Drive Shack Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

REAL ESTATE SECURITIES

REAL ESTATE SECURITIES

3 Months Ended

Mar. 31, 2017

Investments, Debt and Equity Securities [Abstract]

The following is a summary of the Company’s real estate securities at March 31, 2017, 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.



			Amortized Cost Basis							Gross Unrealized							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)
ABS - Non-Agency RMBS	$	4,000	$	2,338	$	(1,521	)	$	817	$	1,215	$	—	$	2,032	1	C	1.37	%	25.44	%	9.2	28.8	%
Total Securities, Available-for-Sale (F)	$	4,000	$	2,338	$	(1,521	)	$	817	$	1,215	$	—	$	2,032	1

FNMA/FHLMC (A)	319,380		337,972		(11,094		)	326,878		—		—		326,878		1	AAA	3.50	%	3.13	%	7.7	N/A
Total Securities, Pledged as Collateral (F)	$	319,380	$	337,972	$	(11,094	)	$	326,878	$	—	$	—	$	326,878	1


(A)	As of March 31, 2017, the Company reclassified gross unrealized losses of $11.1 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.


(B)	See Note 10 regarding the estimation of fair value, which is equal to carrying value for all securities.

(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. The Company uses an implied AAA rating for the Fannie Mae/Freddie Mac (“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.


(D)	The weighted average life is based on the timing of expected cash flows on the assets.


(E)	Percentage of the outstanding face amount of securities and residual interests that is subordinate to the Company’s investments.


(F)	The total outstanding face amount was $319.4 million for fixed rate securities and $4.0 million for floating rate securities.

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the three months ended March 31, 2017, the Company recorded other-than-temporary impairment charges (“OTTI”) of $0.6 million with respect to real estate securities (gross of $0.0 million of other-than-temporary impairment recognized in other comprehensive income). Based on management’s analysis of the securities, the performance of the underlying loans and changes in market factors, the Company 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 on the Company’s securities were primarily the result of changes in market factors, rather than issuer-specific credit impairment. The Company 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 the Company's securities in an unrealized loss position as of March 31, 2017.




			Amortized Cost Basis							Gross Unrealized							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	$	319,380	$	337,972	$	(11,094	)	$	326,878	$	—	$	—	$	326,878	1	AAA	3.50	%	3.13	%	7.7
Twelve or More Months	—		—		—			—		—		—		—		—	—	—	%	—	%	—
Total	$	319,380	$	337,972	$	(11,094	)	$	326,878	$	—	$	—	$	326,878	1	AAA	3.50	%	3.13	%	7.7


(A)	As of March 31, 2017, the Company reclassified gross unrealized losses of $11.1 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.

The Company 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). The securities that the Company intends to sell have a fair value of $326.9 million and amortized cost basis after impairment of $326.9 million as of March 31, 2017.

The Company has no activity related to credit losses on debt securities for the three months ended March 31, 2017.

The table below summarizes the geographic distribution of the collateral securing the asset-backed securities (“ABS”) at March 31, 2017:



	ABS - Non-Agency RMBS
Geographic Location	Outstanding Face Amount		Percentage
Western U.S.	$	1,295	32.4	%
Northeastern U.S.	605		15.1	%
Southeastern U.S.	1,065		26.6	%
Midwestern U.S.	430		10.8	%
Southwestern U.S.	605		15.1	%
	$	4,000	100.0	%

Geographic concentrations of investments expose the Company 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 the Company holds significant investments could have a material, negative impact on the Company.

In March 2017, the Company sold $289.7 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 98.8% of par for total proceeds of $286.1 million and recognized a loss on sale of securities of $2.8 million. The Company repaid $277.8 million of repurchase agreements associated with these securities.

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 the Company's Consolidated Balance Sheets as an asset and cash received from the purchaser is recorded on the Company's Consolidated Balance Sheets as a liability.

- Definition

The entire disclosure for investments in certain debt and equity securities.

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