Commercial Mortgage and Subordinate Loans, Net

Our loan portfolio was comprised of the following at December 31, 2018 and 2017 ($ in thousands):



Loan Type	December 31, 2018		December 31, 2017
Commercial mortgage loans, net	$	3,878,981	$	2,653,826
Subordinate loans, net	1,048,612		1,025,932
Total loans, net	$	4,927,593	$	3,679,758

Our loan portfolio consisted of 91% and 88% floating rate loans, based on amortized cost, as of December 31, 2018 and 2017, respectively.

Activity relating to our loan investment portfolio, for the year ended December 31, 2018, was as follows ($ in thousands):



	Principal Balance			Deferred Fees/Other Items ⁽¹⁾			Provision for Loan Loss ⁽²⁾			Carrying Value
December 31, 2017	$	3,706,169		$	(9,430	)	$	(16,981	)	$	3,679,758
New loan fundings	2,069,909			—			—			2,069,909
Add-on loan fundings ⁽³⁾	280,956			—			—			280,956
Loan repayments	(1,066,843		)	—			—			(1,066,843		)
Unrealized gain (loss) on foreign currency translation	(51,202		)	189			—			(51,013		)
Provision for loan loss ⁽²⁾	—			—			(20,000		)	(20,000		)
Deferred fees and other items ⁽¹⁾	—			(34,066		)	—			(34,066		)



PIK interest, amortization of fees and other items ⁽¹⁾	43,525		25,367			—			68,892
December 31, 2018	$	4,982,514	$	(17,940	)	$	(36,981	)	$	4,927,593

———————

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

(2) In addition to the $37.0 million provision for loan loss, we recorded an impairment of $3.0 million against an investment previously recorded under other assets on our consolidated balance sheet.

(3) Represents fundings for loans closed prior to 2018.

The following table details overall statistics for our loan portfolio at the dates indicated ($ in thousands):



	December 31, 2018			December 31, 2017
Number of loans	69			59
Principal balance	$	4,982,514		$	3,706,169
Carrying value	$	4,927,593		$	3,679,758
Unfunded loan commitments ⁽¹⁾	$	1,095,598		$	435,627
Weighted-average cash coupon ⁽²⁾	8.4		%	8.4		%

———————


(1)	Unfunded loan commitments are primarily funded to finance property improvements or lease-related expenditures by the borrowers. These future commitments are funded over the term of each loan, subject in certain cases to an expiration date.


(2)	For floating rate loans, based on applicable benchmark rates as of the specified dates.

The table below details the property type of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):



	December 31, 2018				December 31, 2017
Property Type	Carrying Value		% of Portfolio		Carrying Value		% of Portfolio
Hotel	$	1,286,590	26.1	%	$	645,056	17.6	%
Residential-for-sale: inventory ⁽¹⁾	577,053		11.7	%	92,438		2.5	%
Residential-for-sale: construction ⁽¹⁾	528,510		10.7	%	349,739		9.5	%
Office	832,620		16.9	%	513,830		14.0	%
Urban Predevelopment	683,886		13.9	%	654,736		17.8	%
Multifamily	448,899		9.1	%	465,057		12.6	%
Healthcare	156,814		3.2	%	173,870		4.7	%
Retail Center	156,067		3.2	%	198,913		5.4	%
Other	151,197		3.1	%	154,141		4.2	%
Mixed Use	73,957		1.5	%	354,640		9.6	%
Industrial	32,000		0.6	%	77,338		2.1	%
Total	$	4,927,593	100.0	%	$	3,679,758	100.0	%


(1)	To conform to the current period’s presentation, loans with a combined carrying value of $442.2 million classified as residential-for-sale as of December 31, 2017 were broken out into $349.8 million of residential-for-sale: construction and $92.4 million of residential-for-sale: inventory.

The table below details the geographic distribution of the properties securing the loans in our portfolio at the dates indicated ($ in thousands):



	December 31, 2018				December 31, 2017
Geographic Location	Carrying Value		% of Portfolio		Carrying Value		% of Portfolio
Manhattan, NY	$	1,669,145	33.9	%	$	1,173,833	31.9	%
Brooklyn, NY	346,056		7.0	%	357,611		9.7	%
Northeast	23,479		0.5	%	100,536		2.7	%
Midwest	631,710		12.8	%	683,380		18.6	%



West	614,160		12.5	%	227,024		6.2	%
Southeast	559,043		11.3	%	531,582		14.4	%
Mid Atlantic	211,775		4.3	%	191,976		5.2	%
Southwest	96,345		2.0	%	33,615		0.9	%
United Kingdom	700,460		14.2	%	303,488		8.3	%
Other International	75,420		1.5	%	76,713		2.1	%
Total	$	4,927,593	100.0	%	$	3,679,758	100.0	%

