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Section 1: 10-Q (10-Q)

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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 
Form 10-Q
 
 
(Mark One)
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016
 
Or
 
o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from      to      
 
Commission file number:
001-36299
 
 
Ladder Capital Corp
36557408_ladrlogoa02.jpg
(Exact name of registrant as specified in its charter)
 
 
Delaware
(State or other jurisdiction of
incorporation or organization)
 
80-0925494
(IRS Employer
Identification No.)
 
 
 
345 Park Avenue, New York
(Address of principal executive offices)
 
10154
(Zip Code)
 
(212) 715-3170
(Registrant’s telephone number, including area code)
 
 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  ý  No  o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  ý  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check one):
 
Large accelerated filer o
 
Accelerated filer ý
 
 
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): 
Yes o  No ý
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date.
 
Class
 
Outstanding at October 31, 2016
Class A Common Stock, $0.001 par value
 
65,200,330
Class B Common Stock, $0.001 par value
 
44,388,184

 


Table of Contents

LADDER CAPITAL CORP
 
FORM 10-Q
September 30, 2016
 
Index
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
 
This Quarterly Report on Form 10-Q (this “Quarterly Report”) includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical fact contained in this Quarterly Report, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations, are forward-looking statements. The words “anticipate,” “estimate,” “expect,” “project,” “plan,” “intend,” “believe,” “may,” “might,” “will,” “should,” “can have,” “likely,” “continue,” “design,” and other words and terms of similar expressions are intended to identify forward-looking statements.
 
We have based these forward-looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial condition, results of operations, strategy, short-term and long-term business operations and objectives and financial needs. Although we believe that the expectations reflected in our forward-looking statements are reasonable, actual results could differ from those expressed in our forward-looking statements. Our future financial position and results of operations, as well as any forward-looking statements are subject to change and inherent risks and uncertainties. You should consider our forward-looking statements in light of a number of factors that may cause actual results to vary from our forward-looking statements including, but not limited to:
 
risks discussed under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “Annual Report”), as well as our combined consolidated financial statements, related notes, and the other financial information appearing elsewhere in this Quarterly Report and our other filings with the United States Securities and Exchange Commission (“SEC”);
changes in general economic conditions, in our industry and in the commercial finance and the real estate markets;
changes to our business and investment strategy;
our ability to obtain and maintain financing arrangements;
the financing and advance rates for our assets;
our actual and expected leverage;
the adequacy of collateral securing our loan portfolio and a decline in the fair value of our assets;
interest rate mismatches between our assets and our borrowings used to fund such investments;
changes in interest rates and the market value of our assets;
changes in prepayment rates on our assets;
the effects of hedging instruments and the degree to which our hedging strategies may or may not protect us from interest rate and credit risk volatility;
the increased rate of default or decreased recovery rates on our assets;
the adequacy of our policies, procedures and systems for managing risk effectively;
a potential downgrade in the credit ratings assigned to our investments;
the impact of and changes in governmental regulations, tax laws and rates, accounting guidance and similar matters;
our ability to maintain our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and our ability and the ability of our subsidiaries to operate in compliance with REIT requirements;
our ability and the ability of our subsidiaries to maintain our and their exemptions from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”);
potential liability relating to environmental matters that impact the value of properties we may acquire or the properties underlying our investments;
the inability of insurance covering real estate underlying our loans and investments to cover all losses;
the availability of investment opportunities in mortgage-related and real estate-related instruments and other securities;
fraud by potential borrowers;
the availability of qualified personnel;
the degree and nature of our competition;
the market trends in our industry, interest rates, real estate values, the debt securities markets or the general economy; and
the prepayment of the mortgages and other loans underlying our mortgage-backed and other asset-backed securities.
 

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You should not rely upon forward-looking statements as predictions of future events. In addition, neither we nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The forward-looking statements contained in this Quarterly Report are made as of the date hereof, and the Company assumes no obligation to update or supplement any forward-looking statements.

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REFERENCES TO LADDER CAPITAL CORP
 
Ladder Capital Corp is a holding company, and its primary assets are a controlling equity interest in Ladder Capital Finance Holdings LLLP (“LCFH” or the “Operating Partnership”) and in each series thereof, directly or indirectly. Unless the context suggests otherwise, references in this report to “Ladder,” “Ladder Capital,” the “Company,” “we,” “us” and “our” refer (1) prior to the February 2014 initial public offering (“IPO”) of the Class A common stock of Ladder Capital Corp and related transactions, to LCFH (“Predecessor”) and its combined consolidated subsidiaries and (2) after our IPO and related transactions, to Ladder Capital Corp and its combined consolidated subsidiaries.


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Part I - Financial Information
 
Item 1. Financial Statements (Unaudited)
 
The combined consolidated financial statements of Ladder Capital Corp and the notes related to the foregoing combined consolidated financial statements are included in this Item 1.
 
Index to Combined Consolidated Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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Table of Contents

Ladder Capital Corp
Combined Consolidated Balance Sheets
(Dollars in Thousands)
 
September 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
Assets
 

 
 

Cash and cash equivalents
$
59,693

 
$
108,959

Cash collateral held by broker
37,497

 
30,811

Mortgage loan receivables held for investment, net, at amortized cost
1,643,035

 
1,738,645

Mortgage loan receivables held for sale
784,186

 
571,764

Real estate securities, available-for-sale
2,650,959

 
2,407,217

Real estate and related lease intangibles, net
825,593

 
834,779

Investments in unconsolidated joint ventures
33,860

 
33,797

FHLB stock
77,915

 
77,915

Derivative instruments
254

 
2,821

Accrued interest receivable
23,794

 
22,776

Other assets
79,030

 
65,728

Total assets
$
6,215,816

 
$
5,895,212

Liabilities and Equity
 

 
 

Liabilities
 

 
 

Debt obligations
$
4,601,011

 
$
4,274,723

Due to brokers
16,151

 

Derivative instruments
9,368

 
5,504

Amount payable pursuant to tax receivable agreement
1,910

 
1,910

Dividends payable
3,120

 
17,456

Accrued expenses
54,868

 
78,142

Other liabilities
28,690

 
26,069

Total liabilities
4,715,118

 
4,403,804

Commitments and contingencies (Note 17)

 

Equity
 

 
 

Class A common stock, par value $0.001 per share, 600,000,000 shares authorized; 66,295,378 and 55,758,710 shares issued and 65,200,330 and 55,209,849 shares outstanding
66

 
55

Class B common stock, par value $0.001 per share, 100,000,000 shares authorized; 44,388,184 and 44,055,987 shares issued and outstanding
44

 
44

Additional paid-in capital
900,661

 
776,866

Treasury stock, 1,095,048 and 548,861 shares, at cost
(11,244
)
 
(5,812
)
Retained Earnings/(Dividends in Excess of Earnings)
(31,440
)
 
60,618

Accumulated other comprehensive income (loss)
27,893

 
(3,556
)
Total shareholders’ equity
885,980

 
828,215

Noncontrolling interest in operating partnership
609,650

 
657,380

Noncontrolling interest in consolidated joint ventures
5,068

 
5,813

Total equity
1,500,698

 
1,491,408

 
 
 
 
Total liabilities and equity
$
6,215,816

 
$
5,895,212

 
The accompanying notes are an integral part of these combined consolidated financial statements.

