Annual report pursuant to Section 13 and 15(d)

FAIR VALUE OF FINANCIAL INSTRUMENTS

v3.8.0.1
FAIR VALUE OF FINANCIAL INSTRUMENTS
12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS

The following table summarizes the carrying values and estimated fair values of the Company’s financial instruments at December 31, 2017 and 2016:
 
December 31, 2017
December 31, 2016
 
Carrying
Value
 
Estimated
Fair Value
 
Fair Value Method (A)
 
Carrying
Value
 
Estimated
Fair Value
Assets
 
 
 
 
 
 
 
 
 
Real estate securities, available-for-sale
$
2,294

 
$
2,294

 
Pricing models
 
$
629,254

 
$
629,254

Loans, held-for-sale, net (B)
147

 
147

 
Pricing models
 
55,612

 
61,144

Residential mortgage loans, held-for-sale, net (C)

 

 
Broker/counterparty quotations, pricing models
 
231

 
249

Cash and cash equivalents
167,692

 
167,692

 
 
 
140,140

 
140,140

Restricted cash - current and noncurrent
5,996

 
5,996

 
 
 
6,404

 
6,404

Non-hedge derivative assets (D)
286

 
286

 
Counterparty quotations
 
856

 
856

 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
Repurchase agreements

 

 
Counterparty quotations, market comparables
 
600,964

 
600,964

Credit facilities - Traditional Golf term loan
99,931

 
103,199

 
Pricing models
 
98,680

 
98,680

Junior subordinated notes payable
51,208

 
27,531

 
Pricing models
 
51,217

 
26,756

(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)
Loans held-for-sale, net are recorded in other current assets on the Consolidated Balance Sheets.
(C)
Residential mortgage loans held-for-sale, net is recorded in other current assets on the Consolidated Balance Sheets.
(D)
Represents an interest rate cap and TBA forward contracts (Note 10).
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.
Recurring Fair Value Measurements - Real Estate Securities and Derivatives
The following table summarizes financial assets and liabilities measured at fair value on a recurring basis at December 31, 2017:
 
 
 
Fair Value
 
Carrying Value
 
Level 2
 
Level 3
 
Total
 
 
 
Market Quotations
(Observable)
 
Market Quotations (Unobservable)
 
Internal Pricing Models
 
 
Assets:
 
 
 
 
 
 
 
 
 
Real estate securities, available-for-sale:
 
 
 
 
 
 
 
 
 
ABS- Non-Agency RMBS
$
2,294

 
$

 
$

 
$
2,294

 
$
2,294

 
 
 
 
 
 
 
 
 
 
Derivative assets:
 
 
 
 
 
 
 
 
 
Interest rate cap, not treated as hedge
$
286

 
$
286

 
$

 
$

 
$
286


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 December 31, 2017.
 
 
 
 
 
 
Weighted Average Significant Input
Asset Type
 
Amortized
Cost
Basis
 
Fair
Value
 
Discount Rate
 
Prepayment Speed
 
Cumulative Default Rate
 
Loss Severity
ABS - Non-Agency RMBS
 
$
924

 
$
2,294

 
12.0
%
 
4.8
%
 
4.5
%
 
69.6
%
Total
 
$
924

 
$
2,294

 
 
 
 
 
 
 
 


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.

The Company’s investments in instruments measured at fair value on a recurring basis using Level 3 inputs changed as follows:
 
Level 3 Assets
 
CMBS
 
ABS - Non-Agency RMBS
 
Equity/Other Securities
 
Total
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
39,684

 
$
9,619

 
$
9,731

 
$
59,034

CDO VI deconsolidation
(37,179
)
 
(6,710
)
 

 
(43,889
)
Total gains (losses) (A)
 
 
 
 
 
 
 
Included in net income (B)
(108
)
 
3

 
11,232

 
11,127

Included in other comprehensive income (loss)
(658
)
 
(1,015
)
 
(9,731
)
 
(11,404
)
Amortization included in interest income
879

 
278

 

 
1,157

Purchases, sales and settlements
 
 
 
 
 
 
 
Proceeds from sales
(2
)
 
(3
)
 
(11,232
)
 
(11,237
)
Proceeds from repayments
(2,616
)
 
(222
)
 

 
(2,838
)
Balance at December 31, 2016
$

 
$
1,950

 
$

 
$
1,950

Total gains (losses) (A)
 
 
 
 
 
 
 
Included in net income (B)

 

 

 

Included in other comprehensive income (loss)

 
202

 

 
202

Amortization included in interest income

 
196

 

 
196

Purchases, sales and settlements
 
 
 
 
 
 
 
Proceeds from repayments

 
(54
)
 

 
(54
)
Balance at December 31, 2017
$

 
$
2,294

 
$

 
$
2,294

(A)
None of the gains (losses) recorded in earnings during the periods is 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 year ended December 31, 2017. There were no transfers into or out of Level 3 during the years ended December 31, 2017 and 2016.
(B)
These gains (losses) are recorded in the following line items in the Consolidated Statements of Operations:
 
Year Ended December 31,
 
2017
 
2016
Realized and unrealized gain on investments
$

 
$
11,237

Impairment (reversal)

 
(110
)
Total
$

 
$
11,127

Realized and unrealized gain on investments, net, from investments transferred into Level 3 during the period
$

 
$



Non-Recurring Fair Value Measurements - Loans

Loans, held-for-sale are carried at the lower of amortized cost or fair value and are therefore recorded at fair value on a non-recurring basis. These loans were written down to fair value at the time of the impairment, based on internal pricing models. All the loans were within Level 3 of the fair value hierarchy. The most significant inputs used in the valuations are the amount and timing of expected future cash flows, market yields and the estimated collateral value of such loan investments.
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:
 
 
 
 
Amount and timing of expected future cash flows
 
 
 
 
Interest rates
 
 
 
 
Market yields
 
 
 
 
 
 
Junior subordinated notes payable
 
Level 3
 
Valuation technique is based on discounted cash flows. Significant inputs include:
 
 
 
 
Amount and timing of expected future cash flows
 
 
 
 
Interest rates
 
 
 
 
Market yields and the credit spread of the Company