UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended March 31, 2013

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Commission file number 001-34436

 


 

Starwood Property Trust, Inc.

(Exact name of registrant as specified in its charter)

 

Maryland

 

27-0247747

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

591 West Putnam Avenue

 

 

Greenwich, Connecticut

 

06830

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code:

(203) 422-8100

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer”, “large accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

 

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of May 7, 2013 was 166,175,195.

 

 

 



 

Special Note Regarding Forward Looking Statements

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including without limitation, statements concerning our operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are developed by combining currently available information with our beliefs and assumptions and are generally identified by the words “believe,” “expect,” “anticipate” and other similar expressions. Forward-looking statements do not guarantee future performance, which may be materially different from that expressed in, or implied by, any such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

 

These forward-looking statements are based largely on our current beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or within our control, and which could materially affect actual results, performance or achievements. Factors that may cause actual results to vary from our forward-looking statements include, but are not limited to:

 

·                  factors described in our Annual Report on Form 10-K for the year ended December 31, 2012 and in this Form 10-Q for the quarter ended March 31, 2013, including those set forth under the captions “Risk Factors” and “Business”;

 

·                  defaults by borrowers in paying debt service on outstanding items;

 

·                  impairment in the value of real estate property securing our loans;

 

·                  availability of mortgage origination and acquisition opportunities acceptable to us;

 

·                  the Company’s ability to integrate the segments of LNR Property LLC, a Delaware limited liability company (“LNR”), which were acquired on April 19, 2013, into our business and achieve the benefits that the we  anticipate from this acquisition;

 

·                  potential mismatches in the timing of asset repayments and the maturity of the associated financing agreements;

 

·                  national and local economic and business conditions;

 

·                  general and local commercial real estate property conditions;

 

·                  changes in federal government policies;

 

·                  changes in federal, state and local governmental laws and regulations;

 

·                  increased competition from entities engaged in mortgage lending;

 

·                  changes in interest rates; and

 

·                  the availability of and costs associated with sources of liquidity.

 

In light of these risks and uncertainties, there can be no assurances that the results referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact occur. Except to the extent required by applicable law or regulation, we undertake no obligation to, and expressly disclaim any such obligation to, update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, changes to future results over time or otherwise.

 

2



 

PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Balance Sheets

(Unaudited, amounts in thousands, except share data)

 

 

 

As of
March 31, 2013

 

As of
December 31, 2012

 

Assets:

 

 

 

 

 

Cash and cash equivalents

 

$

173,074

 

$

177,671

 

Restricted cash

 

41,469

 

3,429

 

Loans held for investment, net

 

2,530,489

 

2,914,434

 

Loans held-for-sale

 

378,690

 

 

Loans transferred as secured borrowings

 

85,763

 

85,901

 

Mortgage-backed securities, available-for-sale, at fair value

 

635,533

 

862,587

 

Securities, held to maturity

 

37,190

 

 

Other investments

 

430,044

 

221,983

 

Accrued interest receivable

 

20,500

 

24,120

 

Receivable for securities sold

 

206,608

 

 

Derivative assets

 

14,933

 

9,227

 

Other assets

 

56,675

 

25,021

 

Total Assets

 

$

4,610,968

 

$

4,324,373

 

Liabilities and Equity

 

 

 

 

 

Liabilities:

 

 

 

 

 

Accounts payable and accrued expenses

 

$

18,738

 

$

8,890

 

Related-party payable

 

11,110

 

1,803

 

Dividends payable

 

60,147

 

73,796

 

Derivative liabilities

 

17,468

 

27,770

 

Secured financing agreements, net

 

1,027,820

 

1,305,812

 

Convertible senior notes, net

 

560,423

 

 

Loan transfer secured borrowings

 

87,523

 

87,893

 

Other liabilities

 

47,340

 

21,204

 

Total Liabilities

 

1,830,569

 

1,527,168

 

Commitments and contingencies (Note 16)

 

 

 

 

 

Equity:

 

 

 

 

 

Starwood Property Trust, Inc. Stockholders’ Equity:

 

 

 

 

 

Preferred stock, $0.01 per share, 100,000,000 shares authorized, no shares issued and outstanding

 

 

 

Common stock, $0.01 per share, 500,000,000 shares authorized, 136,326,045 issued and 135,700,195 outstanding as of March 31, 2013 and 136,125,356 issued and 135,499,506 outstanding as of December 31, 2012

 

1,363

 

1,361

 

Additional paid-in capital

 

2,754,491

 

2,721,353

 

Treasury stock (625,850 shares)

 

(10,642

)

(10,642

)

Accumulated other comprehensive income

 

70,544

 

79,675

 

Accumulated deficit

 

(70,305

)

(72,401

)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

2,745,451

 

2,719,346

 

Non-controlling interests in consolidated subsidiaries

 

34,948

 

77,859

 

Total Equity

 

2,780,399

 

2,797,205

 

Total Liabilities and Equity

 

$

4,610,968

 

$

4,324,373

 

 

See notes to condensed consolidated financial statements.

 

3



 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Operations

(Unaudited, amounts in thousands, except per share data)

 

 

 

For the Three-Months
Ended March 31,

 

 

 

2013

 

2012

 

Net interest margin:

 

 

 

 

 

Interest income from mortgage-backed securities

 

$

15,428

 

$

8,675

 

Interest income from loans

 

67,765

 

69,077

 

Interest expense

 

(16,987

)

(11,852

)

Net interest margin

 

66,206

 

65,900

 

Expenses:

 

 

 

 

 

Management fees (including $4,508 and $3,649 for the three-months ended March 31, 2013 and 2012, respectively, of non-cash stock-based compensation)

 

14,275

 

15,167

 

Business combination costs

 

4,391

 

 

Investment pursuit costs

 

81

 

861

 

General and administrative (including $148 and $116 for the three-months ended March 31, 2013 and 2012, respectively, of non-cash stock-based compensation)

 

4,286

 

3,023

 

Loan loss allowance

 

30

 

 

Total expenses

 

23,063

 

19,051

 

Income before other income (expense) and income taxes

 

43,143

 

46,849

 

Other (expense) income

 

(1,726

)

803

 

Other-than-temporary impairment (“OTTI”), net of $485 and $1,439 recognized in other comprehensive income (loss) for the three-months ended March 31, 2013 and 2012, respectively

 

(42

)

(656

)

Net gains on sales of investments

 

13,859

 

7,333

 

Net realized foreign currency (losses) gains

 

(239

)

8,834

 

Net gains (losses) on currency derivatives

 

16,078

 

(6,257

)

Net gains on interest rate derivatives

 

150

 

566

 

Net change in unrealized (losses) on loans held-for-sale at fair value

 

 

(5,760

)

Unrealized gain on securities

 

405

 

 

Unrealized foreign currency remeasurement losses

 

(7,427

)

(1,025

)

Income before income taxes

 

64,201

 

50,687

 

Income tax provision

 

777

 

399

 

Net Income

 

63,424

 

50,288

 

Net income attributable to non-controlling interests

 

(1,181

)

(129

)

Net income attributable to Starwood Property Trust, Inc.

 

$

62,243

 

$

50,159

 

Net income per share of common stock:

 

 

 

 

 

Basic

 

$

0.46

 

$

0. 53

 

Diluted

 

$

0.46

 

$

0. 53

 

 

 

 

 

 

 

Distributions declared per common share

 

$

0.44

 

$

0. 44

 

 

See notes to condensed consolidated financial statements.

 

4



 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, amounts in thousands)

 

 

 

For the Three-Months
Ended March 31,

 

 

 

2013

 

2012

 

Net Income

 

$

63,424

 

$

50,288

 

Other comprehensive income (net change by component):

 

 

 

 

 

Cash flow hedges

 

279

 

(252

)

Unrealized gain (loss) on available-for-sale securities

 

(2,349

)

15,113

 

Foreign currency remeasurement

 

(7,061

)

 

Other comprehensive income

 

(9,131

)

14,861

 

Comprehensive income

 

54,293

 

65,149

 

Less: Comprehensive income attributable to non-controlling interests

 

(1,181

)

(129

)

Comprehensive income attributable to Starwood Property Trust, Inc.

 

$

53,112

 

$

65,020

 

 

See notes to condensed consolidated financial statements.

 

5



 

Starwood Property Trust, Inc. and Subsidiaries

 

Condensed Consolidated Statements of Equity

(Unaudited, amounts in thousands, except share data)

 

 

 

Common Stock

 

Additional

 

 

 

 

 

 

 

Accumulated
Other
Comprehensive

 

Total
Starwood
Property
Trust, Inc.

