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Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net

12 Months Ended

Dec. 31, 2020

Commercial Mortgage, Subordinate Loans and Other Lending Assets, Net

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


Loan Type	December 31, 2020		December 31, 2019
Commercial mortgage loans, net (1)	$	5,451,084	$	5,326,967
Subordinate loans and other lending assets, net	1,045,893		1,048,126
Carrying value, net	$	6,496,977	$	6,375,093

———————

(1)Includes $136.1 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 December 31, 2020 and 2019.

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


	Principal Balance		Deferred Fees/Other Items (1)		Specific CECL Allowance		Carrying Value, Net
December 31, 2019	$	6,467,842	$	(35,768)	$	(56,981)	$	6,375,093
New loan fundings	463,940		—		—		463,940
Add-on loan fundings (2)	412,718		—		—		412,718
Loan repayments and sales	(683,254)		—		—		(683,254)
Gain (loss) on foreign currency translation	80,832		(214)		—		80,618
Specific CECL Allowance	—		—		(118,019)		(118,019)
Realized loss on investment	(44,885)		2,420		—		(42,465)
Transfer to Real estate owned, held for sale	(12,255)		—		—		(12,255)
Deferred fees	—		(6,455)		—		(6,455)
PIK interest and amortization of fees	43,486		21,672		—		65,158
December 31, 2020	$	6,728,424	$	(18,345)	$	(175,000)	$	6,535,079
General CECL Allowance (3)							(38,102)
Carrying value, net							$	6,496,977

———————

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

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

(3)$3.4 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 our consolidated balance sheet.

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


	December 31, 2020			December 31, 2019
Number of loans	67			72
Principal balance	$	6,728,424		$	6,467,842
Carrying value, net	$	6,496,977		$	6,375,093
Unfunded loan commitments (1)	$	1,399,989		$	1,952,887
Weighted-average cash coupon (2)	5.7		%	6.5		%
Weighted-average remaining fully-extended term (3)	2.8 years			3.3 years
Weighted-average expected term (4)	2.1 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 December 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):


	December 31, 2020				December 31, 2019
Property Type	Carrying Value		% of Portfolio(1)		Carrying Value		% of Portfolio
Office	$	1,911,145	29.2	%	$	1,401,400	22.0	%
Hotel	1,576,369		24.1		1,660,162		26.0
Residential-for-sale: construction	738,035		11.3		692,816		10.9
Residential-for-sale: inventory	244,803		3.7		321,673		5.1
Urban Retail	655,456		10.0		643,706		10.1
Healthcare	369,676		5.7		371,423		5.8
Urban Predevelopment	298,909		4.6		409,864		6.4
Industrial	228,918		3.5		227,940		3.6
Other	511,768		7.9		646,109		10.1
Total	$	6,535,079	100.0	%	$	6,375,093	100.0	%
General CECL Allowance (2)	(38,102)
Carrying value, net	$	6,496,977

———————

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

(2)$3.4 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 our consolidated balance sheet.

Geography

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

December 31, 2020

December 31, 2019

Geographic Location

Carrying
Value

% of
Portfolio(1)

Carrying
Value

% of
Portfolio


New York City	$	2,370,337	36.3	%	$	2,167,487	34.0	%
Northeast	103,567		1.6		110,771		1.7
United Kingdom	1,263,264		19.3		1,274,390		20.0
West	749,985		11.5		728,182		11.4
Southeast	581,301		8.9		564,166		8.9
Midwest	552,537		8.5		614,337		9.6
Other	914,088		13.9		915,760		14.4
Total	$	6,535,079	100.0	%	$	6,375,093	100.0	%
General CECL Allowance (2)	(38,102)
Carrying value, net	$	6,496,977

———————

(1)Percentage of portfolio calculations are made prior to consideration of 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, LTV ratio, 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):


