Quarterly report pursuant to Section 13 or 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v3.10.0.1
FAIR VALUE OF FINANCIAL INSTRUMENTS
6 Months Ended
Jun. 30, 2018
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair Value Summary Table

The following table summarizes the carrying values and estimated fair values of the Company’s financial instruments at June 30, 2018
 
Carrying Value
 
Estimated Fair Value
 
Fair Value Method (A)
Assets
 

 
 

 
 
Real estate securities, available-for-sale
$
2,425

 
$
2,425

 
Pricing models - Level 3
Cash and cash equivalents
125,659

 
125,659

 
 
Restricted cash, current and noncurrent
4,636

 
4,636

 
 
Non-hedge derivative assets (B)
617

 
617

 
Counterparty quotations - Level 2
 
 
 
 
 
 
Liabilities
 
 
 
 
 
Credit facilities - Traditional Golf term loan
100,590

 
103,200

 
Pricing models - Level 3
Junior subordinated notes payable
51,204

 
30,255

 
Pricing models - Level 3

(A)
Pricing models are used for (i) real estate securities and loans that are not traded in an active market, and, therefore, have little or no price transparency, and for which significant unobservable inputs must be used in estimating fair value, or (ii) debt obligations which are private and untraded.
(B)
Represents an interest rate cap (Note 9).

Fair Value Measurements

Valuation Hierarchy
The fair value of financial instruments is categorized based on the priority of the inputs to the valuation technique and categorized into a three-level fair value hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The Company follows this hierarchy for its financial instruments measured at fair value.

Level 1 - Quoted prices in active markets for identical instruments.
Level 2 - Valuations based principally on observable market parameters, including
quoted prices for similar assets or liabilities in active markets,
inputs other than quoted prices that are observable for the asset or liability (such as interest rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads), and
market corroborated inputs (derived principally from or corroborated by observable market data).
Level 3 - Valuations determined using unobservable inputs that are supported by little or no market activity, and that are significant to the overall fair value measurement.

The Company’s real estate securities and loans, and debt obligations are currently not traded in active markets and therefore have little or no price transparency. As a result, the Company has estimated the fair value of these illiquid instruments based on internal pricing models subject to the Company’s controls described below.

The Company has various processes and controls in place to ensure that fair value measurements are reasonably estimated. With respect to broker and pricing service quotations, and in order to ensure these quotes represent a reasonable estimate of fair value, the Company’s quarterly procedures include a comparison of such quotations to quotations from different sources, outputs generated from its internal pricing models and transactions completed, as well as on its knowledge and experience of these markets. With respect to fair value estimates generated based on the Company’s internal pricing models, the Company’s management validates the inputs and outputs of the internal pricing models by comparing them to available independent third-party market parameters and models, where available, for reasonableness. The Company believes its valuation methods and the assumptions used are appropriate and consistent with other market participants.
Fair value measurements categorized within Level 3 are sensitive to changes in the assumptions or methodology used to determine fair value and such changes could result in a significant increase or decrease in the fair value. For the Company’s investments in real estate securities and loans categorized within Level 3 of the fair value hierarchy, the significant unobservable inputs include the discount rates, assumptions relating to prepayments, default rates and loss severities.
 
Significant Unobservable Inputs

The following table provides quantitative information regarding the significant unobservable inputs used by the Company for assets and liabilities measured at fair value on a recurring basis as of June 30, 2018:

 
 
 
 
 
 
Weighted Average Significant Input
Asset Type
 
Amortized Cost Basis
 
Fair Value
 
Discount
Rate
 
Prepayment
Speed
 
Cumulative Default Rate
 
Loss
Severity
ABS - Non-Agency RMBS
 
$
991

 
$
2,425

 
12.0
%
 
5.0
%
 
3.7
%
 
66.7
%


All of the inputs used have some degree of market observability, based on the Company’s knowledge of the market, relationships with market participants, and use of common market data sources. Collateral prepayment, default and loss severity projections are in the form of “curves” or “vectors” that vary for each monthly collateral cash flow projection. Methods used to develop these projections vary by asset class but conform to industry conventions. The Company uses assumptions that generate its best estimate of future cash flows of each respective security.

Real estate securities measured at fair value on a recurring basis using Level 3 inputs changed during the six months ended June 30, 2018 as follows:
 
 
ABS - Non-Agency RMBS
Balance at December 31, 2017
 
$
2,294

Total gains (losses) (A)
 
 

Included in other comprehensive income (loss)
 
63

Amortization included in interest income
 
110

Purchases, sales and repayments (A)
 
 

Proceeds
 
(42
)
Balance at June 30, 2018
 
$
2,425


(A)
None of the gains (losses) recorded in earnings during the period are attributable to the change in unrealized gains (losses) relating to Level 3 assets still held at the reporting dates. There were no purchases or sales during the six months ended June 30, 2018. There were no transfers into or out of Level 3 during the six months ended June 30, 2018.

Liabilities for Which Fair Value is Only Disclosed
 
The following table summarizes the level of the fair value hierarchy, valuation techniques and inputs used for estimating each class of liabilities not measured at fair value in the statement of financial position but for which fair value is disclosed:
Type of Liabilities Not Measured At Fair Value for Which Fair Value Is Disclosed
 
Fair Value Hierarchy
 
 
Valuation Techniques and Significant Inputs
Credit facilities
 
Level 3
 
Valuation technique is based on discounted cash flows. Significant inputs include:
 
 
 
 
l
Amount and timing of expected future cash flows
 
 
 
 
l
Interest rates
 
 
 
 
l
Market yields
 
 
 
 
 
 
Junior subordinated notes payable
 
Level 3
 
Valuation technique is based on discounted cash flows. Significant inputs include:
 
 
 
 
l
Amount and timing of expected future cash flows
 
 
 
 
l
Interest rates
 
 
 
 
l
Market yields and the credit spread of the Company