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Loans and Preferred Equity Held for Investment, net
 9 Months Ended
Sep. 30, 2019
Receivables [Abstract]  
Loans and Preferred Equity Held for Investment, net
Loans and Preferred Equity Held for Investment, net
The following table provides a summary of the Company’s loans and preferred equity held for investment, net (dollars in thousands):
 
 
September 30, 2019
 
December 31, 2018
 
 
Unpaid Principal Balance
 
Carrying
Value
 
Weighted Average Coupon(1)
 
Weighted Average Maturity in Years
 
Unpaid Principal Balance
 
Carrying
Value
 
Weighted Average Coupon(1)
 
Weighted Average Maturity in Years
Fixed rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mezzanine loans
 
$
224,597

 
$
223,868

 
12.6
%
 
4.4
 
$
175,448

 
$
174,830

 
12.7
%
 
4.9
Preferred equity interests
 
115,973

 
115,877

 
12.5
%
 
7.1
 
113,860

 
113,687

 
12.6
%
 
7.7
Other loans(2)
 
11,333

 
11,197

 
15.0
%
 
4.7
 
15,000

 
15,000

 
16.0
%
 
0.5
 
 
351,903

 
350,942

 
 
 
 
 
304,308

 
303,517

 
 
 
 
Variable rate
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Senior loans
 
2,417,097

 
2,407,618

 
5.8
%
 
4.2
 
1,432,416

 
1,430,635

 
6.3
%
 
4.2
Securitized loans(3)
 
—

 
—

 
—
%
 
0.0
 
302,868

 
305,106

 
7.9
%
 
1.1
Mezzanine loans
 
40,698

 
40,845

 
11.1
%
 
2.4
 
90,265

 
90,567

 
12.2
%
 
2.0
 
 
2,457,795

 
2,448,463

 
 
 
 
 
1,825,549

 
1,826,308

 
 
 
 
 
 
2,809,698

 
2,799,405

 
 
 
 
 
2,129,857

 
2,129,825

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Allowance for loan losses(4)
 
NA

 
(283,208
)
 
 
 
 
 
NA

 
(109,328
)
 
 
 
 
Loans and preferred equity held for investment, net
 
$
2,809,698

 
$
2,516,197

 
 
 
 
 
$
2,129,857

 
$
2,020,497

 
 
 
 
_________________________________________
(1)
Calculated based on contractual interest rate.
(2)
Includes one corporate term loan secured by the borrower’s limited partnership interests in a fund.
(3)
Represents loans transferred into securitization trusts that are consolidated by the Company.
(4)
At December 31, 2018, allowance for loan losses does not include $5.1 million of provision for loan loss associated with a receivable for operating expenses paid by the Company on the borrower’s behalf in connection with four loans for which the Company took ownership of the underlying collateral in January 2019.
As of September 30, 2019, the weighted average maturity, including extensions, of loans and preferred equity investments was 4.3 years.
The Company had $8.6 million and $8.6 million of interest receivable related to its loans and preferred equity held for investment, net as of September 30, 2019 and December 31, 2018, respectively.
Activity relating to the Company’s loans and preferred equity held for investment, net was as follows (dollars in thousands):
 