December 31, 2020
						Year Originated
Risk Rating	Number of Loans	Total		% of Portfolio		2020		2019		2018		2017		2016		Prior
1	—	$	—	—	%	$	—	$	—	$	—	$	—	$	—	$	—
2	1	32,000		0.5	%	—		—		—		—		—		32,000
3	62	6,129,541		93.8	%	469,586		2,661,017		1,398,479		868,514		88,710		643,235
4	—	—		—	%	—		—		—		—		—		—
5	4	373,538		5.7	%	—		—		—		131,050		115,419		127,069
Total	67	$	6,535,079	100.0	%	$	469,586	$	2,661,017	$	1,398,479	$	999,564	$	204,129	$	802,304
General CECL Allowance		(38,102)
Total carrying value, net		$	6,496,977

Weighted Average 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

Weighted Average Risk Rating				3.0

Current Expected Credit Losses

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


	December 31, 2020		January 1, 2020(1)
Commercial mortgage loans, net	$	17,012	$	12,149
Subordinate loans and other lending assets, net	21,090		15,630
Unfunded commitments(2)	3,365		3,088
Total General CECL Allowance	$	41,467	$	30,867

———————

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

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

In assessing the General CECL Allowance, we consider macroeconomic factors, including 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.

The General CECL Allowance increased by $10.6 million from initial adoption on January 1, 2020, to December 31, 2020. The increase is primarily related to a change in our view of estimated future macroeconomic conditions in the backdrop of the global COVID-19 pandemic and an increase in our view of the remaining expected term of our loan portfolio as of December 31, 2020.

The General CECL Allowance decreased by $1.4 million during the three months ended December 31, 2020. The decrease is primarily related to an improved view of estimated future macroeconomic conditions since the prior quarter end.

Although 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 $40.6 million accrued interest receivable, included in Other Assets on our 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 uncollectible accrued interest receivable is written off in a timely manner. We discontinue accruing interest on loans if we deem the interest to be uncollectible with any previously 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 reduces the loan's amortized cost. The amortized cost basis for loans on cost recovery was $373.5 million and $136.3 million as of December 31, 2020 and 2019, respectively. For the years ended December 31, 2020 and 2019, we received $1.8 million and $1.4 million, respectively, in interest that reduced amortized cost under the cost recovery method.

In November 2020, the borrower under a £309.2 million commercial mortgage loan ($422.7 million assuming conversion into USD), of which we own £247.5 million ($338.4 million assuming conversion into USD), secured by an urban retail

property located in London, UK, entered into administration triggering an event of default. In accordance with the loan agreement, we are entitled to collect default interest in addition to the contractual interest we had been earning. As of December 31, 2020, the loan was in default and is past due with respect to scheduled payments. As of December 31, 2020, we evaluated the loan for collectability and determined that no Specific CECL Allowance was warranted and have continued to accrue all interest owed to us, including default interest.

As of December 31, 2020, the amortized cost basis for loans with interest between 30 and 59 days past due was $19.0 million. Accrued interest is past due for 90 or more days for loans with an amortized cost basis of $711.9 million and $136.3 million as of December 31, 2020 and 2019, respectively.

The following schedule illustrates the quarterly changes in the CECL Allowance since we adopted the CECL Standard on January 1, 2020 ($ in thousands):


		Specific CECL Allowance(1)		General CECL Allowance						Total CECL Allowance		CECL Allowance as % of Amortized Cost
				Funded		Unfunded		Total				General		Total
December 31, 2019		$	56,981	$	—	$	—	$	—	$	56,981	—	%	—	%
Changes:
	January 1, 2020 - Adoption of CECL Standard	—		27,779		3,088		30,867		30,867
	Q1 Allowances	150,000		30,494		2,971		33,465		183,465
March 31, 2020		$	206,981	$	58,273	$	6,059	$	64,332	$	271,313	1.08	%	4.05	%
Changes:
	Q2 Allowances (Reversals)	5,500		(13,729)		(1,940)		(15,669)		(10,169)
	Write-offs	(15,000)		—		—		—		(15,000)
June 30, 2020		$	197,481	$	44,544	$	4,119	$	48,663	$	246,144	0.81	%	3.71	%
Changes:
	Q3 Reversals, net of Allowances	(550)		(5,268)		(524)		(5,792)		(6,342)
September 30, 2020		$	196,931	$	39,276	$	3,595	$	42,871	$	239,802	0.71	%	3.59	%
Changes:
	Q4 Reversals	—		(1,174)		(230)		(1,404)		(1,404)
	Write-offs	(21,931)		—		—		—		(21,931)
December 31, 2020		$	175,000	$	38,102	$	3,365	$	41,467	$	216,467	0.67	%	3.23	%