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Table of Contents

Ladder Capital Corp
Combined Consolidated Statements of Income
(Dollars in Thousands, Except Per Share and Dividend Data)
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net interest income
 

 
 

 
 

 
 

Interest income
$
60,284

 
$
63,013

 
$
175,650

 
$
178,635

Interest expense
30,685

 
29,535

 
88,622

 
83,846

Net interest income
29,599

 
33,478

 
87,028

 
94,789

Provision for loan losses

 
150

 
300

 
450

Net interest income after provision for loan losses
29,599

 
33,328

 
86,728

 
94,339

 
 
 
 
 
 
 
 
Other income
 

 
 

 
 

 
 

Operating lease income
19,466

 
20,671

 
57,845

 
60,207

Tenant recoveries
1,185

 
2,847

 
3,844

 
7,883

Sale of loans, net
19,640

 
15,165

 
30,265

 
59,717

Realized gain (loss) on securities
7,126

 
513

 
9,524

 
23,680

Unrealized gain (loss) on Agency interest-only securities
(47
)
 
731

 
29

 
(639
)
Realized gain on sale of real estate, net
4,649

 
6,406

 
15,616

 
21,347

Fee and other income
8,101

 
3,483

 
17,258

 
10,857

Net result from derivative transactions
9,356

 
(42,242
)
 
(66,148
)
 
(54,594
)
Earnings (loss) from investment in unconsolidated joint ventures
(141
)
 
(25
)
 
485

 
580

Gain on extinguishment of debt

 

 
5,382

 

Total other income (loss)
69,335

 
7,549

 
74,100

 
129,038

Costs and expenses
 

 
 

 
 

 
 

Salaries and employee benefits
17,296

 
17,628

 
43,343

 
47,333

Operating expenses
4,391

 
4,951

 
15,399

 
20,487

Real estate operating expenses
7,969

 
8,975

 
22,613

 
27,976

Real estate acquisition costs
423

 
470

 
631

 
1,524

Fee expense
803

 
675

 
2,407

 
3,260

Depreciation and amortization
9,733

 
9,561

 
28,789

 
29,238

Total costs and expenses
40,615

 
42,260

 
113,182

 
129,818

Income (loss) before taxes
58,319

 
(1,383
)
 
47,646

 
93,559

Income tax expense (benefit)
8,721

 
(4,181
)
 
5,547

 
4,101

Net income (loss)
49,598

 
2,798

 
42,099

 
89,458

Net (income) loss attributable to noncontrolling interest in consolidated joint ventures
439

 
85

 
436

 
578

Net (income) loss attributable to noncontrolling interest in operating partnership
(22,429
)
 
430

 
(17,664
)
 
(43,338
)
Net income (loss) attributable to Class A common shareholders
$
27,608

 
$
3,313

 
$
24,871

 
$
46,698

 
 
 
 
 
 
 
 

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Table of Contents

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.44

 
$
0.06

 
$
0.41

 
$
0.91

Diluted
$
0.44

 
$
0.06

 
$
0.40

 
$
0.91

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
62,148,362

 
52,922,487

 
60,976,046

 
51,091,977

Diluted
63,347,690

 
53,348,858

 
61,875,010

 
51,388,851

 
 
 
 
 
 
 
 
Dividends per share of Class A common stock (Note 11)
$
0.275

 
$
0.275

 
$
0.825

 
$
0.775


The accompanying notes are an integral part of these combined consolidated financial statements.

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Table of Contents

Ladder Capital Corp
Combined Consolidated Statements of Comprehensive Income
(Dollars in Thousands)
(Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income (loss)
$
49,598

 
$
2,798

 
$
42,099

 
$
89,458

 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 

 
 

 
 

 
 

Unrealized gain (loss) on securities, net of tax:
 

 
 

 
 

 
 

Unrealized gain (loss) on real estate securities, available for sale (1)
(1,450
)
 
16,697

 
63,383

 
20,732

Reclassification adjustment for (gains) included in net income (2)
(7,126
)
 
(705
)
 
(10,108
)
 
(24,851
)
 
 
 
 
 
 
 
 
Total other comprehensive income (loss)
(8,576
)
 
15,992

 
53,275

 
(4,119
)
 
 
 
 
 
 
 
 
Comprehensive income
41,022

 
18,790

 
95,374

 
85,339

Comprehensive (income) loss attributable to noncontrolling interest in consolidated joint ventures
439

 
85

 
436

 
578

Comprehensive income of combined Class A common shareholders and Operating Partnership unitholders
$
41,461

 
$
18,875

 
$
95,810

 
$
85,917

Comprehensive (income) attributable to noncontrolling interest in operating partnership
(18,978
)
 
(6,810
)
 
(40,768
)
 
(41,245
)
Comprehensive income attributable to Class A common shareholders
$
22,483

 
$
12,065

 
$
55,042

 
$
44,672

 
(1)
Amounts are net of provision for income taxes of $0.5 million for the nine months ended September 30, 2015.

(2)
Amounts are net of (provision for) income taxes of $(0.5) million for the nine months ended September 30, 2015.
 
The accompanying notes are an integral part of these combined consolidated financial statements.

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Table of Contents

Ladder Capital Corp
Combined Consolidated Statements of Changes in Equity
(Dollars and Shares in Thousands)
(Unaudited)
 
Shareholders’ Equity
 
 
 
 
 
 
 
Class A Common Stock 
  
Class B Common Stock 
  
Additional Paid-
in-Capital
 
  
Treasury Stock 
 
Retained Earnings/(Dividends in Excess of Earnings) 
  
Accumulated
Other
Comprehensive
Income (Loss)
 
  
Noncontrolling Interests 
  
Total Shareholders’
Equity/Partners
Capital
 
Shares 
  
Par 
  
Shares 
  
Par 
  
  
 
  
  
Operating
Partnership
 
  
Consolidated
Joint Ventures
 
  
 
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

Balance, December 31, 2015
55,210

 
$
55

 
44,056

 
$
44

 
$
776,866

 
$
(5,812
)
 
$
60,618

 
$
(3,556
)
 
$
657,380

 
$
5,813

 
$
1,491,408

Contributions

 

 

 

 

 

 

 

 
250

 

 
250

Distributions

 

 

 

 

 

 

 

 
(39,040
)
 
(309
)
 
(39,349
)
Equity based compensation

 

 

 

 
383

 

 

 

 
12,311

 

 
12,694

Grants of restricted stock
794

 
1

 

 

 
(1
)
 

 

 

 

 

 

Purchase of treasury stock
(424
)
 

 

 

 

 
(4,652
)
 

 

 

 

 
(4,652
)
Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock and units
(73
)
 

 
(1
)
 

 

 
(780
)
 

 

 
(6
)
 

 
(786
)
Forfeitures
(48
)
 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 

 

 

 
(52,829
)
 

 

 

 
(52,829
)
Stock dividends
5,606

 
6

 
4,469

 
4

 
64,090

 

 
(64,100
)
 

 

 

 

Exchange of noncontrolling interest for common stock
4,135

 
4

 
(4,135
)
 
(4
)
 
54,116

 

 

 
928

 
(56,456
)
 

 
(1,412
)
Net income (loss)

 

 

 

 

 

 
24,871

 

 
17,664

 
(436
)
 
42,099

Other comprehensive income

 

 

 

 

 

 

 
30,171

 
23,104

 

 
53,275

Rebalancing of ownership percentage between Company and Operating Partnership

 

 

 

 
5,207

 

 

 
350

 
(5,557
)
 

 

Balance, September 30, 2016
65,200

 
$
66

 
44,389

 
$
44

 
$
900,661

 
$
(11,244
)
 
$
(31,440
)
 
$
27,893

 
$
609,650

 
$
5,068

 
$
1,500,698


The accompanying notes are an integral part of these combined consolidated financial statements.