 

Non-

 

 

 

 

 

 

 

Par

 

Paid-In

 

Treasury Stock

 

Accumulated

 

Income

 

Stockholders’

 

Controlling

 

Total

 

 

 

Shares

 

Value

 

Capital

 

Shares

 

Amount

 

Deficit

 

(Loss)

 

Equity

 

Interests

 

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2012

 

93,811,351

 

$

 938

 

$

 1,828,319

 

625,850

 

$

 (10,642

)

$

 (55,129

)

$

 (3,998

)

$

 1,759,488

 

$

 5,659

 

$

 1,765,147

 

Convertible senior notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

193,541

 

2

 

3,763

 

 

 

 

 

 

 

 

 

3,765

 

 

 

3,765

 

Manager incentive fee paid in stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

50,159

 

 

 

50,159

 

129

 

50,288

 

Dividends declared, $0.44 per share

 

 

 

 

 

 

 

 

 

 

 

(41,439

)

 

 

(41,439

)

 

 

(41,439

)

Other comprehensive loss, net

 

 

 

 

 

 

 

 

 

 

 

 

 

14,861

 

14,861

 

 

 

14,861

 

Distribution to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(191

)

(191

)

Balance, March 31, 2012

 

94,004,892

 

$

 940

 

$

 1,832,082

 

625,850

 

$

 (10,642

)

$

 (46,409

)

$

 10,863

 

$

 1,786,834

 

$

 5,597

 

$

1,792,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, January 1, 2013

 

136,125,356

 

$

 1,361

 

$

 2,721,353

 

625,850

 

$

 (10,642

)

$

 (72,401

)

$

 79,675

 

$

 2,719,346

 

$

 77,859

 

$

 2,797,205

 

Convertible senior notes

 

 

 

 

 

28,118

 

 

 

 

 

 

 

 

 

28,118

 

 

 

28,118

 

Stock-based compensation

 

187,501

 

2

 

4,654

 

 

 

 

 

 

 

 

 

4,656

 

 

 

4,656

 

Manager incentive fee paid in stock

 

13,188

 

 

 

366

 

 

 

 

 

 

 

 

 

366

 

 

 

366

 

Net income

 

 

 

 

 

 

 

 

 

 

 

62,243

 

 

 

62,243

 

1,181

 

63,424

 

Dividends declared, $0.44 per share

 

 

 

 

 

 

 

 

 

 

 

(60,147

)

 

 

(60,147

)

 

 

(60,147

)

Other comprehensive income, net

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,131

)

(9,131

)

 

 

(9,131

)

Contribution from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 

6

 

Distribution to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(44,098

)

(44,098

)

Balance, March 31, 2013

 

136,326,045

 

$

 1,363

 

$

 2,754,491

 

625,850

 

$

 (10,642

)

$

(70,305

)

$

70,544

 

$

2,745,451

 

$

 34,948

 

$

2,780,399

 

 

See notes to condensed consolidated financial statement

 

6



 

Starwood Property Trust, Inc. and Subsidiaries

 

Consolidated Statements of Cash Flows

(Amounts in thousands)

 

 

 

For the Three-Months Ended March 31,

 

 

 

2013

 

2012

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net income

 

$

63,424

 

$

50,288

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Amortization of deferred financing costs

 

3,193

 

1,132

 

Amortization of net convertible debt discount and deferred fees

 

841

 

 

Accretion of net discount on mortgage-backed securities (MBS)

 

(9,180

)

(5,616

)

Accretion of net deferred loan fees and discounts

 

(7,856

)

(21,622

)

Accretion of premium from loan transfer secured borrowings

 

(374

)

(221

)

Stock-based compensation

 

4,656

 

3,765

 

Incentive-fee compensation

 

366

 

 

Gain on sale of available-for-sale securities

 

(13,157

)

(46

)

Gain on sale of loans

 

 

(7,287

)

Gain on foreign currency remeasurement

 

(37

)

(9,146

)

Gain on sale of real estate assets

 

(335

)

 

Gain on currency hedges

 

(72

)

 

Gain on sale of other investments

 

(1,107

)

 

Unrealized gains on securities

 

(405

)

 

Unrealized gains (losses) on loans held-for-sale at fair value

 

 

5,760

 

Unrealized gains on interest rate hedges

 

(240

)

(9,779

)

Unrealized (gains) losses on currency hedges

 

(16,006

)

8,573

 

Unrealized foreign currency remeasurement losses

 

7,427

 

1,025

 

OTTI

 

42

 

656

 

Loan loss allowance

 

30

 

 

Depreciation

 

713

 

––

 

Changes in operating assets and liabilities:

 

 

 

 

 

Related-party payable

 

9,307

 

5,002

 

Accrued interest receivable, less purchased interest

 

1,802

 

(1,870

)

Other assets

 

5,839

 

11,388

 

Accounts payable and accrued expenses

 

9,848

 

2

 

Other liabilities

 

26,136

 

9,995

 

Proceeds from sale of held for sale loans

 

 

132,128

 

Net cash provided by operating activities

 

84,855

 

174,127

 

Cash Flows from Investing Activities:

 

 

 

 

 

Purchase of mortgage-backed securities

 

 

(301,772

)

Proceeds from sale of mortgage-backed securities

 

12,711

 

46

 

Mortgage-backed securities principal paydowns

 

21,726

 

20,099

 

Origination and purchase of loans held for investment

 

(129,817

)

(218,872

)

Loan maturities

 

82,410

 

147,707

 

Proceeds from sale of loans and participations

 

44,631

 

28,786

 

Loan investment repayments

 

11,241

 

6,211

 

Purchased interest on investments

 

 

(437

)

Purchase of securities, held to maturity

 

(37,175

)

 

Investments in other investments

 

(104,142

)

(99

)

Acquisition and improvement of real estate

 

(114,925

)

 

Proceeds from sale of real estate

 

3,360

 

 

Return of investment from other investments

 

150

 

303

 

Proceeds from sale of other investments

 

6,769

 

 

Return of investment basis in purchased derivative asset

 

518

 

968

 

Deposit on business combination

 

(40,665

)

 

Restricted cash

 

(38,040

)

 

Net cash used in investing activities

 

(281,248

)

(317,060

)

 

7



 

 

 

For the Three-Months Ended March 31,

 

 

 

2013

 

2012

 

Cash Flows from Financing Activities:

 

 

 

 

 

Borrowings under secured financing agreements

 

347,521

 

383,037

 

Borrowings under convertible debt offering

 

587,700

 

 

Principal repayments on borrowings under secured financing arrangements

 

(625,513

)

(177,694

)

Payment of deferred financing costs

 

(24

)

(2,250

)

Payment of dividends

 

(73,796

)

(41,431

)

Contributions from non-controlling interest owners

 

6

 

 

Distributions to non-controlling interest owners

 

(44,098

)

(191

)

Net cash provided by financing activities

 

191,796

 

161,471

 

Net (decrease) increase in cash and cash equivalents

 

(4,597

)

18,538

 

Cash and cash equivalents, beginning of period

 

177,671

 

114,027

 

Cash and cash equivalents, end of period

 

$

173,074

 

$

132,565

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest

 

$

10,536

 

$

13,143

 

Income taxes paid

 

$

327

 

 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

Dividends declared, but not yet paid

 

$

60,147

 

$

41,439

 

Unsettled securities trade receivable

 

$

206,608

 

 

 

See notes to condensed consolidated financial statements.

 

8



 

Starwood Property Trust, Inc. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

As of March 31, 2013

(Unaudited)

 

1. Business and Organization

 

Starwood Property Trust, Inc. (“the Trust” together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations on August 17, 2009 (“Inception”) upon the completion of its initial public offering (“IPO”). From our inception in 2009 through the end of the first quarter of 2013, we have been focused primarily on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities, and other commercial real estate-related debt investments.  We collectively refer to the following as our target assets:

 

·                  Commercial real estate mortgage loans;

·                  Commercial real estate mortgage-backed securities (“CMBS”);

·                  Other commercial real estate-related debt investments;

·                  Residential mortgage-backed securities (“RMBS”); and

·                  Residential real estate owned (“REO”) and residential non-performing mortgage loans.

 

As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.  Refer to Note 17 for disclosure of our acquisition of LNR, which was consummated on April 19, 2013.

 

We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). As such, we will generally not be subject to U.S. federal corporate income tax on that portion of our net income that is distributed to stockholders if we distribute at least 90% of our taxable income to our stockholders by prescribed dates and comply with various other requirements.

 

We are organized as a holding company and conduct our business primarily through our various wholly owned subsidiaries. We are externally managed and advised by SPT Management, LLC (our “Manager”) pursuant to the terms of a Management Agreement. Our Manager is controlled by Barry Sternlicht, our Chairman and Chief Executive Officer. Our Manager is an affiliate of Starwood Capital Group, a privately-held private equity firm founded and controlled by Mr. Sternlicht.

