Commercial Mortgage and Subordinate Loans, Net

12 Months Ended

Dec. 31, 2017

Mortgage Loans on Real Estate [Abstract]

The Company’s loan portfolio was comprised of the following at December 31, 2017:



Loan Type	December 31, 2017		December 31, 2016
Commercial mortgage loans, net	$	2,653,826	$	1,641,856
Subordinate loans, net	1,025,932		1,051,236
Total loans, net	$	3,679,758	$	2,693,092

Activity relating to our loan investment portfolio was as follows:



	Principal Balance			Deferred Fees/Other Items ⁽¹⁾			Provision for Loan Loss ⁽²⁾			Carrying Value
December 31, 2016	$	2,720,344		$	(12,252	)	$	(15,000	)	$	2,693,092
Loan fundings	1,828,758			—			—			1,828,758
Loan repayments	(891,848		)	—			—			(891,848		)
Unrealized gain on foreign currency translation	23,766			(154		)	—			23,612
Provision for loan loss ⁽²⁾	—			—			(1,981		)	(1,981		)
Deferred fees and other items ⁽¹⁾	—			(27,424		)	—			(27,424		)
PIK interest, amortization of fees and other items ⁽¹⁾	25,149			30,400			—			55,549
December 31, 2017	$	3,706,169		$	(9,430	)	$	(16,981	)	$	3,679,758

———————

(1) Other items primarily consist of purchase discounts or premiums, exit fees and deferred origination expenses.

(2) In addition to the $1,981 provision for loan loss, the Company recorded an impairment of $3,019 against a related investment previously recorded under other assets on the Company's consolidated balance sheet.

The following table details overall statistics for our loan portfolio:



	December 31, 2017			December 31, 2016
Number of loans	59			45
Principal balance	$	3,706,169		$	2,720,344
Carrying value	$	3,679,758		$	2,693,092
Unfunded loan commitments⁽¹⁾	$	435,627		$	170,365
Weighted-average cash coupon ⁽²⁾	8.40		%	8.88		%

———————


(1)	Unfunded loan commitments are primarily funded to finance property improvements or lease-related expenditures by the borrowers. These future commitments are funded over the term of each loan, subject in certain cases to an expiration date.


(2)	For floating rate loans, assumes one-month LIBOR of 1.56% and 0.77%, as of December 31, 2017 and December 31, 2016, respectively.

The table below details the property type of the properties securing the loans in our portfolio:



	December 31, 2017		December 31, 2016
Property Type	Carrying Value	% of Portfolio	Carrying Value	% of Portfolio
Urban Retail Predevelopment	$654,736	17.8%	$491,187	18.2%
Hotel	645,056	17.5%	408,428	15.2%
Office	513,830	14.0%	255,031	9.5%
Residential Rental	465,057	12.6%	309,243	11.5%
Residential - for sale	442,179	12.0%	469,997	17.5%
Mixed Use	354,640	9.6%	134,797	5.0%
Retail Center	198,913	5.4%	209,401	7.8%
Healthcare	173,870	4.7%	170,549	6.3%
Other	154,141	4.2%	87,650	3.3%
Industrial	77,338	2.1%	156,809	5.8%
	3,679,758	100.0%	2,693,092	100.0%

The table below details the geographic distribution of the properties securing the loans in our portfolio:



	December 31, 2017		December 31, 2016
Geographic Location	Carrying Value	% of Portfolio	Carrying Value	% of Portfolio
Manhattan, NY	$1,173,833	31.9%	$870,914	32.3%
Brooklyn, NY	357,611	9.7%	163,389	6.1%
Northeast	100,536	2.7%	137,770	5.1%
Midwest	683,380	18.6%	405,992	15.1%
Southeast	531,582	14.4%	332,276	12.3%
United Kingdom	303,488	8.2%	244,756	9.1%
West	227,024	6.2%	219,664	8.2%
Mid Atlantic	191,976	5.2%	263,717	9.8%
Other International	76,713	2.1%	—	—%
Southwest	33,615	0.9%	54,614	2.0%
Total	3,679,758	100.0%	$2,693,092	100.0%

The Company assesses the risk factors of each loan, and assigns a risk rating based on a variety of factors, including, without limitation, loan-to-value ratio, or LTV, debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows:

1. Very low risk

2. Low risk

3. Moderate/average risk

4. High risk/potential for loss: a loan that has a risk of realizing a principal loss

5. Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss or has been impaired

The following table allocates the carrying value of our loan portfolio based on the Company's internal risk ratings:



	December 31, 2017
Risk Rating	Number of Loans	Carrying Value		% of Loan Portfolio
1	—	$	—	—	%
2	5	399,326		10	%
3	51	3,034,358		83	%
4	1	168,208		5	%
5	2	77,866		2	%
	59	$	3,679,758	100	%

The Company evaluates its loans for possible impairment on a quarterly basis. 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/sponsor on a loan by loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations are sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan 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 borrower operates. Such loan loss analysis is completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants. An allowance for loan loss is established when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan.

During the year ended December 31, 2017, the Company recorded a loan loss provision of $1,981 on a commercial mortgage loan secured by fully-built, for-sale residential condominium units located in Bethesda, MD. In addition to the $1,981 provision for loan loss, the Company recorded an impairment of $3,019 on a related investment previously recorded under other assets on the Company's consolidated balance sheet. The loan loss provision and impairment were based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision and related impairment). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were sales price per square foot and discount rate which were an average of $678 dollars per square foot across properties and 15%, respectively. Effective April 1, 2017, the Company ceased accruing all interest associated with the loan and accounts for the loan on a cost-recovery basis (all proceeds are applied towards the loan balance). As of December 31, 2017, this was assigned a risk rating of 5.

