FINANCING RECEIVABLES

6 Months Ended

Jun. 30, 2024

NOTE 6 - FINANCING RECEIVABLES

The following table shows the activity in the allowance for credit losses for the six months ended June 30, 2024 and the year ended December 31, 2023 (in thousands):


	Six Months Ended June 30, 2024		Year Ended December 31, 2023
Allowance for credit losses at beginning of period	$	28,757	$	18,803
Provision for credit losses		6,233		10,902
Charge offs		—		(948	)
Allowance for credit losses at end of period	$	34,990	$	28,757

During the three and six months ended June 30, 2024, the Company recorded a provision for expected credit losses of $1.3 million and $6.2 million, respectively, primarily driven by worsening macroeconomic factors, including, but not limited to, higher interest rates lasting longer than expected pressuring CRE pricing, offset, in part, by a decrease in modeled credit risk resulting from payoffs and net improvements in property-level performance.

At both June 30, 2024 and December 31, 2023, the Company individually evaluated the following loans for impairment:

•

An office mezzanine loan in the Northeast region with a principal balance of $4.7 million at both June 30, 2024 and December 31, 2023. The Company fully reserved this loan in the fourth quarter of 2022, and it continues to be fully reserved at June 30, 2024. The loan entered payment default in February 2023 and has been placed on nonaccrual status.

•

An office loan in the Southwest region, with a principal balance of $14.4 million and $19.1 million at June 30, 2024 and December 31, 2023, respectively, for which foreclosure was determined to be probable. The loan had an initial maturity of March 2022 and was modified three times to extend its maturity to June 2022. The loan entered into payment default and was placed on nonaccrual status. However, in exchange for payments, comprising principal paydowns, interest payments and the reimbursement of certain legal fees, received between October 2022 and May 2024, the Company agreed to temporarily defer its right to foreclose on the property. Additionally, at both June 30, 2024 and December 31, 2023, this loan had an as-is appraised value in excess of its principal, and, as such, had no CECL allowance. In July 2024, the Company foreclosed on this loan.

At June 30, 2024, the Company individually evaluated one additional loan:

•

One multifamily loan in the Southeast region, with a principal balance of $9.3 million at June 30, 2024 and December 31, 2023, respectively, for which foreclosure was determined to be probable. This loan had an as-is appraised value in excess of its principal, and, as such, had no CECL allowance at June 30, 2024.

At December 31, 2023, the Company had individually evaluated two additional loans for which resolutions were reached in fiscal year 2024:

•

A retail loan in the Northeast region, with a principal balance of $8.0 million at December 31, 2023, for which foreclosure was determined to be probable. The loan was modified in February 2021 to extend its maturity to December 2021. In December 2021, this loan entered payment default and was placed on nonaccrual status. The borrower filed for bankruptcy in 2023 and the property was sold to a third-party bidder at auction in February 2024. The sale closed in April 2024 at a purchase price of $8.3 million and the loan was paid off at par.

•

An office loan in the East North Central region with a principal balance of $14.0 million at December 31, 2023. During the year ended December 31, 2023, the loan entered into payment default and was placed on nonaccrual status. The loan had an as-is appraised value in excess of its principal and interest balances, and, as such, had no allowance for CECL at December 31, 2023. In March 2024, the Company accepted the deed-in-lieu of foreclosure in full satisfaction of the loan and recognized a $5.8 million gain upon conversion of the loan to real estate owned based on the property's fair value of $20.3 million as determined by a current appraisal. Upon receipt, the property was immediately contributed to a joint venture with an independent third party at its aforementioned fair value, and the Company's investment in that joint venture is included in investments in unconsolidated entities on the consolidated balance sheet (see Note 3).

Credit quality indicators

Commercial Real Estate Loans

CRE loans are collateralized by a diversified mix of real estate properties and are assessed for credit quality based on the collective evaluation of several factors, including but not limited to: collateral performance relative to underwritten plan, time since origination, current implied and/or re-underwritten loan-to-collateral value ("LTV") ratios, loan structure and exit plan. Depending on the loan’s performance against these various factors, loans are rated on a scale from 1 to 5, with loans rated 1 representing loans with the highest credit quality and loans rated 5 representing loans with the lowest credit quality. Loans are rated a 2 at origination. The factors evaluated provide general criteria to monitor credit migration in the Company’s loan portfolio; as such, a loan’s rating may improve or worsen, depending on new information received.

