Annual report pursuant to Section 13 and 15(d)

REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS

v3.6.0.2
REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
 12 Months Ended
Dec. 31, 2016
Receivables [Abstract]  
REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
REAL ESTATE RELATED AND OTHER LOANS, RESIDENTIAL MORTGAGE LOANS AND SUBPRIME MORTGAGE LOANS
The following is a summary of real estate related and other loans, residential mortgage loans and subprime mortgage loans. The loans contain various terms, including fixed and floating rates, self-amortizing and interest only. They are generally subject to prepayment.
 
 
December 31, 2016
 
December 31, 2015
Loan Type
 
Outstanding
Face Amount
 
Carrying
Value (A)
 
Valuation Allowance (Reversal)
 
Loan
Count
 
Wtd.
Avg
Yield
 
Wtd
Avg
Coupon
 
Wtd
Avg
Life
(Years) (B)
 
Floating Rate
Loans as a %
of Face
Amount
 
Delinquent
Face Amount
(C)
 
Carrying
Value
 
Loan Count
 
Wtd. Avg.
Yield
Mezzanine Loans
 
$
17,767

 
$
—

 
$
—

 
2

 
0.00
%
 
8.39
%
 
0.0
 
100.0
%
 
$
17,767

 
$
19,433

 
3
 
8.00
%
Corporate Loans
 
120,381

 
55,612

 
3,826

 
4

 
22.49
%
 
15.20
%
 
0.5
 
0.0
%
 
59,384

 
129,765

 
4
 
22.42
%
Total Real Estate Related and other Loans Held-for-Sale, Net (D)
 
$
138,148

 
$
55,612

 
$
3,826

 
6

 
22.49
%
 
14.32
%
 
0.5
 
12.9
%
 
$
77,151

 
$
149,198

 
7
 
20.54
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential Mortgage Loans Held-for-Sale, Net (E)
 
$
771

 
$
231

 
$
213

 
3

 
3.40
%
 
3.05
%
 
1.8
 
100.0
%
 
$
628

 
$
532

 
4
 
62.02
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Subprime Mortgage Loans Subject to Call Option
 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
$
380,806

 
 
 
 

(A)
The aggregate United States federal income tax basis for such assets at December 31, 2016 was approximately $75.5 million (unaudited). Carrying value includes negligible interest receivable for the residential housing loans.
(B)
The weighted average maturity is based on the timing of expected cash flows on the assets.
(C)
Includes loans that are 60 days or more past due (including loans that are in foreclosure and borrowers in bankruptcy) or considered real estate owned (“REO”). As of December 31, 2016 and December 31, 2015, $77.2 million and $63.5 million face amount of real estate related and other loans, respectively, was on non-accrual status.
(D)
Loans which are more than 3% of the total current carrying value (or $1.7 million) at December 31, 2016 are as follows:
 
 
December 31, 2016
Loan Type
 
Outstanding
Face Amount
 
Carrying Value
 
Prior Liens
 
Loan
Count
 
Yield (1)
 
Coupon (1)
 
Weighted Average
Life (Years)
Individual Corporate Loan (2)
 
$
60,997

 
$
55,465

 
$
554,480

 
1

 
22.50
%
 
22.50
%
 
0.5
Others (3)
 
77,151

 
147

 
327,234

 
5

 
20.00
%
 
7.85
%
 
0.5
 
 
$
138,148

 
$
55,612

 
 
 
6

 
22.49
%
 
14.32
%
 
0.5
(1)
For Others, represents weighted average yield and weighted average coupon.
(2)
Interest accrued to principal balance over life to maturity. Prior Liens reflect indebtedness and other claims on the assets of the related companies which support the Individual Corporate Loan.
(3)
Various terms of payment. This represents $59.4 million and $17.8 million of corporate loans and mezzanine loans, respectively. Each of the five loans had a carrying value of less than $1.7 million at December 31, 2016. Prior Liens reflect face amounts of third party liens that are senior to Drive Shack Inc.’s position for Others.
(E)
Loans acquired at a discount for credit quality. Residential mortgage loans held-for-sale, net is recorded in receivables and other assets on the Consolidated Balance Sheets.


Drive Shack Inc.’s management monitors the credit qualities of the residential loans primarily by using the aging analysis, current trends in delinquencies and the actual loss incurrence rate.
Drive Shack Inc.'s investments in real estate related and other loans were classified as held-for-sale as of December 31, 2016 and December 31, 2015. Loans held-for-sale are carried on the Consolidated Balance Sheets at the lower of cost or fair value.
 
