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Commercial Mortgage Loans
 3 Months Ended
Mar. 31, 2023
Receivables [Abstract]  
Commercial Mortgage Loans Commercial Mortgage Loans
The following table is a summary of the Company's commercial mortgage loans, held for investment, carrying values by class (dollars in thousands):
March 31, 2023December 31, 2022
Senior loans$5,025,739 $5,251,464 
Mezzanine loans25,762 18,312 
Total gross carrying value of loans5,051,501 5,269,776 
General allowance for credit losses28,751 26,624 
Specific allowance for credit losses (1)
— 14,224 
Less: Allowance for credit losses28,751 40,848 
Total commercial mortgage loans, held for investment, net$5,022,750 $5,228,928 
_________________________________________________________
(1) As of December 31, 2022, the Company recorded a specific allowance for credit losses with respect to a retail loan designated as non-performing. As of March 31, 2023, the loan was written down to the estimated fair value of the collateral less estimated costs to sell and the excess of the carrying value of the loan over fair value of the collateral less estimated costs to sell was charged-off against the specific allowance for credit losses.
As of March 31, 2023 and December 31, 2022, the Company's total commercial mortgage loan portfolio, held for investment, was comprised of 157 and 161 loans, respectively.
Allowance for Credit Losses
The following table presents the activity in the Company's allowance for credit losses, excluding the unfunded loan commitments, as of March 31, 2023 (dollars in thousands):
MultiFamilyRetailOfficeIndustrialMixed UseHospitalitySelf-StorageManufactured HousingTotal
December 31, 2022$21,166 $14,601 $670 $259 $47 $4,064 $10 $31 $40,848 
Changes:
General allowance/(benefit) for credit losses(1,759)(343)2,986 (205)30 1,342 45 31 2,127 
Specific allowance/(benefit) for credit losses— 835 — — — — — — 835 
Write offs against specific allowance
for credit losses		— (15,059)— — — — — — (15,059)
March 31, 2023$19,407 $34 $3,656 $54 $77 $5,406 $55 $62 $28,751 
The Company recorded an increase in its general provision for credit losses during the three months ended March 31, 2023 of $2.1 million. The primary driver for the higher reserve balance is the change in economic outlook since the end of the prior year offset slightly by the decrease in loan portfolio.
The Company identified a commercial mortgage loan, held for investment secured by a portfolio of 24 retail properties, that was assigned a risk rating of “5” due to certain conditions that negatively impacted the underlying collateral property’s cash flows. As of December 31, 2022, the specific allowance for current losses remaining was $14.2 million. During the three months ended March 31, 2023, the Company recorded an additional $0.8 million to the specific allowance for current losses and charged off the remaining $15.1 million which directly reduced the amortized cost basis of the loan. The Company's evaluation of the significant unobservable inputs to the discounted cash flow model used to approximate the fair value of the retail properties collateralizing the loan included a capitalization rate, which ranged from 5.00%-6.75%. As of March 31, 2023, the loan has a fully funded outstanding principal balance of $38.4 million and carrying value of $26.4 million which is composed of 9 remaining retail properties.
The following table presents the activity in the Company's allowance for credit losses for the unfunded loan commitments, which is included in accounts payable and accrued expenses in the consolidated balance sheets as of March 31, 2023 (dollars in thousands):
MultiFamilyRetailOfficeIndustrialMixed UseHospitalitySelf-StorageManufactured HousingTotal
December 31, 2022$165 $(36)$86 $3 $— $61 $— $1 $280 
Changes:
General allowance/(benefit) for credit losses579 36 804 — — (21)— — 1,398 
March 31, 2023$744 $— $890 $3 $— $40 $— $1 $1,678 
The following tables represent the composition by loan collateral type and region of the Company's commercial mortgage loans, held for investment portfolio (dollars in thousands):
March 31, 2023December 31, 2022
Loan Collateral Type Par Value Percentage Par ValuePercentage
Multifamily$3,851,347 75.9 %$4,030,975 76.1 %
Hospitality602,615 11.9 %510,566 9.7 %
Office328,454 6.5 %405,705 7.7 %
Retail87,102 1.7 %120,017 2.3 %
Industrial78,050 1.5 %93,035 1.8 %
Other128,642 2.5 %128,676 2.4 %
Total $5,076,210 100.0 %$5,288,974 100.0 %
March 31, 2023December 31, 2022
Loan RegionPar Value Percentage Par Value Percentage
Southeast$2,029,772 40.0 %$2,229,756 42.2 %
Southwest1,736,116 34.2 %1,763,492 33.3 %
Mideast524,930 10.3 %706,192 13.4 %
Far West197,207 3.9 %234,891 4.4 %
Great Lakes162,563 3.2 %162,162 3.1 %
Various425,622 8.4 %192,481 3.6 %
Total$5,076,210 100.0 %$5,288,974 100.0 %
As of March 31, 2023 and December 31, 2022, the Company's total commercial mortgage loans, held for sale, measured at fair value were each comprised of two loans. As of March 31, 2023 and December 31, 2022, the contractual principal outstanding of commercial mortgage loans, held for sale, measured at fair value was $15.6 million. As of March 31, 2023 and December 31, 2022, none of the Company's commercial mortgage loans, held for sale, measured at fair value were in default or greater than ninety days past due.
