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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q   
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______ to ____________

Commission file number 001-32216

NEW YORK MORTGAGE TRUST, INC.
(Exact Name of Registrant as Specified in Its Charter)
Maryland 
47-0934168 
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)

275 Madison Avenue, New York, New York 10016
(Address of Principal Executive Office) (Zip Code)

(212) 792-0107
(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☒
Accelerated Filer ☐
Non-Accelerated Filer ☐
Smaller Reporting Company ☐
Emerging Growth Company ☐
    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding on August 6, 2018 was 124,685,626.

Table of Contents


NEW YORK MORTGAGE TRUST, INC.

FORM 10-Q

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Table of Contents


PART I.  FINANCIAL INFORMATION

Item 1.  Condensed Consolidated Financial Statements

NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except share data)
 
June 30, 2018
 
December 31, 2017
 
(unaudited)
 
 
ASSETS
 
 
 
Investment securities, available for sale, at fair value (including pledged securities of $976,113 and $1,076,187, as of June 30, 2018 and December 31, 2017, respectively, and $50,134 and $47,922 held in securitization trusts as of June 30, 2018 and December 31, 2017, respectively)
$
1,290,015

 
$
1,413,081

Residential mortgage loans held in securitization trusts, net
66,047

 
73,820

Residential mortgage loans, at fair value
169,197

 
87,153

Distressed residential mortgage loans, net (including $105,851 and $121,791 held in securitization trusts as of June 30, 2018 and December 31, 2017, respectively)
290,645

 
331,464

Multi-family loans held in securitization trusts, at fair value
9,345,360

 
9,657,421

Derivative assets
10,543

 
10,101

Cash and cash equivalents
84,717

 
95,191

Investment in unconsolidated entities
53,671

 
51,143

Preferred equity and mezzanine loan investments
176,741

 
138,920

Real estate held for sale in consolidated variable interest entities
29,502

 
64,202

Goodwill
25,222

 
25,222

Receivables and other assets
99,213

 
108,567

Total Assets (1)
$
11,640,873

 
$
12,056,285

LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
Liabilities:
 
 
 
Financing arrangements, portfolio investments
$
1,179,961

 
$
1,276,918

Financing arrangements, residential mortgage loans
192,233

 
149,063

Residential collateralized debt obligations
62,198

 
70,308

Multi-family collateralized debt obligations, at fair value
8,838,841

 
9,189,459

Securitized debt
61,026

 
81,537

Mortgages and notes payable in consolidated variable interest entities
32,520

 
57,124

Accrued expenses and other liabilities
83,155

 
82,126

Subordinated debentures
45,000

 
45,000

Convertible notes
129,738

 
128,749

Total liabilities (1)
10,624,672

 
11,080,284

Commitments and Contingencies

 

Stockholders' Equity:
 
 
 
Preferred stock, $0.01 par value, 7.75% Series B cumulative redeemable, $25 liquidation preference per share, 6,000,000 shares authorized, 3,000,000 shares issued and outstanding
72,397

 
72,397

Preferred stock, $0.01 par value, 7.875% Series C cumulative redeemable, $25 liquidation preference per share, 4,140,000 shares authorized, 3,600,000 shares issued and outstanding
86,862

 
86,862

Preferred stock, $0.01 par value, 8.00% Series D Fixed-to-Floating Rate cumulative redeemable, $25 liquidation preference per share, 5,750,000 shares authorized and 5,400,000 shares issued and outstanding
130,496

 
130,496

Common stock, $0.01 par value, 400,000,000 shares authorized, 124,312,846 and 111,909,909 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively
1,243

 
1,119

Additional paid-in capital
825,960

 
751,155

Accumulated other comprehensive (loss) income
(25,450
)
 
5,553

Accumulated deficit
(75,541
)
 
(75,717
)
Company's stockholders' equity
1,015,967

 
971,865

Non-controlling interest in consolidated variable interest entities
234

 
4,136

Total equity
1,016,201

 
976,001

Total Liabilities and Stockholders' Equity
$
11,640,873

 
$
12,056,285


(1) 
Our condensed consolidated balance sheets include assets and liabilities of consolidated variable interest entities ("VIEs") as the Company is the primary beneficiary of these VIEs. As of June 30, 2018 and December 31, 2017, assets of consolidated VIEs totaled $9,663,179 and $10,041,468, respectively, and the liabilities of consolidated VIEs totaled $9,027,733 and $9,436,421, respectively. See Note 10 for further discussion.

The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of Contents


NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
(unaudited)
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
INTEREST INCOME:
 
 
 
 
 
 
 
Investment securities and other
$
16,990

 
$
10,199

 
$
33,248

 
$
20,000

Multi-family loans held in securitization trusts
85,629

 
75,752

 
170,721

 
137,056

Residential mortgage loans
2,384

 
1,365

 
4,571

 
2,607

Distressed residential mortgage loans
2,720

 
6,665

 
8,074

 
12,703

Total interest income
107,723

 
93,981

 
216,614

 
172,366

 
 
 
 
 
 
 
 
INTEREST EXPENSE:
 
 
 
 
 
 
 
Investment securities and other
10,477

 
5,805

 
20,127

 
11,374

Convertible notes
2,652

 
2,615

 
5,301

 
4,590

Multi-family collateralized debt obligations
74,686

 
66,873

 
149,165

 
120,805

Residential collateralized debt obligations
475

 
239

 
886

 
575

Securitized debt
1,243

 
2,171

 
2,574

 
4,286

Subordinated debentures
690

 
570

 
1,310

 
1,110

Total interest expense
90,223

 
78,273

 
179,363

 
142,740

 
 
 
 
 
 
 
 
NET INTEREST INCOME
17,500

 
15,708

 
37,251

 
29,626

 
 
 
 
 
 
 
 
OTHER INCOME (LOSS):
 
 
 
 
 
 
 
Recovery of (provision for) loan losses
437

 
(300
)
 
395

 
(112
)
Realized (loss) gain on investment securities and related hedges, net
(8,654
)
 
1,114

 
(12,076
)
 
(109
)
Realized gain on distressed residential mortgage loans at carrying value, net
2,021

 
2,364

 
1,248

 
14,335

Net gain (loss) on residential mortgage loans at fair value
97

 
—

 
(70
)
 
—

Unrealized gain (loss) on investment securities and related hedges, net
12,606

 
(1,051
)
 
24,298

 
495

Unrealized gain on multi-family loans and debt held in securitization trusts, net
12,019

 
1,447

 
19,564

 
2,831

Income from operating real estate and real estate held for sale in consolidated variable interest entities
1,253

 
2,316

 
3,379

 
2,316

Other income
228

 
2,282

 
4,223

 
5,121

Total other income
20,007

 
8,172

 
40,961

 
24,877

 
 
 
 
 
 
 
 
GENERAL, ADMINISTRATIVE AND OPERATING EXPENSES:
 
 
 
 
 
 
 
General and administrative expenses
5,276

 
5,065

 
9,932

 
9,952

Base management and incentive fees
809

 
(109
)
 
1,642

 
2,969

Expenses related to distressed residential mortgage loans
1,811

 
2,218

 
3,414

 
4,457

Expenses related to operating real estate and real estate held for sale in consolidated variable interest entities
873

 
4,415

 
2,479

 
4,415

Total general, administrative and operating expenses
8,769

 
11,589

 
17,467

 
21,793

 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS BEFORE INCOME TAXES
28,738

 
12,291

 
60,745

 
32,710

Income tax (benefit) expense
(13
)
 
442

 
(92
)
 
1,680

 
 
 
 
 
 
 
 
NET INCOME
28,751

 
11,849

 
60,837

 
31,030

Net loss (income) attributable to non-controlling interest in consolidated variable interest entities
943

 
2,487

 
(1,526
)
 
2,487

NET INCOME ATTRIBUTABLE TO COMPANY
29,694

 
14,336

 
59,311

 
33,517

Preferred stock dividends
(5,925
)
 
(3,225
)
 
(11,850
)
 
(6,450
)
NET INCOME ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS
$
23,769

 
$
11,111

 
$
47,461

 
$
27,067

 
 
 
 
 
 
 
 
Basic earnings per common share
$
0.21

 
$
0.10

 
$
0.42

 
$
0.24

Diluted earnings per common share
$
0.20

 
$
0.10

 
$
0.40

 
$
0.24

Weighted average shares outstanding-basic
115,211

 
111,863

 
113,623

 
111,792

Weighted average shares outstanding-diluted
135,164

 
111,863

 
133,470

 
111,792


The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of Contents


NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollar amounts in thousands)
(unaudited)
 
For the Three Months Ended
June 30,
 
For the Six Months Ended
June 30,
 
2018
 
2017
 
2018
 
2017
NET INCOME ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS
$
23,769

 
$
11,111

 
$
47,461

 
$
27,067

OTHER COMPREHENSIVE (LOSS) INCOME
 
 
 
 
 
 
 
(Decrease) increase in fair value of available for sale securities
(6,525
)
 
4,108

 
(31,003
)
 
7,386

Reclassification adjustment for net gain included in net income
—

 
(238
)
 
—

 
(759
)
(Decrease) increase in fair value of derivative instruments utilized for cash flow hedges
—

 
(72
)
 
—

 
92

TOTAL OTHER COMPREHENSIVE (LOSS) INCOME
(6,525
)
 
3,798

 
(31,003
)
 
6,719

COMPREHENSIVE INCOME ATTRIBUTABLE TO COMPANY'S COMMON STOCKHOLDERS
$
17,244

 
$
14,909

 
$
16,458

 
$
33,786


The accompanying notes are an integral part of the condensed consolidated financial statements.
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NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollar amounts in thousands)
(unaudited)
 
Common
Stock
 
Preferred
Stock
 
Additional
Paid-In
Capital
 
Retained Earnings (Accumulated Deficit)
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total Company Stockholders' Equity
 
Non-Controlling Interest in Consolidated VIE
 
Total
Balance, December 31, 2017
$
1,119

 
$
289,755

 
$
751,155

 
$
(75,717
)
 
$
5,553

 
$
971,865

 
$
4,136

 
$
976,001

Net income
—

 
—

 
—

 
59,311

 
—

 
59,311

 
1,526

 
60,837

Common stock issuance, net
124

 
—

 
74,805

 
—

 
—

 
74,929

 
—

 
74,929

Dividends declared on common stock
—

 
—

 
—

 
(47,285
)
 
—

 
(47,285
)
 
—

 
(47,285
)
Dividends declared on preferred stock
—

 
—

 
—

 
(11,850
)
 
—

 
(11,850
)
 
—

 
(11,850
)
Decrease in fair value of available for sale securities
—

 
—

 
—

 
—

 
(31,003
)
 
(31,003
)
 
—

 
(31,003
)
Decrease in non-controlling interest related to distributions from and de-consolidation of variable interest entities
—

 
—

 
—

 
—

 
—

 
—

 
(5,428
)
 
(5,428
)
Balance, June 30, 2018
$
1,243

 
$
289,755

 
$
825,960

 
$
(75,541
)
 
$
(25,450
)
 
$
1,015,967

 
$
234

 
$
1,016,201


The accompanying notes are an integral part of the condensed consolidated financial statements.
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Table of Contents
NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
(unaudited)


 
For the Six Months Ended
June 30,
 
2018
 
2017
Cash Flows from Operating Activities:
 
 
 
Net income
$
60,837

 
$
31,030

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net (accretion) amortization
(11,588
)
 
1,323

Realized loss on investment securities and related hedges, net
12,076

 
109

Net gain on distressed residential mortgage and residential mortgage loans
(1,178
)
 
