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Commercial Mortgage Loans Held for Investment
9 Months Ended
Sep. 30, 2024
SEC Schedule, 12-29, Real Estate Companies, Investment in Mortgage Loans on Real Estate [Abstract]  
Commercial Mortgage Loans Held for Investment

Note 3 – Commercial Mortgage Loans Held for Investment

The following tables show a summary of the Company’s commercial mortgage loans held for investment as of September 30, 2024 and December 31, 2023:

September 30, 2024

Loan Type (1)

Number
of Loans

 

Principal
Balance

 

Unamortized (fees)/costs, net

 

Allowance for credit losses

 

Carrying
Value

 

Weighted Average
Interest Rate
(2)

 

Weighted Average
Years to Maturity
(3)

 

First mortgage loans

 

28

 

$

650,021

 

$

633

 

$

(20,009

)

$

630,645

 

 

8.4

%

 

0.5

 

Credit loans

 

2

 

 

13,380

 

 

 

 

(4,040

)

 

9,340

 

 

9.2

%

 

1.9

 

Total and average

 

30

 

$

663,401

 

$

633

 

$

(24,049

)

$

639,985

 

 

8.4

%

 

0.5

 

December 31, 2023

Loan Type (1)

Number
of Loans

 

Principal
Balance

 

Unamortized (fees)/costs, net

 

Allowance for credit losses

 

Carrying
Value

 

Weighted Average
Interest Rate
(2)

 

Weighted Average
Years to Maturity
(3)

 

First mortgage loans

 

34

 

$

729,380

 

$

972

 

$

(21,809

)

$

708,543

 

 

8.8

%

 

0.9

 

Credit loans

 

2

 

 

13,500

 

 

 

 

(40

)

 

13,460

 

 

9.6

%

 

2.4

 

Total and average

 

36

 

 

742,880

 

 

972

 

 

(21,849

)

 

722,003

 

 

8.8

%

 

0.9

 

 

 

 

(1)
First mortgage loans are first position mortgage loans and credit loans are mezzanine and subordinated loans.
(2)
Weighted average interest rate is based on the loan spreads plus the applicable indices as of the last interest reset date, which is typically the 15th of each month. On September 15, 2024, the one-month term USD Secured Overnight Financing Rate (“SOFR”) rate reset to 5.10%. On December 15, 2023, the SOFR rate reset to 5.36%. Weighted average interest rate excludes maturity default interest and interest on loans placed on nonaccrual status.
(3)
Weighted average years to maturity excludes allowable extensions on the loans.

For the nine months ended September 30, 2024, the activity in the Company’s commercial mortgage loans, held-for-investment portfolio was as follows:

 

 

Commercial mortgage loans at cost

 

 

Allowance for credit losses

 

 

Carrying Value

 

Balance at Beginning of Year

 

$

743,852

 

 

$

(21,849

)

 

$

722,003

 

Loan originations/advances

 

 

8,006

 

 

 

 

 

 

8,006

 

Principal repayments

 

 

(50,325

)

 

 

 

 

 

(50,325

)

Sale of loan (1)

 

 

(12,749

)

 

 

 

 

 

(12,749

)

Amortization of loan origination and deferred exit fees

 

 

443

 

 

 

 

 

 

443

 

Origination fees and extension fees received on commercial loans

 

 

(782

)

 

 

 

 

 

(782

)

Transfer on foreclosure to real estate owned (2)

 

 

(24,411

)

 

 

 

 

 

(24,411

)

Provision for credit losses

 

 

 

 

 

(3,055

)

 

 

(3,055

)

Charge-offs (2)

 

 

 

 

 

855

 

 

 

855

 

Balance at End of Period

 

$

664,034

 

 

$

(24,049

)

 

$

639,985

 

 

 

(1)
Relates to sale of a loan at par. The loan was placed on nonaccrual status as of February 1, 2024 and any subsequent cash collected was being applied to the principal balance. The Company completed the sale of the loan in September 2024 and recognized a gain on sale of $929 on the loan.
(2)
Relates to acquisition of two properties secured by a senior loan in July 2024. See Note 13 - “Real Estate Owned” for additional information.

Allowance for Credit Losses

The following table presents the activity in the Company’s allowance for credit losses for the nine months ended September 30, 2024:

 

 

Commercial Mortgage Loans

 

 

Unfunded Loan Commitments (1)

 

 

Total

 

Balance at beginning of period

 

$

(21,849

)

 

$

(289

)

 

$

(22,138

)

(Provision for) reversal of credit losses

 

 

(3,055

)

 

 

150

 

 

 

(2,905

)

Charge-offs (2)

 

 

855

 

 

 

 

 

 

855

 

Ending allowance for credit losses

 

$

(24,049

)

 

$

(139

)

 

$

(24,188

)

 

(1)
The reserve for expected credit losses related to unfunded loan commitments is recorded in “accrued expenses and other liabilities” on the consolidated balance sheets following the adoption of ASU 2016-13 on January 1, 2023.
(2)
Relates to acquisition of two properties secured by a senior loan in July 2024. See Note 13 - “Real Estate Owned” for additional information.

