LOANS HELD-FOR-INVESTMENT

9 Months Ended

Sep. 30, 2020

NOTE 7 — LOANS HELD-FOR-INVESTMENT

The Company’s loans held-for-investment consisted of the following as of September 30, 2020 and December 31, 2019 (dollar amounts in thousands):


	As of September 30,		As of December 31,
	2020		2019
Mezzanine loans	$	146,516	$	146,060
Senior loans	327,244		152,820
Total CRE loans-held-for-investment and related receivables, net	473,760		298,880
Broadly syndicated loans	419,135		2,750
Loans-held-for-investment and related receivables, net	$	892,895	$	301,630

Less: Allowance for credit losses	$	(35,039)	$	—
Total loans-held-for-investment and related receivables, net	$	857,856	$	301,630

During the nine months ended September 30, 2020, the Company invested $475.0 million in broadly syndicated loans. During the same period, the Company sold broadly syndicated loans for an aggregate gross sales price of $27.3 million, resulting in proceeds of $25.8 million after closing costs and a loss of $562,000. The loss was recorded as a decrease to interest expense and other, net in the condensed consolidated statements of operations. As of September 30, 2020, the Company had $42.1 million of unsettled broadly syndicated loan purchases included in cash and cash equivalents in the accompanying condensed consolidated balance sheet.

As of September 30, 2020, the Company had $61.8 million of unfunded commitments related to CRE loans held-for-investment, the funding of which is subject to the satisfaction of borrower milestones. These commitments are not reflected in the accompanying condensed consolidated balance sheet.

The following table details overall statistics for the Company’s loans held-for-investment as of September 30, 2020 and December 31, 2019 (dollar amounts in thousands):


	CRE Loans (1) (2)						Broadly Syndicated Loans
	September 30, 2020			December 31, 2019			September 30, 2020			December 31, 2019
Number of loans	12			11			161			1
Principal balance	$	473,834		$	297,357		$	422,771		$	2,750
Net book value	$	447,008		$	298,880		$	410,848		$	2,750
Weighted-average interest rate	7.6		%	8.9		%	3.8		%	4.5		%

Weighted-average maximum years to maturity	2.5			2.9			4.8			5.2

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(1) As of September 30, 2020, 100% of the Company’s CRE loans by principal balance earned a floating rate of interest, primarily indexed to U.S. dollar LIBOR.

(2) Maximum maturity date assumes all extension options are exercised by the borrower; however, the Company’s CRE loans may be repaid prior to such date.

Activity relating to the Company’s loans held-for-investment portfolio was as follows (dollar amounts in thousands):


	Principal Balance		Deferred Fees / Other Items (1)		Loan Fees Receivable		Net Book Value
Balance, December 31, 2019	$	300,135	$	(6,047)	$	7,542	$	301,630
Loan originations and acquisitions	697,127		(5)		5		697,127
Cure payments receivable (2)	6,411		—		—		6,411
Sale of loans	(27,344)		945		—		(26,399)
Principal repayments received (3)	(80,263)		—		—		(80,263)
Capitalized interest (4)	539		—		—		539
Deferred fees and other items	—		(7,760)		(380)		(8,140)
Accretion and amortization of fees and other items	—		1,990		—		1,990
Allowance for credit losses (5)	—		(35,039)		—		(35,039)
Balance, September 30, 2020	$	896,605	$	(45,916)	$	7,167	$	857,856

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

(2) Represents operating expenses paid by the Company on the borrower’s behalf in connection with the foreclosure proceedings that commenced during the three months ended September 30, 2020, as further discussed below in “Allowance for Credit Losses”.

(3) Includes the repayment of a $40.8 million senior loan prior to the maturity date.

(4) Represents accrued interest on loans whose terms do not require a current cash payment of interest.

(5) Includes the initial allowance for credit losses against the loans held-for-investment recorded on January 1, 2020 and the increase in allowance for credit losses related to its loans held-for-investment during the nine months ended September 30, 2020, as further discussed below in “Allowance for Credit Losses”.

Allowance for Credit Losses

The allowance for credit losses reflects the Company’s current estimate of potential credit losses related to the loans held-for-investment included in the Company’s condensed consolidated balance sheets. Refer to Note 2 — Summary of Significant Accounting Policies for further discussion of the Company’s allowance for credit losses.