(14,335
)
Unrealized gain on investment securities and related hedges, net
(24,298
)
 
(495
)
Gain on sale of real estate held for sale in consolidated variable interest entities
(2,328
)
 
—

Impairment of real estate under development in consolidated variable interest entities
2,091

 
—

Unrealized gain on loans and debt held in multi-family securitization trusts
(19,564
)
 
(2,831
)
Net decrease in loans held for sale
688

 
17

(Recovery of) provision for loan losses
(395
)
 
112

Income from unconsolidated entity, preferred equity and mezzanine loan investments
(13,526
)
 
(11,112
)
Distributions of income from unconsolidated entity, preferred equity and mezzanine loan investments
8,340

 
6,554

Amortization of stock based compensation, net
1,211

 
694

Changes in operating assets and liabilities:


 

Receivables and other assets
(78
)
 
(6,910
)
Accrued expenses and other liabilities
(1,403
)
 
6,652

Net cash provided by operating activities
10,885

 
10,808

 
 
 
 
Cash Flows from Investing Activities:
 
 
 
Cash received from initial consolidation of variable interest entities
—

 
112

Net proceeds from sale of real estate in consolidated variable interest entities
33,192

 
—

Proceeds from sales of investment securities
26,899

 
46,740

Purchases of investment securities
(60,321
)
 
(111,023
)
Purchases of other assets
(35
)
 
(23
)
Capital expenditures on operating real estate and real estate held for sale in consolidated variable interest entities
(255
)
 
(105
)
Funding of preferred equity, equity and mezzanine loan investments
(45,532
)
 
(11,122
)
Principal repayments received on preferred equity and mezzanine loan investments
9,122

 
6,500

Return of capital from unconsolidated entity investments
1,246

 
3,083

Net proceeds from other derivative instruments settled during the period
13,662

 
2,850

Principal repayments received on residential mortgage loans held in securitization trusts
7,831

 
8,857

Principal repayments and proceeds from sales and refinancing of distressed residential mortgage loans
50,072

 
99,402

Principal repayments received on multi-family loans held in securitization trusts
67,880

 
66,148

Principal paydowns on investment securities - available for sale
120,508

 
132,826

Proceeds from sale of real estate owned
2,136

 
4,045

Purchases of residential mortgage loans and distressed residential mortgage loans
(94,075
)
 
(33,533
)
Purchases of investments held in multi-family securitization trusts
—

 
(65,453
)
Net cash provided by investing activities
132,330

 
149,304

 
 
 
 
Cash Flows from Financing Activities:
 
 
 
Net payments made on financing arrangements
(54,120
)
 
(134,350
)
Proceeds from issuance of convertible notes
—

 
126,995

Common stock issuance, net
73,831

 
574

Dividends paid on common stock
(44,805
)
 
(49,123
)
Dividends paid on preferred stock
(11,910
)
 
(6,450
)
Payments made on mortgages and notes payable in consolidated variable interest entities
(25,673
)
 
(116
)
Proceeds from mortgages and notes payable in consolidated variable interest entities
1,058

 
2,795

Payments made on residential collateralized debt obligations
(8,142
)
 
(9,387
)
Payments made on multi-family collateralized debt obligations
(67,886
)
 
(66,144
)
Payments made on securitized debt
(21,351
)
 
(50,075
)
Net cash used in financing activities
(158,998
)
 
(185,281
)
 
 
 
 
Net Decrease in Cash, Cash Equivalents and Restricted Cash
(15,783
)
 
(25,169
)
Cash, Cash Equivalents and Restricted Cash - Beginning of Period
106,195

 
139,530

Cash, Cash Equivalents and Restricted Cash - End of Period
$
90,412

 
$
114,361


The accompanying notes are an integral part of the condensed consolidated financial statements.
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NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollar amounts in thousands)
(unaudited)


 
 
 
 
 
 
 
 
Supplemental Disclosure:
 
 
 
Cash paid for interest
$
204,174

 
$
153,121

Cash paid for income taxes
$
1,342

 
$
1,681

Non-Cash Investment Activities:
 
 
 
Sales of investment securities not yet settled
$
—

 
$
5,976

Purchase of investment securities not yet settled
$
—

 
$
172,557

Consolidation of multi-family loans held in securitization trusts
$
—

 
$
1,537,526

Consolidation of multi-family collateralized debt obligations
$
—

 
$
1,472,073

Transfer from residential loans to real estate owned
$
3,558

 
$
4,142

 
 
 
 
Non-Cash Financing Activities:
 
 
 
Dividends declared on common stock to be paid in subsequent period
$
24,863

 
$
22,378

Dividends declared on preferred stock to be paid in subsequent period
$
5,925

 
$
3,225

 
 
 
 
Cash, Cash Equivalents and Restricted Cash Reconciliation:
 
 
 
Cash and cash equivalents
$
84,717

 
$
75,391

Restricted cash included in receivables and other assets
$
5,695

 
$
38,970

Total cash, cash equivalents, and restricted cash
$
90,412

 
$
114,361


The accompanying notes are an integral part of the condensed consolidated financial statements.
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NEW YORK MORTGAGE TRUST, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
(unaudited)
1.
Organization

New York Mortgage Trust, Inc., together with its consolidated subsidiaries ("NYMT," "we," "our," or the “Company"), is a real estate investment trust, or REIT, in the business of acquiring, investing in, financing and managing mortgage-related and residential housing-related assets. Our objective is to deliver long-term stable distributions to our stockholders over changing economic conditions through a combination of net interest margin and net realized capital gains from a diversified investment portfolio. Our portfolio includes, without limitation, residential mortgage loans, including distressed residential and second mortgage loans, multi-family CMBS, preferred equity and joint venture equity investments in, and mezzanine loans to, owners of multi-family properties, equity and debt securities issued by entities that invest in residential and commercial real estate, non-Agency RMBS, Agency RMBS consisting of fixed-rate, adjustable-rate and hybrid adjustable-rate RMBS and Agency IOs consisting of interest only and inverse interest-only RMBS.

The Company conducts its business through the parent company, New York Mortgage Trust, Inc., and several subsidiaries, including special purpose subsidiaries established for residential loan, distressed residential loan and CMBS securitization purposes, taxable REIT subsidiaries ("TRSs") and qualified REIT subsidiaries ("QRSs"). The Company consolidates all of its subsidiaries under generally accepted accounting principles in the United States of America (“GAAP”).

The Company is organized and conducts its operations to qualify as a REIT for federal income tax purposes. As such, the Company will generally not be subject to federal income taxes on that portion of its income that is distributed to stockholders if it distributes at least 90% of its REIT taxable income to its stockholders by the due date of its federal income tax return and complies with various other requirements.


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2.Summary of Significant Accounting Policies

Definitions – The following defines certain of the commonly used terms in these financial statements: 

“RMBS” refers to residential mortgage-backed securities comprised of adjustable-rate, hybrid adjustable-rate, fixed-rate, interest only and inverse interest only and principal only securities;
“Agency RMBS” refers to RMBS representing interests in or obligations backed by pools of mortgage loans issued or guaranteed by a government sponsored enterprise (“GSE”), such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or an agency of the U.S. government, such as the Government National Mortgage Association (“Ginnie Mae”);
“non-Agency RMBS” refers to RMBS backed by prime jumbo residential mortgage loans, including performing, re-performing and non-performing mortgage loans;
"IO RMBS" refers to RMBS comprised of IOs;
“IOs” refers collectively to interest only and inverse interest only mortgage-backed securities that represent the right to the interest component of the cash flow from a pool of mortgage loans;
“POs” refers to mortgage-backed securities that represent the right to the principal component of the cash flow from a pool of mortgage loans;
“Agency IOs” refers to Agency RMBS comprised of IO RMBS;
“ARMs” refers to adjustable-rate residential mortgage loans;
“prime ARM loans” and “residential securitized loans” each refer to prime credit quality residential ARM loans held in our securitization trusts;
“Agency ARMs” refers to Agency RMBS comprised of adjustable-rate and hybrid adjustable-rate RMBS;
“Agency fixed-rate RMBS” refers to Agency RMBS comprised of fixed-rate RMBS;
“CMBS” refers to commercial mortgage-backed securities comprised of commercial mortgage pass-through securities, as well as IO or PO securities that represent the right to a specific component of the cash flow from a pool of commercial mortgage loans;
“Multi-family CMBS” refers to CMBS backed by commercial mortgage loans on multi-family properties;
“CDOs” refers to collateralized debt obligations; and
“CLO” refers to collateralized loan obligations.

Basis of Presentation – The accompanying condensed consolidated balance sheet as of December 31, 2017 has been derived from audited financial statements. The accompanying condensed consolidated balance sheet as of June 30, 2018, the accompanying condensed consolidated statements of operations for the three and six months ended June 30, 2018 and 2017, the accompanying condensed consolidated statements of comprehensive income for the three and six months ended June 30, 2018 and 2017, the accompanying condensed consolidated statement of changes in stockholders’ equity for the six months ended June 30, 2018 and the accompanying condensed consolidated statements of cash flows for the six months ended June 30, 2018 and 2017 are unaudited. In our opinion, all adjustments (which include only normal recurring adjustments) necessary to present fairly the Company’s financial position, results of operations and cash flows have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted in accordance with Article 10 of Regulation S-X and the instructions to Form 10-Q. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the U.S. Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the operating results for the full year.

The accompanying condensed consolidated financial statements have been prepared on the accrual basis of accounting in accordance with GAAP. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management has made significant estimates in several areas, including valuation of its CMBS investments, multi-family loans held in securitization trusts and multi-family CDOs, as well as, income recognition on distressed residential mortgage loans purchased at a discount. Although the Company’s estimates contemplate current conditions and how it expects them to change in the future, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially impact the Company’s results of operations and its financial condition.

Reclassifications – Certain prior period amounts have been reclassified in the condensed consolidated financial statements to conform to current period presentation.

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Principles of Consolidation and Variable Interest Entities – The accompanying condensed consolidated financial statements of the Company include the accounts of all its subsidiaries which are majority-owned, controlled by the Company or a variable interest entity ("VIE") where the Company is the primary beneficiary. All significant intercompany accounts and transactions have been eliminated in consolidation.

A VIE is an entity that lacks one or more of the characteristics of a voting interest entity. A VIE is defined as an entity in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The Company consolidates a VIE when it is the primary beneficiary of such VIE, herein referred to as a "Consolidated VIE". As primary beneficiary, the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE and a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE. The Company is required to reconsider its evaluation of whether to consolidate a VIE each reporting period, based upon changes in the facts and circumstances pertaining to the VIE.

Business Combinations – The Company evaluates each purchase transaction to determine whether the acquired assets meet the definition of a business. The Company accounts for business combinations by applying the acquisition method in accordance with Accounting Standards Codification (“ASC”) 805, Business Combinations ("ASC 805"). Transaction costs related to acquisition of a business are expensed as incurred and excluded from the fair value of consideration transferred. The identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity are recognized and measured at their estimated fair values. The excess of the fair value of consideration transferred over the fair values of identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity, net of fair value of any previously held interest in the acquired entity, is recorded as goodwill. Such valuations require management to make significant estimates and assumptions, especially with respect to intangible assets and liabilities.

Contingent consideration is classified as a liability or equity, as applicable. Contingent consideration in connection with the acquisition of a business is measured at fair value on acquisition date, and unless classified as equity, is remeasured at fair value each reporting period thereafter until the consideration is settled, with changes in fair value included in net income.

Net cash paid to acquire a business is classified as investing activities on the accompanying condensed consolidated statements of cash flows.

