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Loan Proceeds Held by Servicer | 9 Months Ended
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Sep. 30, 2018
Receivables [Abstract] |
Loan Proceeds Held by Servicer | Commercial Mortgage and Subordinate Loans, Net Our loan portfolio was comprised of the following at September 30, 2018 and December 31, 2017 ($ in thousands):
Loan Type |  | September 30, 2018 |  | December 31, 2017
Commercial mortgage loans, net |  | $ | 3,723,550 |  |  | $ | 2,653,826 |
Subordinate loans, net |  | 1,104,496 |  |  | 1,025,932 |
Total loans, net |  | $ | 4,828,046 |  |  | $ | 3,679,758 |
Our loan portfolio consisted of 90% and 88% floating rate loans, based on amortized cost, as of September 30, 2018 and December 31, 2017, respectively. Activity relating to our loan investment portfolio, for the nine months ended September 30, 2018, was as follows ($ in thousands):
|  | Principal Balance |  | Deferred Fees/Other Items (1) |  | Provision for Loan Loss (2) |  | Carrying Value
December 31, 2017 |  | $ | 3,706,169 |  |  | $ | (9,430 | ) |  | $ | (16,981 | ) |  | $ | 3,679,758 |
New loan fundings |  | 1,590,123 |  |  | — |  |  | — |  |  | 1,590,123 |
Add-on loan fundings (3) |  | 175,053 |  |  | — |  |  | — |  |  | 175,053 |
Loan repayments |  | (601,041 | ) |  | — |  |  | — |  |  | (601,041 | )
Unrealized gain (loss) on foreign currency translation |  | (35,412 | ) |  | (21 | ) |  | — |  |  | (35,433 | )
Provision for loan loss (2) |  | — |  |  | — |  |  | (5,000 | ) |  | (5,000 | )
Deferred fees and other items (1) |  | — |  |  | (24,596 | ) |  | — |  |  | (24,596 | )
PIK interest, amortization of fees and other items (1) |  | 29,944 |  |  | 19,238 |  |  | — |  |  | 49,182 |
September 30, 2018 |  | $ | 4,864,836 |  |  | $ | (14,809 | ) |  | $ | (21,981 | ) |  | $ | 4,828,046 |
——————— (1) Other items primarily consist of purchase discounts or premiums, exit fees and deferred origination expenses. (2) In addition to the $22.0 million provision for loan loss, we recorded an impairment of $3.0 million against an investment previously recorded under other assets on our condensed consolidated balance sheet. (3) Represents fundings for loans closed prior to 2018. The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):
|  | September 30, 2018 |  | December 31, 2017
Number of loans |  | 68 |  |  | 59 |
Principal balance |  | $ | 4,864,836 |  |  | $ | 3,706,169 |
Carrying value |  | $ | 4,828,046 |  |  | $ | 3,679,758 |
Unfunded loan commitments (1) |  | $ | 884,178 |  |  | $ | 435,627 |
Weighted-average cash coupon (2) |  | 8.2 | % |  | 8.4 | %
———————
(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, based on applicable benchmark rates as of the specified dates.
The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
|  | September 30, 2018 |  | December 31, 2017
Property Type |  | Carrying Value |  | % of Portfolio |  | Carrying Value |  | % of Portfolio
Hotel |  | $ | 1,229,460 |  |  | 25.5 | % |  | $ | 645,056 |  |  | 17.6 | %
Residential-for-sale: inventory (1) |  | 602,826 |  |  | 12.5 | % |  | 92,438 |  |  | 2.5 | %
Residential-for-sale: construction (1) |  | 385,303 |  |  | 8.0 | % |  | 349,739 |  |  | 9.5 | %
Urban Predevelopment |  | 677,440 |  |  | 14.0 | % |  | 654,736 |  |  | 17.8 | %
Office |  | 520,926 |  |  | 10.8 | % |  | 513,830 |  |  | 14.0 | %
Multifamily |  | 450,017 |  |  | 9.3 | % |  | 465,057 |  |  | 12.6 | %
Mixed Use |  | 320,984 |  |  | 6.6 | % |  | 354,640 |  |  | 9.6 | %
Healthcare |  | 255,588 |  |  | 5.3 | % |  | 173,870 |  |  | 4.7 | %
Retail Center |  | 202,031 |  |  | 4.2 | % |  | 198,913 |  |  | 5.4 | %
Other |  | 151,471 |  |  | 3.1 | % |  | 154,141 |  |  | 4.2 | %
Industrial |  | 32,000 |  |  | 0.7 | % |  | 77,338 |  |  | 2.1 | %
Total |  | $ | 4,828,046 |  |  | 100.0 | % |  | $ | 3,679,758 |  |  | 100.0 | %
(1) | To conform to the current period’s presentation, loans with a combined carrying value of $442.2 million classified as residential-for-sale as of December 31, 2017 were broken out into $349.8 million of residential-for-sale: construction and $92.4 million of residential-for-sale: inventory.