In June 2015, Drive Shack Inc. sold $12.0 million face amount of commercial real estate related loans from CDO VIII at a price of 100.01% of par for total proceeds of $12.0 million, and recognized a gain of $0.9 million.  Drive Shack Inc. also sold $45.7 million face amount of commercial real estate related loans from CDO IX at an average price of 95.35% for total proceeds of $43.5 million, and recognized a gain of $0.6 million.  These proceeds were used to repay the outstanding notes in CDO VIII and CDO IX, respectively.

In August 2015, Drive Shack Inc. closed on the sale of two residential mortgage loans with face amount of $3.3 million, for total proceeds of $2.9 million net of transaction expenses.

In April 2016, Drive Shack Inc. sold a mezzanine loan with a face amount of $19.4 million at par. Drive Shack Inc. subsequently repaid $11.7 million of notes payable that were collateralized by the loan.

In September 2016, Drive Shack Inc. received a pay down on a corporate loan in the resorts industry (“the resort-related loan”) in the amount of $109.9 million. As of December 31, 2016, the face amount of the resort-related loan was $61.0 million.

The following is a summary of real estate related and other loans by maturity at December 31, 2016:
Year of Maturity (A)
 
Outstanding
Face Amount
 
Carrying Value
 
Number of
Loans
Delinquent (B)
 
$
77,151

 
$
147

 
5

2017
 
—

 
—

 
—

2018
 
—

 
—

 
—

2019
 
60,997

 
55,465

 
1

2020
 
—

 
—

 
—

2021
 
—

 
—

 
—

Thereafter
 
—

 
—

 
—

Total
 
$
138,148

 
$
55,612

 
6


(A)
Based on the final extended maturity date of each loan investment as of December 31, 2016.
(B)
Includes loans that are non-performing, in foreclosure, or under bankruptcy.

Activities relating to the carrying value of real estate related and other loans and residential mortgage loans are as follows:
 
Held for Sale
 
Held for Investment
 
Real Estate
Related Loans
 
Residential
Mortgage Loans (A)
 
Residential
Mortgage Loans
Balance at December 31, 2013
$
437,530

 
$
2,185

 
$
255,450

Purchases / additional fundings
—

 
—

 
—

Interest accrued to principal balance
20,830

 
—

 
—

Principal pay downs
(240,937
)
 
(9,574
)
 
(9,436
)
Sales
—

 
(233,349
)
 
—

Transfer to held-for-sale
—

 
246,121

 
(246,121
)
Valuation (allowance) reversal on loans
3,303

 
(51
)
 
(833
)
Accretion of loan discount and other amortization
8,867

 
—

 
115

Other
607

 
(1,478
)
 
825

Balance at December 31, 2014
$
230,200

 
$
3,854

 
$
—

Purchases / additional fundings
—

 
—

 
—

Interest accrued to principal balance
27,717

 
—

 
—

Principal pay downs
(46,696
)
 
(134
)
 
—

Sales
(55,574
)
 
(2,925
)
 
—

Valuation allowance on loans
(9,284
)
 
(257
)
 
—

Accretion of loan discount and other amortization
3,203

 
—

 
—

Other
(368
)
 
(6
)
 
—

Balance at December 31, 2015
$
149,198

 
$
532

 
$
—

Purchases / additional fundings
—

 
—

 
—

Interest accrued to principal balance
29,025

 
—

 
—

Principal pay downs
(109,892
)
 
(40
)
 
—

Sales
(19,433
)
 
—

 
—

Valuation (allowance) reversal on loans
(3,826
)
 
(213
)
 
—

Accretion of loan discount and other amortization
10,540

 
—

 
—

Loss on settlement of loans
—

 
(48
)
 
—

Balance at December 31, 2016
$
55,612

 
$
231

 
$
—


(A)
Residential mortgage loans held-for-sale, net is recorded in receivables and other assets on the Consolidated Balance Sheets.
The following is a rollforward of the related loss allowance:
 
 
Held for Sale
 
Held for Investment
 
 
Real Estate Related and Other Loans
 
Residential Mortgage Loans (A)
 
Residential Mortgage Loans (B)
Balance at December 31, 2013
 
$
(94,037
)
 
$
(824
)
 
$
(12,247
)
Charge-offs (C)
 
14,808

 
84

 
711

Transfer to held-for-sale
 
—

 
(12,369
)
 
12,369

Sales
 
—

 
13,006

 
—

Valuation (allowance) reversal on loans
 
3,303

 
(51
)
 
(833
)
Balance at December 31, 2014
 
(75,926
)
 
(154
)
 
—

Charge-offs (C)
 
