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Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net

3 Months Ended

Mar. 31, 2020

Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net

Our loan portfolio was comprised of the following at March 31, 2020 and December 31, 2019 ($ in thousands):



Loan Type	March 31, 2020		December 31, 2019
Commercial mortgage loans, net ⁽¹⁾	$	5,413,627	$	5,326,967
Subordinate loans and other lending assets, net	1,016,991		1,048,126
Total	$	6,430,618	$	6,375,093

———————


(1)	Includes $117.8 million and $126.7 million in 2020 and 2019, respectively, of contiguous financing structured as subordinate loans.

Our loan portfolio consisted of 95% floating rate loans, based on amortized cost, as of March 31, 2020 and December 31, 2019, respectively.

Activity relating to our loan portfolio, for the three months ended March 31, 2020, was as follows ($ in thousands):



	Principal Balance		Deferred Fees/Other Items ⁽¹⁾			Provision for Loan Loss			Carrying Value
December 31, 2019	$	6,467,842	$	(35,768	)	$	(56,981	)	$	6,375,093
New loan fundings	439,936		—			—			439,936
Add-on loan fundings ⁽²⁾	118,521		—			—			118,521



Loan repayments and sales	(210,745		)	—			—			(210,745		)
Gain (loss) on foreign currency translation	(99,009		)	1,428			—			(97,581		)
Specific CECL Allowance	—			—			(150,000		)	(150,000		)
Deferred fees	—			(5,053		)	—			(5,053		)
PIK interest and amortization of fees	12,008			6,712			—			18,720
March 31, 2020	$	6,728,553		$	(32,681	)	$	(206,981	)	$	6,488,891
General CECL Allowance ⁽³⁾										(58,273		)
Carrying value net, as of March 31, 2020										6,430,618

———————


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


(2)	Represents fundings for loans closed prior to 2020.


(3)	$6.1 million of the General CECL Allowance is excluded from this table because it relates to unfunded commitments and has been recorded as a liability under Accounts Payable, Accrued Expenses and Other Liabilities in the condensed consolidated balance sheet.

The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):



	March 31, 2020			December 31, 2019
Number of loans	75			72
Principal balance	$	6,728,553		$	6,467,842
Carrying value	$	6,430,618		$	6,375,093
Unfunded loan commitments ⁽¹⁾	$	1,822,967		$	1,952,887
Weighted-average cash coupon ⁽²⁾	6.0		%	6.5		%
Weighted-average remaining fully-extended term ⁽³⁾	3.3 years			3.3 years
Weighted-average expected term ⁽⁴⁾	2.2 years			1.8 years

———————


(1)	Unfunded loan commitments are funded to finance construction costs, tenant improvements, leasing commissions, or carrying costs. 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. For loans placed on non-accrual or cost recovery the interest rate used in calculating weighted-average cash coupon is 0%.


(3)	Assumes all extension options are exercised.


(4)	Expected term represents our estimated timing of repayments as of March 31, 2020 and December 31, 2019, respectively.

Property Type

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



	March 31, 2020					December 31, 2019
Property Type	Carrying Value			% of Portfolio⁽¹⁾		Carrying Value		% of Portfolio
Office	$	1,803,605		27.8	%	$	1,401,400	22.0	%
Hotel	1,537,796			23.7		1,660,162		26.0
Residential-for-sale: construction	763,381			11.8		692,816		10.9
Residential-for-sale: inventory	283,909			4.4		321,673		5.1
Urban Retail	623,564			9.6		643,706		10.1
Healthcare	356,215			5.5		371,423		5.8
Urban Predevelopment	306,503			4.7		409,864		6.4
Other	813,918			12.5		874,049		13.7
Total	$	6,488,891		100.0	%	$	6,375,093	100.0	%
General CECL Allowance	(58,273		)
Total investments, net	$	6,430,618

———————

(1) Percentage of portfolio calculations are made prior to consideration of General CECL Allowance.

Geography

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



	March 31, 2020					December 31, 2019
Geographic Location	Carrying Value			% of Portfolio⁽¹⁾		Carrying Value		% of Portfolio
New York City	$	2,319,325		35.8	%	$	2,167,487	34.0	%
Northeast	118,251			1.8		110,771		1.7
United Kingdom	1,347,897			20.8		1,274,390		20.0
West	747,515			11.5		728,182		11.4
Midwest	557,780			8.6		614,337		9.6
Southeast	512,469			7.9		564,166		8.9
Other	885,654			13.6		915,760		14.4
Total	$	6,488,891		100.0	%	$	6,375,093	100.0	%
General CECL Allowance	(58,273		)
Total investments, net	$	6,430,618

———————

(1) Percentage of portfolio calculations are made prior to consideration of the General CECL Allowance.

