Commercial Mortgage Loans | Commercial Mortgage Loans Commercial Mortgage Loans, Held for Investment The following table is a summary of the Company's commercial mortgage loans, held for investment, carrying values by class (dollars in thousands): June 30, 2023 December 31, 2022 Senior loans $ 5,032,536 $ 5,251,464 Mezzanine loans 29,975 18,312 Total gross carrying value of loans 5,062,511 5,269,776 General allowance for credit losses 38,932 26,624 Specific allowance for credit losses — 14,224 Less: Allowance for credit losses 38,932 40,848 Total commercial mortgage loans, held for investment, net $ 5,023,579 $ 5,228,928 For the six months ended June 30, 2023 and year ended December 31, 2022, the activity in the Company's commercial mortgage loans, held for investment carrying values, was as follows (dollars in thousands): Six Months Ended June 30, 2023 Year Ended December 31, 2022 Amortized cost, beginning of period $ 5,269,776 $ 4,226,888 Acquisitions and originations 474,380 2,247,613 Principal repayments (613,660) (1,109,769) Discount accretion/premium amortization 6,934 12,614 Loans transferred from/(to) commercial real estate loans, held for sale — (9,296) Net fees capitalized into carrying value of loans (2,038) (13,775) Transfer to real estate owned (59,655) (80,460) Cost recovery (1,333) (4,039) Principal charge-off (11,893) — Amortized cost, end of period $ 5,062,511 $ 5,269,776 Allowance for credit losses, beginning of period $ (40,848) $ (15,827) General (provision)/benefit for credit losses (12,308) (10,797) Specific (provision)/benefit for credit losses (12,728) (25,281) Write offs from specific allowance for credit losses 26,952 11,057 Allowance for credit losses, end of period $ (38,932) $ (40,848) Total commercial mortgage loans, held for investment, net $ 5,023,579 $ 5,228,928 As of June 30, 2023 and December 31, 2022, the Company's total commercial mortgage loan, held for investment portfolio, was comprised of 156 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 June 30, 2023 (dollars in thousands): MultiFamily Retail Office Industrial Mixed Use Hospitality Self-Storage Manufactured Housing Total 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 — (15,059) — — — — — — (15,059) March 31, 2023 $ 19,407 $ 34 $ 3,656 $ 54 $ 77 $ 5,406 $ 55 $ 62 $ 28,751 Changes: General provision/(benefit) for credit losses 10,328 269 (2,779) 10 — 2,321 (11) 43 10,181 Specific allowance/(benefit) for credit losses — — 11,893 — — — — — 11,893 Write offs against specific allowance — — (11,893) — — — — — (11,893) June 30, 2023 $ 29,735 $ 303 $ 877 $ 64 $ 77 $ 7,727 $ 44 $ 105 $ 38,932 The Company recorded an increase in its general provision for credit losses excluding the unfunded loan commitments during the three and six months ended June 30, 2023 of $10.2 million and $12.3 million, respectively. 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. During the year ended December 31, 2022, the Company identified a commercial mortgage loan, held for investment secured by 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. The loan was evaluated in accordance with ASC 310 - Receivables and was determined to be a TDR. As of December 31, 2022, the specific allowance for current losses remaining was $14.2 million. During the six months ended June 30, 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. As of December 31, 2022, ten retail properties were foreclosed upon and therefore transferred to real estate owned, held for investment. During the six months ended June 30, 2023, the remaining 14 retail properties were transferred to real estate owned, held for investment as a result of foreclosures and deeds-in-lieu. 