The criteria set forth below should be used as general guidelines. Therefore, not every loan will have all of the characteristics described in each category below.




Risk Rating		Risk Characteristics

1		• Property performance has surpassed underwritten expectations.
		• Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high-quality tenant mix.

2		• Property performance is consistent with underwritten expectations and covenants and performance criteria are being met or exceeded.
		• Occupancy is stabilized, near stabilized or is on track with underwriting.

3		• Property performance lags behind underwritten expectations.
		• Occupancy is not stabilized and the property has some tenancy rollover.

4		• Property performance significantly lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers.
		• Occupancy is not stabilized and the property has a large amount of tenancy rollover.

5		• Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Expected sale proceeds would not be sufficient to pay off the loan at maturity.
		• The property has a material vacancy rate and significant rollover of remaining tenants.
		• An updated appraisal is required upon designation and updated on an as-needed basis.

All CRE loans are evaluated for any credit deterioration by debt asset management and certain finance personnel on at least a quarterly basis. Mezzanine loans may experience greater credit risks due to their nature as subordinated investments.

For the purpose of calculating the quarterly provision for credit losses under CECL, the Company pools CRE loans based on the underlying collateral property type and utilizes a probability of default and loss given default methodology for approximately one year after which it immediately reverts to a historical mean loss ratio.

Credit risk profiles of CRE loans at amortized cost were as follows (in thousands, except amounts in the footnote):


	Rating 1		Rating 2		Rating 3		Rating 4		Rating 5		Total (1)
At June 30, 2024:
Whole loans, floating-rate	$	74,447	$	760,146	$	510,578	$	349,442	$	14,398	$	1,709,011
Mezzanine loan		—		—		—		—		4,700		4,700
Total	$	74,447	$	760,146	$	510,578	$	349,442	$	19,098	$	1,713,711


At December 31, 2023:
Whole loans, floating-rate	$	—	$	973,424	$	581,032	$	256,785	$	41,152	$	1,852,393
Mezzanine loan		—		—		—		—		4,700		4,700
Total	$	—	$	973,424	$	581,032	$	256,785	$	45,852	$	1,857,093

(1)

The total amortized cost of CRE whole loans excluded accrued interest receivable of $12.5 million and $11.8 million at June 30, 2024 and December 31, 2023, respectively.

Credit risk profiles of CRE loans by origination year at amortized cost were as follows (in thousands, except amounts in the footnotes):


	2024		2023		2022		2021		2020			Prior		Total (1)
At June 30, 2024:
Whole loans, floating-rate: (2)
Rating 1	$	—	$	—	$	—	$	74,447	$	—		$	—	$	74,447
Rating 2		—		46,656		192,413		450,493		56,583			14,001		760,146
Rating 3		—		15,785		198,389		285,302		—			11,102		510,578
Rating 4		—		—		84,260		214,676		—			50,506		349,442
Rating 5		—		—		—		—		—			14,398		14,398
Total whole loans, floating-rate		—		62,441		475,062		1,024,918		56,583			90,007		1,709,011
Mezzanine loan (rating 5)		—		—		—		—		—			4,700		4,700
Total	$	—	$	62,441	$	475,062	$	1,024,918	$	56,583		$	94,707	$	1,713,711
Current Period Gross Write-Offs	$	—	$	—	$	—	$	—	$	—		$	—	$	—


	2023		2022		2021		2020		2019			Prior		Total (1)
At December 31, 2023:
Whole loans, floating-rate: (2)
Rating 2	$	63,634	$	212,175	$	636,487	$	22,556	$	38,572		$	—	$	973,424
Rating 3		—		168,791		364,369		34,232		—			13,640		581,032
Rating 4		—		82,918		123,333		—		5,645			44,889		256,785
Rating 5		—		14,000		—		—		19,127			8,025		41,152
Total whole loans, floating-rate		63,634		477,884		1,124,189		56,788		63,344			66,554		1,852,393
Mezzanine loan (rating 5)		—		—		—		—		—			4,700		4,700
Total	$	63,634	$	477,884	$	1,124,189	$	56,788	$	63,344		$	71,254	$	1,857,093
Current Period Gross Write-Offs	$	—	$	—	$	—	$	—	$	(948	)	$	—	$	(948	)

(1)

The total amortized cost of CRE whole loans excluded accrued interest receivable of $12.5 million and $11.8 million at June 30, 2024 and December 31, 2023, respectively.