The following table presents the activity in the Company’s allowance for credit losses for the nine months ended September 30, 2023:

 

 

Commercial Mortgage Loans

 

 

Unfunded Loan Commitments (1)

 

 

Total

 

Balance at beginning of period

 

$

(3,588

)

 

$

 

 

$

(3,588

)

Adoption of ASU 2016-13

 

 

(4,787

)

 

 

(335

)

 

 

(5,122

)

Balance at beginning of period after adoption

 

 

(8,375

)

 

 

(335

)

 

 

(8,710

)

Provision for credit losses

 

(13,715

)

 

 

12

 

 

 

(13,703

)

Charge-offs (2)

 

3,483

 

 

 

 

 

 

3,483

 

Ending allowance for credit losses

$

(18,607

)

 

$

(323

)

 

$

(18,930

)

 

(1)
The reserve for expected credit losses related to unfunded loan commitments is recorded in “accrued expenses and other liabilities” on the consolidated balance sheets following the adoption of ASU 2016-13 on January 1, 2023.
(2)
Relates to sale of a loan during the third quarter of 2023.

As of September 30, 2024, the Company had a total CECL reserve of $24,188, which included an asset-specific component of $16,754 related to five loans. During the nine months ended September 30, 2024, the Company increased the CECL reserve by $2,905 and reduced the CECL reserve by $855 with the charge-off of one loan. This CECL reserve reflects certain loans assessed for impairment in the Company’s portfolio as well as reserves determined based on an analysis of macroeconomic conditions. See “Asset-Specific CECL Reserve” section below for further discussion on the loans with asset-specific CECL reserve.

As of September 30, 2023 the Company had a total CECL reserve of $18,930, which included an asset-specific component of $12,709 related to four loans. During the nine months ended September 30, 2023, the Company increased the CECL reserve by $18,825, which included $5,122 from adoption of ASU 2016-13 and $13,703 in provision for credit losses and reduced CECL reserve by $3,483 with the charge-off of one loan, bringing the total CECL reserve to $18,930. This CECL reserve reflects certain loans assessed for impairment in the Company’s portfolio as well as reserves determined based on an analysis of macroeconomic conditions. See “Asset-Specific CECL Reserve” section below for further discussion on the loans with asset-specific CECL reserve.

Credit Characteristics

As part of the Company’s process for monitoring the credit quality of its investments, it performs a quarterly asset review of the investment portfolio and assigns risk ratings to each of its loans and certain securities it may own, such as CMBS. Risk factors include payment status, lien position, borrower financial resources and investment in collateral, collateral type, project economics and geographic location, as well as national and regional economic factors. To determine the likelihood of loss, the loans are rated on a 5-point scale as follows:

 

Investment

Grade

Investment Grade Definition

1

Investment exceeding fundamental performance expectations and/or capital gain expected. Trends and risk factors since time of investment are favorable.

2

Performing consistent with expectations and a full return of principal and interest expected. Trends and risk factors are neutral to favorable.

3

Performing investment requiring closer monitoring. Trends and risk factors show some deterioration. Collection of principal and interest is still expected.

4

Underperforming investment with the potential of some interest loss but still expecting a positive return on investment. Trends and risk factors are negative.

5

Underperforming investment with expected loss of interest and some principal.

All investments are assigned an initial risk rating of 2 at origination or acquisition.

As of September 30, 2024, 17 loans had a risk rating of 2, seven had a risk rating of 3, four had a risk rating of 4 and two had a risk rating of 5. As of December 31, 2023, 24 loans had a risk rating of 2, seven had a risk rating of 3, three had a risk rating of 4 and two had a risk rating of 5.

Asset-Specific CECL Reserve

The table below provides the components of the asset-specific CECL reserve as of September 30, 2024, December 31, 2023 and September 30, 2023:

Loan Type

Collateral Type

September 30, 2024

 

December 31, 2023

 

September 30, 2023

 

 

Senior

 Office

$

 

$

2,621

 

$

2,448

 

(1)

Senior

 Office

 

 

 

3,603

 

 

3,692

 

(2)

Senior

 Multifamily

 

9,884

 

 

7,073

 

 

4,485

 

(3)

Senior

 Office

 

 

 

2,969

 

 

2,084

 

(4)

Credit

 Office

 

4,000

 

 

 

 

 

(5)

Senior

 Office

 

806

 

 

 

 

 

(6)

Senior

 Office

 

513

 

 

 

 

 

(7)

Senior

 Multifamily

 

1,551

 

 

 

 

 

(8)

Total

 

$

16,754

 

$

16,266

 

$

12,709

 

 

____________

 

 

 

 

 

 

 

 