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Table of Contents

Ladder Capital Corp
Combined Consolidated Statements of Changes in Equity
(Dollars and Shares in Thousands)

 
Shareholders’ Equity
 
 
 
 
 
 
 
Class A Common Stock 
  
Class B Common Stock 
  
Additional Paid-
in-Capital
 
  
Treasury Stock 
 
Retained
Earnings
 
  
Accumulated
Other
Comprehensive
Income (Loss)
 
  
Noncontrolling Interests 
  
Total Shareholders’
Equity/Partners
Capital
 
Shares 
  
Par 
  
Shares 
  
Par 
  
  
 
  
  
Operating
Partnership
 
  
Consolidated
Joint Ventures
 
  
 
 

 
 

 
 

 
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

Balance, December 31, 2014
51,432

 
$
51

 
47,647

 
$

 
$
725,538

 
$

 
$
44,187

 
$
15,656

 
$
711,674

 
$
8,101

 
$
1,505,207

Contributions

 

 

 

 

 

 

 

 

 
74

 
74

Distributions

 

 

 

 

 

 

 

 
(68,673
)
 
(3,930
)
 
(72,603
)
Amendment of the par value of the Class B shares from no par value per share to $0.001 per share

 

 

 
47

 

 

 

 

 
(47
)
 

 

Equity based compensation

 

 

 

 
417

 

 

 

 
13,371

 

 
13,788

Grants of restricted stock
700

 
1

 

 

 
(1
)
 

 

 

 

 

 

Purchase of treasury stock
(84
)
 

 

 

 

 
(994
)
 

 

 

 

 
(994
)
Re-issuance of treasury stock
26

 

 

 

 

 

 

 

 

 

 

Shares acquired to satisfy minimum required federal and state tax withholding on vesting restricted stock and units
(262
)
 

 
(5
)
 

 

 
(4,818
)
 

 

 
(79
)
 

 
(4,897
)
Forfeitures
(188
)
 

 

 

 

 

 

 

 

 

 

Dividends declared

 

 

 

 

 

 
(57,390
)
 

 

 

 
(57,390
)
Exchange of noncontrolling interest for common stock
3,586

 
3

 
(3,586
)
 
(3
)
 
53,011

 

 

 
645

 
(53,656
)
 

 

Adjustment to the Tax Receivable Agreement as a result of the exchange of Class B shares

 

 

 

 
(1,366
)
 

 

 

 

 

 
(1,366
)
Net income

 

 

 

 

 

 
73,821

 

 
70,745

 
1,568

 
146,134

Other comprehensive income

 

 

 

 

 

 

 
(20,046
)
 
(16,499
)
 

 
(36,545
)
Rebalancing of ownership percentage between Company and Operating Partnership

 

 

 

 
(733
)
 

 

 
189

 
544

 

 

Balance, December 31, 2015
55,210

 
$
55

 
44,056

 
$
44

 
$
776,866

 
$
(5,812
)
 
$
60,618

 
$
(3,556
)
 
$
657,380

 
$
5,813

 
$
1,491,408


The accompanying notes are an integral part of these combined consolidated financial statements.

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Ladder Capital Corp
Combined Consolidated Statements of Cash Flows
(Dollars in Thousands)
 (Unaudited)
 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
Cash flows from operating activities:
 

 
 

Net income (loss)
$
42,099

 
$
89,458

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 

(Gain) loss on extinguishment of debt
(5,382
)
 

Depreciation and amortization
28,789

 
29,238

Unrealized (gain) loss on derivative instruments
6,273

 
8,407

Unrealized (gain) loss on Agency interest-only securities
(29
)
 
639

Provision for loan losses
300

 
450

Amortization of equity based compensation
12,694

 
11,342

Amortization of deferred financing costs included in interest expense
5,935

 
4,167

Amortization of premium on mortgage loan financing
(660
)
 
(678
)
Amortization of above- and below-market lease intangibles
(115
)
 
(201
)
Amortization of premium/(accretion) of discount and other fees on loans
(6,515
)
 
(8,584
)
Amortization of premium/(accretion) of discount and other fees on securities
56,151

 
67,773

Realized gain on sale of mortgage loan receivables held for sale
(30,265
)
 
(59,717
)
Realized (gain) loss on real estate securities
(9,524
)
 
(23,680
)
Realized gain on sale of real estate, net
(15,616
)
 
(21,347
)
Realized gain on sale of derivative instruments
(24
)
 

Origination and purchases of mortgage loan receivables held for sale
(887,164
)
 
(1,781,355
)
Repayment of mortgage loan receivables held for sale
1,161

 
1,613

Proceeds from sales of mortgage loan receivables held for sale
703,846

 
1,923,883

Income from investments in unconsolidated joint ventures in excess of distributions received
(485
)
 
(580
)
Distributions from operations of investment in unconsolidated joint ventures
1,017

 
294

Deferred tax asset
(6,263
)
 
(1,588
)
Changes in operating assets and liabilities:
 

 
 

Accrued interest receivable
(1,018
)
 
2,438

Other assets
(12,224
)
 
(4,278
)
Accrued expenses and other liabilities
(21,718
)
 
(31,443
)
Net cash provided by (used in) operating activities
(138,737
)
 
206,251

Cash flows from investing activities:
 

 
 

Reduction (addition) of cash collateral held by broker for derivatives
(11,839
)
 
(4,877
)
Purchase of derivative instruments
(73
)
 

Sale of derivative instruments
49

 

Purchases of real estate securities
(837,190
)
 
(578,299
)
Repayment of real estate securities
307,847

 
142,680

Proceeds from sales of real estate securities
308,429

 
788,964

Purchase of FHLB stock

 
(7,984
)
Sale of FHLB stock

 
2,409

Origination and purchases of mortgage loan receivables held for investment
(480,622
)
 
(840,652
)

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Table of Contents

 
Nine Months Ended September 30,
 
2016
 
2015
 
 
 
 
Repayment of mortgage loan receivables held for investment
582,447

 
575,028

Reduction (addition) of cash collateral held by broker
5,153

 
(3,605
)
Addition (reduction) of deposits received for loan originations
518

 
1,226

Escrow cash and title deposits included in other assets
(4,242
)
 
(3,382
)
Capital contributions to investment in unconsolidated joint ventures

 
(31,085
)
Distributions received from investments in unconsolidated joint ventures in excess of income
49

 
3,747

Capitalization of interest on investment in unconsolidated joint ventures
(644
)
 
(128
)
Purchases of real estate
(50,252
)
 
(166,763
)
Capital improvements of real estate
(6,813
)
 
(2,006
)
Proceeds from sale of real estate
60,516

(1)
84,656

Net cash provided by (used in) investing activities
(126,667
)
 
(40,071
)
Cash flows from financing activities:
 

 
 

Deferred financing costs paid
(2,136
)
 
(1,924
)
Proceeds from borrowings under debt obligations
9,290,374

 
12,833,258

Repayment of borrowings under debt obligations
(8,960,397
)
 
(12,790,584
)
Cash dividends paid to Class A common shareholders
(67,166
)
 
(39,934
)
Capital contributed by noncontrolling interests in operating partnership
250

 

Capital distributed to noncontrolling interests in operating partnership
(39,040
)
 
(56,274
)
Capital contributed by noncontrolling interests in consolidated joint ventures

 
74

Capital distributed to noncontrolling interests in consolidated joint ventures
(309
)
 
(589
)
Payment of liability assumed in exchange for shares for the minimum withholding taxes on vesting restricted stock
(786
)
 
(4,885
)
Purchase of treasury stock
(4,652
)
 

Net cash provided by (used in) financing activities
216,138

 
(60,858
)
Net increase (decrease) in cash
(49,266
)
 
105,322

Cash and cash equivalents at beginning of period
108,959

 
76,218

Cash and cash equivalents at end of period
$
59,693

 
$
181,540

 
 
 
 
Supplemental information:
 

 
 

Cash paid for interest, net of amounts capitalized
$
93,732

 
$
90,565

Cash paid for income taxes
$
14,127

 
$
19,676

 
 
 
 
Non-cash investing and financing activities:
 

 
 

Securities and derivatives purchased, not settled
$
(16,151
)
 
$
(2,012
)
Origination of mortgage loans receivable held for investment
$
50,378

 
$

Repayment of mortgage loans receivable held for investment
$
(50,378
)
 
$

Net settlement of sale of real estate, subject to debt - debt obligations
$

 
$
11,310

Exchange of noncontrolling interest for common stock
$
56,461

 
$
51,072

Change in deferred tax asset related to change in tax receivable agreement
$
(1,413
)
 
$
1,615

Dividends declared, not paid
$
1,801

 
$

Stock dividends
$
64,100

 
$

(1)    Includes cash proceeds received in the current year that relate to prior year sales of real estate of $6.5 million.