On March 31, 2017, the Company determined that it became the primary beneficiary of 200 RHC Hoover, LLC ("Riverchase Landing") and The Clusters, LLC ("The Clusters"), two VIEs that each own a multi-family apartment community and in which the Company held preferred equity investments. Accordingly, on this date, the Company consolidated both Riverchase Landing and The Clusters into its condensed consolidated financial statements in accordance with ASC 810, Consolidation ("ASC 810"). These transactions were accounted for by applying the acquisition method for business combinations under ASC 805 (see Note 10). In March 2018, Riverchase Landing completed the sale of its multi-family apartment community and redeemed the Company's preferred equity investment. The Company de-consolidated Riverchase Landing as of the date of the sale.

Investment Securities Available for Sale – The Company's investment securities, where the fair value option has not been elected and which are reported at fair value with unrealized gains and losses reported in Other Comprehensive Income (“OCI”), include Agency RMBS, non-Agency RMBS and CMBS. The Company has elected the fair value option for its Agency IOs and certain Agency ARMs and Agency fixed-rate RMBS which were transferred from our Agency IO portfolio, which measures unrealized gains and losses through earnings in the accompanying condensed consolidated statements of operations. The fair value option was elected for these investment securities to better match the accounting for these investment securities with the related derivative instruments within the Agency IO portfolio, which are not designated as hedging instruments for accounting purposes. As of June 30, 2018, the Company has fully exited its Agency IO strategy.

The Company generally intends to hold its investment securities until maturity; however, from time to time, it may sell any of its securities as part of the overall management of its business. As a result, our investment securities are classified as available for sale securities. Realized gains and losses recorded on the sale of investment securities available for sale are based on the specific identification method and included in realized gain (loss) on investment securities and related hedges in the accompanying condensed consolidated statements of operations.

Interest income on our investment securities available for sale is accrued based on the outstanding principal balance and their contractual terms. Purchase premiums or discounts on investment securities are amortized or accreted to interest income over the estimated life of the investment securities using the effective yield method. Adjustments to amortization are made for actual prepayment activity.

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Interest income on certain of our credit sensitive securities, such as our CMBS that were purchased at a discount to par value, is recognized based on the security’s effective yield. The effective yield on these securities is based on management’s estimate of the projected cash flows from each security, which are estimated based on assumptions related to fluctuations in interest rates, prepayment speeds and the timing and amount of credit losses. On at least a quarterly basis, management reviews and, if appropriate, adjusts its cash flow projections based on input and analysis received from external sources, internal models, and its judgment about interest rates, prepayment rates, the timing and amount of credit losses, and other factors. Changes in cash flows from those originally projected, or from those estimated at the last evaluation, may result in a prospective change in the yield (or interest income) recognized on these securities.

A portion of the purchase discount on the Company’s first loss PO multi-family CMBS is designated as non-accretable purchase discount or credit reserve, which is intended to partially mitigate the Company’s risk of loss on the mortgages collateralizing such multi-family CMBS, and is not expected to be accreted into interest income. The amount designated as a credit reserve may be adjusted over time, based on the actual performance of the security, its underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a security with a credit reserve is more favorable than forecasted, a portion of the amount designated as credit reserve may be accreted into interest income over time. Conversely, if the performance of a security with a credit reserve is less favorable than forecasted, the amount designated as credit reserve may be increased, or impairment charges and write-downs of such securities to a new cost basis could be required.

The Company accounts for debt securities that are of high credit quality (generally those rated AA or better by a Nationally Recognized Statistical Rating Organization, or NRSRO) at date of acquisition in accordance with ASC 320-10, Investments - Debt and Equity Securities ("ASC 320-10"). The Company accounts for debt securities that are not of high credit quality (i.e., those whose risk of loss is less than remote) or securities that can be contractually prepaid such that we would not recover our initial investment at the date of acquisition in accordance with ASC 325-40, Investments - Beneficial Interests in Securitized Financial Assets ("ASC 325-40"). The Company considers credit ratings, the underlying credit risk and other market factors in determining whether the debt securities are of high credit quality; however, securities rated lower than AA or an equivalent rating are not considered of high credit quality and are accounted for in accordance with ASC 325-40. If ratings are inconsistent among NRSROs, the Company uses the lower rating in determining whether the securities are of high credit quality.

The Company assesses its impaired securities on at least a quarterly basis and designates such impairments as either “temporary” or “other-than-temporary” by applying the guidance prescribed in ASC 320-10. When the fair value of an investment security is less than its amortized cost as of the reporting balance sheet date, the security is considered impaired.  If the Company intends to sell an impaired security, or it is more likely than not that it will be required to sell the impaired security before its anticipated recovery, the Company recognizes an other-than-temporary impairment through earnings equal to the entire difference between the investment’s amortized cost and its fair value as of the balance sheet date. If the Company does not expect to sell an other-than-temporarily impaired security, only the portion of the other-than-temporary impairment related to credit losses is recognized through earnings with the remainder recognized as a component of other comprehensive income (loss) on the accompanying condensed consolidated balance sheets. Impairments recognized through other comprehensive income (loss) do not impact earnings. Following the recognition of an other-than-temporary impairment through earnings, a new cost basis is established for the security, which may not be adjusted for subsequent recoveries in fair value through earnings. However, other-than-temporary impairments recognized through earnings may be accreted back to the amortized cost basis of the security on a prospective basis through interest income. The determination as to whether an other-than-temporary impairment exists and, if so, the amount considered other-than-temporarily impaired is subjective, as such determinations are based on both factual and subjective information available at the time of assessment as well the Company’s estimates of the future performance and cash flow projections. As a result, the timing and amount of other-than-temporary impairments constitute material estimates that are susceptible to significant change.

In determining the other-than temporary impairment related to credit losses for securities that are not of high credit quality, the Company compares the present value of the remaining cash flows expected to be collected at the prior reporting date or purchase date, whichever is most recent, against the present value of the cash flows expected to be collected at the current financial reporting date. The Company considers information available about the past and expected future performance of underlying mortgage loans, including timing of expected future cash flows, prepayment rates, default rates, loss severities and delinquency rates.


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Residential Mortgage Loans Held in Securitization Trusts – Residential mortgage loans held in securitization trusts are comprised of certain ARM loans transferred to Consolidated VIEs that have been securitized into sequentially rated classes of beneficial interests. The Company accounted for these securitization trusts as financings which are consolidated into the Company’s financial statements. Residential mortgage loans held in securitization trusts are carried at their unpaid principal balances, net of unamortized premium or discount, unamortized loan origination costs and allowance for loan losses. Interest income is accrued and recognized as revenue when earned according to the terms of the mortgage loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in all cases when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

The Company establishes an allowance for loan losses based on management's judgment and estimate of credit losses inherent in our portfolio of residential mortgage loans held in securitization trusts. Estimation involves the consideration of various credit-related factors, including but not limited to, macro-economic conditions, current housing market conditions, loan-to-value ratios, delinquency status, historical credit loss severity rates, purchased mortgage insurance, the borrower's current economic condition and other factors deemed to warrant consideration. Additionally, management looks at the balance of any delinquent loan and compares that to the current value of the collateralizing property. Management utilizes various home valuation methodologies including appraisals, broker pricing opinions, internet-based property data services to review comparable properties in the same area or consults with a broker in the property's area.

Residential Mortgage Loans, at fair value – Certain of the Company’s acquired residential mortgage loans, including distressed residential mortgage loans and second mortgage loans, are presented at fair value on its condensed consolidated balance sheets as a result of a fair value election made at the time of acquisition pursuant to ASC 825, Financial Instruments. Changes in fair value are recorded in current period earnings in net gain (loss) on residential mortgage loans at fair value in the Company's condensed consolidated statements of operations.

Premiums and discounts associated with the purchase of residential mortgage loans, at fair value are amortized or accreted into interest income over the life of the related loan using the effective interest method. Any premium amortization or discount accretion is reflected as a component of interest income, residential mortgage loans in the Company's condensed consolidated statements of operations.

Residential mortgage loans at fair value are considered past due when they are 30 days past their contractual due date, and are placed on nonaccrual status when delinquent for more than 90 days. Interest accrued but not yet collected at the time loans are placed on nonaccrual is reversed and subsequently recognized only to the extent it is received in cash or until it qualifies for return to accrual status. Loans are restored to accrual status only when contractually current or the collection of future payments is reasonably assured.
    
Acquired Distressed Residential Mortgage Loans – Distressed residential mortgage loans are comprised of pools of fixed- and adjustable-rate residential mortgage loans acquired by the Company at a discount, with evidence of credit deterioration since their origination and where it is probable that the Company will not collect all contractually required principal payments. Distressed residential mortgage loans held in securitization trusts are distressed residential mortgage loans transferred to Consolidated VIEs that have been securitized into beneficial interests. The Company accounted for these securitization trusts as financings which are consolidated into the Company’s financial statements.

Acquired distressed residential mortgage loans that have evidence of deteriorated credit quality at acquisition are accounted for under ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality ("ASC 310-30"). Management evaluates whether there is evidence of credit quality deterioration as of the acquisition date using indicators such as past due or modified status, risk ratings, recent borrower credit scores and recent loan-to-value percentages. Acquired distressed residential mortgage loans are recorded at fair value at the date of acquisition, with no allowance for loan losses. Under ASC 310-30, the acquired loans may be accounted for individually or aggregated and accounted for as a pool of loans if the loans being aggregated have common risk characteristics. A pool is accounted for as a single asset with a single composite interest rate and an expectation of aggregate cash flows. Once a pool is assembled, it is treated as if it was one loan for purposes of applying the accounting guidance.


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Under ASC 310-30, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield,” is accreted into interest income over the life of the loans in each pool or individually using a level yield methodology. Accordingly, our acquired distressed residential mortgage loans accounted for under ASC 310-30 are not subject to classification as nonaccrual classification in the same manner as our residential mortgage loans that were not distressed when acquired by us. Rather, interest income on acquired distressed residential mortgage loans relates to the accretable yield recognized at the pool level or on an individual loan basis, and not to contractual interest payments received at the loan level. The difference between contractually required principal and interest payments and the cash flows expected to be collected, referred to as the “nonaccretable difference,” includes estimates of both the impact of prepayments and expected credit losses over the life of the individual loan, or the pool (for loans grouped into a pool).

Management monitors actual cash collections against its expectations, and revised cash flow estimates are prepared as necessary. A decrease in expected cash flows in subsequent periods may indicate that the loan pool or individual loan, as applicable, is impaired, thus requiring the establishment of an allowance for loan losses by a charge to the provision for loan losses. An increase in expected cash flows in subsequent periods initially reduces any previously established allowance for loan losses by the increase in the present value of cash flows expected to be collected, and results in a recalculation of the amount of accretable yield for the loan pool. The adjustment of accretable yield due to an increase in expected cash flows is accounted for prospectively as a change in estimate. The additional cash flows expected to be collected are reclassified from the nonaccretable difference to the accretable yield, and the amount of periodic accretion is adjusted accordingly over the remaining life of the loans in the pool or individual loan, as applicable. The impacts of (i) prepayments, (ii) changes in variable interest rates, and (iii) any other changes in the timing of expected cash flows are recognized prospectively as adjustments to interest income.

A distressed residential mortgage loan disposal, which may include a loan sale, receipt of payment in full from the borrower or foreclosure, results in removal of the loan from the loan pool at its allocated carrying amount. In the event of a sale of the loan and receipt of payment (in full or partial) from the borrower, a gain or loss on sale is recognized and reported based on the difference between the sales proceeds or payment from the borrower and the allocated carrying amount of the acquired distressed residential mortgage loan. In the case of a foreclosure, an individual loan is removed from the pool and a loss on sale is recognized if the carrying value exceeds the fair value of the collateral less costs to sell. A gain is not recognized if the fair value of collateral less costs to sell exceeds the carrying value.

