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MORTGAGE LOAN RECEIVABLES | 3 Months Ended
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Mar. 31, 2020
SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract] |
MORTGAGE LOAN RECEIVABLES | 3. MORTGAGE LOAN RECEIVABLES March 31, 2020 ($ in thousands)
| Outstanding Face Amount |  | Carrying Value |  | Weighted Average Yield (1) |  | Remaining Maturity (years)
Mortgage loan receivables held for investment, net, at amortized cost: |  |  |  |  |  |  |
Mortgage loans held by consolidated subsidiaries: |  |  |  |  |  |  |
First mortgage loans | $ | 3,330,918 |  |  | $ | 3,310,167 |  |  | 6.72 | % |  | 1.22
Mezzanine loans | 122,975 |  |  | 122,612 |  |  | 10.84 | % |  | 3.16
Total mortgage loans held by consolidated subsidiaries | 3,453,893 |  |  | 3,432,779 |  |  | 6.86 | % |  | 1.29
Current expected credit losses | N/A |  |  | (49,457 | ) |  |  |  |
Total mortgage loan receivables held for investment, net, at amortized cost | 3,453,893 |  |  | 3,383,322 |  |  |  |  |
Mortgage loan receivables held for sale: |  |  |  |  |  |  |
First mortgage loans | 154,833 |  |  | 146,713 |  |  | 3.94 | % |  | 9.96
Total | $ | 3,608,726 |  |  | $ | 3,530,035 |  |  | 6.84 | % |  | 1.66
(1) | March 31, 2020 LIBOR rates are used to calculate weighted average yield for floating rate loans.
As of March 31, 2020, $2.8 billion, or 80.0%, of the outstanding face amount of our mortgage loan receivables held for investment, net, at amortized cost, were at variable interest rates, linked to LIBOR. Of this $2.8 billion, 100% of these variable interest rate mortgage loan receivables were subject to interest rate floors. As of March 31, 2020, $154.8 million, or 100%, of the outstanding face amount of our mortgage loan receivables held for sale were at fixed interest rates. December 31, 2019 ($ in thousands)
| Outstanding Face Amount |  | Carrying Value |  | Weighted Average Yield (1) |  | Remaining Maturity (years)
Mortgage loan receivables held for investment, net, at amortized cost: |  |  |  |  |  |  |
Mortgage loans held by consolidated subsidiaries: |  |  |  |  |  |  |
First mortgage loans | $ | 3,147,275 |  |  | $ | 3,127,173 |  |  | 6.77 | % |  | 1.35
Mezzanine loans | 130,322 |  |  | 129,863 |  |  | 10.97 | % |  | 3.26
Total mortgage loans held by consolidated subsidiaries | 3,277,597 |  |  | 3,257,036 |  |  | 6.94 | % |  | 1.43
Allowance for loan losses | N/A |  |  | (20,500 | ) |  |  |  |
Total mortgage loan receivables held for investment, net, at amortized cost | 3,277,597 |  |  | 3,236,536 |  |  |  |  |
Mortgage loan receivables held for sale: |  |  |  |  |  |  |
First mortgage loans | 122,748 |  |  | 122,325 |  |  | 4.20 | % |  | 9.99
Total | $ | 3,400,345 |  |  | $ | 3,358,861 |  |  | 6.88 | % |  | 1.75
(1) | December 31, 2019 LIBOR rates are used to calculate weighted average yield for floating rate loans.
As of December 31, 2019, $2.5 billion, or 77.2%, of the outstanding principal of our mortgage loan receivables held for investment, net, at amortized cost, were at variable interest rates, linked to LIBOR. Of this $2.5 billion, 100% of these variable rate mortgage loan receivables were subject to interest rate floors. As of December 31, 2019, $122.7 million, or 100%, of the carrying value of our mortgage loan receivables held for sale were at fixed interest rates. For the three months ended March 31, 2020 and 2019, the activity in our loan portfolio was as follows ($ in thousands):
| Mortgage loan receivables held for investment, net, at amortized cost: |  |
| Mortgage loans held by consolidated subsidiaries |  | Provision expense for current expected credit loss |  | Mortgage loan receivables held for sale
Balance, December 31, 2019 | $ | 3,257,036 |  |  | $ | (20,500 | ) |  | $ | 122,325 |
Origination of mortgage loan receivables | 313,936 |  |  | — |  |  | 212,805 |
Repayment of mortgage loan receivables | (118,531 | ) |  | — |  |  | (64 | )
Proceeds from sales of mortgage loan receivables | — |  |  | — |  |  | (189,358 | )
Non-cash disposition of loans via foreclosure(1) | (23,586 | ) |  | — |  |  | — |
Sale of loans, net | — |  |  | — |  |  | 1,005 |
Accretion/amortization of discount, premium and other fees | 3,924 |  |  | — |  |  | — |
Release of asset-specific loan loss provision via foreclosure(1) | — |  |  | 2,000 |  |  | — |
Provision expense for current expected credit loss (implementation impact)(2) | — |  |  | (4,964 | ) |  |  |
Provision expense for current expected credit loss (impact to earnings)(2) | — |  |  | (17,993 | ) |  | — |
Additional asset-specific reserve | — |  |  | (8,000 | ) |  | — |
Balance, March 31, 2020 | $ | 3,432,779 |  |  | $ | (49,457 | ) |  | $ | 146,713 |
(1) | Refer to Note 5 Real Estate and Related Lease Intangibles, Net for further detail on foreclosure of real estate.
