Our loans held-for-investment are accounted for at amortized cost and our loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option. The following tables summarize our investments in mortgages and loans by subordination class as of June 30, 2019 and December 31, 2018 (dollars in thousands):

(1)	Represents the WAL of each respective group of loans as of the respective balance sheet date. The WAL of each individual loan is calculated using amounts and timing of future principal payments, as projected at origination or acquisition.

(2)

First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. The application of this methodology resulted in mezzanine loans with carrying values of $890.0 million and $1.0 billion being classified as first mortgages as of June 30, 2019 and December 31, 2018, respectively.

(3)	Subordinated mortgages include B-Notes and junior participation in first mortgages where we do not own the senior A-Note or senior participation. If we own both the A-Note and B-Note, we categorize the loan as a first mortgage loan.

During the three and six months ended June 30, 2018, the Company received distributions totaling $12.3 million from a profit participation in a mortgage loan that was repaid in 2016. The loan was secured by a retail and hospitality property located in the Times Square area of New York City. The profit participation is accounted for as a loan in accordance with the acquisition, development and construction accounting guidance within ASC 310-10, which resulted in distributions in excess of basis being recognized within interest income in our consolidated statements of operations. There were no distributions from profit participations received during the three and six months ended June 30, 2019.

As of June 30, 2019, approximately $8.3 billion, or 94.8%, of our loans held-for-investment were variable rate and carried a coupon of LIBOR plus a weighted-average spread of 4.2%.

We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral, as well as the financial and operating capability of the borrower. Specifically, the collateral’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow 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 collateral’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 collateral. In addition, we consider the overall economic environment, real estate or industry sector, and geographic sub-market in which the borrower operates. Such impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, 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.

Our evaluation process, as described above, produces an internal risk rating between 1 and 5, which is a weighted average of the numerical ratings in the following categories: (i) sponsor capability and financial condition, (ii) loan and collateral performance relative to underwriting, (iii) quality and stability of collateral cash flows and (iv) loan structure. We utilize the overall risk ratings as a concise means to monitor any credit migration on a loan as well as on the whole portfolio. While the overall risk rating is generally not the sole factor we use in determining whether a loan is impaired, a loan with a higher overall risk rating would tend to have more adverse indicators of impairment and therefore would be more likely to experience a credit loss.

The rating categories for commercial real estate loans generally include the characteristics described below, but these are utilized as guidelines and therefore not every loan will have all of the characteristics described in each category:


Rating	Characteristics
1	●	Sponsor capability and financial condition—Sponsor is highly rated or investment grade or, if private, the equivalent thereof with significant management experience.
	●	Loan collateral and performance relative to underwriting—The collateral has surpassed underwritten expectations.
	●	Quality and stability of collateral cash flows—Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.
	●	Loan structure—Loan to collateral value ratio (“LTV”) does not exceed 65%. The loan has structural features that enhance the credit profile.

2	●	Sponsor capability and financial condition—Strong sponsorship with experienced management team and a responsibly leveraged portfolio.
	●	Loan collateral and performance relative to underwriting—Collateral performance equals or exceeds underwritten expectations and covenants and performance criteria are being met or exceeded.
	●	Quality and stability of collateral cash flows—Occupancy is stabilized with a diverse tenant mix.
	●	Loan structure—LTV does not exceed 70% and unique property risks are mitigated by structural features.

3	●	Sponsor capability and financial condition—Sponsor has historically met its credit obligations, routinely pays off loans at maturity, and has a capable management team.
	●	Loan collateral and performance relative to underwriting—Property performance is consistent with underwritten expectations.
	●	Quality and stability of collateral cash flows—Occupancy is stabilized, near stabilized, or is on track with underwriting.
	●	Loan structure—LTV does not exceed 80%.

4	●	Sponsor capability and financial condition—Sponsor credit history includes missed payments, past due payment, and maturity extensions. Management team is capable but thin.
	●	Loan collateral and performance relative to underwriting—Property performance lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers. A sale of the property may be necessary in order for the borrower to pay off the loan at maturity.
	●	Quality and stability of collateral cash flows—Occupancy is not stabilized and the property has a large amount of rollover.
	●	Loan structure—LTV is 80% to 90%.

5	●	Sponsor capability and financial condition—Credit history includes defaults, deeds-in-lieu, foreclosures, and/or bankruptcies.
	●	Loan collateral and performance relative to underwriting—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. Sale proceeds would not be sufficient to pay off the loan at maturity.
	●	Quality and stability of collateral cash flows—The property has material vacancy and significant rollover of remaining tenants.
	●	Loan structure—LTV exceeds 90%.

The risk ratings for loans subject to our rating system, which excludes loans held-for-sale, by class of loan were as follows as of June 30, 2019 and December 31, 2018 (dollars in thousands):


	Balance Sheet Classification
	Loans Held-For-Investment														Loans
				First Priority											Transferred				% of
Risk Rating	First			Infrastructure			Subordinated			Mezzanine					As Secured				Total
Category	Mortgages			Loans			Mortgages			Loans		Other			Borrowings		Total		Loans
June 30, 2019
1	$	812		$	—		$	—		$	—	$	23,264		$	—	$	24,076	0.2	%
2		3,316,307			—			38,017			165,910		—			—		3,520,234	33.9	%
3		3,361,878			—			2,933			280,574		31,104			—		3,676,489	35.4	%
4		—			—			—			—		—			—		—	—	%
5		60,637			—			—			—		—			—		60,637	0.6	%
N/A		139,614	(1)		1,356,511	(2)		11,976	(1)		—		7,563	(1)		—		1,515,664	14.6	%
	$	6,879,248		$	1,356,511		$	52,926		$	446,484	$	61,931		$	—		8,797,100
Loans held-for-sale																		1,587,321	15.3	%
Total gross loans																	$	10,384,421	100.0	%