The following tables represent the composition by loan collateral type and region of the Company's commercial mortgage loans, held for sale, measured at fair value (dollars in thousands):
March 31, 2023December 31, 2022
Loan Collateral Type Par Value PercentagePar Value Percentage
Retail$12,000 76.8 %$12,000 76.8 %
Office3,625 23.2 %3,625 23.2 %
Total $15,625 100.0 %$15,625 100.0 %
March 31, 2023December 31, 2022
Loan RegionPar ValuePercentagePar ValuePercentage
Southeast$15,625 100.0 %$15,625 100.0 %
Loan Credit Quality and Vintage
The following tables present the amortized cost of our commercial mortgage loans, held for investment as of March 31, 2023 and December 31, 2022, by loan collateral type, the Company’s internal risk rating and year of origination. The risk ratings are updated as of March 31, 2023.
As of March 31, 2023
20232022202120202019PriorTotal
Multifamily:
Risk Rating:
1-2 internal grade$— $1,452,965 $1,990,747 $74,521 $— $— $3,518,233 
3-4 internal grade— — 242,376 10,761 — 69,742 322,879 
Total Multifamily Loans$— $1,452,965 $2,233,123 $85,282 $— $69,742 $3,841,112 
Retail:
Risk Rating:
1-2 internal grade$— $14,588 $33,897 $— $— $— $48,485 
3-4 internal grade— — — — — — — 
5 internal grade— 26,450 — — — — 26,450 
Total Retail Loans$— $41,038 $33,897 $— $— $— $74,935 
Office:
Risk Rating:
1-2 internal grade$— $— $50,667 $123,578 $58,890 $18,620 $251,755 
3-4 internal grade7,439 — — 43,085 25,761 — 76,285 
Total Office Loans$7,439 $— $50,667 $166,663 $84,651 $18,620 $328,040 
Industrial:
Risk Rating:
1-2 internal grade$— $77,813 $— $— $— $— $77,813 
3-4 internal grade— — — — — — — 
Total Industrial Loans$— $77,813 $— $— $— $— $77,813 
Hospitality:
Risk Rating:
1-2 internal grade$119,423 $139,900 $162,798 $— $49,388 $22,036 $493,545 
3-4 internal grade— — — — 28,799 78,803 107,602 
Total Hospitality Loans$119,423 $139,900 $162,798 $— $78,187 $100,839 $601,147 
Other:
Risk Rating:
1-2 internal grade$— $30,413 $54,156 $36,210 $— $— $120,779 
3-4 internal grade— — — 7,675 — — 7,675 
Total Other Loans$— $30,413 $54,156 $43,885 $— $— $128,454 
Total$126,862 $1,742,129 $2,534,641 $295,830 $162,838 $189,201 $5,051,501 
As of December 31, 2022
202220212020201920182017Total
Multifamily:
Risk Rating:
1-2 internal grade$1,511,181 $2,184,362 $74,372 $— $34,668 $— $3,804,583 
3-4 internal grade— 167,707 10,807 — 34,731 — 213,245 
Total Multifamily Loans$1,511,181 $2,352,069 $85,179 $— $69,399 $— $4,017,828 
Retail:
Risk Rating:
1-2 internal grade$22,275 $33,884 $— $— $— $— $56,159 
3-4 internal grade— — — — — — — 
5 internal grade60,304 — — — — — 60,304 
Total Retail Loans$82,579 $33,884 $— $— $— $— $116,463 
Office:
Risk Rating:
1-2 internal grade$— $50,351 $189,740 $66,110 $18,683 $— $324,884 
3-4 internal grade— — 54,533 25,748 — — 80,281 
Total Office Loans$— $50,351 $244,273 $91,858 $18,683 $— $405,165 
Industrial:
Risk Rating:
1-2 internal grade$77,762 $— $14,955 $— $— $— $92,717 
3-4 internal grade— — — — — — — 
Total Industrial Loans$77,762 $— $14,955 $— $— $— $92,717 
Hospitality:
Risk Rating:
1-2 internal grade$137,055 $160,397 $— $49,564 $22,116 $— $369,132 
3-4 internal grade32,305 — — 28,882 — 78,867 140,054 
Total Hospitality Loans$169,360 $160,397 $— $78,446 $22,116 $78,867 $509,186 
Other:
Risk Rating:
1-2 internal grade$30,418 $54,126 $36,202 $— $— $— $120,746 
3-4 internal grade— — 7,671 — — — 7,671 
Total Other Loans$30,418 $54,126 $43,873 $— $— $— $128,417 
Total$1,871,300 $2,650,827 $388,280 $170,304 $110,198 $78,867 $5,269,776 
Past Due Status
The following table presents an aging summary of the loans amortized cost basis as of March 31, 2023 (dollars in thousands):
MultifamilyRetailOfficeIndustrialMixed UseHospitalitySelf-StorageManufactured HousingTotal
Status:
Current$3,841,111 $48,485 $328,040 $77,813 $52,432 $544,072 $44,867 $31,181 $4,968,001 
1-29 days past due— — — — — — — — 
30-59 days past due— — — — — — — — — 
60-89 days past due— — — — — — — — — 
90-119 days past due— — — — — — — — — 
120+ days past due (1)
— 26,450 — — — 57,075 — — 83,525 
Total$3,841,111 $74,935 $328,040 $77,813 $52,432 $601,147 $44,867 $31,181 $5,051,526 
_________________________________________________________
(1) For the three months ended March 31, 2023, there was no interest income recognized on these loans.
Non-performing Status
The following table presents the amortized cost basis of the loans on nonaccrual status as of March 31, 2023 and December 31, 2022 (dollars in thousands):
March 31, 2023December 31, 2022
Non-performing loan amortized cost at beginning of year, January 1$117,379 $57,075 
Addition of non-performing loan amortized cost— 60,304 
Less: Removal of non-performing loan amortized cost33,854 — 
Non-performing loan amortized cost at end of period$83,525 $117,379 
As of March 31, 2023, the Company had two loans with a total amortized cost basis of $83.5 million designated as non-performing status. One loan is for a hotel property located in New York City which was placed on non-accrual status in 2019 and had an amortized cost basis of $57.1 million as of March 31, 2023. No specific allowance for credit losses has been recorded on the loan. The Company did not recognize any interest income on the non-accrual loan during the three months ended March 31, 2023. In April 2023, the New York Hotel property was sold and as a result of the sale, the Company has recovered the full principal amount of its loan (equal to the carrying cost of the loan as of December 31, 2022) and approximately $20.0 million of additional proceeds after the payment of all related closing expenses. As of December 31, 2022, the hotel property in New York City, had a carrying value of $57.1 million, designated as non-performing, and no specific allowance for credit loss was recorded for the loan.
The second loan relates to a commercial mortgage loan with a fully funded outstanding principal balance of $38.4 million and an amortized costs basis of $26.4 million collateralized by a portfolio of retail properties (the "Walgreens Portfolio") in various locations throughout the United States. The loan has been assigned a risk rating of “5” and concurrently, the Company elected to apply a practical expedient for collateral dependent assets in which a specific allowance for credit loss was determined. The loan was evaluated in accordance with ASC 310 - Receivables and was determined to be a TDR. During the three months ended March 31, 2023 the Company recorded an additional $0.8 million to the specific allowance for credit losses and charged off the remaining $15.1 million specific allowance which directly reduced the amortized cost basis of the loan. The Company designated the loan as non-performing and placed the loan on cost recovery status during the second quarter of 2022. Upon designation, the Company ceased the recognition of interest income. Any contractual amounts received are accounted for under the cost-recovery method, until the loan qualifies for return to accrual status. As of December 31, 2022, the Company had $2.6 million in cost recovery proceeds. During the three months ended March 31, 2023, the Company received $0.6 million additional cost recovery proceeds and $1.1 million was transferred to real estate owned in connection with the five properties foreclosed upon during the period. Cost recovery proceeds directly reduce the amortized cost of the loan. As of December 31, 2022, the retail portfolio had a carrying value of $46.0 million net of a specific allowance for credit losses of $14.2 million.