 

As of March 31, 2013, investments with collateral in the hospitality, office, and retail property sectors represented 42.7%, 16.8%, and 15.2% of our investment portfolio, respectively. Such allocations could materially change in the future.

 

2. Summary of Significant Accounting Policies

 

Basis of Accounting and Principles of Consolidation

 

The accompanying consolidated financial statements include our accounts and those of our consolidated subsidiaries. Intercompany amounts have been eliminated. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and changes in cash flow have been included. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. The most significant and subjective estimate that we make is the projection of cash flows we expect to receive on our investments, which has a significant impact on the amounts of interest income, credit losses (if any), and fair values that we record and/or disclose. In addition, the fair value of financial instruments that are estimated using a discounted cash flows method are significantly impacted by the rates at which we estimate market participants would discount the expected cash flows.

 

A non-controlling interest in a consolidated subsidiary is defined as “the portion of the equity (net assets) in a subsidiary not attributable, directly or indirectly, to a parent”. Non-controlling interests are presented as a separate component of equity in the consolidated balance sheets. In addition, the presentation of net income attributes earnings to controlling and non-controlling interests.

 

9



 

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the period ended December 31, 2012, as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2013 are not necessarily indicative of the operating results for the full year.

 

Segment Reporting

 

We are focused primarily on originating and acquiring real estate-related debt investments and currently operate in one reportable segment.

 

Cash and Cash Equivalents

 

Cash and cash equivalents include cash in banks and short-term investments. Short-term investments are comprised of highly liquid instruments with original maturities of three months or less. The Company maintains its cash and cash equivalents in multiple financial institutions and at times these balances exceed federally insurable limits.

 

Debt Securities

 

GAAP requires that at the time of purchase, we designate debt securities as held-to-maturity, available-for-sale, or trading depending on our investment strategy and ability to hold such securities to maturity. Held-to-maturity securities are stated at cost plus any premiums or discounts, which are amortized or accreted through the consolidated statements of operations using the effective interest method. Securities we (i) do not hold for the purpose of selling in the near-term, or (ii) may dispose of prior to maturity, are classified as available-for-sale and are carried at fair value in the accompanying financial statements. Unrealized gains or losses on available-for-sale securities are reported as a component of accumulated other comprehensive income (loss) in stockholders’ equity. As of March 31, 2013, our CMBS and RMBS securities were classified as available-for-sale. The classification of each investment involves management’s judgment, which is subject to change. Purchases and sales of securities are recorded on the trade date.

 

When the estimated fair value of a security is less than its amortized cost, we consider whether there is an other-than-temporary impairment (“OTTI”) in the value of the security. An impairment is deemed an OTTI if (i) we intend to sell the security, (ii) it is more likely than not that we will be required to sell the security before recovering our cost basis, or (iii) we do not expect to recover the entire amortized cost basis of the security even if we do not intend to sell the security or believe it is more likely than not that we will be required to sell the security before recovering our cost basis. If the impairment is deemed to be an OTTI, the resulting accounting treatment depends on the factors causing the OTTI. If the OTTI has resulted from (i) our intention to sell the security, or (ii) our judgment that it is more likely than not that we will be required to sell the security before recovering our cost basis, an impairment loss is recognized in current earnings equal to the entire difference between our amortized cost basis and fair value. Whereas, if the OTTI has resulted from our conclusion that we will not recover our cost basis even if we do not intend to sell the security or believe it is more likely than not that we will be required to sell the security before recovering our cost basis, only the credit loss portion of the impairment is recorded in current earnings, and the portion of the loss related to other factors, such as changes in interest rates, continues to be recognized in accumulated other comprehensive income (loss). Following the recognition of an OTTI through earnings, a new cost basis is established for the security. Determining whether there is an OTTI may require us to exercise significant judgment and make significant assumptions, including, but not limited to, estimated cash flows, estimated prepayments, loss assumptions, and assumptions regarding changes in interest rates. As a result, actual OTTI losses could differ from reported amounts. Such judgments and assumptions are based upon a number of factors, including (i) credit of the issuer or the underlying borrowers, (ii) credit rating of the security, (iii) key terms of the security, (iv) performance of the underlying loans, including debt service coverage and loan-to-value ratios, (v) the value of the collateral for the underlying loans, (vi) the effect of local, industry, and broader economic factors, and (vii) the historical and anticipated trends in defaults and loss severities for similar securities.

 

Loans Held for Investment

 

Loans that are held for investment are carried at cost, net of unamortized acquisition premiums or discounts, loan fees, and origination and acquisition costs as applicable, unless the loans are deemed impaired. We evaluate each loan classified as held for investment for impairment at least quarterly. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is considered to be impaired, we record an allowance to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral.  After completing the evaluation of each loan as described above, we consider whether any loans shared specific characteristics with other loans such that it was probable, as a group, such loans have incurred an impairment loss as a result of their common characteristic(s).

 

10



 

Our loans are typically collateralized by real estate. As a result, we regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash from operations are sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan, and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, we consider the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such impairment analyses are completed and reviewed by asset management and finance personnel, who utilize various data sources, including (i) periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections, and (iii) current credit spreads and discussions with market participants.

 

Loans Held-for-sale

 

Loans that we intend to sell or liquidate in the short-term are classified as held-for-sale and are carried at the lower of amortized cost or fair value, unless we have elected to record the loans at fair value at the time they were acquired under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 825, Financial Instruments. Refer to Note 15 to the consolidated financial statements for further disclosure regarding loans held-for-sale.

 

Residential Real Estate & Non-Performing Residential Loans

 

We account for real estate at cost less accumulated depreciation and amortization. We compute depreciation using the straight-line method over the estimated useful lives of the assets. We depreciate rental real estate over periods up to 30 years. Real estate in development is related to the development of property (including land) and assets that have not yet been placed in service for our intended use. Depreciation for furniture and fixtures commences once it is placed in service and depreciation for buildings and leasehold improvements commences once they are ready for our intended use. We depreciate furniture and fixtures over periods up to 5 years. We depreciate lease hold improvements over the greater of 15 year or the remaining depreciable life of the asset it improved. Land is not depreciated.

 

Our non-performing residential loans are on nonaccrual status at the time of purchase as it is probable that principal or interest is not fully collectible.  Generally, when loans are placed on nonaccrual status, accrued interest receivable is reversed against interest income in the current period.  Interest payments received thereafter are applied as a reduction to the remaining principal balance as long as concern exists as to the ultimate collection of the principal.

 

Revenue Recognition

 

Interest income on performing loans is accrued based on the outstanding principal amount and contractual terms of our loans and securities. Discounts or premiums associated with the purchase of loans and investment securities are amortized or accreted into interest income as a yield adjustment on the effective interest method, based on expected cash flows through the expected maturity date of the investment. On at least a quarterly basis, we review and, if appropriate, make adjustments to our cash flow projections. We have historically collected, and expect to continue to collect, all contractual amounts due on our loans and CMBS, and non-credit deteriorated RMBS. As a result, we do not adjust the projected cash flows to reflect anticipated credit losses for these types of investments. Conversely, the majority of our RMBS have been purchased at a discount to par value, and we did not expect to collect all amounts contractually due at the time we acquired the securities. Accordingly, we expect that a portion of the purchase discount will not be recognized as interest income, and is instead viewed as a non-accretable yield. The amount considered as non-accretable yield may change over time based on the actual performance of these securities, their underlying collateral, actual and projected cash flow from such collateral, economic conditions and other factors. If the performance of a credit deteriorated security is more favorable than forecasted, we will generally accrete more credit discount into interest income than initially or previously expected. These adjustments are made prospectively beginning in the period subsequent to the determination that a favorable change in performance is projected. Conversely, if the performance of a credit deteriorated security is less favorable than forecasted, an other-than-temporary impairment may be taken, and the amount of discount accreted into income will generally be less than previously expected.

 

For loans that we have not elected to record at fair value under ASC 825, origination fees and direct loan origination costs are also recognized in interest income over the loan term as a yield adjustment using the effective interest method. When we elect to record a loan at fair value, origination fees and direct loan costs are recorded directly in income and are not deferred.

 

Upon the sale of loans or securities, the excess (or deficiency) of net proceeds over the net carrying value of such loans or securities is recognized as a realized gain (or loss).

 

11



 

Rental income attributable to residential leases is recorded when due from tenants, which approximates the amount that would result from straight-lining rents over the lease term. The initial term of our residential leases is generally one year, with renewals upon consent of both parties on an annual or monthly basis.