 
Carrying Value
Balance at January 1, 2019
 
$
2,020,497

Acquisitions/originations/additional funding
 
1,250,018

Loan maturities/principal repayments
 
(419,906
)
Foreclosure of loans held for investment
 
(174,048
)
Discount accretion/premium amortization
 
4,211

Capitalized interest
 
9,304

Change in allowance for loan loss
 
(173,879
)
Balance at September 30, 2019
 
$
2,516,197


Nonaccrual and Past Due Loans and Preferred Equity
Loans and preferred equity that are 90 days or more past due as to principal or interest, or where reasonable doubt exists as to timely collection, are generally considered nonperforming and placed on nonaccrual status. At September 30, 2019, other than the NY hospitality loans discussed below, all other loans and preferred equity held for investment remain current on interest payments.
In March 2018, the borrower on the Company’s four NY hospitality loans in its Legacy, Non-Strategic Portfolio failed to make all required interest payments and the loans were placed on nonaccrual status. These four loans are secured by the same collateral.
The Company believes ultimate sale of the underlying collateral and repayment of the loans from the sales proceeds is the most likely outcome. During 2018, the Company recorded $53.8 million of provision for loan losses to reflect the estimated value to be recovered from the borrower following a sale. During the three and nine months ended September 30, 2019, the Company recorded additional provision for loan loss of $50.0 million and $154.3 million, respectively, based on significant deterioration in the NY hospitality market, feedback from the sales process and the estimated value to be recovered from the borrower following a potential sale.
Within its Legacy, Non-Strategic Portfolio, the Company holds seven loans to five separate borrowers, all secured by regional malls. While these loans are current on interest payments and not in default of loan covenants, given the ongoing challenges and deterioration of the retail market, the Company has been monitoring the estimated fair value of each loan’s underlying collateral. As a result, the Company has recognized the loan loss provisions where it does not expect full principal payment upon maturity, as follows:
•
During 2018, the Company recorded $23.8 million of provision for loan losses for two separate borrowers on three of the Company’s regional mall loans that are secured by two regional malls (“Northeast Regional Mall A” and “Northeast Regional Mall B”) to reflect the estimated fair value of the collateral. In June 2019, the Company completed foreclosure proceedings on two loans secured by Northeast Regional Mall A with unpaid principal balances of $36.9 million. See Note 7, “Real estate, net and Real Estate Held for Sale” for further information.
•
During the three and nine months ended September 30, 2019, the Company recognized additional provisions for loan loss of $6.5 million and $10.5 million, respectively, on Northeast Regional Mall B. The additional provisions are based on current and prospective leasing activity to reflect the estimated fair value of the collateral. Interest payments are current and the Company has been and is continuing to sweep all cash.
•
Also, during three and nine months ended September 30, 2019, the Company separately recognized provisions for loan loss of $16.5 million and $18.5 million, respectively, on two loans secured by one regional mall (“West Regional Mall”) to reflect the estimated fair value of the collateral. Interest payments are current and the Company has been and is continuing to sweep all cash.
•
Furthermore, during the three months ended September 30, 2019, the Company recognized a $37.3 million provision for loan loss on four loans to three separate borrowers (“South Regional Mall A”, “South Regional Mall B”, and “Midwest Regional Mall”) to reflect the estimated fair value of the collateral. Interest payments for South Regional Mall A, South Regional Mall B and Midwest Regional Mall are all current. The Company has been and is continuing to sweep all cash related to South Regional Mall A and South Regional Mall B.
The following table provides an aging summary of loans and preferred equity held for investment at carrying values before allowance for loan losses, if any (dollars in thousands):
 
 
Current or Less Than 30 Days Past Due
 
30-59 Days Past Due
 
60-89 Days Past Due
 
90 Days or More Past Due(1)
 
Total Loans
September 30, 2019
 
$
2,541,276

 
$
—

 
$
—

 
$
258,129

 
$
2,799,405

December 31, 2018
 
1,632,817

 
58,751

 
42,995

 
395,262

 
2,129,825

_________________________________________
(1)
At September 30, 2019, 90 days or more past due loans includes four loans to the same borrower and secured by the same collateral with combined carrying value before allowance for loan losses of $258.1 million on nonaccrual status. All other loans in this table remain current on interest payments.
Troubled Debt Restructuring
During the three and nine months ended September 30, 2019, there were no loans modified as TDRs.
At September 30, 2019, the Company did not have any TDR loans. At December 31, 2018, there was one mezzanine loan previously modified in a TDR with carrying value before allowance for loan losses of $28.6 million. At December 31, 2018, the Company also had three other loans with a combined carrying value before provision for loan loss of $108.5 million that are cross-collateralized with the TDR loan to the same borrower. All three loans were in default at December 31, 2018. All four loans were cross-collateralized with 28 office, retail, multifamily and industrial properties. The Company recorded a $31.7 million provision for loan loss on the four loans and an additional $5.1 million provision for loan loss associated with a receivable for operating expenses paid on behalf of the borrower during the year ended December 31, 2018.
The Company completed foreclosure proceedings under the mezzanine loan to take control of the 28 cross-collateralized properties in January 2019. To improve the operating performance of the 28 properties, the Company has engaged new property managers,
working under the oversight of its asset management team. See Note 7 “Real Estate, net and Real Estate Held for Sale” for further discussion.
Impaired Loans
Loans are identified as impaired when it is no longer probable that interest or principal will be collected according to the contractual terms of the original loan agreement. Impaired loans include predominantly loans under nonaccrual, performing and nonperforming TDRs, as well as loans in maturity default. The following table presents impaired loans at the respective reporting dates (dollars in thousands):
 