Credit Characteristics
As part of the Company's process for monitoring the credit quality of its commercial mortgage loans, excluding those held for sale, measured at fair value, it performs a quarterly loan portfolio assessment and assigns risk ratings to each of its loans. The loans are scored on a scale of 1 to 5 as follows:
Investment Rating
Summary Description
1
Very Low Risk - Investment exceeding fundamental performance expectations and/or capital gain expected. Trends and risk factors since time of investment are favorable.
2
Low Risk - Performing consistent with expectations and a full return of principal and interest expected. Trends and risk factors are neutral to favorable.
3
Average Risk - Performing investments requiring closer monitoring. Trends and risk factors show some deterioration.
4
High Risk/Defaulted/Potential For Loss - Underperforming investment with the potential of some interest loss but still expecting a positive return on investment. Trends and risk factors are negative.
5
Impaired/Loss Likely - Underperforming investment with expected loss of interest and some principal.
All commercial mortgage loans, excluding loans classified as commercial mortgage loans, held for sale, measured at fair value within the consolidated balance sheets, are assigned an initial risk rating of 2. As of March 31, 2023 and December 31, 2022, the weighted average risk rating of loans was 2.1 and 2.2, respectively.
The following table represents the allocation by risk rating for the Company's commercial mortgage loans, held for investment (dollars in thousands):
March 31, 2023  December 31, 2022
Risk Rating  Number of Loans  Par ValueRisk Rating  Number of Loans  Par Value
1  1   $31,450 1  —   $— 
2  133   4,491,420 2  141   4,783,568 
3  20   425,425 3  15   281,071 
4  2   89,514 4  4   160,695 
5  1   38,426 5  1   63,640 
  157   $5,076,235 161   $5,288,974 
For the three months ended March 31, 2023 and year ended December 31, 2022, the activity in the Company's commercial mortgage loans, held for investment portfolio, net of allowance for credit losses, was as follows (dollars in thousands):
Three months ended March 31, 2023Year Ended December 31, 2021
Amortized cost, Beginning of Period$5,269,776 $4,226,888 
Acquisitions and originations193,476 2,247,613 
Principal repayments(381,033)(1,109,769)
Discount accretion/premium amortization3,736 12,614 
Loans transferred from/(to) commercial real estate loans, held for sale— (9,296)
Net fees capitalized into carrying value of loans(601)(13,775)
Transfer to real estate owned(33,206)(80,460)
Cost recovery(648)(4,039)
Amortized cost, End of Period$5,051,500 $5,269,776 
Allowance for credit losses, Beginning of Period$(40,848)$(15,827)
General (provision)/benefit for credit losses(2,127)(10,797)
Specific (provision)/benefit for credit losses(835)(25,281)
Write offs from specific allowance for credit losses15,059 11,057 
Allowance for credit losses, End of Period$(28,751)$(40,848)
Balance, End of Period$5,022,749 $5,228,928 

In February 2020, the Company originated a first mortgage loan secured by an office property in Portland, OR. In February 2023, the fully committed $37.3 million senior loan was restructured as a result of financial difficulty to a $25.0 million committed senior loan. Additionally, the Company committed a $10.1 million mezzanine note. In accordance with the adoption of ASU 2022-02, we have classified the restructuring as a continuation of an existing loan on the senior loan and new loan for the mezzanine note. As of March 31, 2023, the amortized cost basis of the loan was $25.0 million on the senior loan and $7.4 million on the mezzanine note. As of December 31, 2022 and prior to modification, the senior loan had an amortized costs of $36.4 million. The Company internally rated the senior and mezzanine loans as risk rating of 4 as of March 31, 2023, and the senior loan as a 4 as of December 31, 2022.