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Commercial Mortgage and Subordinate Loans, Net | 3 Months Ended
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Mar. 31, 2019
Receivables [Abstract] |
Commercial Mortgage and Subordinate Loans, Net | Commercial Mortgage and Subordinate Loans, Net Our loan portfolio was comprised of the following at March 31, 2019 and December 31, 2018 ($ in thousands):
Loan Type |  | March 31, 2019 |  | December 31, 2018
Commercial mortgage loans, net |  | $ | 4,003,089 |  |  | $ | 3,878,981 |
Subordinate loans, net |  | 1,183,910 |  |  | 1,048,612 |
Total loans, net |  | $ | 5,186,999 |  |  | $ | 4,927,593 |
Our loan portfolio consisted of 93% and 91% floating rate loans, based on amortized cost, as of March 31, 2019 and December 31, 2018, respectively. Activity relating to our loan investment portfolio, for the three months ended March 31, 2019, was as follows ($ in thousands):
|  | Principal Balance |  | Deferred Fees/Other Items (1) |  | Provision for Loan Loss (2) |  | Carrying Value
December 31, 2018 |  | $ | 4,982,514 |  |  | $ | (17,940 | ) |  | $ | (36,981 | ) |  | $ | 4,927,593 |
New loan fundings |  | 441,844 |  |  | — |  |  | — |  |  | 441,844 |
Add-on loan fundings (3) |  | 110,331 |  |  | — |  |  | — |  |  | 110,331 |
Loan repayments |  | (322,354 | ) |  | — |  |  | — |  |  | (322,354 | )
Gain (loss) on foreign currency translation |  | 15,033 |  |  | (136 | ) |  | — |  |  | 14,897 |
Deferred fees |  | — |  |  | (6,069 | ) |  | — |  |  | (6,069 | )
PIK interest and amortization of fees |  | 14,321 |  |  | 6,436 |  |  | — |  |  | 20,757 |
March 31, 2019 |  | $ | 5,241,689 |  |  | $ | (17,709 | ) |  | $ | (36,981 | ) |  | $ | 5,186,999 |
——————— (1) Other items primarily consist of purchase discounts or premiums, exit fees and deferred origination expenses. (2) In addition to the $37.0 million provision for loan loss, we recorded an impairment of $3.0 million against an investment previously recorded under other assets on our condensed consolidated balance sheet. (3) Represents fundings for loans closed prior to 2019. The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):
|  | March 31, 2019 |  | December 31, 2018
Number of loans |  | 69 |  |  | 69 |
Principal balance |  | $ | 5,241,689 |  |  | $ | 4,982,514 |
Carrying value |  | $ | 5,186,999 |  |  | $ | 4,927,593 |
Unfunded loan commitments (1) |  | $ | 1,039,089 |  |  | $ | 1,095,598 |
Weighted-average cash coupon (2) |  | 8.4 | % |  | 8.4 | %
Weighted-average remaining term (3) |  | 2.9 years |  |  | 2.8 years |
———————
(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.
(3) | Assumes all extension options are exercised.
The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
|  | March 31, 2019 |  | December 31, 2018
Property Type |  | Carrying Value |  | % of Portfolio |  | Carrying Value |  | % of Portfolio
Hotel |  | $ | 1,330,842 |  |  | 25.7 | % |  | $ | 1,286,590 |  |  | 26.1 | %
Residential-for-sale: construction |  | 631,501 |  |  | 12.1 | % |  | 528,510 |  |  | 10.7 | %
Residential-for-sale: inventory |  | 421,815 |  |  | 8.1 | % |  | 577,053 |  |  | 11.7 | %
Office |  | 956,989 |  |  | 18.5 | % |  | 832,620 |  |  | 16.9 | %
Urban Predevelopment |  | 610,888 |  |  | 11.8 | % |  | 683,886 |  |  | 13.9 | %
Multifamily |  | 521,087 |  |  | 10.0 | % |  | 448,899 |  |  | 9.1 | %
Industrial |  | 227,206 |  |  | 4.4 | % |  | 32,000 |  |  | 0.6 | %
Retail Center |  | 156,008 |  |  | 3.0 | % |  | 156,067 |  |  | 3.2 | %
Healthcare |  | 144,310 |  |  | 2.8 | % |  | 156,814 |  |  | 3.2 | %
Mixed Use |  | 114,284 |  |  | 2.2 | % |  | 73,957 |  |  | 1.5 | %
Other |  | 72,069 |  |  | 1.4 | % |  | 151,197 |  |  | 3.1 | %
Total |  | $ | 5,186,999 |  |  | 100.0 | % |  | $ | 4,927,593 |  |  | 100.0 | %
The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):
|  | March 31, 2019 |  | December 31, 2018
Geographic Location |  | Carrying Value |  | % of Portfolio |  | Carrying Value |  | % of Portfolio
Manhattan, NY |  | $ | 1,825,136 |  |  | 35.2 | % |  | $ | 1,669,145 |  |  | 33.9 | %
Brooklyn, NY |  | 547,139 |  |  | 10.5 | % |  | 346,056 |  |  | 7.0 | %
Northeast |  | 18,751 |  |  | 0.4 | % |  | 23,479 |  |  | 0.5 | %
West |  | 635,733 |  |  | 12.3 | % |  | 614,160 |  |  | 12.5 | %
Midwest |  | 617,599 |  |  | 11.9 | % |  | 631,710 |  |  | 12.8 | %
Southeast |  | 567,794 |  |  | 10.9 | % |  | 559,043 |  |  | 11.3 | %
Southwest |  | 120,127 |  |  | 2.3 | % |  | 96,345 |  |  | 2.0 | %