The accompanying notes are an integral part of these combined consolidated financial statements.

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Ladder Capital Corp
Notes to Combined Consolidated Financial Statements
(Unaudited)
 
1. ORGANIZATION AND OPERATIONS
 
Ladder Capital Corp is an internally-managed real estate investment trust (“REIT”) that is a leader in commercial real estate finance. Ladder Capital Corp, as the general partner of Ladder Capital Finance Holdings LLLP (“LCFH,” “Predecessor” or the “Operating Partnership”), operates the Ladder Capital business through LCFH and its subsidiaries. As of September 30, 2016, Ladder Capital Corp has a 59.5% economic interest in LCFH and controls the management of LCFH as a result of its ability to appoint its board members. Accordingly, Ladder Capital Corp consolidates the financial results of LCFH and records noncontrolling interest for the economic interest in LCFH held by the Continuing LCFH Limited Partners (as defined below). In addition, Ladder Capital Corp, through certain subsidiaries which are treated as taxable REIT subsidiaries (each a “TRS”), is indirectly subject to U.S. federal, state and local income taxes. Other than the noncontrolling interest in the Operating Partnership and such indirect U.S. federal, state and local income taxes, there are no material differences between Ladder Capital Corp’s combined consolidated financial statements and LCFH’s consolidated financial statements.

The IPO Transactions

Ladder Capital Corp was formed as a Delaware corporation on May 21, 2013. The Company conducted an initial public offering (“IPO”) which closed on February 11, 2014. The Company used the net proceeds from the IPO to purchase newly issued limited partnership units (“LP Units”) from LCFH. In connection with the IPO, Ladder Capital Corp also became a holding corporation and the general partner of, and obtained a controlling interest in, LCFH. Ladder Capital Corp’s only business is to act as the general partner of LCFH, and, as such, Ladder Capital Corp indirectly operates and controls all of the business and affairs of LCFH and its subsidiaries through its ability to appoint the LCFH board. The proceeds received by LCFH in connection with the sale of the LP Units have been and will be used for loan origination and related real estate business lines and for general corporate purposes.
 
Ladder Capital Corp consolidates the financial results of LCFH and its subsidiaries. The ownership interest of certain existing owners of LCFH, who owned LP Units and an equivalent number of shares of Ladder Capital Corp Class B common stock as of the completion of the IPO (the “Continuing LCFH Limited Partners”) and continue to hold equivalent units in the Series of LCFH (as described below) and Ladder Capital Corp Class B common stock, is reflected as a noncontrolling interest in Ladder Capital Corp’s combined consolidated financial statements.
 
Immediately prior to the closing of the IPO on February 11, 2014, LCFH effectuated certain transactions intended to simplify its capital structure (the “Reorganization Transactions”). Prior to the Reorganization Transactions, LCFH’s capital structure consisted of three different classes of membership interests (Series A and Series B Participating Preferred Units and Class A Common Units), each of which had different capital accounts. The net effect of the Reorganization Transactions was to convert the multiple-class structure into LP Units, a single new class of units in LCFH, and an equal number of shares of Class B common stock of Ladder Capital Corp. The conversion of all of the different classes of LCFH occurred in accordance with conversion ratios for each class of outstanding units based upon the liquidation value of LCFH, as if it had been liquidated upon the IPO, with such value determined by the $17.00 price per share of Class A common stock sold in the IPO. The distribution of LP Units per class of outstanding units was determined pursuant to the distribution provisions set forth in LCFH’s amended and restated Limited Liability Limited Partnership Agreement (the “Amended and Restated LLLP Agreement”). In addition, in connection with the IPO, certain of LCFH’s existing investors (the “Exchanging Existing Owners”) received 33,672,192 shares of Ladder Capital Corp Class A common stock in lieu of any or all LP Units and shares of Ladder Capital Corp Class B common stock that would otherwise have been issued to such existing investors in the Reorganization Transactions, which resulted in Ladder Capital Corp, or a wholly-owned subsidiary of Ladder Capital Corp, owning one LP Unit for each share of Class A Common Stock so issued to the Exchanging Existing Owners.
 
The IPO resulted in the issuance by Ladder Capital Corp of 15,237,500 shares of Class A common stock to the public, including 1,987,500 shares of Class A common stock offered as a result of the exercise of the underwriters’ over-allotment option, and net proceeds to Ladder Capital Corp of $238.5 million (after deducting fees and expenses associated with the IPO). In addition, in connection with the IPO, the Company granted 1,687,513 shares of restricted Class A common stock to members of management, certain directors and certain employees. As a result, the equivalent number of LP Units were issued by LCFH to Ladder Capital Corp.
 

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Pursuant to the Amended and Restated LLLP Agreement, and subject to the applicable minimum retained ownership requirements and certain other restrictions, including notice requirements, from time to time, Continuing LCFH Limited Partners (or certain transferees thereof) had the right to exchange their LP Units for shares of Ladder Capital Corp’s Class A common stock on a one-for-one basis.
 
As a result of the Company’s acquisition of LP Units of LCFH and LCFH’s election under Section 754 of the Internal Revenue Code of 1986, as amended (the “Code”), the Company expects to benefit from depreciation and other tax deductions reflecting LCFH’s tax basis for its assets. Those deductions will be allocated to the Company and will be taken into account in reporting the Company’s taxable income.
 
As a result of the transactions described above, at the time of the IPO:
 
Ladder Capital Corp became the general partner of LCFH and, through LCFH and its subsidiaries, operates the Ladder Capital business. Accordingly, Ladder Capital Corp had a 51.0% economic interest in LCFH (which has since increased), and Ladder Capital Corp has a majority voting interest and controls the management of LCFH;

50,597,205 shares of Ladder Capital Corp’s Class A common stock were outstanding (comprised of 15,237,500 shares issued to the investors in the IPO, 33,672,192 shares issued to the Exchanging Existing Owners and 1,687,513 shares issued to certain directors, officers, and employees in connection with the IPO), and 48,537,414 shares of Ladder Capital Corp’s Class B common stock were outstanding.  Class B common stock has no economic interest but rather voting interest in the Company. At the time of the IPO, 99,134,619 LP Units of LCFH were outstanding, of which 50,597,205 LP Units were held by Ladder Capital Corp and its subsidiaries and 48,537,414 units were held by the Continuing LCFH Limited Partners; and

LP Units became exchangeable on a one-for-one basis for shares of Ladder Capital Corp Class A common stock. In connection with an exchange, a corresponding number of shares of Ladder Capital Corp Class B common stock were required to be provided and canceled. LP units and Ladder Capital Corp Class B common stock could not be legally separated.  However, the exchange of LP Units for shares of Ladder Capital Corp Class A common stock would not affect the exchanging owners’ voting power since the votes represented by the canceled shares of Ladder Capital Corp Class B common stock would be replaced with the votes represented by the shares of Class A common stock for which such LP Units were exchanged.

The Company accounted for the Reorganization Transactions as an exchange between entities under common control and recorded the net assets and shareholders’ equity of the contributed entities at historical cost.

The Reorganization Transactions and the IPO are collectively referred to as the “IPO Transactions.”

