| REAL ESTATE SECURITIES |
REAL ESTATE SECURITIES
The following is a summary of Drive Shack Inc.’s real estate securities at December 31, 2016 and 2015, all of which are classified as available for sale and are, therefore, reported at fair value with changes in fair value recorded in other comprehensive income, except for securities that are other-than-temporarily impaired.
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Amortized Cost Basis |
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Gross Unrealized |
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|
Weighted Average |
Asset Type |
|
Outstanding
Face Amount |
|
Before
Impairment |
|
Other-Than-
Temporary-
Impairment (A) |
|
After
Impairment |
|
Gains |
|
Losses |
|
Carrying Value
(B) |
|
Number of
Securities |
|
Rating
(C) |
|
Coupon |
|
Yield |
|
Life
(Years)
(D) |
|
Principal
Subordination
(E) |
December 31, 2016 |
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ABS - Non-Agency RMBS |
|
$ |
4,000 |
|
|
$ |
2,303 |
|
|
$ |
(1,521 |
) |
|
$ |
782 |
|
|
$ |
1,168 |
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|
$ |
— |
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$ |
1,950 |
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|
1 |
|
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C |
|
1.15 |
% |
|
25.45 |
% |
|
9.0 |
|
|
27.9 |
% |
Debt Security Total/Average (F)
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$ |
4,000 |
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|
$ |
2,303 |
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|
$ |
(1,521 |
) |
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$ |
782 |
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$ |
1,168 |
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|
$ |
— |
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$ |
1,950 |
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1 |
|
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C |
|
1.15 |
% |
|
25.45 |
% |
|
9.0 |
|
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Equity Securities |
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— |
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— |
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— |
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— |
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— |
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— |
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1 |
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Total Securities, Available-for-Sale |
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$ |
2,303 |
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|
$ |
(1,521 |
) |
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$ |
782 |
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$ |
1,168 |
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$ |
— |
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$ |
1,950 |
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2 |
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FNMA/FHLMC (A) |
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619,808 |
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650,432 |
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(23,128 |
) |
|
627,304 |
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|
— |
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— |
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627,304 |
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15 |
|
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AAA |
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3.28 |
% |
|
2.65 |
% |
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8.4 |
|
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N/A |
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Total Securities, Pledged as Collateral (F) |
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$ |
619,808 |
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$ |
650,432 |
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$ |
(23,128 |
) |
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$ |
627,304 |
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$ |
— |
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$ |
— |
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$ |
627,304 |
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15 |
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December 31, 2015 |
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CMBS |
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$ |
67,669 |
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$ |
78,416 |
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$ |
(55,372 |
) |
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$ |
23,044 |
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$ |
16,673 |
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$ |
(33 |
) |
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$ |
39,684 |
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16 |
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B |
|
4.97 |
% |
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14.78 |
% |
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2.1 |
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26.1 |
% |
ABS - Non-Agency RMBS |
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16,477 |
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23,403 |
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(20,667 |
) |
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2,736 |
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6,958 |
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(75 |
) |
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9,619 |
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9 |
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CC |
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1.89 |
% |
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11.95 |
% |
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11.0 |
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9.7 |
% |
ABS-Small Business Loans |
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8,464 |
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7,647 |
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(7,647 |
) |
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— |
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— |
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— |
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— |
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1 |
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C |
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6.69 |
% |
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— |
% |
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— |
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— |
% |
CDO (F)
|
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14,632 |
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— |
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— |
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— |
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9,731 |
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— |
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|
9,731 |
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2 |
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C |
|
1.80 |
% |
|
— |
% |
|
7.2 |
|
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25.1 |
% |
Debt Security Total/Average (F)
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$ |
107,242 |
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$ |
109,466 |
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$ |
(83,686 |
) |
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$ |
25,780 |
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$ |
33,362 |
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$ |
(108 |
) |
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$ |
59,034 |
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28 |
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CCC+ |
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4.20 |
% |
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14.48 |
% |
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4.0 |
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Equity Securities |
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— |
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— |
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— |
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— |
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— |
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— |
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2 |
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Total Securities, Available-for-Sale |
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$ |
109,466 |
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$ |
(83,686 |
) |
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$ |
25,780 |
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$ |
33,362 |
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$ |
(108 |
) |
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$ |
59,034 |
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30 |
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FNMA/FHLMC |
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102,660 |
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105,940 |
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— |
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105,940 |
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23 |
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— |
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|
105,963 |
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3 |
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AAA |
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3.50 |
% |
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2.99 |
% |
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7.8 |
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N/A |
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Total Securities, Pledged as Collateral (F) |
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$ |
102,660 |
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$ |
105,940 |
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$ |
— |
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$ |
105,940 |
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$ |
23 |
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|
$ |
— |
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$ |
105,963 |
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3 |
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(A) |
In December 2016, Drive Shack Inc. reclassified gross unrealized losses of $23.1 million from other comprehensive income into earnings on FNMA/FHLMC securities that the Company intends to sell and recorded in realized/unrealized (gain) loss on investments in the Consolidated Statements of Operations.