 
Unpaid Principal Balance(1)
 
Gross Carrying Value
 
 
 
 
 
With Allowance for Loan Losses(2)
 
Without Allowance for Loan Losses
 
Total(2)
 
Allowance for Loan Losses(3)
September 30, 2019
 
$
392,109

 
$
393,448

 
$
—

 
$
393,448

 
$
283,208

December 31, 2018
 
456,703

 
458,942

 
—

 
458,942

 
109,328


_________________________________________
(1)
At September 30, 2019, includes four loans to the same borrower and secured by the same collateral with combined unpaid principal balance of $257.2 million and gross carrying value of $258.1 million on nonaccrual status. All other loans included in this table remain current on interest payments.
(2)
Includes unpaid principal balance plus any applicable exit fees less net deferred loan fees.
(3)
At December 31, 2018, allowance for loan losses does not include $5.1 million of provision for loan loss associated with a receivable for operating expenses paid by the Company on the borrower’s behalf in connection with four loans for which the Company took possession of the underlying collateral in January 2019.
The average carrying value and interest income recognized on impaired loans were as follows (dollars in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2019
 
2018
 
2019
 
2018
Average carrying value before allowance for loan losses
 
$
356,753

 
$
480,547

 
$
426,195

 
$
407,835

Interest income
 
2,737

 
5,886

 
8,282

 
16,541


Allowance for Loan Losses
As of September 30, 2019, the allowance for loan losses was $283.2 million related to $393.4 million in carrying value of loans. As of December 31, 2018, the allowance for loan losses was $109.3 million related to $458.9 million in carrying value of loans.
Changes in allowance for loan losses on loans are presented below (dollars in thousands):
 
 
Nine Months Ended September 30,
 
 
2019
 
2018
Allowance for loan losses at beginning of period
 
$
109,328

 
$
517

Provision for loan losses
 
220,572

 
35,059

Charge-off
 
(46,692
)
 
—

Recoveries
 
—

 
(517
)
Allowance for loan losses at end of period
 
$
283,208

 
$
35,059


Credit Quality Monitoring
Loan and preferred equity investments are typically loans secured by direct senior priority liens on real estate properties or by interests in entities that directly own real estate properties, which serve as the primary source of cash for the payment of principal and interest. The Company evaluates its loan and preferred equity investments at least quarterly and differentiates the relative credit quality principally based on: (i) whether the borrower is currently paying contractual debt service in accordance with its contractual terms; and (ii) whether the Company believes the borrower will be able to perform under its contractual terms in the future, as well as the Company’s expectations as to the ultimate recovery of principal at maturity.
As of September 30, 2019, there were four loans to one borrower with contractual payments past due, which represent the NY hospitality loans in our Legacy, Non-Strategic Portfolio previously discussed. The remaining loans and preferred equity investments were performing in accordance with the contractual terms of their governing documents and were categorized as performing loans. There were 13 loans held for investment with contractual payments past due as of December 31, 2018. For the nine months ended September 30, 2019, no debt investment contributed more than 10.0% of interest income.
Lending Commitments
The Company has lending commitments to borrowers pursuant to certain loan agreements in which the borrower may submit a request for funding contingent on achieving certain criteria, which must be approved by the Company as lender, such as leasing, performance of capital expenditures and construction in progress with an approved budget. At September 30, 2019, assuming the terms to qualify for future fundings, if any, have been met, total unfunded lending commitments was $251.5 million. Refer to Note 17, “Commitments and Contingencies” for further details.