The Company uses the specific allocation method for the removal of loans as the estimated cash flows and related carrying amount for each individual loan are known. In these cases, the remaining accretable yield is unaffected and any material change in remaining effective yield caused by the removal of the loan from the pool is addressed by the re-assessment of the estimate of cash flows for the pool prospectively.

Acquired distressed residential mortgage loans subject to modification are not removed from the pool even if those loans would otherwise be considered troubled debt restructurings because the pool, and not the individual loan, represents the unit of account.

For individual loans not accounted for in pools that are sold or satisfied by payment in full, a gain or loss on sale is recognized and reported based on the difference between the sales proceeds and the carrying amount of the acquired distressed residential mortgage loan. In the case of a foreclosure, a loss is recognized if the carrying value exceeds the fair value of the underlying collateral less costs to sell. A gain is not recognized if the fair value of the underlying collateral less costs to sell exceeds the carrying value.

Multi-Family Loans Held in Securitization Trusts – Multi-family loans held in securitization trusts are comprised of multi-family mortgage loans held in Freddie Mac-sponsored multi-family K-Series securitizations of which we, or one of our "special purpose entities," or "SPEs," own the first loss POs and certain IOs and mezzanine securities and that we consolidate (the “Consolidated K-Series”). Based on a number of factors, management determined that the Company was the primary beneficiary of each VIE within the Consolidated K-Series, met the criteria for consolidation and, accordingly, has consolidated these securitizations, including their assets, liabilities, income and expenses in our financial statements. The Company has elected the fair value option on each of the assets and liabilities held within the Consolidated K-Series, which requires that changes in valuations be reflected in the Company's accompanying consolidated statements of operations. In accordance with ASC 810, the Company measures both the financial assets and financial liabilities of a qualifying consolidated collateralized financing entity ("CFE") using the fair value of either the CFE’s financial assets or financial liabilities, whichever is more observable. As the Company’s multi-family securitization trusts are considered qualifying CFEs, the Company determines the fair value of multi-family loans held in securitization trusts based on the fair value of its multi-family collateralized debt obligations and its retained interests from these securitizations (eliminated in consolidation in accordance with GAAP), as the fair value of these instruments is more observable.


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Interest income is accrued and recognized as revenue when earned according to the terms of the multi-family loans and when, in the opinion of management, it is collectible. The accrual of interest on multi-family loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in all cases when payment becomes greater than 90 days delinquent. The multi-family loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Preferred Equity and Mezzanine Loan Investments - The Company invests in preferred equity of and mezzanine loans to entities that have significant real estate assets.

A preferred equity investment is an equity investment in the entity that owns the underlying property. Preferred equity is not secured by the underlying property, but holders have priority relative to common equity holders on cash flow distributions and proceeds from capital events. In addition, preferred equity holders may be able to enhance their position and protect their equity position with covenants that limit the entity’s activities and grant the holder the exclusive right to control the property after an event of default.

Mezzanine loans are secured by a pledge of the borrower’s equity ownership in the property. Unlike a mortgage, this loan does not represent a lien on the property. Therefore, it is always junior and subordinate to any first lien as well as second liens, if applicable, on the property. These loans are senior to any preferred equity or common equity interests in the entity that owns the property.

Preferred equity, where the risks and payment characteristics are equivalent to mezzanine loans, and mezzanine loan investments are accounted for as loans and are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, net of valuation allowances. The Company has evaluated its preferred equity and mezzanine loan investments for accounting treatment as loans versus equity investment utilizing the guidance provided by the ADC Arrangements Subsection of ASC 310, Receivables.

For preferred equity and mezzanine loan investments where the characteristics, facts and circumstances indicate that loan accounting treatment is appropriate, the Company accretes or amortizes any discounts or premiums and deferred fees and expenses over the life of the related asset utilizing the effective interest method or straight line-method, if the result is not materially different.
 
Management evaluates the collectibility of both interest and principal of each of these loans, if circumstances warrant, to determine whether they are impaired. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the existing contractual terms. When a loan is impaired, the amount of the loss accrual is calculated by comparing the carrying amount of the investment to the estimated fair value of the loan or, as a practical expedient, to the value of the collateral if the loan is collateral dependent. Interest income is accrued and recognized as revenue when earned according to the terms of the loans and when, in the opinion of management, it is collectible. The accrual of interest on loans is discontinued when, in management’s opinion, the interest is not collectible in the normal course of business, but in all cases when payment becomes greater than 90 days delinquent. Loans return to accrual status when principal and interest become current and are anticipated to be fully collectible.

Preferred equity and mezzanine loan investments where the risks and payment characteristics are equivalent to an equity investment are accounted for using the equity method of accounting. See “Investment in Unconsolidated Entities”.

Mortgage Loans Held for Investment – Mortgage loans held for investment are stated at unpaid principal balance, adjusted for any unamortized premium or discount, deferred fees or expenses, net of valuation allowances, and are included in receivables and other assets. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts and prepayment fees are reported in interest income. A loan is considered to be impaired when it is probable that based upon current information and events, the Company will be unable to collect all amounts due under the contractual terms of the loan agreement. Based on the facts and circumstances of the individual loans being impaired, loan specific valuation allowances are established for the excess carrying value of the loan over either: (i) the present value of expected future cash flows discounted at the loan’s original effective interest rate, (ii) the estimated fair value of the loan’s underlying collateral if the loan is in the process of foreclosure or otherwise collateral dependent, or (iii) the loan’s observable market price.


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Investment in Unconsolidated Entities – Non-controlling, unconsolidated ownership interests in an entity may be accounted for using the equity method or the cost method. In circumstances where the Company has a non-controlling interest but either owns a significant interest or is able to exert influence over the affairs of the enterprise, the Company utilizes the equity method of accounting. Under the equity method of accounting, the initial investment is increased each period for additional capital contributions and a proportionate share of the entity’s earnings or preferred return and decreased for cash distributions and a proportionate share of the entity’s losses. Management periodically reviews its investments for impairment based on projected cash flows from the entity over the holding period. When any impairment is identified, the investments are written down to recoverable amounts.

The Company may elect the fair value option for an investment in an unconsolidated entity that is accounted for using the equity method. The Company elected the fair value option for certain investments in unconsolidated entities that own interests (directly or indirectly) in commercial and residential real estate assets because the Company determined that such presentation represents the underlying economics of the respective investment. The Company records the change in fair value of its investment in other income in the condensed consolidated statements of operations (see Note 8).
 
Operating Real Estate Held in Consolidated Variable Interest Entities, Net – The Company recorded its initial investments in income-producing real estate at fair value at the acquisition date in accordance with ASC 805. The purchase price of acquired properties was apportioned to the tangible and identified intangible assets and liabilities acquired at their respective estimated fair values. In making estimates of fair values for purposes of allocating purchase price, the Company utilized a number of sources, including independent appraisals that may be obtained in connection with the acquisition or financing of the respective real estate, its own analysis of recently-acquired and existing comparable properties, property financial results, and other market data. The Company also considered information obtained about the real estate as a result of its due diligence, including marketing and leasing activities, in estimating the fair value of the tangible and intangible assets acquired. The Company considered the value of acquired in-place leases and utilized an amortization period that is the average remaining term of the acquired leases. The Company has reclassified its operating real estate held in consolidated variable interest entities to real estate held for sale in consolidated variable interest entities as of June 30, 2018.

Real Estate - Depreciation – The Company depreciates on a straight-line basis the building component of its real estate over a 30-year estimated useful life, building and improvements over a 10-year to 30-year estimated useful life, and furniture, fixtures and equipment over a 5-year estimated useful life, all of which are judgmental determinations. Betterments and certain costs directly related to the improvement of real estate are capitalized. Expenditures for ordinary maintenance and repairs are expensed to operations as incurred.

Real Estate Held for Sale in Consolidated Variable Interest Entities - The Company classifies its long-lived assets as held for sale in accordance with ASC 360, Property, Plant, and Equipment. When real estate assets are identified as held for sale, the Company discontinues depreciating (amortizing) the assets and estimates the fair value, net of selling costs, of such assets. Real estate held for sale in consolidated variable interest entities is recorded at the lower of the net carrying amount of the assets or the estimated net fair value. If the estimated net fair value of the real estate held for sale is less than the net carrying amount of the assets, an impairment charge is recorded in the condensed consolidated statements of operations with an allocation to non-controlling interests in the respective VIEs, if any.

The Company assesses the net fair value of real estate held for sale each reporting period the assets remain classified as held for sale. Subsequent changes, if any, in the net fair value of the real estate assets held for sale that require an adjustment to the carrying amount are recorded in the condensed consolidated statements of operations with an allocation to non-controlling interests in the respective VIEs, if any, unless the adjustment causes the carrying amount of the assets to exceed the net carrying amount upon initial classification as held for sale.

If circumstances arise that the Company previously considered unlikely and, as a result, the Company decides not to sell real estate assets previously classified as held for sale, the real estate assets are reclassified to another real estate classification. Real estate assets that are reclassified are measured at the lower of (a) their carrying amount before they were classified as held for sale, adjusted for any depreciation (amortization) expense that would have been recognized had the assets remained in their previous classification, or (b) their fair value at the date of the subsequent decision not to sell.


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Real Estate Sales – The Company accounts for its real estate sales in accordance with ASC 360-20, Property, Plant and Equipment - Real Estate Sales. When real estate is sold, the nature of the entire real estate component being sold is considered in relation to the entire transaction to determine whether the substance of the transaction is the sale of real estate. Profit is recognized on the date of the real estate sale provided that a) a sale is consummated, b) the buyer's initial and continuing investments are adequate to demonstrate commitment to pay for the property, c) the seller's receivable is not subject to future subordination, and d) the seller has transferred to the buyer the usual risks and rewards of ownership and does not have a substantial continuing involvement with the sold property. Sales value is calculated based off of the stated sales price plus any other proceeds that are additions to the sales price subtracting any discount needed to reduce a receivable to its present value and any services the seller commits to perform without compensation. See Note 11 for further discussion regarding sales of real estate by consolidated VIEs.

Real Estate Under Development – The Company's expenditures which directly relate to the acquisition, development, construction and improvement of properties are capitalized at cost. During the development period, which culminates once a property is substantially complete and ready for intended use, operating and carrying costs such as interest expense, real estate taxes, insurance and other direct costs are capitalized. Advertising and general administrative costs that do not relate to the development of a property are expensed as incurred. Real estate under development as of June 30, 2018 and December 31, 2017 of $20.3 million and $22.9 million, respectively, is included in receivables and other assets on the condensed consolidated balance sheets.

Real Estate - Impairment – The Company periodically evaluates its real estate assets for indicators of impairment. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions and legal and environmental concerns, as well as the Company's ability to hold and its intent with regard to each asset. Future events could occur which would cause the Company to conclude that impairment indicators exist and an impairment is warranted. If impairment indicators exist for long-lived assets to be held and used, and the expected future undiscounted cash flows are less than the carrying amount of the asset, then the Company will record an impairment loss for the difference between the fair value of the asset and its carrying amount. If the asset is to be disposed of, then an impairment loss is recognized for the difference between the estimated fair value of the asset, net of selling costs, and its carrying amount. The Company, through one of its consolidated VIEs, recorded a $2.1 million impairment loss on real estate under development during the three months ended June 30, 2018. The impairment loss is included in other income in the Company's condensed consolidated statements of operations. $1.0 million of this impairment loss is included in net income attributable to non-controlling interest in consolidated variable interest entities on the accompanying condensed consolidated statements of operations, resulting in a net loss to the Company of $1.1 million. See Note 10 for further discussion regarding impairment.