———————

(1)As of December 31, 2019, amount represents specific loan loss provisions recorded on assets before the adoption of the CECL Standard. After the adoption of the CECL Standard on January 1, 2020, amounts represent Specific CECL Allowances.

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 Specific CECL Allowance). When the repayment or

satisfaction of a loan is dependent on a sale, rather than operations, of the collateral, the fair value is adjusted for the estimated cost to sell the collateral. The fair value of the underlying collateral is determined by using method(s) such as discounted cash flow, the market approach, 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.

We evaluate modifications to our loan portfolio to determine if the modifications constitute a TDR and/or substantial modification, under ASC Topic 310 "Receivables". In 2015, we originated a $157.8 million loan secured by a hotel in New York City. During the second quarter of 2020 the loan was restructured and was deemed to be a TDR. In connection with this restructuring, the borrower committed to contribute additional equity of $15.0 million and concurrently we wrote down our principal on this loan by $15.0 million, which had been previously recorded as a Specific CECL Allowance. As of December 31, 2020, the loan had a principal balance and amortized cost of $142.8 million and $144.7 million, respectively, has a risk rating of 3, and is on accrual status. During the three months ended June 30, 2020, the Specific CECL Allowance of $15.0 million was reversed through reversal of loan losses, while the write-down was recorded in realized loss on investments in our consolidated statement of operations.

In 2018, we originated a $38.5 million commercial mortgage loan secured by a hotel in Pittsburgh, Pennsylvania. During the fourth quarter of 2020, the loan was recapitalized with the minority equity holder in the property. In connection with this recapitalization, we received approximately $5.9 million of principal that paid down the existing loan and we wrote down our principal by $11.0 million, ($9.5 million of which had been previously recorded as a Specific CECL Allowance). In addition, the sponsor committed to contribute $11.4 million in new equity. As of December 31, 2020, the recapitalized loan had a principal balance and amortized cost of $21.6 million and $21.5 million, respectively, with a risk rating of 3. During the fourth quarter of 2020, the Specific CECL Allowance of $9.5 million was reversed through provision for loan losses and impairments, net, while the write-down was recorded in realized loss on investments in our consolidated statement of operations.

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

Type

Property type

Location

Amortized cost(1)

Interest recognition status/ as of date

Mortgage

Urban Predevelopment(2)

Brooklyn, NY

131,050

Cost Recovery/ 3/1/2020

Urban Predevelopment(2)(3)

Miami, FL

115,419

Cost Recovery/ 3/1/2020

Retail Center(4)(5)

Cincinnati, OH

105,344

Cost Recovery/ 10/1/2019

Mortgage total:

351,813

Mezzanine

Hotel(6)

Washington, DC

21,725

Cost Recovery/ 3/31/2020

Mezzanine total:

21,725

Grand total:

373,538

———————

(1)Amortized cost is shown net of $175.0 million of net Specific CECL Allowance. During the year ended December 31, 2020, there was $118.0 million in net Specific CECL Allowances taken due to factors including COVID-19. See Note 2 for additional information regarding COVID-19.

(2)The fair value of urban predevelopment collateral was determined by assuming rent per square foot ranging from $25 to $225 and a capitalization rate ranging from 5.0% to 5.5%.

(3)In October 2020, we entered into a joint venture which owns the underlying properties that secure our $180.5 million first mortgage loan. The entity in which we own an interest, and which owns the underlying properties was deemed to be a VIE and we determined that we are not the primary beneficiary of that VIE.