The REIT Structuring Transactions

In anticipation of the Company’s election to be subject to tax as a REIT under the Code beginning with its 2015 taxable year (the “REIT Election”), we effected an internal realignment as of December 31, 2014 that we believe permits us to operate as a REIT, subject to the risk factors described in the Annual Report (see “Risk Factors—Risks Related to Our Taxation as a REIT”). As part of this realignment, LCFH and certain of its wholly-owned subsidiaries were serialized in order to segregate our REIT-qualified assets and income from our non-REIT-qualified assets and income. Pursuant to such serialization, all assets and liabilities of LCFH and each such subsidiary were identified as TRS assets and liabilities (e.g., our conduit securitization and condominium sales businesses) and REIT assets and liabilities (e.g., balance sheet loans, real estate and most securities), and were allocated on our internal books and records into two pools within LCFH or such subsidiary, Series TRS and Series REIT (collectively, the “Series”), respectively.

In connection with this serialization, the Amended and Restated LLLP Agreement was amended and restated, effective as of December 5, 2014 and again as of December 31, 2014 (the “Third Amended and Restated LLLP Agreement”). Pursuant to the Third Amended and Restated LLLP Agreement, as of December 31, 2014:

all assets and liabilities of LCFH were allocated on LCFH’s internal books and records to either Series REIT or Series TRS of LCFH;

the Company serves as general partner of LCFH and of Series REIT of LCFH;


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Table of Contents

LC TRS I LLC (“LC TRS I”), a Delaware limited liability company wholly-owned by Series REIT of LCFH, serves as the general partner of Series TRS of LCFH;

each outstanding LP Unit was exchanged for one Series REIT limited partnership unit (“Series REIT LP Unit”), which is entitled to receive profits and losses derived from REIT assets and liabilities, and one Series TRS limited partnership unit (“Series TRS LP Unit”), which is entitled to receive profits and losses derived from TRS assets and liabilities (Series REIT LP Units and Series TRS LP Units are collectively referred to as “Series Units”);

as a result, Ladder Capital Corp owned, directly and indirectly, an aggregate of 51.9% of Series REIT of LCFH, and, through such ownership, the right to receive 51.9% of the profits and distributions of Series TRS;

the limited partners of LCFH owned the remaining 48.1% of each of Series REIT and Series TRS of LCFH;

Series REIT of LCFH, in turn, owns, directly or indirectly, 100% of the REIT series of each of its serialized subsidiaries as well as certain wholly-owned REIT subsidiaries;

Series TRS of LCFH owns, directly or indirectly, 100% of the TRS series of each of its serialized subsidiaries, as well as certain wholly-owned TRSs;

Series TRS LP Units are exchangeable for an equal number of shares (“TRS Shares”) of LC TRS I (a “TRS Exchange”);

in order to effect the exchange of Series Units for shares of Class A common stock of the Company on a one-for-one basis (the “Class A Exchange”), holders are required to surrender (i) one share of the Company’s Class B common stock, (ii) one Series REIT LP Unit, and (iii) either one Series TRS LP Unit or one TRS Share; and

Series REIT and Series TRS have separate boards, officers, books and records, bank accounts, and tax identification numbers.

Each Series of LCFH also signed a separate joinder agreement, agreeing, effective as of 11:59:59 pm on December 31, 2014 (the “Effective Time”), to assume and pay when due (i) any and all liabilities of LCFH incurred or accrued by LCFH as of the Effective Time and (ii) any and all obligations of LCFH arising under contracts, bonds, notes, guarantees, leases or other agreements to which LCFH was a party as of the Effective Time (collectively, the “Agreements”), regardless of whether such obligations arise under the applicable Agreement at, prior to, or after the Effective Time, in each case, with the same force and effect as if each Series had been a signatory to such Agreements on the date thereof.

Also in connection with the planned REIT Election, the Company’s certificate of incorporation was amended and restated, effective as of February 27, 2015, following approval by our shareholders (the “Charter Amendment”), to, among other things, impose ownership limitations and transfer restrictions to facilitate our compliance with the REIT requirements. To qualify as a REIT under the Code, our stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year (other than the first year for which an election to be a REIT has been made). Also, not more than 50% of the value of the outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer “individuals” (as defined to include certain entities such as private foundations) during the last half of a taxable year (other than the first taxable year for which an election to be a REIT has been made). Finally, a person actually or constructively owning 10% or more of the vote or value of the outstanding shares of our capital stock could lead to a level of affiliation between the Company and one or more of its tenants that could disqualify our revenues from the affiliated tenants and possibly jeopardize or otherwise adversely impact our qualification as a REIT.
 
To facilitate satisfaction of these requirements for qualification as a REIT, the Charter Amendment contains provisions restricting the ownership and transfer of shares of all classes or series of our capital stock. Including ownership limitations in a REIT’s charter is the most effective mechanism to monitor compliance with the above-described provisions of the Code. The Charter Amendment provides that, subject to certain exceptions and the constructive ownership rules, no person may own, or be deemed to own by virtue of the attribution provisions of the Code, in excess of (i) 9.8% in value of the outstanding shares of all classes or series of our capital stock or (ii) 9.8% in value or number (whichever is more restrictive) of the outstanding shares of any class of our common stock.

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In addition, our Tax Receivable Agreement with the Continuing LCFH Limited Partners (the “TRA Members”) was amended and restated in connection with our REIT Election, effective as of December 31, 2014 (the “TRA Amendment”), in order to preserve a portion of the potential tax benefits currently existing under the Tax Receivable Agreement that would otherwise be reduced in connection with our REIT Election. The TRA Amendment provides that, in lieu of the existing tax benefit payments under the Tax Receivable Agreement for the 2015 taxable year and beyond, LC TRS I will pay to the TRA Members 85% of the amount of the benefits, if any, that LC TRS I realizes or under certain circumstances (such as a change of control) is deemed to realize as a result of (i) the increases in tax basis resulting from the TRS Exchanges by the TRA Members, (ii) any incremental tax basis adjustments attributable to payments made pursuant to the TRA Amendment, and (iii) any deemed interest deductions arising from payments made by LC TRS I under the TRA Amendment. Under the TRA Amendment, LC TRS I may benefit from the remaining 15% of cash savings in income tax that it realizes, which is in the same proportion realized by the Company under the existing Tax Receivable Agreement. The purpose of the TRA Amendment was to preserve the benefits of the Tax Receivable Agreement to the extent possible in a REIT, although, as a result, the amount of payments made to the TRA Members under the TRA Amendment is expected to be less than would be made under the prior Tax Receivable Agreement. The TRA Amendment continues to share such benefits in the same proportions and otherwise has substantially the same terms and provisions as the prior Tax Receivable Agreement. See Note 2 and Note 15 for further discussion of the Tax Receivable Agreement.

As of March 4, 2015, the Company made the necessary TRS and check-the-box elections and elected to be taxed as a REIT on its tax return for the year ended December 31, 2015, filed in September 2016.

2. SIGNIFICANT ACCOUNTING POLICIES
 
Basis of Accounting and Principles of Combination and Consolidation
 
The accompanying combined consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). In the opinion of management, the unaudited financial information for the interim periods presented in this report reflects all normal and recurring adjustments necessary for a fair statement of results of operations, financial position and cash flows. The interim combined consolidated financial statements should be read in conjunction with the audited combined consolidated financial statements for the year ended December 31, 2015, which are included in the Company’s Annual Report, as certain disclosures would substantially duplicate those contained in the audited combined consolidated financial statements have not been included in this interim report. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year. The interim combined consolidated financial statements have been prepared, without audit, and do not necessarily include all information and footnotes necessary for a fair statement of our combined consolidated financial position, results of operations and cash flows in accordance with GAAP.
 