During 2016, the Company recorded a loan loss provision of $10,000 on a multifamily commercial mortgage loan and $5,000 on a multifamily subordinate loan secured by a multifamily property located in Williston, ND. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were terminal capitalization rate and discount rate which were 11% and 10% respectively. The Company ceased accruing payment in kind ("PIK") interest associated with the loan and recognizing interest income upon receipt of cash. As of December 31, 2017, this was assigned a risk rating of 5.

As of December 31, 2017, the aggregate loan loss provision was $11,981 and $5,000 for commercial mortgage loans and subordinate loans, respectively. As of December 31, 2016, the aggregate loan loss provision was $10,000 and $5,000 for commercial mortgage loans and subordinate loans, respectively.

During the years ended December 31, 2017, 2016, and 2015, the Company received pre-payment penalties of $5,416, $5,225, and $1,765, respectively. The Company records pre-payment penalty income under interest income.

During the years ended December 31, 2017, 2016, and 2015, the Company recognized PIK interest of $25,227, $24,379, and $21,997, respectively.

Loan Proceeds Held by Servicer

Loan proceeds held by servicer represents principal payments held by the Company's third-party loan servicer as of the balance sheet date which were remitted to us subsequent to the balance sheet date.

Schedule IV — Mortgage Loans on Real Estate

December 31, 2017



Description	Number of Loans	Property Type	Contractual Interest Rate ⁽¹⁾	Maturity Date⁽²⁾	Periodic Payment	Principal Balance	Carrying Value	Principal Amount of Mortgages Subject to Delinquent Principal or Interest
Commercial mortgage loans individually >3%
Loan A		Urban Retail Predevelopment	7.80%	7/1/2019	Interest Only	$220,000	$221,710	—
Loan B		Office	6.30%	1/5/2023	Principal and Interest	182,616	180,851	—
Loan C		Retail Center	7.10%	5/31/2020	Interest Only	167,340	168,208	—
Loan D		Hotel	6.80%	9/30/2020	Interest Only	138,406	139,159	—
Loan E		Mixed Use	7.10%	10/1/2020	Interest Only	132,184	131,672	—
Loan F		Urban Retail Predevelopment	8.60%	9/1/2018	Interest Only	127,180	128,133	—
Loan G		Mixed Use	6.00%	6/30/2019	Principal and Interest	125,000	124,256	—
Loan H		Office	6.90%	12/1/2022	Principal and Interest	122,651	120,199	—

Commercial mortgage loans individually <3%
First Mortgage	27	Hotel, Mixed Use, Office, Other, Residential-for rent, Residential-for sale, Retail Center, Urban Retail Predevelopment	6.06% - 8.31%	2018 - 2022	Principal and Interest / Interest Only	1,456,494	1,439,637	—
Total Commercial mortgage loans						$2,671,871	$2,653,826	—

Subordinate loans individually >3%⁽³⁾
Loan I		Residential-for sale	15.80%	7/1/2020	Interest Only	115,490	115,776	—
Loan J		Healthcare	11.60%	10/11/2021	Interest Only	129,305	128,785	—

Subordinate loans individually <3%⁽³⁾
Subordinate Mortgage	22	Healthcare, Hotel, Industrial, Mixed Use, Office, Other, Residential-for rent, Residential-for sale	6.81% - 19.06%	2018 - 2027	Principal and Interest / Interest Only	789,503	781,372	—
Total Subordinate loans						$1,034,298	$1,025,932	—

Total loans ⁽⁴⁾						$3,706,169	$3,679,758	—

———————


(1)	Assumes 1.56% 1 month Libor rate for all floating rate loans


(2)	Assumes all extension options are exercised.


(3)	Subject to prior liens.


(4)	The aggregate cost for federal income tax purposes is $3,696,739.

The following table summarizes the changes in the carrying amounts of mortgage loans during 2017 and 2016.



	Year Ended			Year Ended
Reconciliation of Carrying Amount of Loans	December 31, 2017			December 31, 2016
Balance at beginning of year	$	2,693,092		$	1,925,652
Loan fundings⁽¹⁾	1,828,758			1,127,039
Loan repayments	(891,848		)	(331,189		)
Participation sold	—			(24,051		)
Unrealized gain (loss) on foreign currency translation	23,612			(33,383		)
Discount accretion	—			13,656
Provision for loan losses⁽²⁾	(1,981		)	(15,000		)
Deferred Fees	(27,424		)	—
PIK interest, amortization of fees and other items	55,549			30,368
Balance at the close of year	$	3,679,758		$	2,693,092

———————

(1) During the year ended December 31, 2017, $50,000 was purchased from a fund managed by an affiliate of the Manager.

(2) During the year ended December 31, 2017, the Company recorded a loan loss provision of $1,981 on a commercial mortgage loan secured by fully-built, for-sale residential condominium units located in Bethesda, MD. In addition to the $1,981 provision for loan loss, the Company recorded an impairment of $3,019 on a related investment previously recorded under other assets on the Company's consolidated balance sheet. During 2016, the Company recorded a loan loss provision of $10,000 on a multifamily commercial mortgage loan and $5,000 on a multifamily subordinate loan secured by a multifamily property located in Williston, ND.