We assess the risk factors of each loan and assign a risk rating based on a variety of factors, including, without limitation, LTV, debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. This review is performed quarterly. Based on a 5-point scale, our loans are rated "1" through "5," from less risk to greater risk, which ratings are defined as follows:

1. Very low risk

2. Low risk

3. Moderate/average risk

4. High risk/potential for loss: a loan that has a risk of realizing a principal loss

5. Impaired/loss likely: a loan that has a high risk of realizing principal loss, has incurred principal loss or has been impaired

The following table allocates the carrying value of our loan portfolio based on our internal risk ratings at the dates indicated ($ in thousands):



	December 31, 2018					December 31, 2017
Risk Rating	Number of Loans	Carrying Value		% of Loan Portfolio		Number of Loans	Carrying Value		% of Loan Portfolio
1	—	$	—	—	%	—	$	—	—	%
2	3	138,040		3	%	5	399,326		10	%
3	63	4,573,930		93	%	51	3,034,358		83	%
4	—	—		—	%	1	168,208		5	%
5	3	215,623		4	%	2	77,866		2	%
	69	$	4,927,593	100	%	59	$	3,679,758	100	%

We evaluate our loans for possible impairment on a quarterly basis. We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor on a loan by loan basis. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash 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 property’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 properties. In addition, we consider the overall economic environment, real estate sector and geographic sub-market in which the borrower operates. Such loan loss analysis is completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as debt service coverage ratio, property 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. An allowance for loan loss is established when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan.

We evaluate modifications to our loan portfolio to determine if the modifications constitute a troubled debt restructuring ("TDR") and/or substantial modification, under ASC Topic 310, "Receivables." During the second quarter of 2018, we determined that a modification of one commercial mortgage loan, secured by a retail center in Cincinnati, Ohio, with a principal balance of $169.0 million constituted a TDR as the interest rate spread was reduced from 5.5% over LIBOR to 3.0% over LIBOR. The entity that we are a part of and owns the underlying property was deemed to be a VIE and it was determined that we are not the primary beneficiary of that VIE. During the fourth quarter of 2018, we recorded a $15.0 million loan loss provision against this loan. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using the direct capitalization method. The significant unobservable inputs used in determining the collateral value were in-place net operating income and capitalization rate which were $10.5 million and 6.75%, respectively. As of December 31, 2018 and 2017, this loan was assigned a risk rating of 5 and 4, respectively.

We have recorded $10.0 million loan loss provision and impairment against a commercial mortgage loan secured by a fully-built, for-sale residential condominium units located in Bethesda, MD. This was comprised of (i) $5.0 million loan loss recorded during the second quarter of 2018, and (ii) $2.0 million loan loss provision and $3.0 million of impairment recorded during the second quarter of 2017. The impairment was recorded on an investment previously recorded under other assets on our consolidated balance sheet. The loan loss provision and impairment were based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision and related impairment). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were sales price per square foot and discount rate which were an average of $662 per square foot across properties and 15%, respectively. Effective April 1, 2017, we ceased accruing all interest associated with the loan and accounts for the loan on a cost-recovery basis (all proceeds are applied towards the loan balance). As of December 31, 2018 and 2017, this loan was assigned a risk rating of 5.

During 2016, we recorded a loan loss provision of $10.0 million on a commercial mortgage loan and $5.0 million on a contiguous subordinate loan secured by a multifamily property located in Williston, ND. The loan loss provision was based on the difference between fair value of the underlying collateral, and the carrying value of the loan (prior to the loan loss provision). Fair value of the collateral was determined using a discounted cash flow analysis. The significant unobservable inputs used in determining the collateral value were terminal capitalization rate and discount rate which were 11% and 10%, respectively. The entity that we are a part of and owns the underlying property was deemed to be a VIE and it was determined that we are not the primary beneficiary of that VIE. We ceased accruing interest associated with the loan and only recognize interest income upon receipt of cash. As of December 31, 2018 and 2017, this loan was assigned a risk rating of 5.

During the year ended December 31, 2018, we sold a $75.0 million ($17.7 million funded) subordinate position of our $265.0 million loans for the construction of an office campus in Renton, Washington. As of December 31, 2018, our exposure to the property is limited to a $190.0 million ($82.0 million funded) mortgage loan. This transaction was evaluated under ASC 860 - Transfers and Servicing and we determined that it qualifies as a sale and accounted for as such.

As of December 31, 2018 and 2017, the aggregate loan loss provision on our portfolio was $37.0 million and $17.0 million.

During the years ended December 31, 2018, 2017 and 2016, we recognized PIK interest of $43.5 million, $25.2 million and $24.4 million, respectively.

During the years ended December 31, 2018, 2017 and 2016, we recognized pre-payment penalties and accelerated fees of $2.3 million, $5.4 million and $5.2 million, respectively.