The combined consolidated financial statements include the Company’s accounts and those of its subsidiaries which are majority-owned and/or controlled by the Company and variable interest entities for which the Company has determined itself to be the primary beneficiary, if any.  All significant intercompany transactions and balances have been eliminated.  The combined consolidated financial statements of the Company are comprised of the consolidation of LCFH and its wholly-owned and majority owned subsidiaries, prior to the IPO Transactions, and the consolidated financial statements of Ladder Capital Corp, subsequent to the IPO Transactions.
 
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 — Consolidation (“ASC 810”), provides guidance on the identification of entities for which control is achieved through means other than voting rights (“variable interest entities” or “VIEs”) and the determination of which business enterprise, if any, should consolidate the VIEs. Generally, the consideration of whether an entity is a VIE applies when either: (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest; (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company consolidates VIEs in which it is considered to be the primary beneficiary. The primary beneficiary is the entity that has both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance; and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE.


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Table of Contents

Noncontrolling interests in consolidated subsidiaries are defined as “the portion of the equity (net assets) in the subsidiaries not attributable, directly or indirectly, to a parent.”  Noncontrolling interests are presented as a separate component of capital in the combined consolidated balance sheets.  In addition, the presentation of net income attributes earnings to shareholders/unitholders (controlling interest) and noncontrolling interests.

Emerging Growth Company Status

The Company is an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (“JOBS Act”), and is eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies,” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in the Company’s periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. However, the Company chose to “opt out” of such extended transition period, and as a result, it will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Section 107 of the JOBS Act provides that the Company’s decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.

The Company could remain an “emerging growth company” for up to five years from the date of the IPO, or until the earliest of (i) the last day of the first fiscal year in which its annual gross revenues exceed $1 billion; (ii) the date that the Company becomes a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of its common stock that is held by nonaffiliates exceeds $700 million as of the last business day of its most recently completed second fiscal quarter; or (iii) the date on which the Company has issued more than $1 billion in nonconvertible debt during the preceding three-year period.
 
Use of Estimates
 
The preparation of the combined consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the balance sheets and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates and assumptions are reviewed periodically, and the effects of resulting changes are reflected in the combined consolidated financial statements in the period the changes are deemed to be necessary.  Significant estimates made in the accompanying combined consolidated financial statements include, but are not limited to the following:
 
valuation of real estate securities;
allocation of purchase price for acquired real estate;
impairment, and useful lives, of real estate;
useful lives of intangible assets;
valuation of derivative instruments;
valuation of deferred tax asset;
amounts payable pursuant to the Tax Receivable Agreement;
determination of effective yield for recognition of interest income;
adequacy of provision for loan losses;
determination of other than temporary impairment of real estate securities and investments in unconsolidated joint ventures;
certain estimates and assumptions used in the accrual of incentive compensation and calculation of the fair value of equity compensation issued to employees;
determination of the effective tax rate for income tax provision; and
certain estimates and assumptions used in the allocation of revenue and expenses for our segment reporting.

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Table of Contents


Cash and Cash Equivalents

The Company considers all investments with original maturities of three months or less, at the time of acquisition, to be cash equivalents. The Company maintains cash accounts at several financial institutions, which are insured up to a maximum of $250,000 per account as of September 30, 2016 and December 31, 2015. At September 30, 2016 and December 31, 2015 and at various times during the years, the balances exceeded the insured limits.
 
Cash Collateral Held by Broker
 
The Company maintains accounts with brokers to facilitate financial derivative and repurchase agreement transactions in support of its loan and securities investments and risk management activities. Based on the value of the positions in these accounts and the associated margin requirements, the Company may be required to deposit additional cash into these broker accounts.  The cash collateral held by broker is considered restricted cash.

Restricted Cash

As of September 30, 2016 and December 31, 2015, included in other assets on the Company’s combined consolidated balance sheets are $0.4 million and $19.0 million, respectively, of tenant security deposits, deposits related to real estate sales and acquisitions and required escrow balances on credit facilities, which are considered restricted cash.

Out-of-Period Adjustment

During the first quarter of 2016, the Company had recorded the following out-of-period adjustments to correct errors from prior periods: (i) additional deferred financing cost amortization of $0.5 million relating to 2015; (ii) additional taxes of $1.2 million representing additional state taxes relating to 2015 and (iii) additional return on equity of $0.9 million from the Company’s investment in an unconsolidated joint venture predominately relating to prior years. The Company has concluded that these adjustments were not material to the financial position or results of operations for the current period or any prior periods; accordingly, the Company recorded the related adjustments in the three-month period ended March 31, 2016.

Recently Issued Accounting Pronouncements

In May 2014, FASB issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. In adopting ASU 2014-09, companies may use either a full retrospective or a modified retrospective approach. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, FASB issued ASU 2015-14, Deferral of the Effective Date (“ASU 2015-14”), which amends ASU 2014-09. As a result, the effective date for the amendments contained in ASU 2014-09 will be the first quarter of fiscal year 2018, with early adoption permitted in the first quarter of fiscal year 2017. The adoption will use one of two retrospective application methods. The Company anticipates adopting this update in the quarter ending March 31, 2018 and does not expect the adoption to have a material impact on the Company’s combined consolidated financial statements.


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In March 2016, FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”). This update provides clarifying guidance regarding the application of ASU 2014-09 when another party, along with the reporting entity, is involved in providing a good or a service to a customer. In these circumstances, an entity is required to determine whether the nature of its promise is to provide that good or service to the customer (that is, the entity is a principal) or to arrange for the good or service to be provided to the customer by the other party (that is, the entity is an agent). In April 2016, FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”), which clarifies the identification of performance obligations and the licensing implementation guidance. In May 2016, FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 Emerging Issues Task Force (“EITF”) Meeting (SEC Update) (“ASU 2016-11”), which rescinds SEC paragraphs pursuant to SEC staff announcements. These rescissions include changes to topics pertaining to accounting for shipping and handling fees and costs and accounting for consideration given by a vendor to a customer. In May 2016, FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), which provides clarifying guidance in certain narrow areas and adds some practical expedients. The effective dates for these ASU’s are the same as the effective date for ASU No. 2014-09, for annual and interim periods beginning after December 15, 2017. The Company is reviewing its policies and processes to ensure compliance with the requirements in this update with regard to its operations.

In June 2014, FASB issued ASU 2014-12, Compensation-Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (a consensus of the FASB Emerging Issues Task Force) (“ASU 2014-12”). ASU 2014-12 requires that a performance target that affects vesting of share-based payment awards and that could be achieved after the requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which the requisite service has already been rendered. If the performance target becomes likely to be achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The requisite service period ends when the employee can cease rendering service and still be eligible to vest in the award if the performance target is achieved. ASU 2014-12 is effective for all entities for interim and annual periods beginning after December 15, 2015. An entity may apply the amendments in ASU 2014-12 either (i) prospectively to all awards granted or modified after the effective date or (ii) retrospectively to all awards with performance targets that are outstanding as of the beginning of the earliest annual period presented in the financial statements and to all new or modified awards thereafter. The Company adopted this update in the quarter ended March 31, 2016 applying the amendment prospectively. The adoption has not had a material impact on the Company’s combined consolidated financial statements.

In August 2014, FASB issued ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity (a consensus of the FASB Emerging Issues Task Force) (“ASU 2014-13”). For entities that consolidate a collateralized financing entity within the scope of this update, an option to elect to measure the financial assets and the financial liabilities of that collateralized financing entity using either the measurement alternative included in ASU 2014-13 or Topic 820 on fair value measurement is provided. The guidance is effective for fiscal years beginning after December 15, 2015, and the interim periods within those fiscal years. The Company adopted this update in the quarter ended March 31, 2016. The adoption did not have a material effect on the Company’s combined consolidated financial statements.


