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

9 Months Ended

Sep. 30, 2017

Investments, Debt and Equity Securities [Abstract]

The following is a summary of the Company’s real estate securities at September 30, 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.



	September 30, 2017
			Amortized Cost Basis							Gross Unrealized							Weighted Average
Asset Type	Outstanding Face Amount		Before Impairment		Other-Than- Temporary Impairment			After Impairment		Gains		Losses		Carrying Value (A)		Number of Securities	Rating (B)	Coupon		Yield		Life (Years) (C)	Principal Subordination (D)
ABS - Non-Agency RMBS	$	4,000	$	2,410	$	(1,521	)	$	889	$	1,347	$	—	$	2,236	1	CCC	1.63	%	22.61	%	7.5	31.4	%
Total Securities, Available for Sale (E)	$	4,000	$	2,410	$	(1,521	)	$	889	$	1,347	$	—	$	2,236	1


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


(B)	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. 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.


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


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


(E)	The total outstanding face amount was $4.0 million for floating rate securities.

Unrealized losses that are considered other-than-temporary are recognized currently in earnings. During the nine months ended September 30, 2017, the Company recorded other-than-temporary impairment charges (“OTTI”) of $0.6 million with respect to real estate securities (there was no 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 Company had no securities in an unrealized loss position as of September 30, 2017. The Company has no activity related to credit losses on debt securities for the nine months ended September 30, 2017.

The table below summarizes the geographic distribution of the collateral securing the asset-backed securities (“ABS”) at September 30, 2017:



	ABS - Non-Agency RMBS
Geographic Location	Outstanding Face Amount		Percentage
Western U.S.	$	1,277	31.9	%
Northeastern U.S.	592		14.8	%
Southeastern U.S.	1,091		27.3	%
Midwestern U.S.	426		10.6	%
Southwestern U.S.	614		15.4	%
	$	4,000	100.0	%

Geographic concentrations of investments expose the Company to the potential risk of economic downturns within the relevant regions. 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.

FNMA/FHLMC Agency Securities

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

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.

In August 2017, the Company sold $299.5 million face amount of agency FNMA/FHLMC fixed-rate securities at an average price of 103.2% of par for total proceeds of $309.0 million and recognized a gain on sale of securities of $2.3 million. The Company repaid $302.1 million of repurchase agreements associated with these securities.