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 an impairment has been recorded

The following tables allocate the carrying value of our loan portfolio based on our internal risk ratings and date of origination at the dates indicated ($ in thousands):



March 31, 2020
							Year Originated
Risk Rating	Number of Loans	Total			% of Portfolio		2020		2019		2018		2017		2016		Prior
1	—	—			—	%	$	—	$	—	$	—	$	—	$	—	$	—
2	5	130,609			2.0	%	—		—		23,990		—		36,287		70,332
3	63	5,822,078			89.7	%	423,419		2,609,209		1,490,045		779,882		62,580		456,943
4	—	—			—	%	—		—		—		—		—		—
5	7	536,204			8.3	%	—		—		31,372		126,013		117,910		260,909
Total	75	$	6,488,891		100.0	%	$	423,419	$	2,609,209	$1,545,407		$	905,895	$216,777		$	788,184
General CECL Allowance		(58,273		)
Total investments, net		$	6,430,618

W.A. Risk Rating		3.1



December 31, 2019
						Year Originated
Risk Rating	Number of Loans	Total		% of Portfolio		2019		2018		2017		2016		2015		Prior
1	—	$	—	—	%	$	—	$	—	$	—	$	—	$	—	$	—
2	8	348,324		5.5	%	—		241,676		—		36,250		24,546		45,852
3	61	5,707,555		89.5	%	2,736,825		1,355,014		912,636		72,540		499,700		130,840
4	1	182,910		2.9	%	—		—		—		182,910		—		—
5	2	136,304		2.1	%	—		—		—		—		—		136,304
Total	72	$	6,375,093	100.0	%	$	2,736,825	$	1,596,690	$	912,636	$	291,700	$	524,246	$	312,996

W.A. Risk Rating		3.0

Current Expected Credit Losses

Refer to the following schedule of the General CECL Allowance as of March 31, 2020, and as of the date of adoption, January 1, 2020 ($ in thousands):



	March 31, 2020		January 1, 2020⁽¹⁾
Commercial mortgage loans, net	$	28,336	$	12,149
Subordinate loans and other lending assets, net	29,937		15,630
Unfunded commitments⁽²⁾	6,059		3,088
Total General CECL Allowance	$	64,332	$	30,867

———————

(1) As of January 1, 2020, we adopted the CECL Standard through a cumulative-effect adjustment to retained earnings

(2) The General CECL Allowance on Unfunded commitments is recorded as a liability on the condensed consolidated balance sheet within accounts payable, accrued expenses, and other liabilities

The General CECL Allowance increased by $33.5 million from initial adoption on January 1, 2020, to March 31, 2020. The increase is predominantly related to a change in our view of estimated macroeconomic conditions, including the unemployment rate and the commercial real estate price index, in the backdrop of the global pandemic. Other factors that contributed to the increase include an increase in our view of remaining expected term of our loan portfolio and growth in the portfolio from new investments during the quarter.

The macroeconomic factors considered were the unemployment rate, commercial real estate prices, and market liquidity. We compared the historical data for each metric to historical commercial real estate losses in order to determine the correlation of the data. We used projections, obtained from third-party service providers, of each factor to approximate the impact the macroeconomic outlook may have on our loss rate.

Refer to the following roll forward schedule of the General CECL Allowance for the quarter ended March 31, 2020 ($ in thousands):



	General CECL Allowance
General CECL Allowance as of January 1, 2020	$	30,867
Increase in General CECL Allowance	34,500
Transfer to Specific CECL Allowance	(1,035		)
General CECL Allowance as of March 31, 2020⁽¹⁾	$	64,332

———————

(1) Includes $6.1 million of the General CECL Allowance that relates to unfunded commitments and has been recorded as a liability under Accounts Payable, Accrued Expenses and Other Liabilities in the condensed consolidated balance sheet.

Our secured debt obligations and senior secured term loan financing have a minimum tangible net worth

maintenance covenant. The General CECL Allowance has no impact on these covenants as we are permitted to add back the General CECL Allowance for the computation of tangible net worth as defined in the respective agreements.

We have made an accounting policy election to exclude $41.9 million accrued interest receivable, included in Other assets on the condensed consolidated balance sheet, from the amortized cost basis of the related commercial mortgage loans and subordinate loans and other lending assets in determining the General CECL Allowance as any uncollected accrued interest receivable is written off in a timely manner. We discontinue accruing interest on loans if deemed uncollectible with any accrued uncollected interest on the loan charged to interest income in the same period. Under certain circumstances, we may apply the cost recovery method under which interest collected on a loan is a reduction to its amortized cost. The amortized cost basis for loans on cost recovery was $536.2 million and $136.3 million as of March 31, 2020 and December 31, 2019, respectively. For the three months ended March 31, 2020, we received $0.6 million in interest that reduced amortized cost under the cost recovery method.