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(B) |
See Note 10 regarding the estimation of fair value, which is equal to carrying value for all securities. |
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(C) |
Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the lowest rating is used. Drive Shack Inc. used an implied AAA rating for the FNMA/FHLMC securities. Ratings provided were determined by third party rating agencies, represent the most recent credit ratings available as of the reporting date and may not be current.
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(D) |
The weighted average life is based on the timing of expected cash flows on the assets. |
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(E) |
Percentage of the outstanding face amount of securities and residual interests that is subordinate to Drive Shack Inc.’s investments. |
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(F) |
As of December 31, 2016 and 2015, the total outstanding face amount of fixed rate securities was $619.8 million and $168.5 million, respectively, and of floating rate securities were $4.0 million and $41.4 million, respectively.
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(G) |
Excludes eight CDO securities with zero value which had an aggregate face amount of $116.0 million as of December 31, 2015. The Company sold these securities during 2016.
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Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the years ended December 31, 2016, 2015 and 2014, Drive Shack Inc. recorded other-than-temporary impairment charges (“OTTI”) of $23.1 million, $2.4 million and $0.0 million, respectively, (gross of $0.0 million, less than $0.1 million and $0.0 million of other-than-temporary impairment recognized (reversed) in other comprehensive income in 2016, 2015 and 2014, respectively). Based on management’s analysis of the securities, the performance of the underlying loans and changes in market factors, Drive Shack Inc. noted adverse changes in the expected cash flows on certain of these securities and concluded that they were other-than-temporarily impaired. Any remaining unrealized losses as of each balance sheet date on Drive Shack Inc.’s securities were primarily the result of changes in market factors, rather than issuer-specific credit impairment. Drive Shack Inc. performed analyses in relation to such securities, using management’s best estimate of their cash flows, which support that the carrying values of such securities were fully recoverable over their expected holding period. The following table summarizes Drive Shack Inc.’s securities in an unrealized loss position as of December 31, 2016.
