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CURRENT EXPECTED CREDIT LOSSES | 3 Months Ended
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Mar. 31, 2025
Credit Loss [Abstract] |
CURRENT EXPECTED CREDIT LOSSES | CURRENT EXPECTED CREDIT LOSSES The Company estimates its CECL Reserve primarily using a probability-weighted model that considers the likelihood of default and expected loss given default for each individual loan. Calculation of the CECL Reserve requires loan-specific data, which includes capital senior to the Company when the Company is the subordinate lender, changes in net operating income, debt service coverage ratio, loan-to-value, occupancy, property type and geographic location. Estimating the CECL Reserve also requires significant judgment with respect to various factors, including (i) the appropriate historical loan loss reference data, (ii) the expected timing of loan repayments, (iii) calibration of the likelihood of default to reflect the risk characteristics of the Company’s floating rate loan portfolio and (iv) the Company’s current and future view of the macroeconomic environment. The Company may consider loan-specific qualitative factors on certain loans to estimate its CECL Reserve. In order to estimate the future expected loan losses relevant to the Company’s portfolio, the Company utilizes historical market loan loss data licensed from a third party data service. The third party’s loan database includes historical loss data for commercial mortgage-backed securities, or CMBS, issued dating back to 1998, which the Company believes is a reasonably comparable and available data set to its type of loans. The Company utilized macroeconomic forecasts and inputs that reflected a blend of a stable and a weaker economic outlook in the near term; however, the actual financial impact on the Company of the current environment is highly uncertain. For periods beyond the reasonable and supportable forecast period, the Company reverts back to historical loss data. Management’s current estimate of expected credit losses as of March 31, 2025 decreased compared to the estimate of expected credit losses as of December 31, 2024 primarily due to a relative improvement in the near-term macroeconomic forecasts, shorter average remaining loan term and loan repayments during the three months ended March 31, 2025. The CECL Reserve also takes into consideration the assumed impact of macroeconomic conditions on CRE properties and is not specific to any loan losses or impairments on the Company’s loans held for investment, unless the Company determines that a specifically identifiable reserve is warranted for a select asset. In certain instances, the Company may identify specific loans to be collateral dependent. The Company considers loans to be collateral dependent if both of the following criteria are met: (i) loan is expected to be substantially repaid through the operation or sale of the underlying collateral, and (ii) the borrower is experiencing financial difficulty. The determination of whether these criteria are met for an individual loan requires the use of significant judgment and can be based on several factors subject to uncertainty. For such loans that the Company determines that foreclosure of the collateral is probable, the Company estimates the CECL Reserve based on the difference between the fair value of the collateral (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan as of the measurement date. For collateral dependent loans that the Company determines foreclosure is not probable, the Company applies a practical expedient to estimate the CECL Reserve using the difference between the collateral’s fair value (less costs to sell the asset if repayment is expected through the sale of the collateral) and the amortized cost basis of the loan. To determine the fair value of the collateral, the Company may employ different approaches depending on the type of collateral, including methods such as the income approach, the market approach or the direct capitalization approach. These methods require the use of key unobservable inputs, which are inherently uncertain and subjective. Determining the appropriate valuation method and selecting the appropriate key unobservable inputs and assumptions requires significant judgment and consideration of factors specific to the underlying collateral being assessed. Additionally, the key unobservable inputs and assumptions used may vary depending on the information available and market conditions as of the valuation date. As such, the fair value that is used in calculating the CECL Reserve is subject to uncertainty and any actual losses, if incurred, could differ materially from the CECL Reserve. As of March 31, 2025, the Company’s CECL Reserve for its loans held for investment