Cash and Cash Equivalents – Cash and cash equivalents include cash on hand, amounts due from banks and overnight deposits. The Company maintains its cash and cash equivalents in highly rated financial institutions, and at times these balances exceed insurable amounts.

Goodwill – Goodwill represents the excess of the fair value of consideration transferred in a business combination over the fair values of identifiable assets acquired, liabilities assumed and non-controlling interests, if any, in an acquired entity, net of fair value of any previously held interest in the acquired entity. Goodwill of $25.2 million as of June 30, 2018 and December 31, 2017 relates to the Company's multi-family investment reporting unit.

Goodwill is not amortized but is evaluated for impairment on an annual basis, or more frequently if the Company believes indicators of impairment exist, by initially performing a qualitative screen and, if necessary, then comparing fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit is less than the carrying value, an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value (in an amount not to exceed the total amount of goodwill allocated to the reporting unit) is recognized. The Company evaluated goodwill as of October 1, 2017 and no impairment was indicated.

Intangible Assets – Intangible assets consisting of acquired trade name, acquired technology, employment/non-compete agreements, and acquired in-place leases with useful lives ranging from 6 months to 10 years are included in receivables and other assets on the condensed consolidated balance sheets. Intangible assets with estimable useful lives are amortized on a straight-line basis over their respective estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The useful lives of intangible assets are evaluated on an annual basis to determine whether events and circumstances warrant a revision to the remaining useful life. See "Operating Real Estate Held in Consolidated Variable Interest Entities, Net" for further discussion of acquired in-place lease intangible assets.


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Receivables and Other Assets – Receivables and other assets as of June 30, 2018 and December 31, 2017 include restricted cash held by third parties of $5.7 million and $11.0 million, respectively. Included in restricted cash is $0.5 million held in our Agency IO portfolio to be used for trading purposes and $0.7 million held by counterparties as collateral for TBAs as of December 31, 2017. Interest receivable on multi-family loans held in securitization trusts is also included in the amounts of $32.2 million and $33.6 million as of June 30, 2018 and December 31, 2017, respectively.

Financing Arrangements, Portfolio Investments – The Company finances the majority of its investment securities available for sale using repurchase agreements. Under a repurchase agreement, an asset is sold to a counterparty to be repurchased at a future date at a predetermined price, which represents the original sales price plus interest. The repurchase agreements are treated as collateralized financing transactions and carried at the contractual amounts, as specified in the respective agreements. Borrowings under repurchase agreements generally bear interest rates of a specified margin over LIBOR.

Financing Arrangements, Residential Mortgage Loans – The Company finances a portion of its residential mortgage loans, including its distressed residential mortgage loans, through repurchase agreements (see Note 14). The borrowing under the repurchase agreements bear an interest rate of a specified margin over one-month LIBOR. The repurchase agreements are treated as collateralized financing transactions and carried at the contractual amounts, as specified in the respective agreements. Costs related to the establishment of the repurchase agreements which include underwriting, legal, accounting and other fees are reflected as deferred charges. Such costs are presented as a deduction from the corresponding debt liability on the Company’s accompanying condensed consolidated balance sheets in the amount of $0.3 million as of June 30, 2018 and $0.7 million as of December 31, 2017. These deferred charges are amortized as an adjustment to interest expense using the effective interest method, or straight line-method, if the result is not materially different.

Residential Collateralized Debt Obligations (“Residential CDOs”) – We use Residential CDOs to permanently finance our residential mortgage loans held in securitization trusts. For financial reporting purposes, the ARM loans held as collateral are recorded as assets of the Company and the Residential CDOs are recorded as the Company’s debt. The Company completed four securitizations in 2005 and 2006. The first three were accounted for as a permanent financing while the fourth was accounted for as a sale and accordingly, is not included in the Company’s accompanying condensed consolidated financial statements.

Multi-Family Collateralized Debt Obligations (“Multi-Family CDOs”) – The Consolidated K-Series including their debt are referred to as Multi-Family CDOs in our condensed consolidated financial statements. The Multi-Family CDOs permanently finance the multi-family mortgage loans held in the Consolidated K-Series securitizations. For financial reporting purposes, the loans held as collateral are recorded as assets of the Company and the Multi-Family CDOs are recorded as the Company’s debt. We refer to the Residential CDOs and Multi-Family CDOs collectively as "CDOs" in this report.

Securitized Debt – Securitized debt represents third-party liabilities of Consolidated VIEs and excludes liabilities of the VIEs acquired by the Company that are eliminated on consolidation. The Company has entered into several financing transactions that resulted in the Company consolidating as VIEs the SPEs that were created to facilitate the transactions and to which underlying assets in connection with the financing were transferred. The Company engaged in these transactions primarily to obtain permanent or longer term financing on a portion of its multi-family CMBS and acquired distressed residential mortgage loans.

Costs related to issuance of securitized debt which include underwriting, rating agency, legal, accounting and other fees are reflected as deferred charges. Such costs are presented as a deduction from the corresponding debt liability on the Company’s accompanying condensed consolidated balance sheets in the amount of $0.4 million and $0.7 million as of June 30, 2018 and December 31, 2017, respectively. These deferred charges are amortized as an adjustment to interest expense using the effective interest method, or straight line-method, if the result is not materially different.

Convertible Notes – On January 23, 2017, the Company issued convertible notes (the "Convertible Notes") to finance the acquisition of targeted assets and for general working capital purposes. The Company evaluated the conversion features of the Convertible Notes for embedded derivatives in accordance with ASC 815, Derivatives and Hedging ("ASC 815") and determined that the conversion features should not be bifurcated from the notes.
 
The Convertible Notes were issued at a 4% discount. Costs related to issuance of the Convertible Notes which include underwriting, legal, accounting and other fees are reflected as deferred charges. The discount and deferred charges are amortized as an adjustment to interest expense using the effective interest method. The discount and deferred issuance costs, net of amortization, are presented as a deduction from the corresponding debt liability on the Company's accompanying condensed consolidated balance sheets in the amount of $8.3 million and $9.3 million as of June 30, 2018 and December 31, 2017, respectively.


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Derivative Financial Instruments – In accordance with ASC 815, the Company records derivative financial instruments on its condensed consolidated balance sheets as assets or liabilities at fair value. Changes in fair value are accounted for depending on the use of the derivative instruments and whether they qualify for hedge accounting treatment.

The Company uses interest rate swaps to hedge the variable cash flows associated with our variable rate borrowings. We typically pay a fixed rate and receive a floating rate, based on one or three month LIBOR, on the notional amount of the interest rate swaps. The floating rate we receive under our swap agreements has the effect of offsetting the repricing characteristics and cash flows of our financing arrangements. At the inception of an interest rate swap agreement, the Company determines whether the instrument will be part of a qualifying hedge accounting relationship or whether the Company will account for the contract as a trading instrument. The Company has elected to treat all current interest swaps as trading instruments due to volatility and difficulty in effectively matching cash flows. Changes in fair value for interest rate swaps designated as trading instruments are reported in the condensed consolidated statements of operations as unrealized gain (loss) on investment securities and related hedges.
    
All of the Company's interest rate swaps outstanding are cleared through a central clearing house. The Company exchanges variation margin for swaps based upon daily changes in fair value. As a result of amendments to rules governing certain central clearing activities, the exchange of variation margin is treated as a legal settlement of the exposure under the swap contract. Previously such payments were treated as cash collateral pledged against the exposure under the swap contract. Accordingly, the Company accounted for the receipt or payment of variation margin as a direct increase of or reduction to the carrying value of the interest rate swap asset or liability on the Company's consolidated balance sheets.

Manager Compensation – We are a party to an investment management agreement with Headlands Asset Management LLC (“Headlands”) pursuant to which Headlands provides investment management services with respect to our investments in certain distressed residential mortgage loans. From 2011 to December 2017, we were a party to an investment management agreement with the Midway Group, LP ("Midway"), pursuant to which Midway provided investment management services with respect to our investments in Agency IOs. These investment management agreements provide for the payment to our investment managers of a management fee, incentive fee and reimbursement of certain operating expenses, which are accrued and expensed during the period for which they are earned or incurred. On August 2, 2018, the Company provided Headlands with written notice that it will not renew its management agreement at the end of the current term, which is set to expire on June 30, 2019 (see Note 23). The Midway agreement was terminated effective December 31, 2017.

Other Comprehensive Income (Loss) – The Company’s comprehensive income/(loss) attributable to the Company's common stockholders includes net income, the change in net unrealized gains/(losses) on its available for sale securities and its derivative hedging instruments, comprised of interest rate swaps until October 2017 (to the extent that such changes are not recorded in earnings), adjusted by realized net gains/(losses) reclassified out of accumulated other comprehensive income/(loss) for available for sale securities, reduced by dividends declared on the Company’s preferred stock and increased/decreased for net loss/income attributable to non-controlling interest.

Employee Benefits Plans – The Company sponsors a defined contribution plan (the “Plan”) for all eligible domestic employees. The Plan qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The Company made no contributions to the Plan for the six months ended June 30, 2018 and 2017.

Stock Based Compensation – The Company has awarded restricted stock to eligible employees and officers as part of their compensation. Compensation expense for equity based awards and stock issued for services are recognized over the vesting period of such awards and services based upon the fair value of the award at the grant date.

In May 2015, the Company granted Performance Share Awards (“PSAs”) which cliff vest after a three-year period, subject to the achievement of certain performance criteria based on a formula tied to the Company’s achievement of three-year total shareholder return (“TSR”) and the Company’s TSR relative to the TSR of certain peer companies. The feature in this award constitutes a “market condition” which impacts the amount of compensation expense recognized for these awards. The grant date fair values of PSAs were determined through Monte-Carlo simulation analysis.


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In March 2018 and June 2018, the Company granted Performance Stock Units ("PSUs") to the Chief Executive Officer, Chief Financial Officer and certain other employees. The awards were issued pursuant to and are consistent with the terms and conditions of the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The PSUs are subject to performance-based vesting under the 2017 Plan pursuant to a form of PSU award agreement (the "PSU Agreement"). Vesting of the PSUs will occur after a three-year period based on the Company's relative TSR percentile ranking as compared to an identified performance peer group. The feature in this award constitutes a “market condition” which impacts the amount of compensation expense recognized for these awards. The grant date fair values of PSUs were determined through Monte-Carlo simulation analysis.

Income Taxes – The Company operates in such a manner so as to qualify as a REIT under the requirements of the Internal Revenue Code. Requirements for qualification as a REIT include various restrictions on ownership of the Company’s stock, requirements concerning distribution of taxable income and certain restrictions on the nature of assets and sources of income. A REIT must distribute at least 90% of its taxable income to its stockholders, of which 85% plus any undistributed amounts from the prior year must be distributed within the taxable year in order to avoid the imposition of an excise tax. Distribution of the remaining balance may extend until timely filing of the Company’s tax return in the subsequent taxable year. Qualifying distributions of taxable income are deductible by a REIT in computing taxable income.

Certain activities of the Company are conducted through TRSs and therefore are subject to federal and various state and local income taxes. Accordingly, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

ASC 740, Income Taxes ("ASC 740"), provides guidance for how uncertain tax positions should be recognized, measured, presented, and disclosed in the financial statements. ASC 740 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company’s tax returns to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. In situations involving uncertain tax positions related to income tax matters, we do not recognize benefits unless it is more likely than not that they will be sustained. ASC 740 was applied to all open taxable years as of the effective date. Management’s determinations regarding ASC 740 may be subject to review and adjustment at a later date based on factors including, but not limited to, an ongoing analysis of tax laws, regulations and interpretations thereof. The Company will recognize interest and penalties, if any, related to uncertain tax positions as income tax expense in our condensed consolidated statements of operations.