 

Investments in Unconsolidated Entities

 

We own non-controlling equity interests in various privately-held partnerships and limited liability companies. Unless we elect the fair value option under ASC 825, we use the cost method to account for investments when we own five percent or less of, and do not have significant influence over, the underlying investees. We use the equity method to account for all other non-controlling interests in partnerships and limited liability companies. Cost method investments are initially recorded at cost and income is generally recorded when distributions are received. Equity method investments are initially recorded at cost and subsequently adjusted for our share of income or loss, as well as contributions made or distributions received.

 

Investments in unconsolidated entities are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is measured based on the excess of the carrying amount of an investment over its estimated fair value. Impairment analyses are based on current plans, intended holding periods and available information at the time the analyses are prepared.

 

We also own publicly traded equity securities of a company in the real estate industry. For publicly traded companies where we have virtually no influence over the activities of these companies and minimal ownership percentages the investments are classified as available-for-sale and reported at fair value in the balance sheet, with unrealized gains and losses reported as a component of other comprehensive income (loss). For publicly traded securities where we have the ability to exercise significant influence, but not control, over underlying investees, we have elected the fair value reporting option and assets are reported at fair value on the balance sheet with unrealized gains and losses reported in earnings. Dividends on our available-for-sale equity securities are recorded in the statement of operations on the record date.

 

Securitization/Sale and Financing Arrangements

 

We periodically sell our financial assets, such as commercial mortgage loans, CMBS and other assets. In connection with these transactions, we may retain or acquire senior or subordinated interests in the related assets. Gains and losses on such transactions are recognized using the guidance in ASC 860, Transfers and Servicing, which is based on a financial components approach that focuses on control. Under this approach, after a transfer of financial assets that meets the criteria for treatment as a sale—legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint, and transferred control—an entity recognizes the financial assets it retains and any liabilities it has incurred, derecognizes the financial assets it has sold, and derecognizes liabilities when extinguished. We determine the gain or loss on sale of mortgage loans by allocating the carrying value of the underlying mortgage between securities or loans sold and the interests retained based on their fair values, as applicable. The gain or loss on sale is the difference between the cash proceeds from the sale and the amount allocated to the securities or loans sold.

 

Acquisition and Investment Pursuit Costs

 

Net costs incurred in connection with acquiring investments, as well as in pursuing unsuccessful investment acquisitions and loan originations, are charged to current earnings and not deferred.

 

Foreign Currency Transactions

 

Our assets and liabilities denominated in foreign currencies are translated into U.S. dollars using foreign currency exchange rates at the end of the reporting period. Income and expenses are translated at the weighted-average exchange rates for each reporting period. As of March 31, 2013 and December 31, 2012, the U.S. dollar was the functional currency of all investments denominated in foreign currencies. The effects of translating the assets, liabilities and income of our foreign investments are included in unrealized foreign currency remeasurement (loss) gain in the statements of operations for loans held for investment and other comprehensive income for securities available for sale.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash investments, CMBS, RMBS, held to maturity security, loan investments, and interest receivable. We may place cash investments in excess of insured amounts with high quality financial institutions. We perform an ongoing analysis of credit risk concentrations in our investment portfolio by evaluating exposure to various counterparties, markets, underlying property types, contract terms, tenant mix, and other credit metrics.

 

12



 

Derivative Instruments and Hedging Activities

 

GAAP provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, we must provide qualitative disclosures that explain our objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

 

We record all derivatives in the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether we have elected to designate a derivative in a hedging relationship and have satisfied the criteria necessary to apply hedge accounting under GAAP. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. We regularly enter into derivative contracts that are intended to economically hedge certain of our risks, even though the transactions may not qualify for, or we may not elect to pursue, hedge accounting. In such cases, changes in the fair value of the derivatives are recorded in earnings.

 

Deferred Financing Costs

 

Costs incurred in connection with obtaining secured financing arrangements and convertible debt instruments are capitalized and amortized over the respective loan terms of the respective facilities as a component of interest expense. As of March 31, 2013 and December 31, 2012, we had approximately $5.5 million and $7.8 million, respectively, of capitalized financing costs, net of amortization. For the three months ended March 31, 2013 and March 31, 2012, approximately $3.2 million and $1.1 million, respectively, of amortization was included in interest expense on the statements of operations.

 

Earnings Per Share

 

We calculate basic earnings per share by dividing net income attributable to the Company for the period by the weighted-average of shares of common stock outstanding for that period after consideration of the earnings allocated to our restricted stock units, which are participating securities as defined in GAAP. Diluted earnings per share reflects the potential dilution that that could occur from shares issuable in connection with the incentive fee paid to our Manager under the management agreement and conversion of the convertible senior notes into shares of common stock, except when doing so would be anti-dilutive.

 

Share-based Payments

 

We recognize the cost of share-based compensation and payment transactions using the same expense category as would be charged for payments in cash. The fair value of the restricted stock or restricted stock units granted is recorded to expense on a straight-line basis over the vesting period for the award, with an offsetting increase in stockholders’ equity. For grants to employees and directors, the fair value is determined based upon the stock price on the grant date. For non-employee grants, the fair value is based on the stock price when the shares vest, which requires the amount to be adjusted in each subsequent reporting period based on the fair value of the award at the end of the reporting period until the award has vested.

 

Income Taxes

 

We have elected to be taxed as a REIT and intend to comply with the Code with respect thereto. Accordingly, we will not be subject to federal income tax as long as certain asset, income, dividend distribution and stock ownership tests are met. Many of these requirements are technical and complex and if we fail to meet these requirements we may be subject to federal, state, and local income tax and penalties. A REIT’s net income from prohibited transactions is subject to a 100% penalty tax. We have seven taxable REIT subsidiaries (the “TRSs”) where certain investments may be made and activities conducted that (i) may have otherwise been subject to the prohibited transaction tax and (ii) may not be favorably treated for purposes of complying with the various requirements for REIT qualification.  The income, if any, within the TRSs is subject to federal and state income taxes as a domestic C corporation based upon the TRSs’ net income. For the three months ended March 31, 2013, we recorded a provision for income taxes of $0.8 million related to the activities in our TRSs.  These provisions were determined using a federal income tax rate of 34% and state income tax rate of 7.5%.  For the three months ended March 31, 2012, we recorded a provision for income taxes of $0.4 million related to the activities in our TRSs, based on a federal income tax rate of 34% and state income tax rate of 7.5%.

 

13



 

Underwriting Commissions and Offering Costs

 

Underwriting and offering costs related to our equity offering activities, which consist primarily of our equity offerings in April and early October of 2012 as well as our at-the-market offering program (refer to disclosure in Note 12), aggregated zero for the three months ended March 31, 2013 and March 31, 2012. Underwriting and offering costs are reflected as a reduction in additional paid-in capital in the Consolidated Statements of Equity.

 

3. Debt Securities

 

The Company classified all CMBS and RMBS investments as available-for-sale as of March 31, 2013 and December 31, 2012. The CMBS and RMBS classified as available-for-sale are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive (loss) income. The tables below summarize various attributes of our investments in mortgage-backed securities (“MBS”) available-for-sale as of March 31, 2013 and December 31, 2012 (amounts in thousands):

 

 

 

 

 

 

 

 

 

Unrealized Gains or (Losses) Recognized in
Accumulated Other Comprehensive (Loss) Income

 

 

 

March 31, 2013

 

Purchase
Amortized
Cost

 

Credit
OTTI

 

Recorded
Amortized
Cost

 

Non-Credit
OTTI

 

Unrealized
Gains

 

Unrealized
Losses

 

Net
Fair Value
Adjustment

 

Fair Value

 

CMBS

 

$

293,850

 

$

 

$

293,850

 

$

 

$

20,640

 

$

 

$

20,640

 

$

314,490

 

RMBS

 

271,945

 

(10,161

)

261,784

 

(485

)

59,866

 

(122

)

59,259

 

321,043

 

Total

 

$

565,795

 

$

(10,161

)

$

555,634

 

$

(485

)

$

80,506

 

$

(122

)

$

79,899

 

$

635,533

 

 

March 31, 2013

 

Weighted
Average
Coupon(1)

 

Weighted
Average
Rating

 

Weighted
Average
Life
(“WAL”)
(Years)(3)

 

CMBS

 

5.3

%

BB+

(2)

3.6

 

RMBS

 

1.1

%

CCC+

 

5.8

 

 


(1)         Calculated using the one-month LIBOR rate as of March 31, 2013 of 0.20370%.

(2)         Includes a $212.8 million investment in senior securities that were not rated, that are secured by substantially all of the assets of a worldwide operator of hotels, resorts, and timeshare properties, and which had an estimated loan-to-value ratio as of March 31, 2013 in the range of 38%-43%. The remaining $101.7 million CMBS investment position is rated BB+.

