Loan Proceeds Held by Servicer

9 Months Ended

Sep. 30, 2019

Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net

Our loan portfolio was comprised of the following at September 30, 2019 and December 31, 2018 ($ in thousands):



Loan Type	September 30, 2019		December 31, 2018
Commercial mortgage loans, net	$	4,779,501	$	3,878,981
Subordinate loans and other lending assets, net	1,335,073		1,048,612
Total investments, net	$	6,114,574	$	4,927,593

Our loan portfolio consisted of 94% and 91% floating rate loans, based on amortized cost, as of September 30, 2019 and December 31, 2018, respectively.

Activity relating to our loan investment portfolio, for the nine months ended September 30, 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	1,770,623			—			—			1,770,623
Add-on loan fundings ⁽³⁾	290,043			—			—			290,043
Loan repayments	(843,417		)	—			—			(843,417		)
Gain (loss) on foreign currency translation	(38,505		)	105			—			(38,400		)
Realized loss on investment, net of provision for loan loss reversal ⁽²⁾	(12,513		)	—			15,000			2,487
Provision for loan losses	—			—			(35,000		)	(35,000		)
Deferred fees	—			(24,524		)	—			(24,524		)
PIK interest and amortization of fees	43,728			21,441			—			65,169
September 30, 2019	$	6,192,473		$	(20,918	)	$	(56,981	)	$	6,114,574

———————

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

(2) In addition to the $57.0 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. During the second quarter of 2019, the underlying collateral on a commercial mortgage loan and a contiguous subordinate loan secured by a multifamily property located in Williston, ND was sold resulting in a realized loss of $12.5 million. Consequently, the previously recorded $15.0 million loan loss provision was reversed.

(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):



	September 30, 2019			December 31, 2018
Number of loans	74			69
Principal balance	$	6,192,473		$	4,982,514
Carrying value	$	6,114,574		$	4,927,593
Unfunded loan commitments ⁽¹⁾	$	1,073,423		$	1,095,598
Weighted-average cash coupon ⁽²⁾	7.5		%	8.4		%
Weighted-average remaining term ⁽³⁾	3.1 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.

Property Type

The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):



	September 30, 2019				December 31, 2018
Property Type	Carrying Value		% of Portfolio		Carrying Value		% of Portfolio
Hotel	$	1,579,667	25.8	%	$	1,286,590	26.1	%
Residential-for-sale: construction	629,069		10.3	%	528,510		10.7	%
Residential-for-sale: inventory	349,259		5.7	%	577,053		11.7	%
Office	1,406,678		23.0	%	832,620		16.9	%
Urban Predevelopment	602,946		9.9	%	683,886		13.9	%
Urban Retail	466,343		7.6	%	—		—	%
Multifamily	306,142		5.0	%	448,899		9.1	%
Industrial	227,696		3.7	%	32,000		0.6	%
Retail Center	126,068		2.1	%	156,067		3.2	%
Healthcare	190,832		3.1	%	156,814		3.2	%
Other	127,229		2.1	%	151,197		3.1	%
Mixed Use	102,645		1.7	%	73,957		1.5	%
Total	$	6,114,574	100.0	%	$	4,927,593	100.0	%

Geography

The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):



	September 30, 2019				December 31, 2018
Geographic Location	Carrying Value		% of Portfolio		Carrying Value		% of Portfolio
Manhattan, NY	$	2,286,709	37.4	%	$	1,669,145	33.9	%
Brooklyn, NY	443,966		7.3	%	346,056		7.0	%
Northeast	19,195		0.3	%	23,479		0.5	%
West	728,788		11.9	%	614,160		12.5	%
Midwest	626,867		10.3	%	631,710		12.8	%
Southeast	568,103		9.3	%	559,043		11.3	%
Southwest	126,506		2.1	%	96,345		2.0	%
Mid Atlantic	110,895		1.8	%	211,775		4.3	%
United Kingdom	815,168		13.3	%	700,460		14.2	%
Germany	185,208		3.0	%	—		—	%
Italy	129,524		2.1	%	—		—	%
Other International	73,645		1.2	%	75,420		1.5	%
Total	$	6,114,574	100.0	%	$	4,927,593	100.0	%