Mid Atlantic |  | 110,754 |  |  | 2.1 | % |  | 211,775 |  |  | 4.3 | %
United Kingdom |  | 668,507 |  |  | 12.9 | % |  | 700,460 |  |  | 14.2 | %
Other International |  | 75,459 |  |  | 1.5 | % |  | 75,420 |  |  | 1.5 | %
Total |  | $ | 5,186,999 |  |  | 100.0 | % |  | $ | 4,927,593 |  |  | 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):
|  | March 31, 2019 |  | December 31, 2018
Risk Rating |  | Number of Loans |  | Carrying Value |  | % of Loan Portfolio |  | Number of Loans |  | Carrying Value |  | % of Loan Portfolio
1 |  | — |  | $ | — |  |  | — | % |  | — |  | $ | — |  |  | — | %
2 |  | 2 |  | 58,847 |  |  | 1 | % |  | 3 |  | 138,040 |  |  | 3 | %
3 |  | 64 |  | 4,915,843 |  |  | 95 | % |  | 63 |  | 4,573,930 |  |  | 93 | %
4 |  | — |  | — |  |  | — | % |  | — |  | — |  |  | — | %
5 |  | 3 |  | 212,309 |  |  | 4 | % |  | 3 |  | 215,623 |  |  | 4 | %
|  | 69 |  | $ | 5,186,999 |  |  | 100 | % |  | 69 |  | $ | 4,927,593 |  |  | 100 | %
Weighted-average risk rating |  |  |  | 3.1 |  |  |  |  |  |  | 3.1 |
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 evaluate modifications to our loan portfolio to determine if the modifications constitute a troubled debt restructuring ("TDR") and/or substantial modification, under ASC Topic 310, "Receivables." During the second quarter of 2018, we determined that a modification of one commercial mortgage loan, secured by a retail center in Cincinnati, OH, 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. The entity in which we own an interest and which 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 fourth quarter of 2018, we recorded a $15.0 million loan loss provision against this loan. After the loan loss provision, the amortized cost of the loan was $156.0 million as of March 31, 2019 and December 31, 2018. 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 the direct capitalization method. The significant unobservable inputs used in determining the collateral value were in-place net operating income and capitalization rate which were $10.5 million and 6.8%, respectively. The loan is on accrual status and we continue to receive contractual interest due. As of March 31, 2019 and 2018, this loan was assigned a risk rating of 5. 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. After the loan loss provisions and related impairment, the amortized cost balance of the loan was $24.2 million and $27.2 million as of March 31, 2019 and December 31, 2018, respectively. 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 per square foot across properties and 15%, respectively. Effective April 1, 2017, we ceased accruing all interest associated with the loan and account for the loan on a cost-recovery basis (all proceeds are applied towards the loan balance). As of March 31, 2019 and December 31, 2018, 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. After the loan loss provisions, the amortized cost of the loan was $32.1 million and $32.4 million as of March 31, 2019 and December 31, 2018, respectively. 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 entity in which we own an interest and which owns the underlying property was deemed to be a VIE and it was determined that we are not the primary beneficiary of the VIE. We ceased accruing interest associated with the loan and only recognize interest income upon receipt of cash. As of March 31, 2019 and December 31, 2018, this loan was assigned a risk rating of 5. During the year ended December 31, 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 March 31, 2019, our exposure to the property is limited to a $190.0 million ($96.1 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 March 31, 2019 and December 31, 2018, the aggregate loan loss provision was $37.0 million for commercial mortgage loans and subordinate loans. We recognized payment-in-kind ("PIK") interest of $14.5 million and $10.6 million for the three months ended March 31, 2019 and 2018, respectively. We recognized pre-payment penalties and accelerated fees of $3.7 million for the three months ended March 31, 2019. There were no pre-payment penalties and accelerated fees for the three months ended March 31, 2018. 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 $1.0 million as of December 31, 2018. There were no loan proceeds held by servicer as of March 31, 2019.

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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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