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Amortized Cost Basis |
|
Gross Unrealized |
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|
Weighted Average |
Securities in
an Unrealized
Loss Position |
Outstanding
Face
Amount |
|
Before
Impairment |
|
Other-than-
Temporary
Impairment (A) |
|
After
Impairment |
|
Gains |
|
Losses |
|
Carrying
Value |
|
Number
of
Securities |
|
Rating |
|
Coupon |
|
Yield |
|
Life
(Years) |
|
Less Than
Twelve
Months
|
$ |
619,808 |
|
|
$ |
650,432 |
|
|
$ |
(23,128 |
) |
|
$ |
627,304 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
627,304 |
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|
15 |
|
|
AAA |
|
3.28 |
% |
|
2.65 |
% |
|
8.4 |
|
|
Twelve or
More
Months
|
— |
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|
— |
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|
— |
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|
— |
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— |
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— |
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— |
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|
— |
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|
— |
|
— |
|
— |
|
— |
|
Total |
$ |
619,808 |
|
|
$ |
650,432 |
|
|
$ |
(23,128 |
) |
|
$ |
627,304 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
627,304 |
|
|
15 |
|
|
AAA |
|
3.28 |
% |
|
2.65 |
% |
|
8.4 |
|
Drive Shack Inc. performed an assessment of all of its debt securities that are in an unrealized loss position (unrealized loss position exists when a security’s amortized cost basis, excluding the effect of OTTI, exceeds its fair value) and determined the following:
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December 31, 2016 |
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|
Amortized Cost Basis |
|
Unrealized Losses |
|
Fair Value |
|
After Impairment |
|
Credit (C) |
|
Non-Credit (D) |
Securities Drive Shack Inc.intends to sell (A)
|
$ |
627,304 |
|
|
$ |
627,304 |
|
|
$ |
— |
|
|
N/A |
|
Securities Drive Shack Inc. is more likely than not to be required to sell (B)
|
— |
|
|
— |
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|
— |
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|
N/A |
|
Securities Drive Shack Inc. has no intent to sell and is not more likely than not to be required to sell: |
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Credit impaired securities |
— |
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— |
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— |
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— |
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Non-credit impaired securities |
— |
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— |
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— |
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|
— |
|
Total debt securities in an unrealized loss position |
$ |
627,304 |
|
|
$ |
627,304 |
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|
$ |
— |
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$ |
— |
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(A) |
In December 2016, Drive Shack Inc. reclassified gross unrealized losses of $23.1 million from other comprehensive income into earnings on FNMA/FHLMC securities that the Company intends to sell and recorded in realized/unrealized (gain) loss on investments in the Consolidated Statements of Operations.
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(B) |
Drive Shack Inc. may, at times, be more likely than not to be required to sell certain securities for liquidity purposes. While the amount of the securities to be sold may be an estimate, and the securities to be sold have not yet been identified, Drive Shack Inc. must make its best estimate, which is subject to significant judgment regarding future events, and may differ materially from actual future sales. |
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(C) |
This amount is required to be recorded as other-than-temporary impairment through earnings. In measuring the portion of credit losses, Drive Shack Inc.’s management estimates the expected cash flow for each of the securities. This evaluation includes a review of the credit status and the performance of the collateral supporting those securities, including the credit of the issuer, key terms of the securities and the effect of local, industry and broader economic trends. Significant inputs in estimating the cash flows include management’s expectations of prepayment speeds, default rates and loss severities. Credit losses are measured as the decline in the present value of the expected future cash flows discounted at the investment’s effective interest rate. |
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(D) |
This amount represents unrealized losses on securities that are due to non-credit factors and is required to be recorded through other comprehensive income. |
The following table summarizes the activity related to credit losses on debt securities:
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2016 |
|
2015 |
Beginning balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income |
$ |
(3,010 |
) |
|
$ |
(4,174 |
) |
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|
Additions for credit losses on securities for which an OTTI was not previously recognized |
— |
|
|
(1,567 |
) |
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|
Additions to credit losses on securities for which an OTTI was previously recognized and a portion of an OTTI was recognized in other comprehensive income |
(110 |
) |
|
— |
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|
Additions for credit losses on securities for which an OTTI was previously recognized without any portion of OTTI recognized in other comprehensive income |
— |
|
|
(1,443 |
) |
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|
Reduction for credit losses on securities for which no OTTI was recognized in other comprehensive income at the current measurement date |
— |
|
|
4,174 |
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|
Reduction for securities deconsolidated during the period |
3,120 |
|
|
— |
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Reduction for securities sold/written off during the period |
— |
|
|
— |
|
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|
Reduction for increases in cash flows expected to be collected that are recognized over the remaining life of the security |
— |
|
|
— |
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|
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Ending balance of credit losses on debt securities for which a portion of an OTTI was recognized in other comprehensive income |
$ |
— |
|
|
$ |
(3,010 |
) |
The table below summarizes the geographic distribution of the collateral securing the ABS at December 31, 2016:
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ABS - Non-Agency RMBS |
Geographic Location |
|
Outstanding Face Amount |
|
Percentage |
Northeastern U.S. |
|
$ |
623 |
|
|
15.6 |
% |
Southeastern U.S. |
|
1,056 |
|
|
26.4 |
% |
Midwestern U.S. |
|
426 |
|
|
10.7 |
% |
Western U.S. |
|
1,297 |
|
|
32.4 |
% |
Southwestern U.S. |
|
598 |
|
|
14.9 |
% |
|
|
$ |
4,000 |
|
|
100.0 |
% |
Geographic concentrations of investments expose Drive Shack Inc. to the risk of economic downturns within the relevant regions, particularly given the current unfavorable market conditions. These market conditions may make regions more vulnerable to downturns in certain market factors. Any such downturn in a region where Drive Shack Inc. holds significant investments could have a material, negative impact on Drive Shack Inc.