Risk Rating

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, 2019					December 31, 2018
Risk Rating	Number of Loans	Carrying Value		% of Loan Portfolio		Number of Loans	Carrying Value		% of Loan Portfolio
1	—	$	—	—	%	—	$	—	—	%
2	9	470,409		8	%	3	138,040		3	%
3	63	5,502,402		90	%	63	4,573,930		93	%
4	—	—		—	%	—	—		—	%
5	2	141,763		2	%	3	215,623		4	%
	74	$	6,114,574	100	%	69	$	4,927,593	100	%

Weighted-average risk rating				3.0					3.1

Provision for Loan Losses and Impairments

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 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 $171.2 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 loan loss provision of $15.0 million and due to factors including continued weakness in the retail sector, we recorded an additional $32.0 million loan loss provision during the third quarter of 2019, bringing the total provision for loan loss to $47.0 million. The carrying value, as a result of the provision, of the loan was $126.1 million and $156.1 million as of September 30, 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 the direct capitalization method. The significant unobservable input used in determining the collateral value was the capitalization rate which was 7.75% and 6.75% as of September 30, 2019 and December 31, 2018, respectively. Effective September 30, 2019, 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 carrying value of the loan for accounting purposes). As of September 30, 2019 and December 31, 2018, this loan was assigned a risk rating of 5.

We recorded a $13.0 million loan loss provision and impairment against a commercial mortgage loan secured by fully-built, for-sale residential condominium units located in Bethesda, MD. Each of the loan loss provisions were due to factors including slower than expected sales pace of the underlying condominium units and were comprised of (i) $3.0 million loan loss recorded during the third quarter of 2019, (ii) $5.0 million loan loss recorded during the second quarter of 2018, and (iii) $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 $15.7 million and $27.2 million as of September 30, 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 $597 and $662 per square foot across properties and 10% and 15% as of September 30, 2019 and December 31, 2018, respectively. Effective April 1, 2017, we ceased accruing all interest associated with the loan and account for the loan on a cost-recovery basis. As of September 30, 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. 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 recognized interest income upon receipt of cash. As of December 31, 2018, the amortized cost of the loan, net of the loan loss provision, was $32.4 million and was assigned a risk rating of 5. During the second quarter of 2019, the underlying collateral was sold resulting in a realized loss of $12.5 million. Consequently, the previously recorded $15.0 million loan loss provision was reversed.

As of September 30, 2019 and December 31, 2018, the aggregate loan loss provision was $57.0 million and $37.0 million for commercial mortgage loans and subordinate loans, respectively.

Other Loan and Lending Assets Activity

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 September 30, 2019, our exposure to the property is limited to a $190.0 million ($121.8 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.

We recognized payment-in-kind ("PIK") interest of $13.7 million and $42.8 million for the three and nine months ended September 30, 2019, respectively, and $10.2 million and $29.9 million for the three and nine months ended September 30, 2018, respectively.

We recognized $0.3 million and $4.0 million pre-payment penalties and accelerated fees for the three and nine months ended September 30, 2019, respectively and $0.2 million and $1.8 million for the three and nine months ended September 30, 2018, respectively.

Our portfolio includes two other lending assets, which are subordinate risk retention interests in securitization vehicles. The underlying mortgages related to our subordinate risk retention interests are secured by a portfolio of properties located throughout the United States. Our maximum exposure to loss from the subordinate risk retention interests is limited to the book value of such interests of $68.3 million as of September 30, 2019. These interests have a weighted average maturity of 7.07 years. We are not obligated to provide, and do not intend to provide financial support to these subordinate risk retention interests.

Both interests are accounted for as held-to-maturity and recorded at amortized cost on the condensed consolidated balance sheet. We did not hold any collateral securing our subordinate risk retention interests as of December 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 were $3.3 million and $1.0 million as of September 30, 2019 and December 31, 2018, respectively.