LOANS HELD FOR INVESTMENT (Tables)

9 Months Ended

Sep. 30, 2020

Financing Receivable Credit Quality Indicators

As of September 30, 2020, 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):



	2020		2019		2018		2017		2016		Prior		Total
Risk rating:
1	$	—	$	—	$	8,538	$	—	$	—	$	—	$	8,538
2	—		109,385		22,753		27,500		—		—		159,638
3	410,038		482,374		296,576		247,540		16,474		—		1,453,002
4	—		—		99,929		22,974		—		34,118		157,021
5	—		—		—		—		—		—		—
Total	$	410,038	$	591,759	$	427,796	$	298,014	$	16,474	$	34,118	$	1,778,199

Schedule of loans held for investments

The Company’s investments in loans held for investment are accounted for at amortized cost. The following tables summarize the Company’s loans held for investment as of September 30, 2020 and December 31, 2019 ($ in thousands):



	As of September 30, 2020
	Carrying Amount (1)		Outstanding Principal (1)		Weighted Average Unleveraged Effective Yield						Weighted Average Remaining Life (Years)
Senior mortgage loans	$	1,680,529	$	1,690,473	5.9	%	(2)	6.2	%	(3)	1.3
Subordinated debt and preferred equity investments	97,670		98,672		13.4	%	(2)	13.4	%	(3)	2.1
Total loans held for investment portfolio	$	1,778,199	$	1,789,145	6.3	%	(2)	6.6	%	(3)	1.3



	As of December 31, 2019
	Carrying Amount (1)		Outstanding Principal (1)		Weighted Average Unleveraged Effective Yield (2)	Weighted Average Remaining Life (Years)
Senior mortgage loans	$	1,622,666	$	1,632,164	6.5%	1.5
Subordinated debt and preferred equity investments	59,832		60,730		15.1%	2.6
Total loans held for investment portfolio	$	1,682,498	$	1,692,894	6.8%	1.6

_______________________________________________________________________________


(1)	The difference between the Carrying Amount and the Outstanding Principal amount of the loans held for investment consists of unamortized purchase discount, deferred loan fees and loan origination costs.

(2)

Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by the Company as of September 30, 2020 and December 31, 2019 as weighted by the outstanding principal balance of each loan.

(3)

Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all interest accruing loans held by the Company as of September 30, 2020 as weighted by the total outstanding principal balance of each interest accruing loan (excludes loans on non-accrual status as of September 30, 2020).

Schedule of current investment portfolio

A more detailed listing of the Company’s loans held for investment portfolio based on information available as of September 30, 2020 is as follows ($ in millions, except percentages):

Loan Type

Location

Outstanding Principal (1)

Carrying Amount (1)

Interest Rate

Unleveraged Effective Yield (2)

Maturity Date (3)

Payment Terms (4)

Senior Mortgage Loans:

Office

Diversified

$108.6

$108.2

L+3.65%

5.7%

Jan 2023

I/O

Mixed-use

99.0

98.7

L+4.25%

7.8%

Feb 2021

I/O

Multifamily

91.3

90.7

L+5.00%

6.7%

Jun 2022

I/O

Multifamily

75.0

74.7

L+2.85%

5.0%

Oct 2022

I/O

Office

69.6

L+3.75%

5.6%

Dec 2020

I/O

Hotel

OR/WA

68.1

67.6

L+3.45%

4.6%

(5)

May 2021

I/O

Office

61.0

60.8

L+4.25%

8.4%

Mar 2021

I/O

Hotel

Diversified

60.8

60.6

L+3.60%

6.2%

Sep 2021

I/O

Office

57.3

57.2

L+3.95%

6.3%

Jun 2021

I/O

Mixed-use

51.2

51.0

L+4.00%

6.2%

Apr 2022

(6)

