FAIR VALUE MEASUREMENTS

9 Months Ended

Sep. 30, 2024

Fair Value Disclosures [Abstract]

FAIR VALUE MEASUREMENTS

NOTE 3 — FAIR VALUE MEASUREMENTS

GAAP defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements. GAAP emphasizes that fair value is intended to be a market-based measurement, as opposed to a transaction-specific measurement.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date under current market conditions. Depending on the nature of the asset or liability, various techniques and assumptions can be used to estimate the fair value. Assets and liabilities are measured using inputs from three levels of the fair value hierarchy, as follows:

Level 1 — Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date. An active market is defined as a market in which transactions for the assets or liabilities occur with sufficient frequency and volume to provide pricing information on an ongoing basis.

Level 2 — Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active (markets with few transactions), inputs other than quoted prices that are

observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data correlation or other means (market corroborated inputs).

Level 3 — Unobservable inputs, which are only used to the extent that observable inputs are not available, reflect the Company’s assumptions about the pricing of an asset or liability.

The following describes the methods the Company uses to estimate the fair value of the Company’s financial assets and liabilities:

Real estate-related securities and other — The Company generally determines the fair value of its CMBS by utilizing broker-dealer quotations, reported trades or valuation estimates from pricing models to determine the reported price. Pricing models for CMBS are generally discounted cash flow models that usually consider the attributes applicable to a particular class of security (e.g., credit rating, seniority), current market data, and estimated cash flows for each class and incorporate deal collateral performance such as prepayment speeds and default rates, as available. Depending upon the significance of the fair value inputs used in determining these fair values, these securities are valued using Level 1, Level 2 or Level 3 inputs.

The Company’s CLO subordinated note is valued using Level 3 inputs. The Company determines the fair value of its CLO subordinated note through consideration of the underlying investment portfolio metrics, including prepayment rates, default and recovery rates, and estimated market yields, supplemented by actual trades executed in the market and indicative prices provided by broker-dealers. Operating metrics related to the specific CLO subordinated note are also considered in determining the fair value of the investment.

The Company’s equity securities are valued using Level 1, Level 2 or Level 3 inputs depending upon the significance of the fair value inputs used in determining the respective fair values. The estimated fair value of the Company’s equity securities are based on quoted market prices when readily and regularly available in an active market. A breakout of the Company’s CMBS, CLO subordinated note, and equity securities levels of the fair value hierarchy as of September 30, 2024 and December 31, 2023 can be found in the tables under Items Measured at Fair Value on a Recurring Basis below.

Repurchase facilities, notes payable and credit facilities — The fair value is estimated by discounting the expected cash flows based on estimated borrowing rates available to the Company as of the measurement date. Current and prior period liabilities’ carrying and fair values exclude net deferred financing costs. These financial instruments are valued using Level 2 inputs.

Derivative instruments — In the normal course of business, the Company uses certain types of derivative instruments, such as interest rate swaps and interest rate caps, for the purpose of managing or hedging its interest rate risk. All derivative instruments are carried at fair value and are generally valued using Level 2 inputs. The fair value of these instruments is determined using interest rate market pricing models. In addition, credit valuation adjustments are incorporated into the fair values to account for the Company’s potential nonperformance risk and the performance risk of the respective counterparties.

Although the Company has determined that the majority of the inputs used to value its derivatives has generally fallen within Level 2 of the fair value hierarchy, certain credit valuation adjustments associated with such derivatives may utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by the Company and its counterparties.

Loans held-for-investment — The Company’s loans held-for-investment are recorded at cost upon origination, net of loan origination fees and discounts. The Company estimates the fair value of its loans held-for-investment by performing a present value analysis for the anticipated future cash flows using an appropriate market discount rate taking into consideration the credit risk. The Company has determined that its commercial real estate (“CRE”) loans held-for-investment and corporate senior loans are classified in Level 3 of the fair value hierarchy. The Company’s liquid corporate senior loans are classified as Level 2 or Level 3 depending on the number of market quotations or indicative prices from pricing services that are available, and whether the depth of the market is sufficient to transact at those prices in amounts approximating the Company’s investment position at the measurement date.

In accordance with the fair value hierarchy described above, the following table details the net book value and fair value of of the financial instruments described above as of September 30, 2024 and December 31, 2023 (in thousands):

	September 30, 2024				December 31, 2023
	Net Book Value		Fair Value		Net Book Value		Fair Value		Level
Financial assets:
First mortgage loans	$	3,187,490	$	3,367,239	$	3,539,111	$	3,596,662	3
Liquid corporate senior loans	51,083		39,565		518,252		515,839		(1)
Corporate senior loans	229,788		233,967		207,102		211,167		3
Total financial assets	$	3,468,361	$	3,640,771	$	4,264,465	$	4,323,668
Financial liabilities:
Repurchase facilities, notes payable and credit facilities	$	3,274,363	$	3,213,771	$	3,939,125	$	3,827,782	2
Total financial liabilities	$	3,274,363	$	3,213,771	$	3,939,125	$	3,827,782

____________________________________

(1)As of September 30, 2024, $29.8 million and $9.8 million of the Company’s liquid corporate senior loans were classified in Level 2 and Level 3 of the fair value hierarchy, respectively. As of December 31, 2023, $445.7 million and $70.2 million of the Company’s liquid corporate senior loans were classified in Level 2 and Level 3 of the fair value hierarchy, respectively.

Other financial instruments — The Company considers the carrying values of its cash and cash equivalents, restricted cash, tenant receivables, accounts payable and accrued expenses, other liabilities, due to affiliates and distributions payable to approximate their fair values because of the short period of time between their origination and their expected realization as well as their highly-liquid nature. Due to the short-term maturities of these instruments, Level 1 inputs are utilized to estimate the fair value of these financial instruments.

