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.