The table below summarizes the FNMA/FHLMC activity for the years ended December 31, 2016 and 2015 (dollars in millions):
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Settlement Date |
|
Activity |
|
Face Amount of FNMA/FHLMC Purchased (Sold) |
|
Average Price % of Par |
|
Total Proceeds (Payment) |
|
Gain (Loss) |
|
Repurchase Agreement Financed (Repaid) |
March 2015 (A)
|
|
Sale |
|
$ |
(380.4 |
) |
|
104.7 |
% |
|
$ |
398.4 |
|
|
$ |
5.9 |
|
|
$ |
(385.6 |
) |
March 2015 |
|
Purchase |
|
$ |
389.1 |
|
|
104.8 |
% |
|
$ |
(407.6 |
) |
|
N/A |
|
|
$ |
386.1 |
|
July 2015 (B)
|
|
Sale |
|
$ |
(380.4 |
) |
|
103.1 |
% |
|
$ |
392.3 |
|
|
$ |
(5.9 |
) |
|
$ |
(375.7 |
) |
July 2015 |
|
Purchase |
|
$ |
403.9 |
|
|
102.9 |
% |
|
$ |
(415.6 |
) |
|
N/A |
|
|
$ |
393.8 |
|
July 2015 |
|
Purchase |
|
$ |
201.9 |
|
|
102.9 |
% |
|
$ |
(207.7 |
) |
|
N/A |
|
|
$ |
196.7 |
|
September 2015 (A)
|
|
Sale |
|
$ |
(250.4 |
) |
|
103.8 |
% |
|
$ |
260.0 |
|
|
$ |
2.5 |
|
|
$ |
(250.1 |
) |
October 2015 (B)
|
|
Sale |
|
$ |
(348.9 |
) |
|
104.3 |
% |
|
$ |
364.0 |
|
|
$ |
5.1 |
|
|
$ |
(345.9 |
) |
October 2015 |
|
Purchase |
|
$ |
354.8 |
|
|
104.4 |
% |
|
$ |
(370.5 |
) |
|
N/A |
|
|
$ |
352.6 |
|
January 2016 (B)
|
|
Sale |
|
$ |
(350.3 |
) |
|
103.2 |
% |
|
$ |
361.3 |
|
|
$ |
(3.9 |
) |
|
$ |
(348.6 |
) |
January 2016 |
|
Purchase |
|
$ |
102.7 |
|
|
103.2 |
% |
|
$ |
(105.9 |
) |
|
N/A |
|
|
$ |
102.2 |
|
January 2016 |
|
Purchase |
|
$ |
250.1 |
|
|
103.2 |
% |
|
$ |
(258.1 |
) |
|
N/A |
|
|
$ |
249.1 |
|
April 2016 (B)
|
|
Sale |
|
$ |
(347.5 |
) |
|
104.9 |
% |
|
$ |
364.3 |
|
|
$ |
5.9 |
|
|
$ |
(352.0 |
) |
April 2016 |
|
Purchase |
|
$ |
363.1 |
|
|
105.0 |
% |
|
$ |
(381.1 |
) |
|
N/A |
|
|
$ |
366.4 |
|
July 2016 (B)
|
|
Sale |
|
$ |
(353.6 |
) |
|
105.5 |
% |
|
$ |
373.1 |
|
|
$ |
1.8 |
|
|
$ |
(361.1 |
) |
July 2016 |
|
Purchase |
|
$ |
428.9 |
|
|
105.7 |
% |
|
$ |
(453.1 |
) |
|
N/A |
|
|
$ |
434.9 |
|
August 2016 |
|
Purchase |
|
$ |
249.6 |
|
|
103.9 |
% |
|
$ |
(259.3 |
) |
|
N/A |
|
|
$ |
248.7 |
|
August 2016 |
|
Purchase |
|
$ |
116.8 |
|
|
105.7 |
% |
|
$ |
(123.5 |
) |
|
N/A |
|
|
$ |
118.6 |
|
September 2016 |
|
Purchase |
|
$ |
35.6 |
|
|
103.8 |
% |
|
$ |
(37.0 |
) |
|
N/A |
|
|
$ |
35.4 |
|
October 2016 |
|
Purchase |
|
$ |
776.9 |
|
|
103.6 |
% |
|
$ |
(805.1 |
) |
|
N/A |
|
|
$ |
769.6 |
|
October 2016 |
|
Purchase |
|
$ |
632.2 |
|
|
104.9 |
% |
|
$ |
(663.5 |
) |
|
N/A |
|
|
$ |
628.2 |
|
October 2016 (B)
|
|
Sale |
|
$ |
(817.2 |
) |
|
105.0 |
% |
|
$ |
858.2 |
|
|
$ |
0.1 |
|
|
$ |
(831.7 |
) |
November 2016 (A)
|
|
Sale |
|
$ |
(779.0 |
) |
|
101.5 |
% |
|
$ |
790.7 |
|
|
$ |
(16.2 |
) |
|
$ |
(773.7 |
) |
|
|
(A) |