Earnings Per Share – Basic earnings per share excludes dilution and is computed by dividing net income attributable to the Company's common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.

Segment Reporting – ASC 280, Segment Reporting, is the authoritative guidance for the way public entities report information about operating segments in their annual financial statements. We are a REIT focused on the business of acquiring, investing in, financing and managing mortgage-related and residential housing-related assets, and currently operate in only one reportable segment.

Summary of Recent Accounting Pronouncements

Revenue Recognition (Topic 606)

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”). This guidance created a new, principle-based revenue recognition framework that affects nearly every revenue-generating entity. ASU 2014-09 also created a new topic in the Codification, Topic 606 (“ASC 606”). In addition to superseding and replacing nearly all existing GAAP revenue recognition guidance, including industry-specific guidance, ASC 606 does the following: (1) establishes a new control-based revenue recognition model; (2) changes the basis for deciding when revenue is recognized over time or at a point in time; (3) provides new and more detailed guidance on specific aspects of revenue recognition; and (4) expands and improves disclosures about revenue.
 

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ASC 606 applies to all contracts with customers with exceptions for financial instruments and other contractual rights or obligations that are within the scope of other ASC Topics. Exclusions from the scope of ASC 606 include investment securities available for sale (subject to ASC 320, Investments - Debt and Equity Securities or ASC 325, Investments - Other); residential mortgage loans, distressed residential mortgage loans, multi-family loans, and preferred equity and mezzanine loan investments (subject to either ASC 310, Receivables or ASC 825, Financial Instruments); derivative assets and derivative liabilities (subject to ASC 815, Derivatives and Hedging); and investment in unconsolidated entities (subject to either ASC 323, Investments- Equity Method and Joint Ventures or ASC 825, Financial Instruments). In adopting the ASU effective January 1, 2018, the Company evaluated the applicability of this ASU with respect to its investment portfolio and, considering the scope exceptions listed above, the adoption of this ASU did not have a material impact on the Company's financial condition or results of operations.

Financial Instruments —Credit Losses (Topic 326)

In June 2016, the FASB issued ASU 2016-13, Financial Instruments —Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ("ASU 2016-13"). The amendments require the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Financial institutions and other organizations will now use forward-looking information to better inform their credit loss estimates. In addition, the ASU amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Early adoption as of the fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018 is permitted. The Company is currently assessing the impact of this guidance as the ASU will have an effect on the Company's estimation of credit losses on distressed residential mortgage loans, residential mortgage loans held in securitization trusts, residential mortgage loans, and preferred equity and mezzanine loan investments that are accounted for as loans.

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3.
Investment Securities Available For Sale

Investment securities available for sale consisted of the following as of June 30, 2018 and December 31, 2017 (dollar amounts in thousands):
 
June 30, 2018
 
December 31, 2017
 
Amortized  Cost
 
Unrealized
 
Fair Value
 
Amortized  Cost
 
Unrealized
 
Fair Value
 
 
Gains
 
Losses
 
 
 
Gains
 
Losses
 
Agency RMBS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency ARMs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
$
29,384

 
$
—

 
$
(1,161
)
 
$
28,223

 
$
33,623

 
$
16

 
$
(852
)
 
$
32,787

Fannie Mae
48,610

 
10

 
(1,624
)
 
46,996

 
54,958

 
6

 
(1,236
)
 
53,728

Ginnie Mae
4,245

 
—

 
(136
)
 
4,109

 
4,750

 
—

 
(193
)
 
4,557

Total Agency ARMs
82,239

 
10

 
(2,921
)
 
79,328

 
93,331

 
22

 
(2,281
)
 
91,072

Agency Fixed- Rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
92,189

 
—

 
(3,023
)
 
89,166

 
20,804

 
—

 
(736
)
 
20,068

Fannie Mae
971,543

 
—

 
(38,693
)
 
932,850

 
1,038,363

 
669

 
(12,174
)
 
1,026,858

Ginnie Mae
—

 
—

 
—

 
—

 
365

 
—

 
(6
)
 
359

Total Agency Fixed-Rate
1,063,732

 
—

 
(41,716
)
 
1,022,016

 
1,059,532

 
669

 
(12,916
)
 
1,047,285

Agency IOs
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Freddie Mac
—

 
—

 
—

 
—

 
8,436

 
19

 
(2,756
)
 
5,699

Fannie Mae
—

 
—

 
—

 
—

 
11,310

 
22

 
(2,989
)
 
8,343

Ginnie Mae
—

 
—

 
—

 
—

 
21,621

 
230

 
(4,714
)
 
17,137

Total Agency IOs
—

 
—

 
—

 
—

 
41,367

 
271

 
(10,459
)
 
31,179

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total Agency RMBS
1,145,971

 
10

 
(44,637
)
 
1,101,344

 
1,194,230

 
962

 
(25,656
)
 
1,169,536

Non-Agency RMBS
53,695

 
372

 
(10
)
 
54,057

 
100,291

 
1,852

 
(18
)
 
102,125

CMBS (1)
115,799

 
18,815

 
—

 
134,614

 
123,203

 
18,217

 
—

 
141,420

Total investment securities available for sale
$
1,315,465

 
$
19,197

 
$
(44,647
)
 
$
1,290,015

 
$
1,417,724

 
$
21,031

 
$
(25,674
)
 
$
1,413,081



(1) 
Included in CMBS is $50.1 million and $47.9 million of investment securities available for sale held in securitization trusts as of June 30, 2018 and December 31, 2017, respectively.

Realized Gain or Loss Activity

During the three and six months ended June 30, 2018, the Company received total proceeds of approximately $16.8 million and $26.9 million, respectively, from the sale of investment securities available for sale, realizing a net loss of approximately $8.8 million and $12.3 million, respectively. During the three and six months ended June 30, 2017, the Company received total proceeds of approximately $15.4 million and $52.7 million, respectively, from the sale of investment securities available for sale, realizing a net loss of approximately $0.6 million and $2.3 million, respectively.

Weighted Average Life

Actual maturities of our available for sale securities are generally shorter than stated contractual maturities (with maturities up to 30 years), as they are affected by periodic payments and prepayments of principal on the underlying mortgages. As of June 30, 2018 and December 31, 2017, the weighted average life of the Company’s available for sale securities portfolio was approximately 5.9 years and 7.1 years, respectively.


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The following table sets forth the weighted average lives of our investment securities available for sale as of June 30, 2018 and December 31, 2017 (dollar amounts in thousands):
Weighted Average Life
June 30, 2018
 
December 31, 2017
0 to 5 years
$
314,907

 
$
426,061

Over 5 to 10 years
951,455

 
970,336

10+ years
23,653

 
16,684

Total
$
1,290,015

 
$
1,413,081


Portfolio Interest Reset Periods

The following tables set forth the stated reset periods of our investment securities available for sale at June 30, 2018 and December 31, 2017 at carrying value (dollar amounts in thousands):
 
June 30, 2018
 
December 31, 2017
 
Less than 6
months
 
6 to 24
months
 
More than
24 months
 
Total
 
Less than
6 months
 
6 to 24
months
 
More than
24 months
 
Total
Agency RMBS
$
10,170

 
$
15,516

 
$
1,075,658

 
$
1,101,344

 
$
26,876

 
$
24,726

 
$
1,117,934

 
$
1,169,536

Non-Agency RMBS
7,526

 
—

 
46,531

 
54,057

 
84,461

 
—

 
17,664

 
102,125

CMBS
62,038

 
—

 
72,576

 
134,614

 
70,791

 
—

 
70,629

 
141,420

Total investment securities available for sale
$
79,734

 
$
15,516

 
$
1,194,765

 
$
1,290,015

 
$
182,128

 
$
24,726

 
$
1,206,227

 
$
1,413,081


Unrealized Losses in OCI

The following tables present the Company's investment securities available for sale in an unrealized loss position reported through OCI, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2018 and December 31, 2017 (dollar amounts in thousands):

June 30, 2018
Less than 12 months
 
Greater than 12 months
 
Total
 
Carrying
Value
 
Gross
Unrealized
Losses
 
Carrying
Value
 
Gross
Unrealized
Losses
 
Carrying
Value
 
Gross
Unrealized
Losses
Agency RMBS
$
794,830

 
$
(26,721
)
 
$
305,579

 
$
(17,916
)
 
$
1,100,409

 
$
(44,637
)
Non-Agency RMBS
—

 
—

 
181

 
(10
)
 
181

 
(10
)
Total investment securities available for sale
$
794,830

 
$
(26,721
)
 
$
305,760

 
$
(17,926
)
 
$
1,100,590

 
$
(44,647
)

At June 30, 2018, the Company does not intend to sell any of its investments that were in an unrealized loss position, and it is “more likely than not” that the Company will not be required to sell these securities before recovery of their amortized cost basis, which may be at their maturity.

Gross unrealized losses on the Company’s Agency RMBS were $44.6 million at June 30, 2018. Agency RMBS are issued by GSEs and enjoy either the implicit or explicit backing of the full faith and credit of the U.S. Government. While the Company’s Agency RMBS are not rated by any rating agency, they are currently perceived by market participants to be of high credit quality, with risk of default limited to the unlikely event that the U.S. Government would not continue to support the GSEs. Given the credit quality inherent in Agency RMBS, the Company does not consider any of the current impairments on its Agency RMBS to be credit related. In assessing whether it is more likely than not that it will be required to sell any impaired security before its anticipated recovery, which may be at its maturity, the Company considers for each impaired security, the significance of each investment, the amount of impairment, the projected future performance of such impaired securities, as well as the Company’s current and anticipated leverage capacity and liquidity position. Based on these analyses, the Company determined that at June 30, 2018 any unrealized losses on its Agency RMBS were temporary.


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December 31, 2017
Less than 12 months
 
Greater than 12 months
 
Total
 
Carrying
Value
 
Gross
Unrealized
Losses
 
Carrying
Value
 
Gross
Unrealized
Losses
 
Carrying
Value
 
Gross
Unrealized
Losses
Agency RMBS
$
511,313

 
$
(1,807
)
 
$
342,963

 
$
(13,390
)
 
$
854,276

 
$
(15,197
)
Non-Agency RMBS
—

 
—

 
193

 
(18
)
 
193

 
(18
)
Total investment securities available for sale
$
511,313

 
$
(1,807
)
 
$
343,156

 
$
(13,408
)
 
$
854,469

 
$
(15,215
)

Other than Temporary Impairment

For the three and six months ended June 30, 2018 and 2017, the Company recognized no other-than-temporary impairment through earnings.