The following schedule illustrates the CECL Allowance as percentages of amortized cost and total commitment as of March 31, 2020, and as of the date of adoption, January 1, 2020 ($ in thousands):



CECL Allowances	CECL ($)		% of Amortized Cost
General CECL Allowance⁽¹⁾
January 1, 2020	$	30,867	0.49	%
March 31, 2020⁽²⁾	64,332		1.08	%

Total CECL Allowances⁽³⁾
March 31, 2020	$	271,313	4.05	%

———————

(1) Amortized Cost of the General CECL Allowance excludes amortized cost of loans evaluated for the Specific CECL Allowance

(2) Includes $6.1 million of the General CECL Allowance that relates to unfunded commitments and has been recorded as a liability under Accounts Payable, Accrued Expenses and Other Liabilities in the condensed consolidated balance sheet.

(3) Total CECL Allowances includes the General CECL Allowance and the Specific CECL Allowance

Specific CECL Allowance

We regularly evaluate the extent and impact of any credit migration 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 liquidation value of the underlying collateral. 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 impairment 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.

We evaluate our loans on a quarterly basis. For loans where we have deemed the borrower/sponsor to be experiencing financial difficulty, we have elected to apply a practical expedient in accordance with the CECL Standard. In accordance with the practical expedient approach, we determine the loan loss provision to be the difference between the fair value of the underlying collateral and the carrying value of the loan (prior to the loan loss provision). The fair value of the underlying collateral is determined by using method(s) including a discounted cash flow (DCF) or direct capitalization approach. The key unobservable inputs used to determine the fair value of the underlying collateral may vary depending on the information available to us and market conditions as of the valuation date.

The following table summarizes the specific provision for loan losses that has been recorded on our portfolio as of March 31, 2020 ($ in thousands):



Type	Property type	Location	Amortized cost⁽¹⁾		Interest recognition status/ as of date
Mortgage
	Hotel⁽²⁾	Manhattan, NY	$	144,295	Cost Recovery/ 3/31/2020
	Urban Predevelopment⁽³⁾	Brooklyn, NY	126,013		Cost Recovery/ 3/1/2020
	Urban Predevelopment⁽³⁾	Miami, FL	117,910		Cost Recovery/ 3/1/2020
	Retail Center⁽⁴⁾⁽⁵⁾	Cincinnati, OH	103,921		Cost Recovery/ 10/1/2019
	Hotel⁽²⁾	Pittsburgh, PA	31,372		Cost Recovery/ 3/31/2020
	Residential-for-sale: inventory⁽⁶⁾⁽⁷⁾	Bethesda, MD	2,695		Cost Recovery/ 1/1/2018
Mortgage total:			$	526,206
Mezzanine
	Hotel⁽²⁾	Washington, DC	$	10,000	Cost Recovery/ 3/31/2020
Mezzanine total:			$	10,000
Grand total:			$	536,206

———————


(1)	Amortized cost is shown net of $207 million of provisions, $150 million of which were taken during the three months ended March 31, 2020 due to factors including COVID-19. See Note 2 for additional information regarding COVID-19.


(2)	The fair value of hotel collateral was determined by applying a discount and capitalization rate ranging from 8.3% to 11.0% and 6.6% to 9.0%, respectively.


(3)	The fair value of urban predevelopment collateral was determined by assuming rent per square foot and capitalization rate ranging from $48 to $225 and 5.0% to 5.5%, respectively.


(4)	The fair value of retail collateral was determined by applying a capitalization rate of 8.3%.


(5)	The entity in which we own an interest and which owns the underlying property was deemed to be a Variable Interest Entity ("VIE") and we determined that we are not the primary beneficiary of that VIE. During the three months ended March 31, 2020, $0.6 million of interest paid was applied towards reducing the carrying value of the loan.


(6)	The fair value of residential-for-sale: inventory was determined by assuming a sales price per square foot of $371.


(7)	A $3.0 million portion of this provision was recorded on an investment previously recorded under other assets on our condensed consolidated balance sheet.

Other Loan and Lending Assets Activity

We recognized payment-in-kind ("PIK") interest of $12.4 million and $14.5 million for the three months ended March 31, 2020 and 2019, respectively.

We recognized $0.2 million and $3.7 million in pre-payment penalties and accelerated fees for the three months ended March 31, 2020 and 2019, 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 $68.1 million as of March 31, 2020. These interests have a weighted average maturity of 6.57 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.

In January 2020, we sold £62.2 million ($81.3 million assuming conversion into U.S. dollars) in a mezzanine loan and £50.0 million ($65.3 million assuming conversion into U.S. dollars) unfunded commitment of a senior mortgage secured by a mixed-use property in London, UK to a fund managed by an affiliate of the Manager, that was originated by us in December 2019. 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 recorded no gain or loss related to this sale.

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. There were no loan proceeds held by servicer as of March 31, 2020. Loan proceeds held by servicer were $8.3 million as of December 31, 2019.