(3)         Represents the WAL of each respective group of MBS. The WAL of each individual security is calculated as a fraction, the numerator of which is the sum of the timing (in years) of each expected future principal payment multiplied by the balance of the respective payment, and with the denominator equal to the sum of the expected principal payments. This calculation was made as of March 31, 2013. Assumptions for the calculation of the WAL are adjusted as necessary for changes in projected principal repayments and/or maturity dates of the security.

 

 

 

 

 

 

 

 

 

Unrealized Gains or (Losses) Recognized in
Accumulated Other Comprehensive (Loss) Income

 

 

 

December 31, 2012

 

Purchase
Amortized
Cost

 

Credit
OTTI

 

Recorded
Amortized
Cost

 

Non-Credit
OTTI

 

Unrealized
Gains

 

Unrealized
Losses

 

Net
Fair Value
Adjustment

 

Fair Value

 

CMBS

 

$

498,064

 

$

 

$

498,064

 

$

 

$

31,370

 

$

 

$

31,370

 

$

529,434

 

RMBS

 

293,321

 

(10,194

)

283,127

 

 

50,717

 

(691

)

50,026

 

333,153

 

Total

 

$

791,385

 

$

(10,194

)

$

781,191

 

$

 

$

82,087

 

$

(691

)

$

81,396

 

$

862,587

 

 

14



 

December 31, 2012

 

Weighted
Average
Coupon(1)

 

Weighted
Average
Rating

 

Weighted
Average
Life
(“WAL”)
(Years)(3)

 

CMBS

 

4.3

%

BB+

(2)

3.3

 

RMBS

 

1.1

%

CCC+

 

5.4

 

 


(1)                                 Calculated using the December 31, 2012 one-month LIBOR rate of 0.2087% for floating rate securities.

(2)                                 Approximately 20.4% of the CMBS securities are rated BB+. The remaining 79.6% are securities where the obligors are certain special purpose entities that were formed to hold substantially all of the assets of a worldwide operator of hotels, resorts and timeshare properties; the securities are not rated but the loan-to-value ratio was estimated to be in the range of 39%-44% at December 31, 2012.

(3)                                 Represents the WAL of each respective group of MBS. The WAL of each individual security or loan is calculated as a fraction, the numerator of which is the sum of the timing (in years) of each expected future principal payment multiplied by the balance of the respective payment, and with a denominator equal to the sum of the expected principal payments. This calculation was made as of December 31, 2012. Assumptions for the calculation of the WAL are adjusted as necessary for changes in projected principal repayments and/or maturity dates of the security.

 

The following table contains a reconciliation of aggregate principal balance to amortized cost for our CMBS and RMBS as of March 31, 2013 and December 31, 2012 (amounts in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

 

 

 

CMBS

 

RMBS

 

CMBS

 

RMBS

 

Principal balance

 

$

302,459

 

$

456,814

 

$

519,575

 

$

489,218

 

Accretable yield

 

(8,609

)

(98,957

)

(21,511

)

(108,486

)

Non-accretable difference

 

 

(96,073

)

 

(97,605

)

Total discount

 

(8,609

)

(195,030

)

(21,511

)

(206,091

)

Amortized cost

 

$

293,850

 

$

261,784

 

$

498,064

 

$

283,127

 

 

The principal balance of credit deteriorated RMBS was $407.3 million and $438.0 million as of March 31, 2013 and December 31, 2012, respectively. Accretable yield related to these securities totaled $86.9 million and $93.6 million, as of March 31, 2013 and December 31, 2012, respectively.

 

The following table discloses the changes to accretable yield and non-accretable difference for our CMBS and RMBS during the three month period ended March 31, 2013:

 

 

 

For the three months ended March 31, 2013

 

 

 

Accretable Yield

 

Non-Accretable
Difference

 

 

 

CMBS

 

RMBS

 

CMBS

 

RMBS

 

Balance as of December 31, 2012

 

$

21,511

 

$

108,486

 

$

 

$

97,605

 

Accretion of discount

 

(3,029

)

(6,151

)

 

 

Principal write-downs

 

 

 

 

(496

)

Sales

 

(9,873

)

(2,418

)

 

(2,038

)

OTTI

 

 

42

 

 

 

Transfer to/from non-accretable difference

 

 

(1,002

)

 

1,002

 

Balance as of March 31, 2013

 

$

8,609

 

$

98,957

 

$

 

96,073

 

 

During the three-months ended March 31, 2013, purchases and sales executed, as well as the principal payments received, were as follows (amounts in thousands):

 

March 31, 2013

 

Held to Maturity
Security

 

RMBS

 

CMBS

 

Purchases

 

$

37,190

 

$

 

$

 

Sales/Maturities

 

 

12,711

 

206,608

 

Principal payments received

 

 

16,868

 

4,858

 

 

15



 

During the three-months ended March 31, 2012, purchases and sales executed, as well as the principal payments received, were as follows (amounts in thousands):

 

March 31, 2012

 

RMBS

 

CMBS

 

Purchases

 

$

 

$

301,772

 

Sales

 

 

 

Principal pay-downs

 

16,539

 

3,560

 

 

During the three-months ended March 31, 2013, the Company sold a CMBS position which was recorded on the trade date. As of March 31, 2013, the Company had recorded a receivable for the securities sold of $206.6 million. The sale generated a gain of approximately $11.0 million.  The sale settled shortly after March 31, 2013, and the Company received $66.5 million after repayment of related financing.

 

Within the hospitality sector, as of March 31, 2013 we had an aggregate investment of $212.8 million in senior debt secured by substantially all of the assets of a worldwide operator of hotels, resorts and timeshare properties. As of March 31, 2013, the aggregate face value of $211.8 million represented 3.0% of the total face value of this operator’s senior secured debt outstanding, and the aggregate carrying value of our investment represented 4.6% of our total assets. As of December 31, 2012, the aggregate face value of $421.8 million represented 5.8% of the total face value of this operator’s senior debt outstanding, and the aggregate carrying value of our investment represented 9.7% of our total assets.

 

As of March 31, 2013, 67.7%, of the CMBS are variable rate and pay interest at LIBOR plus a weighted average spread of 2.30%.  As of December 31, 2012, 79.6% of the CMBS are variable rate and paid interest at LIBOR plus a weighted average spread of 2.30%.

 

Subject to certain limitations on durations, we have allocated an amount to invest in RMBS that cannot exceed 10% of our total assets. We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.6 million and $0.3 million for the three-months ended March 31, 2013 and March 31, 2012, respectively, which has been recorded as an offset to interest income in the accompanying condensed consolidated statements of operations.  As of March 31, 2013, approximately $277.0 million, or 86.3%, of the RMBS are variable rate and pay interest at LIBOR plus a weighted average spread of 0.38%. As of December 31, 2012, approximately $281.2 million, or 84.4%, of the RMBS were variable rate and pay interest at LIBOR plus a weighted average spread of 0.38%.  We purchased all of the RMBS at a discount that will be accreted into income over the expected remaining life of the security. The majority of the income from this strategy is earned from the accretion of these discounts.

 

The following table presents the gross unrealized losses and estimated fair value of our securities that are in an unrealized loss position as of March 31, 2013 for which OTTIs (full or partial) have not been recognized in earnings (amounts in thousands):

 

 

 

Estimated Fair Value

 

Unrealized Losses

 

As of March 31, 2013

 

Securities with a loss less
than 12 months

 

Securities with a loss
greater than 12 months

 

Securities with a loss
less than 12 months

 

Securities with a loss
greater than 12 months

 

CMBS

 

$

 

$

 

$

 

$

 

RMBS

 

1,868

 

1,738

 

(122

)

(485

)

Total

 

$

1,868

 

$

1,738

 

$

(122

)

$

(485

)

 

As of March 31, 2013 there were three securities with unrealized losses. After evaluating each security we determined that the impairments on two of these securities, totaling $0.5 million, were other-than-temporary. Credit losses represented $42 thousand of this total, which we calculated by comparing (i) the estimated future cash flows of each security discounted at the yield determined as of the initial acquisition date or, if since revised, as of the last date previously revised, to (ii) our amortized cost basis.  For the three months ended March 31, 2012, our aggregate MBS credit losses (as reported in the condensed consolidated statement of operations) were $0.7 million.  We further determined that the remaining security was not other-than-temporarily impaired.  We considered a number of factors in reaching this conclusion, including that we did not intend to sell any individual security, it was not considered more likely than not that we would be forced to sell any individual security prior to recovering our amortized cost, and there were no material credit events that would have caused us to otherwise conclude that we would not recover our cost.  Significant judgment is required is used in projecting cash flows for our non-agency RMBS. As a result, actual income and/or impairments could be materially different from what is currently projected and/or reported.