(2) | During the three months ended March 31, 2020, the initial impact of the implementation of the CECL accounting standard as of January 1, 2020 is recorded against retained earnings. Subsequent remeasurement thereafter, including the period to date change for the three months ended March 31, 2020, is accounted for as provision expense for current expected credit loss in the consolidated statements of income.
| Mortgage loan receivables held for investment, net, at amortized cost: |  |
| Mortgage loans held by consolidated subsidiaries |  | Mortgage loans transferred but not considered sold |  | Provision for loan losses |  | Mortgage loan receivables held for sale
Balance, December 31, 2018 | $ | 3,318,390 |  |  | $ | — |  |  | $ | (17,900 | ) |  | $ | 182,439 |
Origination of mortgage loan receivables | 224,418 |  |  | — |  |  | — |  |  | 175,256 |
Repayment of mortgage loan receivables | (245,444 | ) |  | — |  |  | — |  |  | (321 | )
Proceeds from sales of mortgage loan receivables | — |  |  | — |  |  | — |  |  | (159,424 | )
Sale of loans, net | — |  |  | — |  |  | — |  |  | 7,079 |
Transfer between held for investment and held for sale(1) | — |  |  | 15,504 |  |  | — |  |  | (15,504 | )
Accretion/amortization of discount, premium and other fees | 5,389 |  |  | — |  |  | — |  |  | — |
Provision for loan losses | — |  |  | — |  |  | (300 | ) |  | — |
Balance, March 31, 2019 | $ | 3,302,753 |  |  | $ | 15,504 |  |  | $ | (18,200 | ) |  | $ | 189,525 |
(1) | We sell certain loans into securitizations; however, for a transfer of financial assets to be considered a sale, the transfer must meet the sale criteria of ASC 860 under which the Company must surrender control over the transferred assets which must qualify as recognized financial assets at the time of transfer. The assets must be isolated from the Company, even in bankruptcy or other receivership, the purchaser must have the right to pledge or sell the assets transferred and the Company may not have an option or obligation to reacquire the assets. If the sale criteria are not met, the transfer is considered to be a secured borrowing, the assets remain on the Company’s consolidated balance sheets and the sale proceeds are recognized as a liability. During the three months ended March 31, 2019, the Company reclassified from mortgage loan receivables held for sale to mortgage loans transferred but not considered sold, at amortized cost, one loan with an outstanding face amount of $15.4 million, a book value of $15.5 million (fair value at the date of reclassification) and a remaining maturity of 9.8 years. This loan was sold to the WFCM 2019-C49 securitization trust and is considered a financing for accounting purposes. This transfer has been reflected as a non-cash item on the consolidated statement of cash flows for the three months ended March 31, 2019.
During the three months ended March 31, 2020, the transfers of financial assets via sales of loans were treated as sales under ASC Topic 860 — Transfers and Servicing. During the three months ended March 31, 2019, the transfers of financial assets via sales of loans were treated as sales under ASC Topic 860 — Transfers and Servicing, except for the one loan discussed above. As of March 31, 2020 and December 31, 2019, there was $0.4 million of unamortized discounts included in our mortgage loan receivables held for investment, net, at amortized cost, on our consolidated balance sheets. Allowance for Loan Losses and Non-Accrual Status ($ in thousands)
| Three Months Ended March 31, |
| 2020 |  | 2019 |
Allowance for loan losses at beginning of period | $ | 20,500 |  |  | $ | 17,900 |  |
Provision expense for current expected credit loss (implementation impact) | 4,964 |  |  | — |  |
Provision expense for current expected credit loss (impact to earnings) | 17,993 |  |  | 300 |  |
Additional asset-specific reserve | 8,000 |  |  | — |  |
Foreclosure of loans subject to asset-specific reserve | (2,000 | ) |  | — |  |
Allowance for loan losses at end of period | $ | 49,457 |  |  | $ | 18,200 |  |
| March 31, 2020 |  | December 31, 2019 |
Principal balance of loans on non-accrual status(1) | $ | 142,387 |  | (1) | $ | 98,725 |  | (2)
(1) | Represents two of the Company’s loans, which were originated simultaneously as part of a single transaction and had a combined carrying value of $26.9 million, two loans with a combined carrying value of $46.4 million, one loan with a carrying value of $61.5 million, and two loans, which were originated simultaneously as part of a single transaction and have a combined carrying value of $7.7 million as further discussed below.