Considerable judgment is necessary to develop estimated fair values of financial assets and liabilities. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize, or be liable for, upon disposition of the financial assets and liabilities. The Company evaluates its hierarchy disclosures each quarter and depending on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. The Company does not expect that changes in classifications between levels will be frequent.

Items Measured at Fair Value on a Recurring Basis

In accordance with the fair value hierarchy described above, the following tables show the fair value of the Company’s financial assets that are required to be measured at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 (in thousands):

	Balance as of September 30, 2024		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
CMBS	$	324,664	$	—	$	255,004	$	69,660
CLO subordinated note	28,061		—		—		28,061
Equity securities	36,902		36,387		—		515
Total financial assets	$	389,627	$	36,387	$	255,004	$	98,236

	Balance as of December 31, 2023		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Financial assets:
CMBS	$	476,715	$	—	$	347,634	$	129,081
Equity security	42,999		42,999		—		—
Total financial assets	$	519,714	$	42,999	$	347,634	$	129,081

The following are reconciliations of the changes in financial assets with Level 3 inputs in the fair value hierarchy for the nine months ended September 30, 2024 (in thousands):

	Level 3
Beginning Balance, January 1, 2024	$	129,081
Total gains and losses:
Unrealized loss included in other comprehensive income (loss)	(10,548)
Current expected credit losses	(51,424)
Purchases and payments received:
Conversion to equity security (1)	654
Investment in CLO subordinated note	31,825
Accreted interest income	415
Discounts, net	(2,670)
Capitalized interest income	903
Ending Balance, September 30, 2024	$	98,236

____________________________________

(1)During the nine months ended September 30, 2024, one of the Company’s defaulted liquid corporate senior loans was equitized into a Level 3 equity security, as further discussed in Note 7 — Real Estate-Related Securities and Other.

Items Measured at Fair Value on a Non-Recurring Basis (Including Impairment Charges)

Certain financial and nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The Company’s process for identifying and recording impairment related to credit investments, real estate assets and intangible assets is discussed in Note 2 — Summary of Significant Accounting Policies.

As of September 30, 2024, the Company had an aggregate $318.1 million asset-specific credit loss reserve on funded and unfunded commitments related to eight of the Company’s first mortgage loans with an aggregate carrying value of $1.1 billion. The asset-specific credit loss reserve was recorded based on the Company’s estimation of the fair value of the first mortgage loans’ aggregate underlying collateral, less costs to sell the underlying collateral, as of September 30, 2024. These loans are therefore measured at fair value on a nonrecurring basis using significant unobservable inputs, and are classified as Level 3 assets in the fair value hierarchy. The Company considered a variety of inputs including property performance, market data and comparable sales, as applicable. The significant unobservable inputs used include the terminal capitalization rate, which ranged from 5.5% to 11.9%, and the discount rate, which ranged from 10.0% to 13.0%. For additional information regarding the first mortgage loans, refer to Note 8 — Loans Held-For-Investment.

As discussed in Note 4 — Real Estate Assets, during the nine months ended September 30, 2024, seven properties were deemed to be impaired due to sales prices or revised cash flow estimates that were less than their respective carrying values, and their carrying values were reduced to an estimated fair value of $115.4 million, resulting in impairment charges of $51.5 million. The revised cash flow estimates were a result of continued deterioration of fundamentals at certain office properties, including weakened leasing activity and increased capitalization rates, and a revision in assumed holding periods at certain properties. Additionally, during the nine months ended September 30, 2024, certain condominium units were deemed to be impaired, primarily due to a decrease in expected sales prices for certain units, and their carrying values were reduced to their estimated fair value, resulting in impairment charges of $8.9 million. During the nine months ended September 30, 2023, real estate assets related to five properties were deemed to be impaired and their carrying values were reduced to an estimated fair value of $38.6 million, resulting in impairment charges of $11.6 million. Additionally, during the nine months ended September 30, 2023, one condominium unit was deemed to be impaired and its carrying value was reduced to its estimated fair value, resulting in impairment charges of $156,000. The Company estimates fair values using Level 3 inputs and a combined income and market approach, specifically using discounted cash flow analysis and recent comparable sales transactions. The evaluation of real estate assets for potential impairment requires the Company’s management to exercise significant judgment and to make certain key assumptions, including, but not limited to, the following: (1) terminal capitalization rates; (2) discount rates; (3) the number of years the property will be held; (4) property operating expenses; and (5) re-leasing assumptions, including the number of months to re-lease, market rental income and required tenant improvements. There are inherent uncertainties in making these estimates such as market conditions and the future performance and sustainability of the Company’s tenants. The Company determined that the selling prices used to determine the fair values were Level 2 inputs.

The following summarizes the ranges of discount rates and terminal capitalization rates used for the Company’s impairment test for the real estate assets during the nine months ended September 30, 2024 and 2023:

Nine Months Ended September 30,
2024		2023
Discount Rate	Terminal Capitalization Rate	Discount Rate	Terminal Capitalization Rate
8.6% - 11.0%	8.1% - 9.5%	7.5% - 11.9%	7.0% - 11.4%

The following table presents the impairment charges by asset class recorded during the nine months ended September 30, 2024 and 2023 (in thousands):

	Nine Months Ended September 30,
	2024		2023
Asset class impaired:
Land	$	8,184	$	2,954
Buildings, fixtures and improvements	39,372		7,856
Intangible lease assets	3,917		758
Intangible lease liabilities	5		—
Condominium developments	8,940		156
Total impairment loss	$	60,418	$	11,724