The following table presents the activity in the Company’s allowance for credit losses by loan type for the three months ended September 30, 2020 (dollar amounts in thousands):


	Mezzanine Loans		Senior Loans		Broadly Syndicated Loans		Total
Allowance for credit losses as of December 31, 2019	$	—	$	—	$	—	$	—
Transition adjustment on January 1, 2020	1,494		468		40		2,002
Provision for credit losses	13,047		341		4,389		17,777
Allowance for credit losses as of March 31, 2020	14,541		809		4,429		19,779
Provision for credit losses	6,728		(317)		1,494		7,905
Allowance for credit losses as of June 30, 2020	21,269		492		5,923		27,684
Provision for credit losses	3,601		1,390		2,364		7,355
Allowance for credit losses as of September 30, 2020	$	24,870	$	1,882	$	8,287	$	35,039

The Company’s initial allowance for credit losses against the loans held-for-investment of $2.0 million recorded on January 1, 2020 is reflected as a direct charge to retained earnings on the Company’s condensed consolidated statements of stockholders’ equity; however, subsequent changes to the allowance for credit losses are recognized through net income on the Company’s condensed consolidated statements of operations. During the nine months ended September 30, 2020, the Company recorded a $33.0 million increase in allowance for credit losses related to its loans held-for-investment, bringing the total allowance for credit losses to $35.0 million as of September 30, 2020.

During the year ended December 31, 2019, the borrower on the Company’s eight mezzanine loans, which represents approximately 3.9% of total assets as of September 30, 2020, became delinquent on certain required reserve payments. During the three months ended March 31, 2020, the borrower remained delinquent on the required reserve payments and became delinquent on principal and interest. As a result, the Company recorded an allowance for credit losses on its mezzanine loans of $14.5 million for the three months ended March 31, 2020, which was the difference between the fair value of the collateral and the amortized cost basis of the loans. Additionally, during the three months ended June 30, 2020, the fair value of the collateral, which is based on comparable market sales, further decreased compared to the amortized cost basis and as a result, the Company recorded an additional allowance for credit losses on its mezzanine loans of $6.7 million. During the three months ended September 30, 2020, the Company commenced foreclosure proceedings to take control of the condominium properties in New York securing the mezzanine loans. As a result, the Company recorded an additional net increase of $3.6 million to its provision for loan loss on the four loans to reflect the estimated fair value of the collateral, which included $6.4 million of provision for loan loss associated with a cure payments receivable for operating expenses paid by the Company on the borrower’s behalf during the nine months ended September 30, 2020.

As further described in Note 2 — Summary of Significant Accounting Policies, the Company evaluates its loans-held-for-investment portfolio on a quarterly basis. Each quarter, the Company assesses the risk factors of each loan, and assigns a risk rating based on several factors. Factors considered in the assessment include, but are not limited to, loan and credit structure, current LTV, debt yield, collateral performance, and the quality and condition of the sponsor, borrower, and guarantor(s). Loans are rated “1” (less risk) through “5” (greater risk), which ratings are defined in Note 2 — Summary of Significant Accounting Policies.

The Company’s primary credit quality indicator is its risk ratings, which are further discussed above. The following table presents the net book value of the Company’s loans-held-for-investment portfolio as of September 30, 2020 by year of origination, loan type, and risk rating (dollar amounts in thousands):


	Amortized Cost of Loans Held-For-Investment by Year of Origination (1)
	As of September 30, 2020
	2020		2019		2018		Total
Mezzanine loans by internal risk rating:
1	$	—	$	—	$	—	$	—
2	—		—		—		—
3	—		—		—		—
4	—		—		—		—
5	—		57,045		89,471		146,516
Total mezzanine loans	—		57,045		89,471		146,516
Senior loans by internal risk rating:
1	—		—		—		—
2	—		—		—		—
3	212,385		114,859		—		327,244
4	—		—		—		—
5	—		—		—		—
Total senior loans	212,385		114,859		—		327,244
Broadly syndicated loans by internal risk rating:
1	—		—		—		—
2	5,957		—		—		5,957
3	403,158		2,739		—		405,897
4	7,281		—		—		7,281
5	—		—		—		—
Total broadly syndicated loans	416,396		2,739		—		419,135
Less: Allowance for credit losses							(35,039)
Total loans-held-for-investment and related receivables, net							$	857,856
Weighted Average Risk Rating (2)							3.3

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(1) Date loan was originated or acquired by the Company. Origination dates are subsequently updated to reflect material loan modifications.

(2) Weighted average risk rating calculated based on carrying value at period end.