14,345

 
160

 
—

Sales
 
—

 
—

 
—

Valuation (allowance) reversal on loans
 
(9,284
)
 
(257
)
 
—

Balance at December 31, 2015
 
$
(70,865
)
 
$
(251
)
 
$
—

Charge-offs (C)
 
—

 
—

 
—

Sales
 
—

 
—

 
—

Valuation (allowance) reversal on loans
 
(3,826
)
 
(213
)
 
—

Balance at December 31, 2016
 
$
(74,691
)
 
$
(464
)
 
$
—


(A)
Residential mortgage loans held-for-sale, net is reported in receivables and other assets on the Consolidated Balance Sheets.
(B)
The allowance for credit losses was determined based on the guidance for loans acquired with deteriorated credit quality.
(C)
The charge-offs for real estate related loans represent zero, four and three loans which were written off, sold, restructured, or paid off at a discounted price during 2016, 2015 and 2014, respectively.

The average carrying amount of Drive Shack Inc.’s real estate related and other loans was approximately $116.6 million, $172.8 million and $270.1 million during 2016, 2015 and 2014, respectively, on which Drive Shack Inc. earned approximately $40.1 million, $36.8 million and $49.3 million of gross interest revenues, respectively. The $40.1 million of gross interest revenues recognized in 2016 includes $10.5 million accretion of discount related to the pay down of the resort-related loan.
The average carrying amount of Drive Shack Inc.’s residential mortgage loans was approximately $0.4 million, $2.4 million and $90.5 million during 2016, 2015 and 2014, respectively, on which Drive Shack Inc. earned approximately $0.1 million, $0.1 million and $8.3 million of gross interest revenues, respectively.
The table below summarizes the geographic distribution of real estate related and other loans and residential loans at December 31, 2016:
 
 
Real Estate Related and Other Loans
 
Residential Mortgage Loans
Geographic Location
 
Outstanding Face Amount
 
Percentage
 
Outstanding Face Amount
 
Percentage
Northeastern U.S.
 
$
—

 
0.0
 %
 
$
523

 
67.8
%
Southeastern U.S.
 
—

 
0.0
 %
 
248

 
32.2
%
Foreign
 
63,454

 
100.0
 %
 
—

 
—

 
 
$
63,454

 
100.0
 %
 
$
771

 
100.0
%
Other
 
74,694

 
(A)
 
 
 
 
 
 
$
138,148

 
 
 
 
 
 
(A)
Includes corporate loans which are not directly secured by real estate assets.

Securitization of Subprime Mortgage Loans
Drive Shack Inc. acquired and securitized two portfolios of subprime residential mortgage loans (“Subprime Portfolio I” and “Subprime Portfolio II”), through subsidiaries. Both portfolios are being serviced by an affiliate of the Manager for a servicing fee equal to 0.50% per annum on their respective unpaid principal balances.
Both portfolios were securitized through special purpose entities (“Securitization Trust 2006”) and (“Securitization Trust 2007”) which are not consolidated by Drive Shack Inc. Drive Shack Inc. retained a portion of the notes issued by, and all of the equity of, both entities. Drive Shack Inc., as holder of the equity (or residual interest), had the option (a call option) to redeem the notes once the aggregate principal balance of Subprime Portfolio I or Subprime Portfolio II is equal to or less than 20% or 10%, respectively, of such balance at the date of the transfer. The transactions between Drive Shack Inc. and each securitization trust qualified as sales for accounting purposes. However, the loans subject to a call option were not treated as being sold and were classified as “held for investment” subsequent to the completion of the securitizations. The loans subject to call option and the corresponding financing recognize interest income and expense based on the expected weighted average coupons of the loans subject to call options at the call date of 9.24% and 8.68% for Subprime Portfolios I and II, respectively.
 
In both transactions, the residual interests and the retained bonds were reported as real estate securities, available for sale. The retained loans subject to call option and corresponding financing were reported as separate line items on Drive Shack Inc.’s Consolidated Balance Sheet.

On December 29, 2016, Drive Shack Inc. sold the call option to a third party for less than $0.1 million and recognized a gain of less than $0.1 million in other income on the Consolidated Statements of Operations. As a result of this sale, the loans subject to call option and corresponding financing were no longer reported on Drive Shack Inc.’s Consolidated Balance Sheet. Drive Shack Inc.’s exposure to loss is solely limited to the carrying amount of its residual interests and retained bonds which are issued by Subprime Portfolio I and Subprime Portfolio II.

Drive Shack Inc. received negligible cash flows from the retained interests of Subprime Portfolios I and II during the years ended December 31, 2016, 2015 and 2014.