 

16



 

The following table presents the gross unrealized losses and estimated fair value of our securities that are in an unrealized loss position as of December 31, 2012 for which OTTIs (full or partial) have not been recognized in earnings (amounts in thousands)

 

 

 

Estimated Fair Value

 

Unrealized Losses

 

As of December 31, 2012

 

Securities with a loss less
than 12 months

 

Securities with a loss
greater than 12 months

 

Securities with a loss
less than 12 months

 

Securities with a loss
greater than 12 months

 

CMBS

 

$

 

$

 

$

 

$

 

RMBS

 

4,096

 

599

 

(654

)

(37

)

Total

 

$

4,096

 

$

599

 

$

(654

)

$

(37

)

 

In March 2013, we originated a preferred equity interest of $37.2 million in a limited liability company that owns commercial real estate.  The preferred equity interest matures in October 2014.    Due to this mandatory redemption feature, we have classified this investment as a debt security in accordance with GAAP, and we expect to hold the investment to its maturity. The preferred equity interest pays 1 Month LIBOR plus a spread of 10.0%.

 

4. Loans

 

Our investments in loans held-for-investment are accounted for at amortized cost and the loans held-for-sale are accounted for at the lower of cost or fair value, unless we elect (upon origination or acquisition) to record such loans at fair value. The following table summarizes our investments in mortgages and loans by subordination class as of March 31, 2013 and December 31, 2012 (amounts in thousands):

 

March 31, 2013

 

Carrying
Value

 

Face
Amount

 

Weighted
Average
Coupon

 

WAL
(years)(2)

 

First mortgages

 

$

1,132,159

 

$

1,167,350

 

6.4

%

4.1

 

Subordinated mortgages(1)

 

322,447

 

354,635

 

10.3

%

4.7

 

Mezzanine loans

 

1,077,974

 

1,096,237

 

10.4

%

3.4

 

Total loans held for investment

 

2,532,580

 

2,618,222

 

 

 

 

 

First mortgages held-for-sale at fair value

 

378,690

 

381,478

 

6.6

%

2.6

 

Loans transferred as secured borrowings

 

85,763

 

86,149

 

4.7

%

3.0

 

Total gross loans

 

2,997,033

 

3,085,849

 

 

 

 

 

Loan loss allowance

 

(2,091

)

 

 

 

 

 

Total net loans

 

$

2,994,942

 

$

3,085,849

 

 

 

 

 

 

December 31, 2012

 

Carrying
Value

 

Face
Amount

 

Weighted
Average
Coupon

 

WAL
(years)(2)

 

First mortgages

 

$

1,461,666

 

$

1,502,382

 

6.2

%

3.8

 

Subordinated mortgages(1)

 

397,159

 

430,444

 

9.8

%

4.0

 

Mezzanine loans

 

1,057,670

 

1,079,897

 

10.3

%

3.6

 

Total loans held for investment

 

2,916,495

 

3,012,723

 

 

 

 

 

Loan transfer secured borrowings

 

85,901

 

86,337

 

4.7

%

3.2

 

Total gross loans

 

3,002,396

 

3,099,060

 

 

 

 

 

Loan loss allowance

 

(2,061

)

 

 

 

 

 

Total net loans

 

$

3,000,335

 

$

3,099,060

 

 

 

 

 

 


(1)                                 Subordinated mortgages include (i) subordinated mortgages that we retain after having sold first mortgage positions related to the same collateral, (ii) B-Notes, and (iii) subordinated loan participations.

(2)                                 Represents the WAL of each respective group of loans. The WAL of each individual loan is calculated as a fraction, the numerator of which is the sum of the timing (in years) of each expected future principal payment multiplied by the balance of the respective payment, and with a denominator equal to the sum of the expected principal payments. This calculation was made as of March 31, 2013 and December 31, 2012. Assumptions for the calculation of the WAL are adjusted as necessary for changes in projected principal repayments and/or maturity dates of the loan.

 

17



 

As of March 31, 2013, approximately $2.0 billion, or 66.5%, of the loans are variable rate and pay interest at LIBOR plus a weighted-average spread of 6.23%. The following table summarizes our investments in floating rate loans (amounts in thousands):

 

 

 

March 31, 2013

 

December 31, 2012

 

Index

 

Rate

 

Carrying Value

 

Rate

 

Carrying Value

 

1 Month LIBOR

 

0.2037%

 

$

 746,606

 

0.2087%

 

$

 674,327

 

1 Month Citibank LIBOR(1)

 

0.1900%

 

88,419

 

0.1900%

 

93,195

 

3 Month Citibank LIBOR(1)

 

0.2750%

 

7,246

 

0.3000%

 

7,217

 

LIBOR Floor

 

0.5% - 2.0%

 

1,149,531

 

0.5% - 2.0%

 

1,143,443

 

Total

 

 

 

$

 1,991,802

 

 

 

$

 1,918,182

 

 


(1)         The Citibank LIBOR rate is equal to the rate per annum at which deposits in United States dollars are offered by the principal office of Citibank, N.A. in London, England to prime banks in the London interbank market.

 

As described in Note 2, we evaluate each of our loans for impairment at least quarterly. Our loans are typically collateralized by real estate. As a result, we regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, as well as the financial and operating capability of the borrower. Specifically, a property’s operating results and any cash reserves are analyzed and used to assess (i) whether cash flow from operations is sufficient to cover the debt service requirements currently and into the future, (ii) the ability of the borrower to refinance the loan at maturity, and/or (iii) the property’s liquidation value. We also evaluate the financial wherewithal of any loan guarantors as well as the borrower’s competency in managing and operating the properties. In addition, we consider the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections, and (iii) current credit spreads and discussions with market participants.

 

Our evaluation process as described above produces an internal risk rating between 1 and 5, which is a weighted-average of the numerical ratings in the following categories: (i) sponsor capability and financial condition, (ii) loan and collateral performance relative to underwriting, (iii) quality and stability of collateral cash flows, and (iv) loan structure. We utilize the overall risk ratings as a concise means to monitor any credit migration on a loan as well as on the whole portfolio. While the overall risk rating is generally not the sole factor we use in determining whether a loan is impaired, a loan with a higher overall risk rating would tend to have more adverse indicators of impairment, and therefore would be more likely to experience a credit loss.

 

The rating categories generally include the characteristics described below, but these are utilized as guidelines and therefore not every loan will have all of the characteristics described in each category:

 

Rating

 

Characteristics

1

 

·

Sponsor capability and financial condition—Sponsor is highly rated or investment grade or, if private, the equivalent thereof with significant management experience.

 

 

·

Loan collateral and performance relative to underwriting—The collateral has surpassed underwritten expectations.

 

 

·

Quality and stability of collateral cash flows—Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.

 

 

·

Loan structure—Loan-to-collateral value ratio (“LTV”) does not exceed 65%. The loan has structural features that enhance the credit profile.

2

 

·

Sponsor capability and financial condition—Strong sponsorship with experienced management team and a responsibly leveraged portfolio.

 

 

·

Loan collateral and performance relative to underwriting—Collateral performance equals or exceeds underwritten expectations and covenants and performance criteria are being met or exceeded.

 

 

·

Quality and stability of collateral cash flows—Occupancy is stabilized with a diverse tenant mix.

 

 

·

Loan structure—LTV does not exceed 70% and unique property risks are mitigated by structural features.

3

 

·

Sponsor capability and financial condition—Sponsor has historically met its credit obligations, routinely pays off loans at maturity, and has a capable management team.

 

 

·

Loan collateral and performance relative to underwriting—Property performance is consistent with underwritten expectations.

 

 

·

Quality and stability of collateral cash flows—Occupancy is stabilized, near stabilized, or is on track with underwriting.

 

 

·

Loan structure—LTV does not exceed 80%.

4

 

·

Sponsor capability and financial condition—Sponsor credit history includes missed payments, past due payment, and maturity extensions. Management team is capable but thin.

 

18



 

Rating

 

Characteristics

 

 

·

Loan collateral and performance relative to underwriting—Property performance lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers. A sale of the property may be necessary in order for the borrower to pay off the loan at maturity.

 

 

·

Quality and stability of collateral cash flows—Occupancy is not stabilized and the property has a large amount of rollover.

 

 

·

Loan structure—LTV is 80% to 90%.

5

 

·

Sponsor capability and financial condition—Credit history includes defaults, deeds-in-lieu, foreclosures, and/or bankruptcies.

 

 

·

Loan collateral and performance relative to underwriting—Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Sale proceeds would not be sufficient to pay off the loan at maturity.

 

 

·

Quality and stability of collateral cash flows—The property has material vacancy and significant rollover of remaining tenants.

 

 

·

Loan structure—LTV exceeds 90%.

