Mortgage Notes Receivable

3 Months Ended

Mar. 31, 2023

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 March 31, 2023, the weighted average term outstanding of our active loans was 23 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 10.0% as of March 31, 2023. 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 March 31, 2023 and December 31, 2022:


(dollars in thousands)	March 31, 2023		December 31, 2022
Total loan commitments	$	1,211,474	$	1,417,325
Less:
Construction holdbacks(1)		356,645		452,690
Interest reserves		28,234		33,633
Total principal outstanding for our mortgage notes receivable		826,595		931,002
Less:
Allowance for credit losses(2)		35,920		41,492
Deferred origination and amendment fees		5,794		7,560
Mortgage notes receivable, net	$	784,881	$	881,950

(1)

As of March 31, 2023 and December 31, 2022 this amount includes $11.3 and $22.8 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 March 31, 2023 and December 31, 2022, $1.1 and $1.5 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 March 31, 2023 and December 31, 2022, the principal outstanding on loans in contractual default status placed on non-accrual status was $165.2 and $217.2 million, respectively.

As of March 31, 2023 and December 31, 2022, the principal outstanding on loans in contractual default was $166.6 and $250.4 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:


	March 31, 2023
(dollars in thousands)	Number of Loans		Carrying Value		% of Total
Collateral Type
Residential lots		6	$	28,855		17.3	%
Single Family Housing		14		24,509		14.7
Entitled Land		2		24,426		14.7
Hotel		1		15,770		9.5
Mixed Use		3		13,095		7.9
Apartments		5		12,624		7.6
Duplex		1		10,218		6.1
Quadplex		1		10,179		6.1
Offices		1		6,328		3.8
Townhomes		3		6,227		3.7
Condos		2		6,126		3.7
Retail		1		5,505		3.3
Commercial Lots		1		2,698		1.6
Total		41	$	166,560		100.0	%


	March 31, 2023
(dollars in thousands)	Carrying Value		% of Total
LTV(1)
0 - 40%	$	2,690		1.6	%
41 - 60%		57,304		34.4
61 - 80%		90,779		54.5
Above 80%		15,787		9.5
Total	$	166,560		100.0	%

(1)

Represents current LTV as of origination or latest amendment. At March 31, 2023, the weighted average LTV for loans in contractual default using the latest appraisal was 137.7%. The weighted average LTV of our loans in contractual default net of our allowance for credit losses was approximately 80.2%.


	December 31, 2022
(dollars in thousands)	Number of Loans		Carrying Value		% of Total
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 Total
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%.

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 three months ended March 31, 2023 and 2022:


	CECL Allowance
(dollars in thousands)	Funded			Unfunded(2)			Total
CECL allowance as of December 31, 2022	$	41,492		$	1,474		$	42,966
Provision for credit losses, net		2,117			(416	)		1,701
Charge-offs(1)		(7,689	)		—			(7,689	)
CECL allowance as of March 31, 2023	$	35,920		$	1,058		$	36,978


	CECL Allowance
(dollars in thousands)	Funded			Unfunded (2)		Total
CECL allowance as of December 31, 2021	$	10,394		$	904	$	11,298
Provision for credit losses, net		1,554			193		1,747
Charge-offs(1)		(3,301	)		—		(3,301	)
CECL allowance as of March 31, 2022	$	8,647		$	1,097	$	9,744

(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 March 31, 2023 and 2022, the funded and unfunded CECL allowance aggregated $37.0 and $9.7 million, which represents a decrease from December 31, 2022 and 2021, respectively, of $6.0 and $1.6 million. This decreased allowance reflects increased principal losses realized on repaid loans and loans transferred to real estate owned.

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:


	March 31, 2023						Year Originated(1)
(dollars in thousands)	Carrying Value			% of Portfolio			2023		2022		2021		2020		Prior
Construction Type
Vertical Construction	$	502,227			61.2	%	$	19,303	$	353,282	$	64,242	$	56,817	$	8,583
Horizontal Development		177,596			21.6			—		164,656		918		9,405		2,617
Investment		42,606			5.2			3,965		14,371		21,181		3,089		—
Rehabilitation		37,403			4.6			—		20,069		16,883		451		—
Land Entitlement		26,284			3.2			—		4,297		—		21,987		—
Bridge		20,713			2.5			—		19,893		—		—		820
Acquisition		13,972			1.7			—		11,162		2,622		188		—
Total		820,801			100.0	%	$	23,268	$	587,730	$	105,846	$	91,937	$	12,020
CECL allowance(2)		(35,920	)
Carrying value, net	$	784,881
Gross write-offs	$	13,083					$	4	$	581	$	4,327	$	352	$	7,819

(1)

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

(2)

Includes $30.0 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, $1.1 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.