portfolio is $139.6 million or 945 basis points of the Company’s total loans held for investment commitment balance of $1.5 billion and is bifurcated between the CECL Reserve (contra-asset) related to outstanding balances on loans held for investment of $131.4 million and a liability for unfunded commitments of $8.2 million. The liability was based on the unfunded portion of the loan commitment over the full contractual period over which the Company is exposed to credit risk through a current obligation to extend credit. Management considered the likelihood that funding will occur, and if funded, the expected credit loss on the funded portion. As of March 31, 2025, the senior mortgage loan on an office property located in Illinois with a principal balance of $165.1 million had a risk rating of “5.” As of March 31, 2025, this loan was assessed individually and the Company elected to assign a CECL Reserve of $57.7 million on the Illinois office loan. The CECL Reserve for this loan was based on the Company’s estimate of net proceeds available from the potential sale of the collateral property and this CECL Reserve is included in the Company’s total CECL Reserve. Current Expected Credit Loss Reserve for Funded Loan Commitments Activity related to the CECL Reserve for outstanding balances on the Company’s loans held for investment as of and for the three months ended March 31, 2025 was as follows ($ in thousands):
Balance at December 31, 2024 (1) |  | $ | 136,224 |
Provision for (reversal of) current expected credit losses, net |  | (4,791) |
Balance at March 31, 2025 (1) |  | $ | 131,433 |
__________________________ (1) The CECL Reserve related to outstanding balances on loans held for investment is recorded within current expected credit loss reserve in the Company’s consolidated balance sheets. Current Expected Credit Loss Reserve for Unfunded Loan Commitments Activity related to the CECL Reserve for unfunded commitments on the Company’s loans held for investment as of and for the three months ended March 31, 2025 was as follows ($ in thousands):
Balance at December 31, 2024 (1) |  | $ | 8,757 |
Provision for (reversal of) current expected credit losses, net |  | (549) |
Balance at March 31, 2025 (1) |  | $ | 8,208 |
__________________________ (1) The CECL Reserve related to unfunded commitments on loans held for investment is recorded within other liabilities in the Company’s consolidated balance sheets. The Company continuously evaluates the credit quality of each loan by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, loan structure and exit plan, loan-to-value ratio, debt service coverage ratio, project sponsorship, and other factors deemed necessary. Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from less risk to greater risk, which ratings are defined as follows:
Ratings |  | Definition
1 |  | Very Low Risk
2 |  | Low Risk
3 |  | Medium Risk
4 |  | High Risk/Potential for Loss: Asset performance is trailing underwritten expectations. Loan at risk of impairment without material improvement to performance
5 |  | Impaired/Loss Likely: A loan that has a significantly increased probability of default and principal loss
The risk ratings are primarily based on historical data as well as taking into account future economic conditions. As of March 31, 2025, the carrying value, excluding the CECL Reserve, of the Company’s loans held for investment within each risk rating by year of origination is as follows ($ in thousands):
|  | 2025 |  | 2024 |  | 2023 |  | 2022 |  | 2021 |  | Prior |  | Total
Risk rating: |  |  |  |  |  |  |  |  |  |  |  |  |  |
1 |  | $ | — |  | $ | — |  | $ | — |  | $ | 7,668 |  | $ | — |  | $ | — |  | $ | 7,668
2 |  | — |  | — |  | 104,269 |  | — |  | 27,805 |  | 20,067 |  | 152,141
3 |  | — |  | — |  | 11,394 |  | 320,558 |  | 430,033 |  | 112,024 |  | 874,009
4 |  | — |  | — |  | — |  | 154,786 |  | 7,586 |  | 10,880 |  | 173,252
5 |  | — |  | — |  | — |  | — |  | — |  | 148,194 |  | 148,194
Total |  | $ | — |  | $ | — |  | $ | 115,663 |  | $ | 483,012 |  | $ | 465,424 |  | $ | 291,165 |  | $ | 1,355,264
Accrued Interest Receivable The Company elected not to measure a CECL Reserve on accrued interest receivable due to the Company’s policy of writing off uncollectible accrued interest receivable balances in a timely manner. As of March 31, 2025 and December 31, 2024, interest receivable of $6.0 million and $8.1 million, respectively, is included within other assets in the Company’s consolidated balance sheets and is excluded from the carrying value of loans held for investment. If the Company were to have uncollectible accrued interest receivable, it generally would reverse accrued and unpaid interest against interest income and no longer accrue for these amounts.

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