(2) | Represents two of the Company’s loans, which were originated simultaneously as part of a single transaction and had a combined carrying value of $26.9 million, one loan with a carrying value of $10.4 million and one loan with a carrying value of $61.5 million, as further discussed below.
Current Expected Credit Loss (“CECL”) In compliance with the new CECL reporting requirements, the Company has supplemented the existing credit monitoring and management processes with additional processes to support the calculation of the CECL reserves. Based on the Company’s process, at adoption, on January 1, 2020, the Company recorded a CECL Reserve of $11.6 million, which equated to 0.36% of $3.2 billion carrying value of its held for investment loan portfolio. This reserve excluded three loans that previously had an aggregate of $14.7 million of asset-specific reserves and a carrying value of $39.8 million as of January 1, 2020. Upon adoption, the aggregated CECL Reserve reduced total shareholder’s equity by $5.8 million (or approximately $0.05 of book value per share of common stock). As of March 31, 2020, the Company recorded additional CECL reserves of $18.6 million for a total CECL reserve of $30.2 million. This excludes five loans that previously had an aggregate of $20.7 million of asset-specific reserves and a total principal balance of $81.3 million as of March 31, 2020. The change of $18.6 million in the quarter is reflected as an increase of reserve to provision expense of $18.0 million, and an increase in reserve on unfunded commitments of $0.6 million. These increases are primarily due to the update of the macro economic assumptions used in the Company’s CECL evaluation in the current quarter to reflect a recessionary macro economic scenario instead of the more stable “Baseline” scenario from the Federal Reserve that was utilized in the January 1, 2020 CECL reserve analysis. The Company has concluded that none of its loans, other than the four loans discussed below, are individually impaired as of March 31, 2020. Loan Portfolio by Property Type, Geographic Region and Vintage ($ in thousands)
|  | Principal Amount
Property Type |
Multifamily |  | $ | 1,046,253 |
Office |  | 854,808 |
Hospitality |  | 386,487 |
Mixed Use |  | 423,002 |
Retail |  | 247,958 |
Other |  | 105,879 |
Industrial |  | 174,098 |
Manufactured Housing |  | 82,666 |
Self-Storage |  | 51,425 |
Subtotal loans |  | 3,372,576 |
Individually impaired loans(1) |  | 81,316 |
Total loans |  | $ | 3,453,892 |
|  | Principal Amount
Geographic Region |
Northeast |  | $ | 966,468 |
Southwest |  | 660,635 |
Midwest |  | 640,633 |
South |  | 547,812 |
West |  | 557,028 |
Subtotal loans |  | 3,372,576 |
Individually impaired loans(1) |  | 81,316 |
Total loans |  | $ | 3,453,892 |
|  | Principal Amount
Vintage |
2019 |  | $ | 291,604 |
2018 |  | 1,319,593 |
2017 |  | 1,020,543 |
2016 |  | 322,563 |
Prior to 2016 |  | 418,273 |
Subtotal loans |  | 3,372,576 |
Individually impaired loans(1) |  | 81,316 |
Total loans |  | $ | 3,453,892 |
(1) | Included in individually impaired loans are one loan, originated in 2016, with a carrying value of $5.9 million, collateralized by a mixed use property located in the Northeast region, two loans, which were restructured in 2018, with a combined carrying value of $46.4 million, collateralized by a mixed use property located in the Northeast region, and one loan, originated in 2018, with a carrying value of $4.1 million, collateralized by a hotel located in the Midwest region.