 

As of March 31, 2013, the risk ratings by class of loan were as follows (amounts in thousands):

 

 

 

Balance Sheet Classification

 

 

 

Risk

 

Loans Held for Investment

 

Loans Held
for Sale

 

Loans 
Transferred

 

 

 

Rating
Category

 

First
Mortgages

 

Subordinated
Mortgages

 

Mezzanine
Loans

 

First
Mortgages

 

as Secured
Borrowings

 

Total

 

1

 

$

 

$

 

$

 

$

 

$

 

$

 

2

 

39,176

 

2,429

 

370,646

 

 

13,087

 

425,338

 

3

 

1,031,954

 

288,434

 

698,875

 

367,183

 

72,676

 

2,459,122

 

4

 

61,029

 

31,584

 

8,453

 

 

 

101,066

 

5

 

 

 

 

11,507

 

 

11,507

 

 

 

$

1,132,159

 

$

322,447

 

$

1,077,974

 

$

378,690

 

$

85,763

 

$

2,997,033

 

 

As of December 31, 2012, the risk ratings by class of loan were as follows (amounts in thousands):

 

 

 

Balance Sheet Classification

 

 

 

Risk

 

Loans Held for Investment

 

Loans Held
for Sale

 

Loans
Transferred

 

 

 

Rating
Category

 

First
Mortgages

 

Subordinated
Mortgages

 

Mezzanine
Loans

 

First
Mortgages

 

As Secured
Borrowings

 

Total

 

1

 

$

 

$

 

$

 

$

 

$

 

$

 

2

 

39,734

 

2,434

 

370,671

 

 

13,113

 

425,952

 

3

 

1,350,455

 

363,275

 

679,371

 

 

72,788

 

2,465,889

 

4

 

59,970

 

31,450

 

7,628

 

 

 

99,048

 

5

 

11,507

 

 

 

 

 

11,507

 

 

 

$

1,461,666

 

$

397,159

 

$

1,057,670

 

$

 

$

85,901

 

$

3,002,396

 

 

After completing the evaluation of each loan as described above, we concluded that no loans were individually impaired as of March 31, 2013 or December 31, 2012. In addition, we considered whether any loans shared specific characteristics with other loans such that it was probable, as a group, such loans had incurred an impairment loss as of March 31, 2013 or December 31, 2012 as a result of their common characteristics. After completing this analysis, we recorded an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4,” plus (ii) 5% of the aggregate carrying amount of loans rated as a “5.” These groups accounted for 3.8% and 3.7% of our loan portfolio as of March 31, 2013 and December 31, 2012, respectively:

 

 

 

For the Three-
Months Ended
March 31, 2013

 

For the Three-
Months Ended
March 31, 2012

 

Reserve for loan losses at beginning of year

 

$

2,061

 

$

 

Provision for loan losses

 

30

 

 

Charge-offs

 

 

 

Recoveries

 

 

 

Reserve for loan losses at end of period

 

$

2,091

 

$

 

Recorded investment in loans related to the allowance for loan loss

 

$

112,573

 

$

 

 

19



 

For the three months ended March 31, 2013, the activity in our loan portfolio (including loans held-for-sale) was as follows (amounts in thousands):

 

Balance December 31, 2012

 

$

3,000,335

 

Acquisitions/originations

 

124,664

 

Additional funding

 

5,153

 

Capitalized interest (1)

 

1,611

 

Basis of loans sold(2)

 

(44,631

)

Loan maturities

 

(82,410

)

Principal repayments

 

(11,241

)

Discount accretion/premium amortization

 

7,632

 

Unrealized foreign currency remeasurement loss

 

(6,141

)

Loan loss allowance

 

(30

)

Balance March 31, 2013

 

$

2,994,942

 

 


(1)         Represents accrued interest income on loans whose terms do not require current payment of interest.

(2)         See Note 8 & 11 of the condensed consolidated financial statements for additional disclosure on this transaction.

 

We acquired or originated $124.7 million (face value) in loans during the three months ended March 31, 2013, which included: (1) an $86.0 million first mortgage construction financing for the development of 30 luxury condominium residences and a ground floor retail space in Manhattan, New York. Of this total loan amount, $50.6 million was funded at closing; (2) an origination of a $41.9 million first mortgage and mezzanine loan, with $36.0 million funded at closing, collateralized by a 277 key hotel located in California; and (3) an origination of a $43.1 million first mortgage and mezzanine loan, with $37.7 million funded at closing, secured by the fee interest in a 9 story office building in California. Additionally, three loans, totaling $82.4 million, prepaid or matured during the three months ended March 31, 2013.

 

5. Other Investments

 

Other investments are comprised of the following assets (amounts in thousands):

 

 

 

March 31, 
2013

 

December 31,
2012

 

Residential real estate

 

$

211,681

 

$

99,115

 

Non-performing residential loans

 

171,645

 

68,883

 

Investment in marketable securities

 

14,551

 

21,667

 

Investment in limited liability company

 

32,167

 

32,318

 

Total other investments

 

$

430,044

 

$

221,983

 

 

Residential real estate

 

During 2012, we began to purchase single family residential homes and non-performing residential loans. At acquisition, a significant portion of the properties were either vacant or had occupants that were not subject to a lease and/or were not paying rent to the previous owner. Upon acquisition, we began actively preparing the properties to be either rented or sold, as applicable. For the three-months ended March 31, 2013, we incurred approximately $6.6 million in costs of preparing these properties for their intended use, and such costs were added to our investment basis.

 

Type

 

Depreciable
Life

 

Acquisition
Cost

 

Cost Capitalized
Subsequent to
Acquisition

 

Accumulated
Depreciation

 

Net Book
Value

 

Building

 

30 years

 

$

89,294

 

$

8,777

 

$

(883

)

$

97,188

 

Land

 

 

45,087

 

 

 

45,087

 

Furniture & Fixtures

 

5 years

 

186

 

507

 

(39

)

654

 

Development Assets (1)

 

 

66,031

 

2,721

 

 

68,752

 

 

 

 

 

$

200,598

 

$

12,005

 

$

(922

)

$

211,681

 

 


(1)   Development Assets include building, land, furniture and fixture which are currently being renovated prior to rental. All costs to renovate are capitalized in this phase.

 

20



 

For the three-months ended March 31, 2013, the operating results of the properties and the classification of the item in the consolidated statements of operations were as follows (amounts in thousands):

 

Rental income

 

$

1,124

 

Other income (expense)

 

Operating expenses

 

(1,632

)

Other income (expense)

 

Net operating loss

 

(508

)

 

 

Depreciation

 

(713

)

Other income (expense)

 

Acquisition & startup costs

 

(438

)

Other income (expense)

 

Gain on real estate sales

 

10

 

Realized gain on sale of investments

 

Other expenses

 

(6

)

General and administrative expense

 

Income tax expense

 

(5

)

Income tax provision

 

Net loss

 

$

(1,660

)

 

 

 

Non-performing loan pool

 

As of March 31, 2013, we had acquired 1,318 non-performing residential loans at an aggregate cost of $171.6 million.  After acquisition we have sold or converted loans to REO with a basis of $1.5 million.  For the three-months ended March 31, 2013 the operating results and the classification of the item in the consolidated statements of operations were as follows (amounts in thousands):

 

Interest income

 

$

 

Other income (expense)

 

Operating expenses

 

(325

)

Various

 

Net interest margin

 

(325

)

 

 

Acquisition & startup costs

 

(438

)

Other income (expense)

 

Gain on loan sales

 

325

 

Realized gain on sale of investments

 

Other expenses

 

(20

)

General and administrative expense

 

Income tax expense

 

(157

)

Income tax provision

 

Net loss

 

$

(615

)

 

 

 

Investment in marketable securities

 

In December 2012, we acquired 9,140,000 ordinary shares in Starwood European Real Estate Finance Limited (“SEREF”), a debt fund that is externally managed by an affiliate of our Manager and is listed on the London Stock Exchange, for approximately $14.7 million. As a result, we own approximately 4% of SEREF. We have elected to report this investment at fair value with changes in fair value reported in income because the shares are listed on an exchange, which allows us to determine the fair value using a quoted price from an active market, and also due to potential in lags in reporting that were expected to result from differences in the respective regulatory filing deadlines. We have not received any distributions from SEREF, and the fair value of the investment remeasured into USD was $14.6 million at March 31, 2013.

 

In the first quarter of 2013, we sold our remaining investment in the publicly traded equity securities of certain REITs that are classified as available-for-sale.  The aggregate cost basis sold was $5.7 million resulting in a realized gain of $1.1 million. As of December 31, 2012, the aggregate cost basis was $5.7 million, and the aggregate fair value was $6.5 million. For the three-months ended March 31, 2013, we recognized no dividend income related to these investments.