I/O

Industrial

49.8

49.6

L+5.00%

8.3%

Feb 2021

I/O

Multifamily

46.2

46.0

L+5.00%

6.6%

Jun 2022

I/O

Multifamily

43.3

43.1

L+2.60%

5.5%

Jan 2022

I/O

Student Housing

41.0

40.9

L+4.75%

5.4%

Jan 2021

I/O

Multifamily

41.0

40.8

L+3.05%

4.9%

Mar 2022

I/O

Office

40.2

39.7

L+3.05%

5.7%

Dec 2022

I/O

Hotel

40.0

L+4.12%

5.9%

Jan 2021

I/O

Student Housing

39.7

L+3.95%

5.2%

Jul 2021

(7)

I/O

Multifamily

35.8

35.5

L+3.25%

5.5%

Nov 2022

I/O

Mixed-use

35.2

34.9

L+3.75%

6.7%

Sep 2022

I/O

Industrial

34.8

34.6

L+4.05%

5.9%

Mar 2024

I/O

Hotel

34.2

34.1

L+3.95%

4.3%

Jul 2022

(8)

I/O

Hotel

32.9

32.4

L+4.40%

—%

(9)

May 2021

I/O

Office

31.1

30.8

L+3.35%

6.0%

Nov 2022

I/O

Multifamily

30.1

L+3.20%

4.9%

Dec 2020

I/O

Student Housing

30.0

29.9

L+3.15%

5.9%

Feb 2022

I/O

Multifamily

29.4

29.2

L+3.00%

5.9%

Dec 2021

I/O

Office

28.0

27.7

L+3.80%

6.2%

Jan 2023

I/O

Multifamily

27.5

L+3.20%

4.9%

Oct 2021

(10)

I/O

Student Housing

24.6

24.3

L+3.45%

5.5%

Feb 2023

I/O

Student Housing

24.1

23.0

L+4.45%

—%

(9)

Dec 2020

(11)

I/O

Office

22.8

L+3.40%

6.2%

Nov 2021

I/O

Mixed-use

22.5

22.2

L+4.10%

6.5%

Mar 2023

I/O

Office

22.1

21.5

L+3.52%

6.8%

May 2023

I/O

Student Housing

22.0

21.9

L+3.25%

5.9%

Aug 2022

I/O

Industrial

21.5

21.4

L+4.50%

7.3%

Dec 2021

I/O

Self Storage

19.5

19.4

L+3.50%

6.0%

Mar 2022

I/O

Multifamily

18.6

18.5

L+3.00%

5.1%

Mar 2023

I/O

Office

15.8

15.6

L+4.05%

7.6%

Nov 2021

I/O

Residential

13.7

13.00%

13.0%

Feb 2021

(12)

I/O

Industrial

13.5

13.3

L+3.75%

6.3%

Mar 2023

I/O

Multifamily

9.1

8.8

L+6.50%

10.1%

Sep 2022

I/O

Office

8.6

8.5

L+4.00%

6.7%

Nov 2022

I/O

Subordinated Debt and Preferred Equity Investments:

Office

34.5

34.2

L+8.00%

10.0%

Mar 2023

I/O

Office

17.0

16.5

12.00%

12.8%

Jan 2026

I/O

(13)

Residential Condominium

16.8

L+14.00%

(14)

18.0%

May 2021

(14)

I/O

Mixed-use

15.9

15.8

L+12.25%

14.5%

Nov 2021

I/O

Residential Condominium

11.5

14.00%

17.0%

Oct 2020

(15)

I/O

Office

2.9

L+8.25%

9.7%

Nov 2021

I/O

Total/Weighted Average

$1,789.1

$1,778.2

6.3%

_________________________

(1)

The difference between the Carrying Amount and the Outstanding Principal amount of the loans held for investment consists of unamortized purchase discount, deferred loan fees and loan origination costs. For the loans held for investment that represent co-investments with other investment vehicles managed by Ares Management (see Note 13 included in these consolidated financial statements for additional information on co-investments), only the portion of Carrying Amount and Outstanding Principal held by the Company is reflected.