(2)

Acquired CRE whole loans are grouped within each loan’s year of origination.

The Company has one additional mezzanine loan that was included in other assets held for sale, and that loan had no carrying value at both June 30, 2024 and December 31, 2023.

Loan Portfolio Aging Analysis

The following table presents the CRE loan portfolio aging analysis at the dates indicated for CRE loans at amortized cost (in thousands, except amounts in footnotes):


	30-59 Days		60-89 Days		Greater than 90 Days (1)		Total Past Due		Current (2)		Total Loans Receivable (3)		Total Loans > 90 Days and Accruing
At June 30, 2024:
Whole loans, floating-rate	$	—	$	—	$	14,398	$	14,398	$	1,694,613	$	1,709,011	$	—
Mezzanine loan (4)		—		—		4,700		4,700		—		4,700		—
Total	$	—	$	—	$	19,098	$	19,098	$	1,694,613	$	1,713,711	$	—

At December 31, 2023:
Whole loans, floating-rate	$	—	$	—	$	41,152	$	41,152	$	1,811,241	$	1,852,393	$	19,127
Mezzanine loan (4)		—		—		4,700		4,700		—		4,700		—
Total	$	—	$	—	$	45,852	$	45,852	$	1,811,241	$	1,857,093	$	19,127

(1)

During the three and six months ended June 30, 2024, the Company recognized interest income of $258,000 and $922,000, respectively, on one CRE whole loan with a principal payment past due greater than 90 days at June 30, 2024. During the three and six months ended June 30, 2023, the Company recognized interest income of $837,000 and $1.8 million, respectively, on one CRE whole loan with a principal payment past due greater than 90 days at June 30, 2023.

(2)

Includes three CRE whole loans, with total amortized costs of $88.5 million, that are past due on interest payments at June 30, 2024.

(3)

The total amortized cost of CRE whole loans excluded accrued interest receivable of $12.5 million and $11.8 million at June 30, 2024 and December 31, 2023, respectively.

(4)

Fully reserved at both June 30, 2024 and December 31, 2023.

At June 30, 2024 and December 31, 2023, the Company had four and three CRE whole loans, with total amortized costs of $102.9 million and $41.2 million, respectively, and one mezzanine loan, with a total amortized cost of $4.7 million, in payment default.

Loan Modifications

The Company is required to disclose modifications where it determined the borrower is experiencing financial difficulty and modified the agreement to: (i) forgive principal, (ii) reduce the interest rate, (iii) cause an other-than-insignificant payment delay, (iv) extend the loan term, or (v) any combination thereof.

During the six months ended June 30, 2024, the Company entered into the following three loan modifications that required disclosure:

•

A multifamily loan with an amortized cost of $52.9 million, representing 3.1% of the total amortized cost of the portfolio, was modified to: (i) extend its maturity from June 2025 to June 2026, (ii) reduce its current interest rate from BR + 3.70% to BR + 1.70%, and (iii) defer interest of 2.00% that will be due at payoff. In connection with the modification, the borrower funded additional capital into the project for interest reserves to cover debt service.

•

A multifamily loan with an amortized cost of $44.1 million, representing 2.6% of the total amortized cost of the portfolio, was modified to: (i) reduce its current pay interest rate from BR + 3.31% to a 5.00% fixed rate and (ii) defer the unpaid interest that will be due at loan payoff. In connection with the modification, the borrower funded additional capital into the project for interest reserves to cover debt service.

•

A multifamily loan with an amortized cost of $70.6 million, representing 4.1% of the total amortized cost of the portfolio, was modified to: (i) extend its maturity from January 2025 to January 2026 and (ii) provide for 2.00% per annum of the interest rate to be deferred until payoff. The Company also entered into a mezzanine loan with a total commitment of $6.0 million, of which $2.3 million was funded at June 30, 2024. The loan has a fixed rate of 15.00% that accrues and will be due at payoff in January 2026. In connection with the modification, the borrower renewed the interest rate cap.

These loans were performing in accordance with the modified contractual terms as of June 30, 2024. At June 30, 2024, these loans had a risk rating of "4." Loans with a risk rating of "4" are included in the determination of our general CECL reserves.

During the six months ended June 30, 2023, the Company did not enter into any loan modifications for borrowers that were experiencing financial difficulty.