruments that are similar or issued by the same issuer when such inputs are unavailable. Generally, an increase in the yields, credit spreads or estimated duration will decrease the fair value of our financial instruments. Due to the inherent uncertainty of determining the fair value of investments that do not have a readily available market value, the fair value, as determined by management, may fluctuate from period to period and any ultimate liquidation or sale of the investment may result in proceeds that may be significantly different than fair value. For the fair value of our junior subordinated notes, at fair value, we estimate the fair value of these financial instruments using significant unobservable inputs. For the junior subordinated notes, at fair value, a discounted cash flow model was used as the valuation technique and the significant unobservable inputs as of June 30, 2019 include a discount rate of 30% and as of December 31, 2018 include a discount rate of 27%. The gains attributable to changes in instrument-specific credit risk were determined by discounting the future cash flows of the notes at base market interest rates and subtracting this amount from the total fair value of the instrument.

The following table summarizes additional information about our liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the six months ended June 30, 2019: 

Liabilities	Junior Subordinated Notes, at Fair Value			Total Level 3 Liabilities
Balance, as of December 31, 2018	$	6,110		$	6,110
Change in fair value of financial instruments		(1,020	)		(1,020	)
Balance, as of June 30, 2019	$	5,090		$	5,090

The following table summarizes additional information about our liabilities that are measured at fair value on a recurring basis for which we have utilized level 3 inputs to determine fair value for the three months ended June 30, 2019:

Liabilities	Junior Subordinated Notes, at Fair Value			Total Level 3 Liabilities
Balance, as of March 31, 2019	$	5,500		$	5,500
Change in fair value of financial instruments		(410	)		(410	)
Balance, as of June 30, 2019	$	5,090		$	5,090

Non-Recurring Fair Value Measurements

Our non-recurring fair value measurements relate primarily to our commercial real estate loans that are considered impaired. In evaluating our impaired loans, we estimate the fair value of the underlying collateral of the respective commercial real estate loan and compare that fair value to our total investment in the loan. When estimating the fair value of the underlying collateral of the commercial real estate loan, management uses discounted cash flow analyses and/or direct capitalization valuation analyses. The significant inputs to these valuations are capitalization rates and discount rates and are based on market information and comparable sales of similar properties.  As of June 30, 2019, we measured the underlying collateral of five of our loans at a fair value of $48,872 in our consolidated balance sheet as they were impaired.

Our other non-recurring fair value measurements relate to our commercial real estate loans that are considered held for sale and are recorded at the lower of cost or fair value in our consolidated balance sheets. In evaluating our loans held for sale, we estimate the fair value of each loan and compare that fair value to our total investment in the loan. The estimate of fair value for each loan is determined using a discounted cash flow analysis. The significant inputs to these valuations are estimated future cash flows for each loan and market discount rates. The discount rates are based on underlying property performance and recent data from comparable lending markets. As of June 30, 2019, we measured two loans held for sale at a fair value of $4,973 in our consolidated balance sheet.

Fair Value of Financial Instruments

The following tables summarize the valuation technique and the level of the fair value hierarchy for financial instruments that are not recorded at fair value in the accompanying consolidated balance sheets but for which fair value is required to be disclosed. The fair value of cash and cash equivalents and restricted cash approximates cost due to the nature of these instruments and are not included in the tables below.

	Carrying Amount as of June 30, 2019		Estimated Fair Value as of June 30, 2019		Valuation Technique	Level in Fair Value Hierarchy
Total investment in mortgage loans, held for investment, net	$	361,134	$	333,668	Discountedcash flows	Three
Investment in mortgage loans, held for sale		4,973		4,973	Discounted cash flows	Three
7.625% Senior Notes		55,217		38,300	Trading price	Two
7.125% Senior Notes		65,264		56,834	Trading price	Two
Junior subordinated notes, at amortized cost		25,100		5,780	Discounted cash flows	Three
CDO notes payable, at amortized cost		99,875		75,063	Discounted cash flows	Three
CMBS securitizations		195,239		195,765	Discounted cash flows	Three
Loans payable on real estate		40,166		40,911	Discounted cash flows	Three

	Carrying Amount as of December 31, 2018		Estimated Fair Value as of December 31, 2018		Valuation Technique	Level in Fair Value Hierarchy
Total investment in mortgage loans, held for investment, net	$	480,061	$	444,962	Discounted cash flows	Three
Investment in mortgage loans, held for sale		4,873		4,873	Discounted cash flows	Three
7.625% Senior Notes		55,100		41,229	Trading price	Two
7.125% Senior Notes		64,997		58,010	Trading price	Two
Junior subordinated notes, at amortized cost		25,100		6,550	Discounted cash flows	Three
CDO notes payable, at amortized cost		116,102		94,513	Discounted cash flows	Three
CMBS securitizations		318,008		320,711	Discounted cash flows	Three
Loans payable on real estate		40,499		40,608	Discounted cash flows	Three

The following table summarizes realized and unrealized gains and losses on assets and liabilities for which we elected the fair value option of FASB ASC Topic 825, “Financial Instruments” and derivatives as reported in change in fair value of financial instruments in the accompanying consolidated statements of operations:

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
Description	2019			2018			2019			2018
Change in fair value of junior subordinated notes	$	(210	)	$	(77	)	$	(180	)	$	(272	)
Change in fair value of derivatives		—			188			—			470
Change in fair value of financial instruments	$	(210	)	$	111		$	(180	)	$	198

The changes in the fair value for the junior subordinated notes for which the fair value option was elected for the three and six months ended June 30, 2019 and 2018 was primarily attributable to changes in base market interest rates. The changes in the fair value of derivatives for the three and six months ended June 30, 2018 was primarily attributable to changes in interest rates.