The gain (loss) on these sales was recorded on the trade date. |
|
|
(B) |
The gain (loss) on these sales was recorded on the trade date which occurred in the month prior to the settlement date. |
In May 2015, Drive Shack Inc. sold $98.6 million face amount of CMBS securities at an average price of 104.03% of par for total proceeds of $102.6 million, and recognized a gain of $14.0 million. Drive Shack Inc. also sold $42.8 million face amount of ABS -non-agency RMBS securities at an average price of 85.54% of par for total proceeds of $36.7 million, and recognized a gain of $14.1 million. The proceeds from these CMBS and ABS - non-agency RMBS sales were used to repay the associated outstanding notes in CDO VI, CDO VIII and CDO IX.
Additionally in May 2015, Drive Shack Inc. received a $25.0 million par pay down of CMBS securities held in CDO IX. These funds were used to repay the associated outstanding notes in CDO IX.
In May 2015, Drive Shack Inc. also sold $3.9 million face amount of unencumbered ABS - non-agency RMBS at an average price of 24.11% of par for total proceeds of $0.9 million and recognized a gain of $0.8 million.
In June 2016, Drive Shack Inc. sold a CDO bond with a face amount of $10.0 million at a price of 7.25% of par for total proceeds of $0.7 million and reported a gain on sale of $0.7 million, as this bond was previously written down to zero.
In August 2016, Drive Shack Inc. settled on a trade to sell $14.8 million face amount of 2 CDO securities at an average price of 67.3% of par for total proceeds of $9.9 million and recognized a gain on the sale of approximately $9.9 million.
In October 2016, Drive Shack Inc. settled on a trade to sell $39.6 million face amount of 4 CDO securities for total proceeds of less than $0.1 million and recognized a gain of less than $0.1 million.
In December 2016, Drive Shack Inc. settled on a trade to sell $8.5 million face amount of a ABS-Small Business Loan security for total proceeds of less than $0.1 million and recognized a gain of less than $0.1 million.
In December 2016, Drive Shack Inc. settled on a trade to sell $10.3 million face amount of 2 CMBS securities for total proceeds of less than $0.1 million and recognized a gain of less than $0.1 million.
Securities Pledged as Collateral
These government agency securities were sold under agreements to repurchase which are treated as collateralized financing transactions. Although being pledged as collateral, securities financed through a repurchase agreement remains on Drive Shack Inc.'s Consolidated Balance Sheets as an asset and cash received from the purchaser is recorded on Drive Shack Inc.'s Consolidated Balance Sheets as a liability.
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