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. In connection with the restructuring, the Company committed a $10.1 million mezzanine note. In accordance with the adoption of ASU 2022-02, we classified the restructuring as a continuation of an existing loan on the senior loan and new loan for the mezzanine note. During the three months ended June 30, 2023, the Company assigned the senior and mezzanine notes a risk rating of "5" and placed the loan on cost recovery status. The Company elected to apply a practical expedient for collateral dependent assets in which the allowance for credit losses is calculated as the difference between the estimated fair value of the underlying collateral, less estimated cost to sell, and the amortized cost basis of the loan. As a result, the Company recorded a specific allowance for credit losses of $11.9 million on this loan. As of June 30, 2023, the Company recorded cost recoveries of $0.7 million and charged off the specific allowance for credit losses of $11.9 million (comprised of $7.6 million on the mezzanine note and $4.3 million on the senior note), resulting in an amortized cost basis of the loan to $20.4 million. 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 June 30, 2023 (dollars in thousands): MultiFamily Retail Office Industrial Mixed Use Hospitality Self-Storage Manufactured Housing Total December 31, 2022 $ 165 $ (36) $ 86 $ 3 $ — $ 61 $ — $ 1 $ 280 Changes: General allowance/(benefit) for credit losses 579 36 804 — — (21) — — 1,398 March 31, 2023 $ 744 $ — $ 890 $ 3 $ — $ 40 $ — $ 1 $ 1,678 Changes: General provision/(benefit) for credit losses 352 2 (826) — — 23 — (1) (450) June 30, 2023 $ 1,096 $ 2 $ 64 $ 3 $ — $ 63 $ — $ — $ 1,228 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): June 30, 2023 December 31, 2022 Loan Collateral Type Par Value Percentage Par Value Percentage Multifamily $ 3,938,973 77.4 % $ 4,030,975 76.1 % Hospitality 583,744 11.5 % 510,566 9.7 % Office 326,526 6.4 % 405,705 7.7 % Retail 50,156 1.0 % 120,017 2.3 % Industrial 78,050 1.5 % 93,035 1.8 % Other 108,641 2.2 % 128,676 2.4 % Total $ 5,086,090 100.0 % $ 5,288,974 100.0 % June 30, 2023 December 31, 2022 Loan Region Par Value Percentage Par Value Percentage Southeast $ 2,116,194 41.6 % $ 2,229,756 42.2 % Southwest 1,788,685 35.2 % 1,763,492 33.3 % Mideast 562,079 11.1 % 706,192 13.4 % Far West 202,114 4.0 % 234,891 4.4 % Great Lakes 162,479 3.2 % 162,162 3.1 % Various 254,539 4.9 % 192,481 3.6 % Total $ 5,086,090 100.0 % $ 5,288,974 100.0 % Commercial Mortgage Loans, Held for Sale, Measured at Fair Value As of June 30, 2023 and December 31, 2022, the contractual principal outstanding of commercial mortgage loans, held for sale, measured at fair value was $34.3 million and $15.6 million, respectively, which were comprised of one and two loans, respectively. As of June 30, 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): June 30, 2023 December 31, 2022 Loan Collateral Type Par Value Percentage Par Value Percentage Hospitality 34,250 100.0 % — — % Retail $ — — % $ 12,000 76.8 % Office — — % 3,625 23.2 % Total $ 34,250 100.0 % $ 15,625 100.0 % June 30, 2023 December 31, 2022 Loan Region Par Value Percentage Par Value Percentage Southeast $ 34,250 100.0 % $ 15,625 100.0 % 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 described in Note 2 – Summary of Significant Accounting Policies. 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 June 30, 2023 and December 31, 2022, the weighted average risk rating of loans was 2.2 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): June 30, 2023 December 31, 2022 Risk Rating Number of Loans Par Value Risk Rating Number of Loans Par Value 1 2 $ 61,526 1 — $ — 2 127 4,343,059 2 141 4,783,568 3 22 535,339 3 15 281,071 4 4 113,204 4 4 160,695 5 1 32,962 5 1 63,640 156 $ 5,086,090 161 $ 5,288,974 Loan Credit Quality and Vintage The following tables present the amortized cost of our commercial mortgage loans, held for investment as of June 30, 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 June 30, 2023. As of June 30, 2023 2023 2022 2021 2020 2019 Prior Total Multifamily: Risk Rating: 1-2 internal grade $ 172,656 $ 1,346,198 $ 1,910,726 $ 35,451 $ — $ — $ 3,465,031 3-4 internal grade — 56,430 339,087 — — 69,603 465,120 Total Multifamily Loans $ 172,656 $ 1,402,628 $ 2,249,813 $ 35,451 $ — $ 69,603 $ 3,930,151 Retail: Risk Rating: 1-2 internal grade — 16,089 $ 33,911 $ — $ — $ — $ 50,000 Total Retail Loans $ — $ 16,089 $ 33,911 $ — $ — $ — $ 50,000 Office: Risk Rating: 1-2 internal grade $ — $ — $ 6,694 $ 122,987 $ 56,406 $ 18,557 $ 204,644 3-4 internal grade — — 44,837 17,994 25,774 — 88,605 5 internal grade — — — 20,384 — — 20,384 Total Office Loans $ — $ — $ 51,531 $ 161,365 $ 82,180 $ 18,557 $ 313,633 Office: Current-period gross charge-offs $ — $ — $ — $ 11,893 $ — $ — $ 11,893 Industrial: Risk Rating: 1-2 internal grade $ — $ 77,865 $ — $ — $ — $ — $ 77,865 Total Industrial Loans $ — $ 77,865 $ — $ — $ — $ — $ 77,865 Hospitality: Risk Rating: 1-2 internal grade $ 168,167 $ 151,668 $ 141,413 $ — $ 49,400 $ 21,956 $ 532,604 3-4 internal grade — — — — 28,068 21,668 49,736 Total Hospitality Loans $ 168,167 $ 151,668 $ 141,413 $ — $ 77,468 $ 43,624 $ 582,340 Other: Risk Rating: 1-2 internal grade $ — $ 30,463 $ 32,498 $ 1,316 $ — $ — $ 64,277 3-4 internal grade — — 6,682 37,563 — — 44,245 Total Other Loans $ — $ 30,463 $ 39,180 $ 38,879 $ — $ — $ 108,522 Total $ 340,823 $ 1,678,713 $ 2,515,848 $ 235,695 $ 159,648 $ 131,784 $ 5,062,511 As of December 31, 2022 2022 2021 2020 2019 2018 2017 Total 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 grade 60,304 — — — — — 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 grade 32,305 — — 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 June 30, 2023 (dollars in thousands): Multifamily Retail Office Industrial Mixed Use Hospitality Self-Storage Manufactured Housing Total Status: Current $ 3,930,149 $ 29,616 $ 313,632 $ 77,865 $ 52,463 $ 576,766 $ 29,885 $ 26,176 $ 5,036,552 1-29 days past due — — — — — — — — 30-59 days past due — — — — — — — — — 60-89 days past due — — — — — — — — — 90-119 days past due — — — — — — — — — 120+ days past due 5,575 (1) — 20,384 (2) — — — — — 25,959 Total $ 3,935,724 $ 29,616 $ 334,016 $ 77,865 $ 52,463 $ 576,766 $ 29,885 $ 26,176 $ 5,062,511 _________________________________________________________ (1) Subsequent to June 30, 2023, the full outstanding principal balance of $5.6 million was received. (2) For the three months ended June 30, 2023, there was no interest income recognized on this loan. Non-performing Status The following table presents the amortized cost basis of the loans on nonaccrual status as of June 30, 2023 and December 31, 2022 (dollars in thousands): June 30, 2023 December 31, 2022 Non-performing loan amortized cost at beginning of year, January 1 $ 117,379 $ 57,075 Addition of non-performing loan amortized cost 20,384 60,304 Less: Removal of non-performing loan amortized cost 117,379 — Non-performing loan amortized cost at end of period $ 20,384 $ 117,379 As of June 30, 2023, the Company had one loan with a total amortized cost basis of $20.4 million designated as non-performing status. The loan is for an office property located in Portland, OR (see discussion above under the "Allowance for Credit Losses" section). During the six months ended June 30, 2023, the Company removed two loans with a total amortized cost of $117.4 million from non-performing status. One loan was collateralized by 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 December 31, 2022. During the three months ended June 30, 2023, as a result of the sale of the hotel property, the Company recovered the full principal amount of its loan (equal to the carrying cost of the loan as of December 31, 2022) and $20.5 million of additional proceeds which was recognized in Interest income on the Company's consolidated statements of operations. The second loan which was removed from non-performing status related to a commercial mortgage loan with an amortized cost basis of $60.3 million as of December 31, 2022 collateralized by a portfolio of retail properties (the "Walgreens Portfolio") in various locations throughout the United States. The Company designated the loan as non-performing and placed the loan on cost recovery status during the second quarter of 2022 and ceased the recognition of interest income. |