CURRENT EXPECTED CREDIT LOSSES

3 Months Ended

Mar. 31, 2022

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 data that reflects a current recession; however, the short and long-term economic implications of the COVID-19 pandemic and its financial impact on the Company continue to be 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, 2022 decreased compared to the current estimate of expected credit losses as of December 31, 2021 primarily due to forecasted improvement in macroeconomic factors, shorter average remaining loan term and loan payoffs, partially offset by growth in the loan portfolio and other changes to the loan portfolio during the three months ended March 31, 2022. The CECL Reserve takes into consideration the assumed macroeconomic impact of the COVID-19 pandemic on CRE properties and is not specific to any loan losses or impairments on the Company’s loans held for investment.

As of March 31, 2022, the Company’s CECL Reserve for its loans held for investment portfolio is $24.7 million or 92 basis points of the Company’s total loans held for investment commitment balance of $2.7 billion and is bifurcated between the CECL reserve (contra-asset) related to outstanding balances on loans held for investment of $20.5 million and a liability for unfunded commitments of $4.2 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.    

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, 2022 was as follows ($ in thousands):

Balance at December 31, 2021 (1)	$	23,939
Provision for current expected credit losses	(3,487)
Write-offs	—
Recoveries	—
Balance at March 31, 2022 (1)	$	20,452

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(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, 2022 was as follows ($ in thousands):

Balance at December 31, 2021 (1)	$	1,308
Provision for current expected credit losses	2,893
Write-offs	—
Recoveries	—
Balance at March 31, 2022 (1)	$	4,201

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(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, 2022, 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):

	2022		2021		2020		2019		2018		Prior		Total
Risk rating:
1	$	—	$	35,806	$	—	$	33,905	$	9,393	$	—	$	79,104
2	19,771		495,289		—		105,949		22,816		96,819		740,644
3	159,724		511,837		320,711		260,597		157,575		89,794		1,500,238
4	—		—		—		—		101,786		—		101,786
5	—		—		—		—		—		—		—
Total	$	179,495	$	1,042,932	$	320,711	$	400,451	$	291,570	$	186,613	$	2,421,772

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, 2022 and December 31, 2021, interest receivable of $11.5 million and $17.1 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.