	March 31, 2023						Year Originated(1)
(dollars in thousands)	Carrying Value			% of Portfolio			2023		2022		2021		2020		Prior
Collateral Type
Apartments	$	195,140			23.8	%	$	1,000	$	125,210	$	33,869	$	33,109	$	1,952
Single Family Housing		134,879			16.5			1,258		112,736		19,380		174		1,331
Townhomes		97,291			11.9			—		85,365		7,973		2,259		1,694
Entitled Land		89,654			10.9			3,965		38,559		22,054		25,076		—
Residential Lots		58,522			7.1			—		45,582		918		9,405		2,617
Commercial		57,527			7.0			—		57,527		—		—		—
Mixed Use		46,973			5.7			—		45,702		—		451		820
Condos		36,974			4.5			4,168		20,656		8,356		188		3,606
Hotel		29,957			3.6			12,877		1,310		—		15,770		—
Senior Housing		17,135			2.1			—		17,135		—		—		—
Duplex		15,097			1.8			—		15,097		—		—		—
Commercial Other		11,547			1.4			—		—		11,547		—		—
Quadplex		10,179			1.2			—		10,179		—		—		—
Retail		9,546			1.2			—		2,292		1,749		5,505		—
Offices		6,328			0.8			—		6,328		—		—		—
Residential Lots		2,698			0.3			—		2,698		—		—		—
Triplex		717			0.1			—		717		—		—		—
Unentitled Land		637			0.1			—		637		—		—		—
Total		820,801			100.0	%	$	23,268	$	587,730	$	105,846	$	91,937	$	12,020
CECL allowance(2)		(35,920	)
Carrying value, net	$	784,881

(1)

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

(2)


	March 31, 2023						Year Originated(1)
(dollars in thousands)	Carrying Value			% of Portfolio			2023		2022		2021		2020		Prior
LTV (2)
0 - 40%	$	20,944			2.6	%	$	1,000	$	16,855	$	—	$	3,089	$	—
41 - 45%		29,701			3.6			—		7,714		—		21,987		—
46 - 50%		54,571			6.6			—		54,571		—		—		—
51 - 55%		73,832			9.0			—		40,434		27,893		5,505		—
56 - 60%		71,258			8.7			—		63,203		4,700		1,094		2,261
61 - 65%		440,760			53.7			22,268		284,466		69,661		60,262		4,103
66 - 70%		96,544			11.8			—		91,258		3,592		—		1,694
71 - 75%		1,056			0.10			—		1,056		—		—		—
76- 80%		2,594			0.3			—		2,594		—		—		—
Above 80%		29,541			3.6			—		25,579		—		—		3,962
Total		820,801			100.0	%	$	23,268	$	587,730	$	105,846	$	91,937	$	12,020
CECL allowance(3)		(35,920	)
Carrying value, net	$	784,881

(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, 2022						Year Originated(1)
(dollars in thousands)	Carrying Value			% of Portfolio			2022		2021		2020		2019		Prior
Construction Type
Vertical Construction	$	552,468			52.5	%	$	352,355	$	128,130	$	33,895	$	1,928	$	36,160
Horizontal Development		221,078			21.5			144,082		68,201		8,795		—		—
Acquisition		46,536			10.6			46,536		—		—		—		—
Investment		39,422			7.2			12,936		15,009		11,477		—		—
Rehabilitation		26,132			3.0			4,146		21,986		—		—		—
Land Entitlement		22,611			2.7			19,450		937		—		2,224		—
Bridge		15,195			2.5			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
Residential Lots	$	191,708			12.2	%	$	134,816	$	49,944	$	5,020	$	1,928	$	—
Apartments		133,702			11.8			124,218		9,245		239		—		—
Townhomes		106,888			10.2			81,393		24,701		794		—		—
Mixed Use		104,100			9.5			56,675		38,630		8,795		—		—
Single Family Housing		76,251			9.6			54,265		21,986		—		—		—
Condos		71,975			7.1			29,738		2,515		3,562		—		36,160
Commercial		58,515			6.8			13,838		44,677		—		—		—
Senior Housing		50,127			6.7			6,209		30,217		11,477		2,224		—
Storage		30,221			6.2			14,116		—		16,105		—		—
Unentitled Land		18,467			5.0			12,179		—		6,288		—		—
Entitled Land		17,262			4.9			16,325		937		—		—		—
Hotel		16,595			3.5			16,595		—		—		—		—
Offices		13,639			1.7			13,639		—		—		—		—
Commercial Lots		11,411			1.1			—		11,411		—		—		—
Quadplex		9,071			1.1			5,443		1,741		1,887		—		—
Commercial Other		8,932			1.0			8,932		—		—		—		—
Retail		4,018			0.9			4,018		—		—		—		—
Duplex		560			0.7			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			5.9	%	$	22,544	$	3,509	$	—	$	—	$	—
41 - 45%		29,025			5.3			7,039		21,986		—		—		—
46 - 50%		42,267			7.0			22,524		13,455		6,288		—		—
51 - 55%		144,649			10.1			76,978		58,876		8,795		—		—
56 - 60%		107,098			8.7			98,691		8,407		—		—		—
61 - 65%		456,743			61.4			284,722		112,569		21,364		1,928		36,160
66 - 70%		93,104			0.1			71,638		16,561		2,681		2,224		—
71 - 75%		4,280			0.0			4,280		—		—		—		—
76 - 80%		2,540			0.0			2,540		—		—		—		—
Above 80%		17,683			1.5			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 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:


	March 31, 2023
(dollars in thousands)	Carrying Value		CECL Allowance			Carrying Value, net
Collateral Type
Residential Lots	$	26,881	$	(7,952	)	$	18,929
Single Family Housing		24,509		(1,105	)		23,404
Entitled Land		24,426		(127	)		24,299
Hotel		15,770		(10,695	)		5,075
Apartments		11,247		(1,167	)		10,080
Offices		6,328		(5,082	)		1,246
Condos		6,126		(3,185	)		2,941
Retail		5,505		(222	)		5,283
Townhomes		3,047		(974	)		2,073
Commercial Lots		2,698		(109	)		2,589
Mixed Use		1,271		(632	)		639
Total	$	127,808	$	(31,250	)	$	96,558


	December 31, 2022
(dollars in thousands)	Carrying Value		CECL Allowance			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