The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
|  | September 30, 2018 |  | December 31, 2017
Geographic Location |  | Carrying Value |  | % of Portfolio |  | Carrying Value |  | % of Portfolio
Manhattan, NY |  | $ | 1,365,211 |  |  | 28.3 | % |  | $ | 1,173,833 |  |  | 31.9 | %
Brooklyn, NY |  | 332,372 |  |  | 6.9 | % |  | 357,611 |  |  | 9.7 | %
Northeast |  | 37,410 |  |  | 0.8 | % |  | 100,536 |  |  | 2.7 | %
Midwest |  | 800,196 |  |  | 16.6 | % |  | 683,380 |  |  | 18.6 | %
Southeast |  | 608,925 |  |  | 12.6 | % |  | 531,582 |  |  | 14.4 | %
West |  | 522,818 |  |  | 10.8 | % |  | 227,024 |  |  | 6.2 | %
Mid Atlantic |  | 213,881 |  |  | 4.4 | % |  | 191,976 |  |  | 5.2 | %
Southwest |  | 115,683 |  |  | 2.4 | % |  | 33,615 |  |  | 0.9 | %
United Kingdom |  | 706,342 |  |  | 14.6 | % |  | 303,488 |  |  | 8.3 | %
Other International |  | 125,208 |  |  | 2.6 | % |  | 76,713 |  |  | 2.1 | %
Total |  | $ | 4,828,046 |  |  | 100.0 | % |  | $ | 3,679,758 |  |  | 100.0 | %
We assess the risk factors of each loan and assign a risk rating based on a variety of factors, including, without limitation, loan-to-value ratio ("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 our internal risk ratings at the dates indicated ($ in thousands):
|  | September 30, 2018 |  | December 31, 2017
Risk Rating |  | Number of Loans |  | Carrying Value |  | % of Loan Portfolio |  | Number of Loans |  | Carrying Value |  | % of Loan Portfolio
1 |  | — |  | $ | — |  |  | — | % |  | — |  | $ | — |  |  | — | %
2 |  | 5 |  | 340,237 |  |  | 7 | % |  | 5 |  | 399,326 |  |  | 10 | %
3 |  | 60 |  | 4,254,383 |  |  | 88 | % |  | 51 |  | 3,034,358 |  |  | 83 | %
4 |  | 1 |  | 171,127 |  |  | 4 | % |  | 1 |  | 168,208 |  |  | 5 | %
5 |  | 2 |  | 62,299 |  |  | 1 | % |  | 2 |  | 77,866 |  |  | 2 | %
|  | 68 |  | $ | 4,828,046 |  |  | 100 | % |  | 59 |  | $ | 3,679,758 |  |  | 100 | %
We evaluate our loans for possible impairment on a quarterly basis. We regularly evaluate 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 is 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. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, we consider 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 we will not be able to collect all amounts due according to the contractual terms of the loan. We recorded a $10.0 million loan loss provision and impairment against a commercial mortgage loan secured by a fully-built, for-sale residential condominium units located in Bethesda, MD. This was comprised of (i) $5.0 million loan loss recorded during the second quarter of 2018, and (ii) $2.0 million loan loss provision and $3.0 million of impairment recorded during the second quarter of 2017. The impairment was recorded on an investment previously recorded under other assets on our condensed 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 $662 dollars per square foot across properties and 15%, respectively. Effective April 1, 2017, we 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 September 30, 2018 and December 31, 2017, this loan was assigned a risk rating of 5. During 2016, we recorded a loan loss provision of $10.0 million on a commercial mortgage loan and $5.0 million on a contiguous 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. We ceased accruing interest associated with the loan and only recognize interest income upon receipt of cash. As of September 30, 2018 and December 31, 2017, this loan was assigned a risk rating of 5. We evaluate modifications to our loan portfolio to determine if the modifications constitute a troubled debt restructuring ("TDR"), under ASC Topic 310, “Receivables." During the second quarter of 2018, we determined that a modification of one commercial mortgage loan with a principal balance