(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 VIE and we determined that we are not the primary beneficiary of that VIE. As of December 31, 2019 we had recorded $47.0 million of Specific CECL Allowance. During the years ended December 31, 2020 and 2019, $1.6 million and $1.4 million, respectively, of interest paid was applied towards reducing the carrying value of the loan.

(6)The fair value of hotel collateral was determined by applying a discount rate of 8.5% and a capitalization rate of 7.0%. During the year ended December 31, 2020 and 2019, there was $0.2 million and $0 million of interest paid applied towards reducing the carrying value of the loan, respectively.

Other Loan and Lending Assets Activity

We recognized PIK interest of $46.7 million, $54.6 million, and $43.5 million for the years ended December 31, 2020, 2019, and 2018 respectively.

We recognized $0.2 million, $6.1 million, and $2.3 million in pre-payment penalties and accelerated fees for the years

ended December 31, 2020, 2019, and 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 $68.1 million as of December 31, 2020. These interests have a weighted average maturity of 5.8 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 carrying value on our consolidated balance sheet.

Loan Sales

The following loan sales occurred in 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, WA. As of December 31, 2020, our exposure to the property was limited to a $190.0 million ($137.5 million funded) mortgage loan. This transaction was evaluated under ASC 860 - "Transfers and Servicing" and we determined that it qualified as a sale and was accounted for as such.

The following loan sales occurred in 2019:

We sold a $30.3 million and a $122.3 million (both fully funded at close) subordinate position of our $470.8 million loans for an urban retail property in New York, NY. As of December 31, 2020, our exposure to the property was limited to a $318.1 million mortgage loan. This transaction was evaluated under ASC 860 - "Transfers and Servicing" and we determined that it qualified as a sale and was accounted for as such.

The following loan sales occurred in 2020:

In the first quarter of 2020, we sold £62.2 million ($81.3 million assuming conversion into USD) in a mezzanine loan and £50.0 million ($65.3 million assuming conversion into USD) unfunded commitment of a senior mortgage secured by a mixed-use property in London, United Kingdom 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 it as such. We recorded no gain or loss related to this sale.

In the second quarter of 2020, we sold interests in three construction loans, with aggregate commitments of $376.9 million (of which approximately $127.0 million was funded at the time of sale). The sales were to entities managed by affiliates of the Manager. We recorded a loss of approximately $1.4 million in connection with these sales. These transactions were evaluated under ASC 860 - "Transfers and Servicing," and we determined that they qualify as sales and accounted for them as such.

In the third quarter of 2020, we sold our interest in a foreign residential-for-sale inventory loan, with outstanding principal of £97.5 million ($124.2 million assuming conversion into USD). We recorded a loss of approximately $1.0 million in connection with this sale. This transaction was evaluated under ASC 860 - "Transfers and Servicing", and we determined that it qualifies as a sale and accounted for it as such.

In the fourth quarter of 2020, we sold our interest in a residential-for-sale inventory loan secured by property in New York, NY, with outstanding principal of $73.4 million. We recorded a loss of approximately $2.7 million in connection with this sale. This transaction was evaluated under ASC 860 - "Transfers and Servicing," and we determined that it qualifies as a sale and accounted for it as such.

Other

In October 2020, an $80.0 million loan originated in 2015 was fully resolved. The loan was secured by for-sale residential condominium units located in Bethesda, MD. In conjunction with the sale of the last remaining condominiums, we recorded an aggregate realized loss of $14.1 million. The realized loss on investment consisted of a $11.1 million realized loss on the loan and a $3.0 million realized loss on the write-off the equity position previously held in other assets on our consolidated balance sheet. As of December 31, 2019 we had recorded $13.0 million of Specific CECL Allowance and impairments. Additionally during 2020, we recorded a net Specific CECL Allowance of $1.1 million. In connection with the loan payoff we reversed $11.1 million of Specific CECL Allowance related to the loan and $3.0 million of previously recorded impairments related to the equity position.