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In August 2014, FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern (“ASU 2014-15”). The guidance in ASU 2014-15 sets forth management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern as well as the related required disclosures. ASU 2014-15 indicates that, when preparing interim and annual financial statements, management should evaluate whether conditions or events, in the aggregate, raise substantial doubt about the entity’s ability to continue as a going concern for one year from the date the financial statements are issued or are available to be issued. This evaluation should include consideration of conditions and events that are either known or are reasonably knowable at the date the financial statements are issued or are available to be issued, and, if applicable, whether it is probable that management’s plans to address the substantial doubt will be implemented and, if so, whether it is probable that the plans will alleviate the substantial doubt. ASU 2014-15 is effective for annual periods ending after December 15, 2016, and interim periods and annual periods thereafter. The Company anticipates adopting this update for the year ending December 31, 2016 and does not expect the adoption to have a material impact on the Company’s combined consolidated financial statements.

In February 2015, FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (“ASU 2015-02”). This ASU makes changes to the VIE model and voting interest (“VOE”) model consolidation guidance. The main provisions of the ASU include the following: (i) adding a requirement that limited partnerships and similar legal entities must provide partners with either substantive kick-out rights or substantive participating rights over the general partner to qualify as a VOE rather than a VIE; (ii) eliminating the presumption that the general partner should consolidate a limited partnership; (iii) eliminating certain conditions that need to be met when evaluating whether fees paid to a decision maker or service provider are considered a variable interest; (iv) excluding certain fees paid to decision makers or service providers when evaluating which party is the primary beneficiary of a VIE; and (v) revising how related parties are evaluated under the VIE guidance. Lastly, the ASU eliminates the indefinite deferral of ASU 810, which allowed reporting entities with interests in certain investment funds to follow previous guidance in FIN 46 (R). However, the ASU permanently exempts reporting entities from consolidating registered money market funds that operate in accordance with Rule 2a-7 under the Investment Company Act. The ASU is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Entities may apply this ASU either using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the beginning period of adoption or retrospectively to all prior periods presented in the financial statements.The Company adopted this update in the quarter ended March 31, 2016. Under this ASU, the Operating Partnership is now considered a VIE, however, since the Company was previously consolidating the Operating Partnership, the adoption of this ASU had no material impact on the Company’s combined consolidated financial statements. Substantially all of the Company’s assets, liabilities, operations and cash flows are those of the Operating Partnership.

In June 2015, FASB issued ASU 2015-10, Technical Corrections and Improvements (“ASU 2015-10”). The amendments in this update cover a wide range of topics in the codification and are generally categorized as follows: amendments related to differences between original guidance and the codification; guidance clarification and reference corrections; simplification and minor improvements. The amendments are effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. As the objectives of this standard are to clarify the codification, correct unintended application of guidance, eliminate inconsistencies and to improve the codification’s presentation of guidance, the adoption of this standard is not expected to have a significant effect on current accounting practice or create a significant administrative cost on most entities. The Company adopted this update in the quarter ended March 31, 2016. The adoption did not have a material impact on the Company’s combined consolidated financial statements.

In September 2015, FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). This update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. ASU 2015-16 applies to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Entities must apply the new guidance prospectively to adjustments to provisional amounts that occur after the effective date of ASU 2015-16, with earlier adoption permitted for financial statements that have not yet been made available for issuance. The Company adopted this update in the quarter ended March 31, 2016. The adoption did not have a material impact on the Company’s combined consolidated financial statements.


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In January 2016, FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). The update provides guidance to improve certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The standard is effective for a public companies for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. Early adoption by public companies for fiscal years or interim periods that have not yet been issued or, by all other entities, that have not yet been made available for issuance of this guidance are permitted as of the beginning of the fiscal year of adoption, under certain restrictions. The Company is required to apply the guidance by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The guidance related to equity securities without readily determinable fair values should be applied prospectively to equity investments that exist at the date of adoption. The Company anticipates adopting this update in the quarter ending March 31, 2018 and is currently evaluating the impact on the Company’s combined consolidated financial statements.

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC Topic 840, Leases. ASU 2016-02 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). This update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases today. This update requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The standard is effective on January 1, 2019, with early adoption permitted. The ASU is expected to impact the Company’s combined consolidated financial statements as the Company has certain operating lease arrangements for which it is the lessee. The Company is in the process of evaluating the impact of this new guidance.

In March 2016, FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). The guidance requires the recognition of the income tax effects of awards in the income statement when the awards vest or are settled, thus eliminating additional paid in capital pools. The guidance also allows the employer to repurchase more of an employee’s shares for tax withholding purposes without triggering liability accounting. In addition, the guidance allows for a policy election to account for forfeitures as they occur rather than on an estimated basis. For a public company, ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted in any interim or annual period. The Company is currently assessing the impact that this guidance will have on its combined consolidated financial statements when adopted.

In June 2016, FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). The guidance changes the impairment model for most financial assets. The new model uses a forward-looking expected loss method, which will generally result in earlier recognition of allowances for losses. ASU 2016-13 is effective for annual and interim periods beginning after December 15, 2019, and early adoption is permitted for annual and interim periods beginning after December 15, 2018. The Company is currently assessing the impact that this guidance will have on its combined consolidated financial statements when adopted.

In August 2016, FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). ASU 2016-15 provides cash flow statement classification guidance for certain transactions, including how the predominance principle should be applied when cash receipts and cash payments have aspects of more than one class of cash flows. For a public company, ASU 2016-15 is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted in any interim or annual period. The Company is currently assessing the impact that this guidance will have on its combined consolidated financial statements when adopted.


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3. MORTGAGE LOAN RECEIVABLES
 
September 30, 2016 ($ in thousands)
 
 
Outstanding
Face Amount
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Remaining
Maturity
(years)
 
 
 
 
 
 
 
 
Mortgage loan receivables held for investment, at amortized cost
$
1,654,554

 
$
1,647,035

 
7.09
%
 
1.70
Provision for loan losses
N/A

 
(4,000
)
 
 
 
 
Total mortgage loan receivables held for investment, at amortized cost
1,654,554

 
1,643,035

 
 
 
 
Mortgage loan receivables held for sale
783,441

 
784,186

 
4.40
%
 
7.54
Total
$
2,437,995

 
$
2,427,221

 
 

 
 
 
(1)         September 30, 2016 London Interbank Offered Rate (“LIBOR”) rates are used to calculate weighted average yield for floating rate loans.

As of September 30, 2016, $207.6 million, or 12.6%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $1.4 billion, or 87.4%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at variable interest rates, linked to LIBOR, some of which include interest rate floors. As of September 30, 2016, $784.2 million, or 100.0%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates.
 
December 31, 2015 ($ in thousands)
 
 
Outstanding
Face Amount
 
Carrying
Value
 
Weighted
Average
Yield (1)
 
Remaining
Maturity
(years)
 
 
 
 
 
 
 
 
Mortgage loan receivables held for investment, at amortized cost
$
1,749,556

 
$
1,742,345

 
7.56
%
 
1.38
Provision for loan losses
N/A

 
(3,700
)
 
 
 
 
Total mortgage loan receivables held for investment, at amortized cost
1,749,556

 
1,738,645

 
 
 
 
Mortgage loan receivables held for sale
571,638

 
571,764

 
4.56
%
 
6.20
Total
2,321,194

 
2,310,409

 
 

 
 
 
(1)         December 31, 2015 LIBOR rates are used to calculate weighted average yield for floating rate loans.
 
As of December 31, 2015, $343.2 million, or 19.7%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at fixed interest rates and $1.4 billion, or 80.3%, of the carrying value of our mortgage loan receivables held for investment, at amortized cost, were at variable interest rates, linked to LIBOR, some of which include interest rate floors. As of December 31, 2015, $571.8 million, or 100%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates.