of $169.0 million constituted a TDR as the interest rate spread was reduced from 5.5% over LIBOR to 3.0% over LIBOR. As of September 30, 2018 and December 31, 2017, this loan was assigned a risk rating of 4. The entity that we are a part of and owns the underlying property was deemed to be a variable interest entity ("VIE") and it was determined that we are not the primary beneficiary of that VIE. During the three months ended September 30, 2018, we sold a $75.0 million ($17.7 million funded) subordinate position of our $265.0 million loans for the construction of an office campus in Renton, Washington. As of September 30, 2018, our exposure to the property is limited to a $190.0 million ($65.5 million funded) mortgage loan. This transaction was evaluated under ASC 860 - Transfers and Servicing and we determined that it qualifies as a sale and accounted for as such. As of September 30, 2018 and December 31, 2017, the aggregate loan loss provision was $17.0 million and $5.0 million for commercial mortgage loans and subordinate loans, respectively. We recognized payment-in-kind ("PIK") interest of $10.2 million and $29.9 million for the three and nine months ended September 30, 2018, respectively, and $5.3 million and $19.3 million for the three and nine months ended September 30, 2017, respectively. We recognized pre-payment penalties and accelerated fees of $0.2 million and $1.8 million for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2017, we recognized pre-payment penalties of $3.6 million and $4.0 million, respectively. Loan Proceeds Held by Servicer Loan proceeds held by servicer represents principal payments held by our third-party loan servicer as of the balance sheet date which were remitted to us subsequent to the balance sheet date. Loan proceeds held by servicer was $302.8 million as of December 31, 2017. There were no loan proceeds held by servicer as of September 30, 2018.

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- Definition The entire disclosure for claims held for amounts due a entity, excluding financing receivables. Examples include, but are not limited to, trade accounts receivables, notes receivables, loans receivables. Includes disclosure for allowance for credit losses. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section 50 -Paragraph 4 -URI http://asc.fasb.org/extlink&oid=84173941&loc=d3e5074-111524 Reference 2: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 210 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.5-02(4)) -URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682 Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 944 -SubTopic 210 -Section S99 -Paragraph 1 -Subparagraph (SX 210.7-03(a)(5)) -URI http://asc.fasb.org/extlink&oid=6879938&loc=d3e572229-122910 Reference 4: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section 50 -Paragraph 11 -URI http://asc.fasb.org/extlink&oid=84173941&loc=d3e5162-111524 Reference 5: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 310 -SubTopic 10 -Section 50 -Paragraph 3 -URI http://asc.fasb.org/extlink&oid=84173941&loc=d3e5066-111524 Reference 6: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 210 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.5-02(3)) -URI http://asc.fasb.org/extlink&oid=6877327&loc=d3e13212-122682 Reference 7: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 942 -SubTopic 210 -Section S99 -Paragraph 1 -Subparagraph (SX 210.9-03(7)) -URI http://asc.fasb.org/extlink&oid=6876686&loc=d3e534808-122878 Reference 8: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 946 -SubTopic 210 -Section S99 -Paragraph 1 -Subparagraph (SX 210.6-04(6)) -URI http://asc.fasb.org/extlink&oid=6488278&loc=d3e603758-122996 + Details
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