4.
Residential Mortgage Loans Held in Securitization Trusts, Net and Real Estate Owned

Residential mortgage loans held in securitization trusts, net consist of the following as of June 30, 2018 and December 31, 2017, respectively (dollar amounts in thousands):
 
June 30, 2018
 
December 31, 2017
Unpaid principal balance
$
69,451

 
$
77,519

Deferred origination costs – net
440

 
492

Reserve for loan losses
(3,844
)
 
(4,191
)
Total
$
66,047

 
$
73,820


Allowance for Loan Losses - The following table presents the activity in the Company's allowance for loan losses on residential mortgage loans held in securitization trusts for the six months ended June 30, 2018 and 2017, respectively (dollar amounts in thousands):
 
Six Months Ended June 30,
 
2018
 
2017
Balance at beginning of period
$
4,191

 
$
3,782

(Recovery of) provision for loan losses
(110
)
 
207

Transfer to real estate owned
—

 
(6
)
Charge-offs
(237
)
 
—

Balance at the end of period
$
3,844

 
$
3,983


On an ongoing basis, the Company evaluates the adequacy of its allowance for loan losses. The Company’s allowance for loan losses as of June 30, 2018 was $3.8 million, representing 554 basis points of the outstanding principal balance of residential loans held in securitization trusts, as compared to 541 basis points as of December 31, 2017. As part of the Company’s allowance for loan loss adequacy analysis, management will assess an overall level of allowances while also assessing credit losses inherent in each non-performing residential mortgage loan held in securitization trusts. These estimates involve the consideration of various credit related factors, including but not limited to, current housing market conditions, current loan to value ratios, delinquency status, the borrower’s current economic and credit status and other relevant factors.

Real Estate Owned – The Company had real estate owned held in residential securitization trusts of $0.1 million at June 30, 2018 and December 31, 2017. Real estate owned held in residential securitization trusts are included in receivables and other assets on the accompanying condensed consolidated balance sheets and write downs are included in recovery of (provision for) loan losses in the accompanying condensed consolidated statements of operations for reporting purposes.


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All of the Company’s mortgage loans and real estate owned held in residential securitization trusts are pledged as collateral for the Residential CDOs issued by the Company. The Company’s net investment in the residential securitization trusts, which is the maximum amount of the Company’s investment that is at risk to loss and represents the difference between (i) the carrying amount of the mortgage loans, real estate owned and receivables held in residential securitization trusts and (ii) the amount of Residential CDOs outstanding, was $4.9 million and $4.4 million as of June 30, 2018 and December 31, 2017, respectively.

Delinquency Status of Our Residential Mortgage Loans Held in Securitization Trusts

As of June 30, 2018, we had 24 delinquent loans with an aggregate principal amount outstanding of approximately $15.0 million categorized as residential mortgage loans held in securitization trusts, net, of which $6.7 million, or 45%, are under some form of temporary modified payment plan. The table below shows delinquencies in our portfolio of residential mortgage loans held in securitization trusts, including real estate owned (REO) through foreclosure, as of June 30, 2018 (dollar amounts in thousands):

June 30, 2018
Days Late
Number of
Delinquent
Loans 
 
Total
Unpaid
Principal 
 
% of Loan
Portfolio 
30 - 60
1
 
$
311

 
0.45
%
61 - 90
1
 
$
170

 
0.24
%
90 +
22
 
$
14,481

 
20.82
%
Real estate owned through foreclosure
1
 
$
118

 
0.17
%

As of December 31, 2017, we had 26 delinquent loans with an aggregate principal amount outstanding of approximately $16.5 million categorized as residential mortgage loans held in securitization trusts, net, of which $10.2 million, or 62%, are under some form of temporary modified payment plan. The table below shows delinquencies in our portfolio of residential mortgage loans held in securitization trusts, including REO through foreclosure, as of December 31, 2017 (dollar amounts in thousands):

December 31, 2017
Days Late
Number of Delinquent
Loans
 
Total
Unpaid Principal
 
% of Loan
Portfolio
30 - 60
1
 
$
203

 
0.26
%
61 - 90
1
 
$
173

 
0.22
%
90 +
24
 
$
16,147

 
20.80
%
Real estate owned through foreclosure
1
 
$
118

 
0.15
%

The geographic concentrations of credit risk exceeding 5% of the total loan balances in our residential mortgage loans held in securitization trusts and REO held in residential securitization trusts as of June 30, 2018 and December 31, 2017 are as follows:
 
June 30, 2018
 
December 31, 2017
New York
31.9
%
 
31.8
%
Massachusetts
19.5
%
 
20.7
%
New Jersey
13.0
%
 
11.9
%
Florida
9.4
%
 
8.8
%
Connecticut
7.7
%
 
7.3
%
Maryland
4.9
%
 
5.2
%


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5.
Residential Mortgage Loans, At Fair Value
Certain of the Company’s residential mortgage loans, including distressed residential mortgage loans and second mortgages, are presented at fair value on its condensed consolidated balance sheets as a result of a fair value election made at time of acquisition. Subsequent changes in fair value are reported in current period earnings and presented in net gain (loss) on residential mortgage loans at fair value on the Company’s condensed consolidated statements of operations.
The Company’s residential mortgage loans at fair value consist of the following as of June 30, 2018 and December 31, 2017, respectively (dollar amounts in thousands):
 
 
Principal
 
Premium/(Discount)
 
Unrealized Gains/(Losses)
 
Carrying Value
June 30, 2018
 
$
175,275

 
$
(5,598
)
 
$
(480
)
 
$
169,197

December 31, 2017
 
92,105

 
(4,911
)
 
(41
)
 
87,153

As of June 30, 2018, the Company is committed to purchase $1.9 million of second mortgage loans from originators.

The following table presents the components of net gain (loss) on residential mortgage loans at fair value for the six months ended June 30, 2018 and 2017, respectively (dollar amounts in thousands):

 
June 30, 2018
 
June 30, 2017
Net realized gain on payoff and sale of loans
$
369

 
$
—

Net unrealized losses
(439
)
 
—


The geographic concentrations of credit risk exceeding 5% of the unpaid principal balance of residential mortgage loans at fair value as of June 30, 2018 and December 31, 2017, respectively, are as follows:
 
June 30, 2018
 
December 31, 2017
California
28.4
%
 
35.9
%
Florida
8.5
%
 
6.6
%
New Jersey
6.4
%
 
7.7
%

The following table presents the difference between the fair value and the aggregate unpaid principal balance of the Company's residential mortgage loans at fair value greater than 90 days past due and in non-accrual status as of June 30, 2018 and December 31, 2017, respectively (dollar amounts in thousands):
 
Fair Value
 
Unpaid Principal Balance
 
Difference
June 30, 2018
$
2,212

 
$
2,649

 
$
(437
)
December 31, 2017
1,048

 
1,214

 
(166
)

Distressed residential mortgage loans and second mortgages with a fair value of approximately $117.4 million and $44.2 million at June 30, 2018 and December 31, 2017, respectively, are pledged as collateral for master repurchase agreements with Deutsche Bank AG, Cayman Islands Branch (see Note 14).

6.
Distressed Residential Mortgage Loans

As of June 30, 2018 and December 31, 2017, the carrying value of the Company’s distressed residential mortgage loans, including distressed residential mortgage loans held in securitization trusts, amounts to approximately $290.6 million and $331.5 million, respectively.


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The Company considers its purchase price for the distressed residential mortgage loans, including distressed residential mortgage loans held in securitization trusts, to be at fair value at the date of acquisition. The Company only establishes an allowance for loan losses subsequent to acquisition.

The following table presents information regarding the estimates of the contractually required payments, the cash flows expected to be collected, and the estimated fair value of the distressed residential mortgage loans acquired during the six months ended June 30, 2017 (dollar amounts in thousands):
 
June 30, 2017
Contractually required principal and interest
$
76,529

Nonaccretable yield
(6,467
)
Expected cash flows to be collected
70,062

Accretable yield
(58,767
)
Fair value at the date of acquisition
$
11,295


Distressed residential mortgage loans purchased during the six months ended June 30, 2018 are presented in the accompanying condensed consolidated balance sheets at fair value (see Note 5).
    
The following table details activity in accretable yield for the distressed residential mortgage loans, including distressed residential mortgage loans held in securitization trusts, for the six months ended June 30, 2018 and 2017, respectively (dollar amounts in thousands):
 
June 30, 2018
 
June 30, 2017
Balance at beginning of period
$
303,949

 
$
530,511

Additions
3,314

 
88,391

Disposals
(37,665
)
 
(206,166
)
Accretion
(8,074
)
 
(12,711
)
Balance at end of period (1)
$
261,524

 
$
400,025


(1) 
Accretable yield is the excess of the distressed residential mortgage loans’ cash flows expected to be collected over the purchase price. The cash flows expected to be collected represents the Company’s estimate of the amount and timing of undiscounted principal and interest cash flows. Additions include accretable yield estimates for purchases made during the period and reclassification to accretable yield from nonaccretable yield. Disposals include distressed residential mortgage loan dispositions, which include refinancing, sale and foreclosure of the underlying collateral and resulting removal of the distressed residential mortgage loans from the accretable yield, and reclassifications from accretable to nonaccretable yield. The reclassifications between accretable and nonaccretable yield and the accretion of interest income is based on various estimates regarding loan performance and the value of the underlying real estate securing the loans. As the Company continues to update its estimates regarding the loans and the underlying collateral, the accretable yield may change. Therefore, the amount of accretable income recorded in each of the six month periods ended June 30, 2018 and 2017 is not necessarily indicative of future results.


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The geographic concentrations of credit risk exceeding 5% of the unpaid principal balance of our distressed residential mortgage loans, including distressed residential mortgage loans held in securitization trusts, as of June 30, 2018 and December 31, 2017, respectively, are as follows:
 
June 30, 2018
 
December 31, 2017
Florida
11.2
%
 
11.2
%
North Carolina
8.5
%
 
8.3
%
California
6.9
%
 
6.9
%
Georgia
6.0
%
 
5.8
%
New York
5.9
%
 
5.7
%
South Carolina
5.3
%
 
5.0
%
Ohio
5.0
%
 
5.1
%

The Company's distressed residential mortgage loans held in securitization trusts with a carrying value of approximately $105.9 million and $121.8 million at June 30, 2018 and December 31, 2017, respectively, are pledged as collateral for certain of the Securitized Debt issued by the Company (see Note 10). In addition, distressed residential mortgage loans with a carrying value of approximately $160.6 million and $182.6 million at June 30, 2018 and December 31, 2017, respectively, are pledged as collateral for a master repurchase agreement with Deutsche Bank AG, Cayman Islands Branch (see Note 14).

7.
Consolidated K-Series

The Company has elected the fair value option on the assets and liabilities held within the Consolidated K-Series, which requires that changes in valuations in the assets and liabilities of the Consolidated K-Series be reflected in the Company's condensed consolidated statements of operations. Our investment in the Consolidated K-Series is limited to the multi-family CMBS comprised of first loss POs, certain IOs and mezzanine securities issued by certain Freddie Mac K-Series securitizations with an aggregate net carrying value of $506.5 million and $468.0 million at June 30, 2018 and December 31, 2017, respectively (see Note 10). The Consolidated K-Series is comprised of seven multi-family CMBS investments as of June 30, 2018 and December 31, 2017.

The condensed consolidated balance sheets of the Consolidated K-Series at June 30, 2018 and December 31, 2017, respectively, are as follows (dollar amounts in thousands):

Balance Sheets
June 30, 2018
 
December 31, 2017
Assets
 
 
 
Multi-family loans held in securitization trusts
$
9,345,360

 
$
9,657,421

Receivables
32,246

 
33,562

Total Assets
$
9,377,606

 
$
9,690,983

Liabilities and Equity
 
 
 
Multi-family CDOs
$
8,838,841

 
$
9,189,459

Accrued expenses
31,818

 
33,136

Total Liabilities
8,870,659

 
9,222,595

Equity
506,947

 
468,388

Total Liabilities and Equity
$
9,377,606

 
$
9,690,983


The multi-family loans held in securitization trusts had aggregate unpaid principal balances of approximately $9.3 billion and $9.4 billion at June 30, 2018 and December 31, 2017, respectively. The multi-family CDOs had aggregate unpaid principal balances of approximately $9.3 billion and $9.4 billion at June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018 and December 31, 2017, the current weighted average interest rate on these multi-family CDOs was 4.05% and 3.92%, respectively.