(1)
The loan was secured by two office properties in Addison, TX with an outstanding balance of $24,411 and no unfunded commitment as of June 30, 2024. The loan had been in maturity default since September 9, 2023. The Company foreclosed on the two properties securing the loan in the quarter ended September 30, 2024. The Company intends to hold these properties as real estate held for use with the intent to eventually sell when the properties and market improve.
(2)
The loan is secured by an office property in Charlotte, NC with an outstanding balance of $22,897, no unfunded commitment and a maturity date of October 9, 2025. During the quarter ended September 30, 2024, the Company observed an increase in the in-place net operating income and other macroeconomic improvements which resulted in an improvement in the estimated value of the property. As the estimated value exceeded the loan balance, the asset-specific CECL reserve was reversed. The loan has a risk rating of 4 as of September 30, 2024.
(3)
The loan is secured by a multifamily property in Portland, OR with an outstanding balance of $29,476 and no unfunded commitment. The loan was extended in December 2023 to May 9, 2024 to provide the sponsor time to stabilize the rent roll and eventually sell the property. The Company established an interest reserve through maturity that was added to the principal balance in the amount of $1,750. The borrower was unable to sell the property or pay-off the loan at maturity. As of September 30, 2024, the loan was on nonaccrual status, the Company had recorded an asset-specific CECL reserve of $9,884 and the loan has a risk rating of 5. On October 23, 2024, the Company foreclosed on the property securing the loan. The Company intends to hold the property as real estate held for use with the intent to eventually sell when the property and market improve.
(4)
The loan was secured by an office property in Reston, VA with an outstanding loan balance of $13,113 and no unfunded commitment as of June 30, 2024, and a maturity date of March 9, 2024. The Company was unsuccessful in negotiating a loan
extension with the sponsor. The loan was placed on nonaccrual status as of February 1, 2024. During June 2024, the Company received a letter of intent to purchase the loan at par plus a portion of accrued interest. The Company completed the sale of the loan in September 2024 recognizing a gain of $929.
(5)
The loan is secured by an office property in Las Vegas, NV with an outstanding balance of $5,880, no unfunded commitment and a maturity date of October 6, 2024 for which the Company has recorded an asset-specific CECL reserve of $4,000 as of September 30, 2024. The office property has a single tenant that will possibly vacate the property at the end of its lease term, which is after the loan maturity date. The Company has negotiated a possible settlement with the borrower which is reflected in the asset-specific CECL reserve. The loan has a risk rating of 5 as of September 30, 2024 and has been on nonaccrual status since July 1, 2024.
(6)
The loan is secured by an office property in Memphis, TN with an outstanding balance of $7,934, an unfunded commitment of $495 and a maturity date of November 9, 2024. The Company has recorded an asset-specific CECL reserve of $806 as of September 30, 2024 as the estimated value of the property securing the loan was below the loan balance. The loan has a risk rating of 4 as of September 30, 2024.
(7)
The loan is secured by an office property in San Diego, CA with an outstanding balance of $13,626 and an unfunded commitment of $669. The loan matures on October 9, 2024 and the Company extended the loan for one year on October 23, 2024. The Company has recorded an asset-specific CECL reserve of $513 as of September 30, 2024 as the estimated value of the property securing the loan was below the loan balance. The loan has a risk rating of 3 as of September 2024.
(8)
The loan is secured by a multifamily property in Arlington, TX with an outstanding balance of $24,581, an unfunded commitment of $469 and a maturity date of December 9, 2024. The Company has recorded an asset-specific CECL reserve of $1,551 as of September 30, 2024 as the estimated value of the property securing the loan was below the loan balance. The loan has a risk rating of 3 as of September 30, 2024.

During the three and nine months ended September 30, 2024, the Company recognized $0 and $426, respectively, in interest income related to the nonaccrual status loans. During the three and nine months ended September 30, 2023, the Company recognized $533 and $1,727, respectively, in interest income related to the nonaccrual status loan. During the three and nine months ended September 30, 2024 and 2023, there was no reversal of interest income as a result of placing the loans on nonaccrual status. For the three and nine months ended September 30, 2024, the total interest income forgone on the loans on nonaccrual status was $1,205 and $4,287, respectively. For the three and nine months ended September 30, 2023, the total interest income forgone on the loans on nonaccrual status was $402.

Loan Modifications

The Company may amend or modify a loan based on its specific facts and circumstances. These modifications are often in the form of a term extension to provide the borrower additional time to refinance or sell the collateral property in order to repay the principal balance of the loan. Such extensions are generally made at the loan’s contractual interest rate and may require an extension fee be paid to the Company. During the three months ended September 30, 2024, the Company made no such modifications which are disclosable under ASU 2022-02, Troubled Debt Restructurings and Vintage Disclosures (“ASU 2022-02”). During the nine months ended September 30, 2024, the Company made one such modification which is disclosable under ASU 2022-02, as it was considered an other-than-insignificant payment delay for a borrower experiencing financial difficulty. In this instance, the Company granted a two-year term extension, which can be further extended by one year subject to certain terms and conditions, for a senior loan secured by an office property located in Charlotte, NC described above. The Company waived maturity default interest of $738 on the loan. No principal was forgiven as a result of the modification. The modification provides for payment-in-kind of any accrued interest that exceeds a per annum rate of 4%. The loan’s modified terms were included in the determination of the CECL reserve. The loan had an amortized cost basis of $22,897, representing 3.6% of the Company’s commercial mortgage loans as of September 30, 2024. During the three and nine months ended September 30, 2023, the Company made no such modifications which are disclosable under ASU 2022-02.