December 31, 2018
1	$	6,538		$	—		$	—		$	—	$	23,767		$	—	$	30,305	0.3	%
2		3,356,342			—			7,392			111,466		—			74,346		3,549,546	36.1	%
3		2,987,296			—			33,410			282,366		31,039			—		3,334,111	33.9	%
4		63,094			—			—			—		—			—		63,094	0.6	%
5		—			—			—			—		—			—		—	—	%
N/A		193,847	(1)		1,456,779	(2)		11,976	(1)		—		6,195	(1)		—		1,668,797	17.0	%
	$	6,607,117		$	1,456,779		$	52,778		$	393,832	$	61,001		$	74,346		8,645,853
Loans held-for-sale																		1,187,552	12.1	%
Total gross loans																	$	9,833,405	100.0	%

(1)	Principally represents loans individually evaluated for impairment in accordance with ASC 310-10.

(2)	First priority infrastructure loans were not risk rated as the Company is in the process of developing a risk rating policy for these loans.

After completing our impairment evaluation process as of June 30, 2019, we concluded that no additional impairment charges or releases thereof were required. During the six months ended June 30, 2019, we charged-off an allowance for impaired loans of $8.3 million relating to a first mortgage loan on a grocery distribution facility located in Montgomery, Alabama that we foreclosed on in March 2019 and obtained physical possession of the underlying collateral property. As of the foreclosure date, our carrying value of the loan totaled $9.0 million ($20.9 million unpaid principal balance net of an $8.3 million allowance for impaired loan and $3.6 million of unamortized discount). In April 2019, we foreclosed on a first mortgage loan on a grocery distribution facility located in Orlando, Florida and obtained physical possession of the underlying collateral property. As of the foreclosure date, the appraised value of the property exceeded the $18.5 million carrying value of the loan ($21.9 million unpaid principal and interest balance net of a $3.4 million unamortized discount, and no reserve for impaired loan).

As of June 30, 2019, we had allowances for impaired loans of $29.9 million. Of this amount, $21.6 million relates to a residential conversion project located in New York City, for which our recorded investment was as follows as of June 30, 2019: (i) $139.6 million first mortgage and contiguous mezzanine loans ($110.1 million unpaid principal balance, which does not reflect $38.4 million of accrued interest and $21.6 million allowance for impaired loan) and (ii) $6.7 million unsecured promissory note ($7.4 million unpaid principal balance and no reserve for impaired loan).

Also included in the allowance for impaired loans is $8.3 million related to two subordinated mortgages on department stores located in the Greater Chicago area. Our recorded investment in these loans totaled $12.2 million ($12.0 million unpaid principal balance and $8.3 million allowance for impaired loans) as of June 30, 2019.

We apply the cost recovery method of interest income recognition for these impaired loans. The average recorded investment in the impaired loans for the three and six months ended June 30, 2019 was $172.9 million and $186.0 million, respectively.

As of June 30, 2019, we held TDRs with unfunded commitments of $4.6 million. There were no TDRs for which interest income was recognized during the three and six months ended June 30, 2019.

As of June 30, 2019, the department store loans discussed above were 90 days or greater past due, as were $4.5 million of residential loans and a $36.2 million infrastructure loan with a carrying value of $29.2 million, net of a $7.0 million non-accretable difference. In accordance with our interest income recognition policy, these loans were placed on non-accrual status.

In accordance with our policies, we record an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4,” plus (ii) 5% of the aggregate carrying amount of loans rated as a “5,” plus (iii) allowance for infrastructure loans held-for-sale where amortized cost is in excess of fair value, plus (iv) impaired loan reserves, if any. The following table presents the activity in our allowance for loan losses (amounts in thousands):


	For the Six Months Ended
	June 30,
	2019		2018
Allowance for loan losses at January 1	$	39,151	$	4,330
Provision for (reversal of) loan losses		3,281		(3,055)
Provision for impaired loans		—		29,852
Charge-offs		(9,126)		—
Recoveries		—		—
Allowance for loan losses at June 30	$	33,306	$	31,127
Recorded investment in loans related to the allowance for loan loss	$	303,981	$	273,020

The activity in our loan portfolio was as follows (amounts in thousands):


	For the Six Months Ended
	June 30,
	2019		2018
Balance at January 1	$	9,794,254	$	7,382,641
Acquisitions/originations/additional funding		3,704,727		3,315,664
Capitalized interest (1)		52,405		29,499
Basis of loans sold (2)		(1,767,387)		(676,214)
Loan maturities/principal repayments		(1,447,593)		(1,964,644)
Discount accretion/premium amortization		16,112		20,961
Changes in fair value		33,157		22,633
Unrealized foreign currency translation loss		(3,903)		(8,608)
Loan loss provision, net		(3,281)		(26,797)
Loan foreclosure		(27,303)		—
Transfer to/from other asset classifications		(73)		27
Balance at June 30	$	10,351,115	$	8,095,162

(1) Represents accrued interest income on loans whose terms do not require current payment of interest.

(2) See Note 11 for additional disclosure on these transactions.