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The Company does not have any claims to the assets or obligations for the liabilities of the Consolidated K-Series (other than those securities represented by our first loss and mezzanine securities). We have elected the fair value option for the Consolidated K-Series. The net fair value of our investment in the Consolidated K-Series, which represents the difference between the carrying values of multi-family loans held in securitization trusts less the carrying value of multi-family CDOs, approximates the fair value of our underlying securities. The fair value of our underlying securities is determined using the same valuation methodology as our CMBS investments available for sale (see Note 18).

The condensed consolidated statements of operations of the Consolidated K-Series for the three and six months ended June 30, 2018 and 2017, respectively, are as follows (dollar amounts in thousands):

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
Statements of Operations
2018
 
2017
 
2018
 
2017
Interest income
$
85,629

 
$
75,752

 
$
170,721

 
$
137,056

Interest expense
74,686

 
66,873

 
149,165

 
120,805

Net interest income
10,943

 
8,879

 
21,556

 
16,251

Unrealized gain on multi-family loans and debt held in securitization trusts, net
12,019

 
1,447

 
19,564

 
2,831

Net income
$
22,962

 
$
10,326

 
$
41,120

 
$
19,082


The geographic concentrations of credit risk exceeding 5% of the total loan balances related to our CMBS investments included in investment securities available for sale and multi-family loans held in securitization trusts as of June 30, 2018 and December 31, 2017, respectively, are as follows:

 
June 30, 2018
 
December 31, 2017
California
14.7
%
 
14.7
%
Texas
12.7
%
 
12.7
%
New York
6.5
%
 
6.5
%
Maryland
5.5
%
 
5.5
%



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8.
Investment in Unconsolidated Entities

The Company's investments in unconsolidated entities accounted for under the equity method consist of the following as of June 30, 2018 and December 31, 2017 (dollar amounts in thousands):

 
 
June 30, 2018

December 31, 2017
Investment Name
 
Ownership Interest
 
Carrying Amount
 
Ownership Interest
 
Carrying Amount
BBA-EP320 II, L.L.C., BBA-Ten10 II, L.L.C., and Lexington on the Green Apartments, L.L.C. (collectively)
 
45%
 
$
8,519

 
45%
 
$
8,320

Total - Equity Method
 
 
 
$
8,519

 
 
 
$
8,320

    
The Company's investments in unconsolidated entities accounted for under the equity method using the fair value option consist of the following as of June 30, 2018 and December 31, 2017 (dollar amounts in thousands):
 
 
June 30, 2018
 
December 31, 2017
Investment Name
 
Ownership Interest
 
Carrying Amount
 
Ownership Interest
 
Carrying Amount
Morrocroft Neighborhood Stabilization Fund II, LP
 
11%
 
$
13,302

 
11%
 
$
12,623

Evergreens JV Holdings, LLC
 
85%
 
4,420

 
85%
 
4,220

The Preserve at Port Royal Venture, LLC
 
77%
 
13,430

 
77%
 
13,040

WR Savannah Holdings, LLC
 
90%
 
14,000

 
90%
 
12,940

Total - Fair Value Option
 
 
 
$
45,152

 
 
 
$
42,823


The following table presents income from investments in unconsolidated entities for the three and six months ended June 30, 2018 and June 30, 2017 (dollar amounts in thousands):
        
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
Investment Name
 
2018
 
2017
 
2018
 
2017
Autumnwood Investments LLC
 
$
—

 
$
73

 
$
—

 
$
73

200 RHC Hoover, LLC
 
—

 
—

 
—

 
275

BBA-EP320 II, L.L.C., BBA-Ten10 II, L.L.C., and Lexington on the Green Apartments, L.L.C. (collectively)
 
259

 
247

 
512

 
488

Morrocroft Neighborhood Stabilization Fund II, LP
 
398

 
332

 
680

 
980

Evergreens JV Holdings, LLC
 
171

 
139

 
365

 
303

Bent Tree JV Holdings, LLC
 
—

 
297

 
—

 
585

Summerchase LR Partners LLC
 
—

 
180

 
—

 
362

Lake Mary Realty Partners, LLC
 
—

 
222

 
—

 
433

The Preserve at Port Royal Venture, LLC
 
419

 
441

 
902

 
826

WR Savannah Holdings, LLC
 
1,269

 
295

 
1,629

 
625




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9.
Preferred Equity and Mezzanine Loan Investments

Preferred equity and mezzanine loan investments consist of the following as of June 30, 2018 and December 31, 2017 (dollar amounts in thousands):
 
June 30, 2018
 
December 31, 2017
Investment amount
$
178,372

 
$
140,560

Deferred loan fees, net
(1,631
)
 
(1,640
)
Total
$
176,741

 
$
138,920


There were no delinquent preferred equity and mezzanine loan investments as of June 30, 2018 and December 31, 2017. As of June 30, 2018, the Company is committed to fund $2.8 million of preferred equity on an existing investment.
The geographic concentrations of credit risk exceeding 5% of the total preferred equity and mezzanine loan investment amounts as of June 30, 2018 and December 31, 2017 are as follows:
 
June 30, 2018
 
December 31, 2017
New York
23.9
%
 
24.1
%
Texas
15.7
%
 
24.3
%
Florida
13.5
%
 
3.9
%
Virginia
8.5
%
 
10.8
%
Tennessee
6.2
%
 
—

Alabama
5.7
%
 
7.1
%
South Carolina
5.6
%
 
7.0
%

10.
Use of Special Purpose Entities and Variable Interest Entities

The Company uses SPEs to facilitate transactions that involve securitizing financial assets or re-securitizing previously securitized financial assets. The objective of such transactions may include obtaining non-recourse financing, obtaining liquidity or refinancing the underlying securitized financial assets on improved terms. Securitization involves transferring assets to an SPE to convert all or a portion of those assets into cash before they would have been realized in the normal course of business through the SPE’s issuance of debt or equity instruments. Investors in an SPE usually have recourse only to the assets in the SPE and depending on the overall structure of the transaction, may benefit from various forms of credit enhancement, such as over-collateralization in the form of excess assets in the SPE, priority with respect to receipt of cash flows relative to holders of other debt or equity instruments issued by the SPE, or a line of credit or other form of liquidity agreement that is designed with the objective of ensuring that investors receive principal and/or interest cash flow on the investment in accordance with the terms of their investment agreement.    

The Company has entered into resecuritization and financing transactions which required the Company to analyze and determine whether the SPEs that were created to facilitate the transactions are VIEs in accordance with ASC 810, and if so, whether the Company is the primary beneficiary requiring consolidation. The Company evaluated the following resecuritization or financing transactions: 1) its Residential CDOs; 2) its multi-family CMBS re-securitization transaction and 3) its distressed residential mortgage loan securitization transaction (each a “Financing VIE” and collectively, the “Financing VIEs”) and concluded that the entities created to facilitate each of the transactions are VIEs and that the Company is the primary beneficiary of these VIEs. Accordingly, the Company continues to consolidate the Financing VIEs as of June 30, 2018.


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Table of Contents


The Company invests in multi-family CMBS consisting of PO securities that represent the first loss of the securitizations from which they were issued, and certain IOs and mezzanine CMBS securities issued from Freddie Mac-sponsored multi-family K-Series securitization trusts. The Company has evaluated these CMBS investments in Freddie Mac-sponsored K-Series securitization trusts to determine whether they are VIEs and if so, whether the Company is the primary beneficiary requiring consolidation. The Company has determined that seven Freddie Mac-sponsored multi-family K-Series securitization trusts are VIEs as of June 30, 2018 and December 31, 2017. The Company also determined that it is the primary beneficiary of each VIE within the Consolidated K-Series and, accordingly, has consolidated its assets, liabilities, income and expenses in the accompanying condensed consolidated financial statements (see Notes 2 and 7). Of the Company’s multi-family CMBS investments included in the Consolidated K-Series, six of these investments are not included as collateral to any Financing VIE as of June 30, 2018 and December 31, 2017.

In analyzing whether the Company is the primary beneficiary of the Consolidated K-Series and the Financing VIEs, the Company considered its involvement in each of the VIEs, including the design and purpose of each VIE, and whether its involvement reflected a controlling financial interest that resulted in the Company being deemed the primary beneficiary of the VIEs. In determining whether the Company would be considered the primary beneficiary, the following factors were assessed:

•
whether the Company has both the power to direct the activities that most significantly impact the economic performance of the VIE; and
•
whether the Company has a right to receive benefits or absorb losses of the entity that could be potentially significant to the VIE.
    
RB Development Holding Company, LLC ("RBDHC"), a wholly-owned subsidiary of the Company, owns 50% of Kiawah River View Investors LLC ("KRVI"), a limited liability company that owns developed land and residential homes under development in Kiawah Island, SC, for which RiverBanc LLC ("RiverBanc"), a wholly-owned subsidiary of the Company, is the manager. The Company has evaluated KRVI to determine if it is a VIE and if so, whether the Company is the primary beneficiary requiring consolidation. The Company has determined that KRVI is a VIE for which RBDHC is the primary beneficiary as the Company, collectively through RiverBanc and RBDHC, has both the power to direct the activities that most significantly impact the economic performance of KRVI and has a right to receive benefits or absorb losses of KRVI that could be potentially significant to KRVI. Accordingly, the Company has consolidated KRVI in its condensed consolidated financial statements with a non-controlling interest for the third-party ownership of KRVI membership interests.

During the three months ended June 30, 2018, the Company evaluated the home pricing and lot values of the real estate under development that is owned by KRVI, which is included in other assets on the Company's condensed consolidated balance sheets. Based on the evaluation, the Company determined that the real estate under development with a carrying amount of $22.4 million was no longer recoverable and was impaired. The Company wrote down the assets to $20.3 million and recognized a $2.1 million impairment loss included in other income in the Company's condensed consolidated statements of operations. $1.0 million of this impairment loss is included in net income attributable to non-controlling interest in consolidated variable interest entities on the accompanying condensed consolidated statements of operations, resulting in a net loss to the Company of $1.1 million. Fair value was determined based on the sales comparison approach which derives a value indication by comparing the subject property to similar properties that have been recently sold and assumes a purchaser will not pay more for a particular property than a similar substitute property.

On March 31, 2017, (the "Changeover Date"), the Company reconsidered its evaluation of its variable interests in Riverchase Landing and The Clusters, two VIEs that each own a multi-family apartment community and in which the Company held a preferred equity investment. The Company determined that it gained the power to direct the activities, and became primary beneficiary, of Riverchase Landing and The Clusters on the Changeover Date. Prior to the Changeover Date, the Company accounted for Riverchase Landing as an investment in an unconsolidated entity and for The Clusters as a preferred equity investment.

On the Changeover Date, the Company consolidated Riverchase Landing and The Clusters into its condensed consolidated financial statements. These transactions were accounted for by applying the acquisition method for business combinations.

The estimated Changeover Date fair value of the consideration transferred totaled $12.5 million, which consisted of the estimated fair value of the Company's preferred equity investments in both Riverchase Landing and The Clusters. The Company determined the estimated fair value of its preferred equity investments in Riverchase Landing and The Clusters using assumptions for the timing and amount of expected future cash flows from the underlying multi-family apartment communities and a discount rate.

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The following table summarizes the estimated fair values of the assets and liabilities of Riverchase Landing and The Clusters at the Changeover Date (dollar amounts in thousands).
Cash
$
112

Operating real estate (1)
62,322

Lease intangibles (1)
5,340

Receivables and other assets