Individually Impaired Loans As of March 31, 2020, two of the Company’s loans, collateralized by a mixed use property, which were originated simultaneously as part of a single transaction and had a carrying value of $26.9 million, were in default. These loans are directly and indirectly secured by the same property. The Company placed these loans on non-accrual status in July 2017. In assessing these collateral-dependent loans for impairment, the most significant consideration is the fair value of the underlying real estate collateral, which includes an in-place long-dated retail lease. The value of such property is most significantly affected by the contractual lease terms and the appropriate market capitalization rates, which are driven by the property’s market strength, the general interest rate environment and the retail tenant’s creditworthiness. In view of these considerations, the Company uses a direct capitalization rate valuation methodology to calculate the fair value of the underlying real estate collateral. During the three months ended March 31, 2018, management believed these loans to be impaired, reflecting a decline in collateral value attributable to: (i) on-going bankruptcy proceedings; (ii) rising interest rates; and (iii) the retail tenant’s creditworthiness. As a result, on March 31, 2018, the Company recorded an asset-specific provision for loss on one of these loans, with a carrying value of $5.9 million, of $2.7 million to reduce the carrying value of these loans to the fair value of the property less the cost to foreclose and sell the property utilizing direct capitalization rates of 4.70% to 5.00%. As of March 31, 2020, the Company believed no additional loss provision was necessary based on the application of direct capitalization rates of 4.60% to 4.90%. During the year ended December 31, 2018, management identified a loan, secured by a mixed-use office and hospitality property, with a carrying value of $45.0 million as impaired, reflecting a decline in collateral value attributable to: (i) recent and near term tenant vacancies at the property; (ii) new information available during the three months ended September 30, 2018 regarding the addition of supply that will increase the local submarket vacancy rate; and (iii) declining market conditions. A reserve of $10.0 million was recorded for this impaired loan in the three months ended September 30, 2018 to reduce the carrying value of the loan to the estimated fair value of the collateral, less the estimated costs to sell. The Company has placed this loan on non-accrual status as of September 30, 2018. During the quarter ended December 31, 2018, this loan experienced a maturity default and its terms were modified in a Troubled Debt Restructuring (“TDR”) on October 17, 2018. The terms of the TDR provided for, among other things, the restructuring of the Company’s existing $45.0 million first mortgage loan into a $35.0 million A-Note and a $10.0 million B-Note and a 19.0% equity interest which is not subject to dilution and that can be increased to 25% under certain conditions. Under certain conditions, the B-Note may be forgiven or reduced. The reserve of $10.0 million was applied to the B-Note and the B-Note was placed on non-accrual status on October 17, 2018. During the quarter ended March 31, 2020, management identified that the A-Note was impaired, reflecting a decline in collateral value due to: (i) new information available during the three months ended March 31, 2020 regarding two recent non-distressed sales of office buildings in the Wilmington, DE central business district; (ii) a change in market conditions driven by COVID-19 as capital flow to the tertiary markets shifted given increased opportunities in primary markets; and (iii) the closure of the corporate housing component of the property. As a result, on March 31, 2020, the Company recorded an asset-specific provision for loss on the A-Note of $7.5 million to reduce the carrying value of this loan to the fair value of the property less the cost to foreclose and sell the property utilizing direct capitalization rates of 7.50% to 8.75%. The Company placed the A-Note on non-accrual status as of March 31, 2020. As of March 31, 2020, the combined carrying value of the A-Note and the B-Note was $46.4 million. As of March 31, 2020, two of the Company’s loans, collateralized by hotel properties, which were originated simultaneously as part of a single transaction and had a carrying value of $7.7 million, were in default. The Company placed these loans on non-accrual status in March 2020. The Company filed for foreclosure in December 2019 and did not believe there was an impairment at that time. In assessing these collateral-dependent loans for impairment, the most significant consideration is the fair value of the underlying real estate collateral. Based on current indications of value from market participants with knowledge of the asset and the temporary closure of the nearby university and local businesses due to COVID-19, the Company believes the fair value of one of the two hotel properties is below the carrying value of $4.1 million. As a result, on March 31, 2020, the Company recorded an asset-specific provision for loss of $0.5 million to reduce the carrying value of this loan to the fair value of the property less the cost to foreclose and sell the property. As of March 31, 2020, there were no unfunded commitments associated with modified loans considered TDRs. These non-recurring fair values are considered Level 3 measurements in the fair value hierarchy. Loans on Non-Accrual Status During the three months ended December 31, 2019, one of the Company’s loans, which had a carrying value of $61.5 million, was placed on non-accrual status. The Company performed a review of the loan collateral. The review consisted of conversations with market participants familiar with the property location as well as reviewing market data and comparables. Based on this review, no asset-specific impairment was required for this loan. There are no other loans on non-accrual status other than discussed in Individually Impaired Loans above as of March 31, 2020.

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