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The following table summarizes mortgage loan receivables by loan type ($ in thousands):
 
 
September 30, 2016
 
December 31, 2015
 
Outstanding
Face Amount
 
Carrying
Value
 
Outstanding
Face Amount
 
Carrying
Value
 
 
 
 
 
 
 
 
Mortgage loan receivables held for investment, at amortized cost
 

 
 

 
 

 
 

First mortgage loans
$
1,484,063

 
$
1,477,440

 
$
1,462,228

 
$
1,456,212

Mezzanine loans
170,491

 
169,595

 
287,328

 
286,133

Total mortgage loan receivables held for investment, at amortized cost
1,654,554

 
1,647,035

 
1,749,556

 
1,742,345

Mortgage loan receivables held for sale
 

 
 

 
 

 
 

First mortgage loans
783,441

 
784,186

 
571,638

 
571,764

Total mortgage loan receivables held for sale
783,441

 
784,186

 
571,638

 
571,764

 
 
 
 
 
 
 
 
Provision for loan losses
N/A

 
(4,000
)
 
N/A

 
(3,700
)
Total
$
2,437,995

 
$
2,427,221

 
$
2,321,194

 
$
2,310,409

 
For the nine months ended September 30, 2016 and 2015, the activity in our loan portfolio was as follows ($ in thousands):

 
Mortgage loan
receivables held
for investment, at
amortized cost
 
Mortgage loan 
receivables held
for sale
 
 
 
 
Balance, December 31, 2015
$
1,738,645

 
$
571,764

Origination of mortgage loan receivables
531,000

(1)
887,164

Repayment of mortgage loan receivables
(632,825
)
(1)
(1,161
)
Proceeds from sales of mortgage loan receivables

 
(703,846
)
Realized gain on sale of mortgage loan receivables

 
30,265

Accretion/amortization of discount, premium and other fees
6,515

 

Loan loss provision
(300
)
 

Balance, September 30, 2016
$
1,643,035

 
$
784,186

 
(1)         Includes $50.4 million of non-cash originations and repayments.

 
Mortgage loan
receivables held
for investment, at
amortized cost
 
Mortgage loan
receivables held
for sale
 
 
 
 
Balance, December 31, 2014
$
1,521,054

 
$
417,955

Origination of mortgage loan receivables
840,652

 
1,781,355

Repayment of mortgage loan receivables
(575,028
)
 
(1,613
)
Proceeds from sales of mortgage loan receivables

 
(1,923,883
)
Realized gain on sale of mortgage loan receivables

 
59,717

Accretion/amortization of discount, premium and other fees
8,584

 

Loan loss provision
(450
)
 

Balance, September 30, 2015
$
1,794,812

 
$
333,531


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During the three months ended September 30, 2016, $324.4 million of financial assets (loans) have been treated as sales in accordance with ASC Topic 860 Transfers and Servicing, in connection with a securitization transaction. In addition, during the three months ended September 30, 2016, of the three assets (loans), with a combined principal balance of $137.6 million, $61.6 million, non-controlling, pari passu interests were also transferred as part of a securitization transaction. Since effective control continued to reside with the retained portions of the loans the transfers of any of these assets are considered nonrecourse secured borrowings in which the full loan assets remain on the Company’s consolidated balance sheets in mortgage loan receivables held for investment, net, at amortized cost and the sale proceeds of $63.2 million are recognized in debt obligations. The Company expects to sell the retained portions of the loans in a future securitization and relinquish control. During the three months ended September 30, 2015, the transfers of financial assets via sales of loans were treated as sales under ASC Topic 860 Transfers and Servicing.

At September 30, 2016 and December 31, 2015, there was $0.6 million and $0.7 million, respectively, of unamortized discounts included in our mortgage loan receivables held for investment, at amortized cost, on our combined consolidated balance sheets. 

The Company evaluates each of its loans for potential losses at least quarterly. Its loans are typically collateralized by real estate directly or indirectly. As a result, the Company regularly evaluates the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan at maturity, and/or (iii) the property’s liquidation value. The Company also evaluates the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, the Company considers the overall economic environment, real estate sector, and geographic sub-market in which the collateral property is located. Such impairment analyses are completed and reviewed by asset management personnel, who utilize various data sources, including (i) periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, the borrowers’ business plan, and capitalization and discount rates, (ii) site inspections, and (iii) current credit spreads and other market data. As a result of this analysis, the Company has concluded that none of its loans are individually impaired as of September 30, 2016 and December 31, 2015.

However, based on the inherent risks shared among the loans as a group, it is probable that the loans had incurred an impairment due to common characteristics and inherent risks in the portfolio. Therefore, the Company has recorded a reserve, based on a targeted percentage level which it seeks to maintain over the life of the portfolio, as disclosed in the tables below. Historically, the Company has not incurred losses on any originated loans.

As of September 30, 2016, two of the Company’s loans, which were originated simultaneously as part of a single transaction, and had a carrying value of $26.9 million, were in default. The Company determined that no impairment was necessary and continues to accrue interest on these loans because the loans’ collateral value was in excess of the outstanding balances. As of September 30, 2016, accrued but unpaid interest totaled $2.3 million, which includes $1.5 million of default interest.

At September 30, 2016 and December 31, 2015 there were no loans on non-accrual status.
 
Provision for Loan Losses ($ in thousands)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Provision for loan losses at beginning of period
$
4,000

 
$
3,400

 
$
3,700

 
$
3,100

Provision for loan losses

 
150

 
300

 
450

Provision for loan losses at end of period
$
4,000

 
$
3,550

 
$
4,000

 
$
3,550

 

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4. REAL ESTATE SECURITIES
 
Commercial mortgage backed securities (“CMBS”), CMBS interest-only securities, Agency securities, Government National Mortgage Association (“GNMA”) construction securities and GNMA permanent securities are classified as available-for-sale and reported at fair value with changes in fair value recorded in the current period in other comprehensive income. GNMA and Federal Home Loan Mortgage Corp (“FHLMC”) securities (collectively, “Agency interest-only securities”) are recorded at fair value with changes in fair value recorded in current period earnings. The following is a summary of the Company’s securities at September 30, 2016 and December 31, 2015 ($ in thousands):

September 30, 2016
 
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
Weighted Average
Asset Type
 
Outstanding
Face Amount
 
Amortized
Cost Basis
 
Gains
 
Losses
 
Carrying
Value
 
# of
Securities
 
Rating (1)
 
Coupon %
 
Yield %
 
Remaining
Duration
(years)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
CMBS(2)
 
$
2,169,241

 
$
2,199,698

 
$
42,550

 
$
(855
)
 
$
2,241,393

 
142

 
AAA
 
3.24
%
 
2.79
%
 
3.06
CMBS interest-only(2)
 
8,626,247

(3)
343,218

 
4,589

 
(440
)
 
347,367

 
57

 
AAA
 
0.83
%
 
3.52
%
 
3.14
GNMA interest-only(4)
 
519,846

(3)
21,444

 
102

 
(2,190
)
 
19,356

 
18

 
AA+
 
0.74
%
 
4.02
%
 
4.66
Agency securities(2)
 
798

 
828

 
3

 
(1
)
 
830

 
2

 
AA+
 
2.93
%
 
1.29
%
 
3.43
GNMA permanent securities(2)
 
40,120

 
40,977

 
1,190

 
(154
)
 
42,013

 
11

 
AA+
 
4.16
%
 
3.85
%
 
10.11
Total
 
$
11,356,252

 
$
2,606,165

 
$
48,434

 
$
(3,640
)
 
$
2,650,959

 
230

 
 
 
1.30
%
 
2.91
%
 
3.20
 
December 31, 2015
 
 
 
 
 
 
 
Gross Unrealized
 
 
 
 
 
Weighted Average
Asset Type
 
Outstanding
Face Amount
 
Amortized
Cost Basis
 
Gains
 
Losses
 
Carrying
Value
 
# of
Securities
 
Rating (1)
 
Coupon %
 
Yield %