(2)

Unleveraged Effective Yield is the compounded effective rate of return that would be earned over the life of the investment based on the contractual interest rate (adjusted for any deferred loan fees, costs, premiums or discounts) and assumes no dispositions, early prepayments or defaults. Unleveraged Effective Yield for each loan is calculated based on LIBOR as of September 30, 2020 or the LIBOR floor, as applicable. The total Weighted Average Unleveraged Effective Yield is calculated based on the average of Unleveraged Effective Yield of all loans held by the Company as of September 30, 2020 as weighted by the outstanding principal balance of each loan.

(3)

Certain loans are subject to contractual extension options that generally vary between one and two 12-month extensions and may be subject to performance based or other conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities and amend other terms of the loans in connection with loan modifications.


(4)	I/O = interest only, P/I = principal and interest.

(5)

At origination, the Oregon/Washington loan was structured as both a senior and mezzanine loan with the Company holding both positions. The mezzanine position of this loan, which had an outstanding principal balance of $13.1 million as of September 30, 2020, was on non-accrual status as of September 30, 2020 and therefore, the Unleveraged Effective Yield presented is for the senior position only as the mezzanine position is non-interest accruing.


(6)	In May 2020, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior California loan to April 2022.


(7)	In May 2020, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior California loan to July 2021.


(8)	In August 2020, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior Michigan loan to July 2022.


(9)	Loan was on non-accrual status as of September 30, 2020 and therefore, there is no Unleveraged Effective Yield as the loan is non-interest accruing.


(10)	In September 2020, the borrower exercised a one-year extension option in accordance with the loan agreement, which extended the maturity date on the senior Texas loan to October 2021.


(11)	In July 2020, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the senior Alabama loan to December 2020.


(12)	In August 2020, the Company and the borrowers entered into a modification and extension agreement to, among other things, extend the maturity date on the senior California loan to February 2021.


(13)	In February 2021, amortization will begin on the subordinated New Jersey loan, which had an outstanding principal balance of $17.0 million as of September 30, 2020. The remainder of the loans in the Company’s portfolio are non-amortizing through their primary terms.

(14)

The subordinated New York loan includes a $2.4 million loan to the borrower, for which such amount accrues interest at a per annum rate of 20.00% and has an initial maturity date of April 2021 upon the borrower exercising a 6-month extension option in September 2020 in accordance with the loan agreement. The remaining outstanding principal balance of the subordinated New York loan accrues interest at L + 14.00% and has an initial maturity date of May 2021.

(15)

In March 2020, the Company and the borrower entered into a modification and extension agreement to, among other things, extend the maturity date on the subordinated Hawaii loan to October 2020.

Schedule of activity in loan portfolio

For the nine months ended September 30, 2020, the activity in the Company’s loan portfolio was as follows ($ in thousands):



Balance at December 31, 2019	$	1,682,498
Initial funding	422,062
Origination fees and discounts, net of costs	(4,915		)
Additional funding	74,372
Amortizing payments	(1,819		)
Loan payoffs	(299,227		)
Loans sold to third parties (1)	(100,504		)
Origination fee accretion	5,732
Balance at September 30, 2020	$	1,778,199

_________________________

(1)

In July 2020, the Company closed the sale of a senior mortgage loan with outstanding principal of $31.5 million, which was collateralized by a hotel property located in Minnesota, to a third party. In addition, in August 2020, the Company closed the sale of two senior mortgage loans to a third party with outstanding principal of $39.9 million and $29.6 million, respectively, which were collateralized by multifamily properties located in Illinois and Texas, respectively. As of June 30, 2020, it was the Company’s intent to sell these three senior mortgage loans and thus, the three loans were reclassified from held for investment to held for sale and were carried at fair value in the Company's consolidated balance sheets. For the three months ended June 30, 2020, the Company recognized an aggregate net unrealized loss of $4.0 million in the Company's consolidated statements of operations upon reclassifying the three loans from held for investment to held for sale as the carrying value exceeded fair value as determined by the sale prices of the loans. This aggregate net unrealized loss was realized during the three months ended September 30, 2020. The three senior mortgage loans discussed above were previously classified as held for investment and were sold in order to rebalance and optimize the Company’s loan portfolio.