 

Investments in LLCs

 

In June 2011, we acquired a non-controlling 49% interest in a privately-held limited liability company (“LLC”) for $25.5 million, which is accounted for under the equity method. In December 2011 we sold 20% of this investment for an amount that approximated our carrying amount. The LLC owns a mezzanine loan participation, and our share of earnings for the three-months ended March 31, 2013 and March 31, 2012 was $0.7 million and $0.6 million, which is included in other income on the consolidated statements of operations. As of March 31, 2013 and December 31, 2012, our cost basis was $24.1 million and $24.3 million, respectively.

 

Prior to 2011, we had committed $9.7 million to acquire at least a 5% interest in a privately-held limited liability company formed to acquire assets of a commercial real estate debt management and servicing business primarily for the opportunity to

 

21



 

participate in debt opportunities arising from the venture’s special servicing business (the “Participation Right”). As of March 31, 2013, we had funded $8.0 million of our commitment. As of both March 31, 2013 and December 31, 2012, the cost basis was $8.0 million, and we recognized no income from distributions during the three months ended March 31, 2013 and 2012, respectively, related to this investment, which is included in other income on the consolidated statements of operations.

 

6. Secured Financing Agreements

 

On March 31, 2010, Starwood Property Mortgage Sub-1, L.L.C. (“SPM Sub-1”), our indirect wholly-owned subsidiary, entered into a Master Repurchase and Securities Contract (the “Wells Repurchase Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”). The Wells Repurchase Agreement was secured by the diversified loan portfolio purchased from Teachers Insurance and Annuity Association of America on February 26, 2010 (“the TIAA Portfolio”). Advances under the Wells Repurchase Agreement accrued interest at a per annum pricing rate equal to the sum of one-month LIBOR plus the pricing margin of 3.0%. The maturity date of the Wells Repurchase Agreement was May 31, 2013. On February 11, 2013, the last remaining loan in the TIAA portfolio prepaid and, as a result, the Wells Repurchase Agreement was terminated on February 12, 2013.

 

On August 6, 2010, Starwood Property Mortgage Sub-2, L.L.C. (“SPM Sub-2”), our indirect wholly owned subsidiary, entered into a second Master Repurchase and Securities Contract with Wells Fargo, which second repurchase facility was amended and restated by Wells Fargo, SPM Sub-2 and Starwood Property Mortgage Sub-2-A, L.L.C. (“SPM Sub-2-A”), our indirect wholly owned subsidiary, on February 28, 2011, pursuant to an Amended and Restated Master Repurchase and Securities Contract (the “Second Wells Repurchase Agreement”). The Second Wells Repurchase Agreement was amended on May 24, 2011, November 3, 2011 (“Amendment No. 2”) and December 30, 2011, and is being used by SPM Sub-2 and SPM Sub-2-A to finance the acquisition or origination of commercial mortgage loans (and participations therein) and mezzanine loans. In connection with Amendment No. 2, available borrowings under the facility increased by $200 million to $550 million. Advances under the Second Wells Repurchase Agreement accrue interest at a per annum pricing rate equal to the sum of one-month LIBOR plus a margin of between 1.75% and 6.0% depending on the type of asset being financed. If an event of default (as such term is defined in the Second Wells Repurchase Agreement) occurs and is continuing, amounts borrowed may become due and payable immediately and interest accrues at the default rate, which is equal to the pricing rate plus 4.0%. The initial maturity date of the Second Wells Repurchase Agreement is August 5, 2013, subject to two one-year extension options, each of which may be exercised by us upon the satisfaction of certain conditions and the payment of an extension fee. The Company guarantees certain of the obligations of SPM Sub-2 and SPM Sub-2-A under the Second Wells Repurchase Agreement up to a maximum liability of either 25% or 100% of the then-currently outstanding repurchase price of purchased assets, depending upon the type of asset being financed. As of March 31, 2013, $260.5 million was outstanding under the Second Wells Repurchase Agreement and the carrying value of the pledged collateral was $729.0 million.

 

On March 18, 2011, Starwood Property Mortgage, L.L.C. (“SPM”), our indirect wholly owned subsidiary, entered into a third Master Repurchase and Securities Contract with Wells Fargo the “Third Wells Repurchase Agreement”). The Third Wells Repurchase Agreement was amended on March 5, 2012, June 5, 2012 and March 14, 2013 (“Amendment No. 3”), and is being used by SPM to finance the acquisition and ownership of RMBS and provides for asset purchases up to $175.0 million. Prior to Amendment No. 3, advances under the Third Wells Repurchase Agreement generally accrued interest at a per annum pricing rate equal to one-month LIBOR plus a margin of 2.10%. If an event of default (as such term is defined in the Third Wells Repurchase Agreement) occurs and is continuing, amounts borrowed may become due and payable immediately and interest accrues at the default rate, which is equal to the pricing rate plus 4.0%. The Company has guaranteed certain of the obligations of SPM under the Third Wells Repurchase Agreement. The facility was originally scheduled to terminate on March 16, 2013. Pursuant to Amendment No. 3, the facility was extended for an additional 180 days, and is subject to automatic one day extensions until the date that is 180 days after Wells Fargo delivers a termination notice to SPM, subject to a maximum extended maturity date of March 13, 2015. In addition, the per annum pricing rate was amended to one-month LIBOR plus a margin of 1.90%. As of March 31, 2013, $73.1 million was outstanding and the carrying value of the pledged collateral was $283.7 million.

 

On December 30, 2011, Starwood Property Mortgage Sub-5, L.L.C. (“SPM Sub-5”) and Starwood Property Mortgage Sub-5-A, L.L.C. (“SPM Sub-5-A”), our indirect wholly owned subsidiaries, entered into a fourth Master Repurchase and Securities Contract with Wells Fargo (the “Fourth Wells Repurchase Agreement”). The Fourth Wells Repurchase Agreement was amended on May 24, 2012 and provides for advances up to $189.9 million and is secured by a loan portfolio of 18 separate commercial mortgage loans. As of March 31, 2013, advances under the Fourth Wells Repurchase Agreement accrued interest at one-month LIBOR plus a pricing

 

22



 

margin of 2.75%. The availability of additional advances, as well as the pricing margin on all outstanding borrowings at any given time, is determined by the current operating cash flows and fair values of the underlying collateral, both in relation to the existing collateral loan receivable balances outstanding, and all as approved by Wells Fargo. The overall term of the Fourth Wells Repurchase Agreement is three years, with two one-year conditional extensions. As of March 31, 2013, SPM Sub-5-A had borrowed $175.4 million under this facility and the carrying value of the pledged collateral was $237.5 million. At closing, we paid a 0.50% commitment fee based upon the total committed proceeds. If the overall facility is extended beginning in December 2014, we would pay a 0.25% extension fee for each year. The Company guarantees 60% of the currently outstanding repurchase price for all purchased assets; however, the Company guarantees 100% of the outstanding balance of any individual repurchase transaction involving a collateral property with operating cash flows that at any time is less than 15% of the related collateral loan receivable balance.

 

On February 1, 2012, Starwood Property Mortgage Sub-7, L.L.C. (“SPM Sub-7”), our indirect wholly owned subsidiary, entered into a Master Repurchase Agreement with Goldman Sachs International (the “Second Goldman Repurchase Agreement”). At closing, we borrowed $155.4 million under the Second Goldman Repurchase Agreement to finance the acquisition of $222.8 million in senior debt securities that are expected to mature on November 15, 2015. The senior debt securities were issued by certain special purpose entities that were formed to hold substantially all of the assets of a worldwide operator of hotels, resorts and timeshare properties. Advances under the Second Goldman Repurchase Agreement accrue interest at a per annum rate of one-month LIBOR plus a spread of 2.90%. The maturity date of the Second Goldman Repurchase Agreement is August 20, 2015. The carrying value of the collateral senior debt securities was $212.8 million and the amount outstanding under the facility was $147.8 million at March 31, 2013.

 

On March 26, 2012, Starwood Property Mortgage Sub-6, L.L.C. (“SPM Sub-6”) and Starwood Property Mortgage Sub-6-A, L.L.C. (“SPM Sub-6-A”), our indirect wholly owned subsidiaries, entered into a Master Repurchase Agreement with Citibank, N.A. (the “Citi Repurchase Agreement). The Citi Repurchase Agreement was amended on November 7, 2012 and provides for asset purchases of up to $125.0 million to finance commercial mortgage loans and senior interests in commercial mortgage loans originated or acquired by us and including loans and interests intended to be included in commercial mortgage loan securitizations as well as those not intended to be securitized. Advances under the Citi Repurchase Agreement accrue interest at a per annum interest rate equal to the sum of (i) 30-day LIBOR plus (ii) a margin of between 1.75% and 3.75% depending on (A) asset type, (B) the amount advanced and (C) the debt yield and loan-to-value ratios of the purchased mortgage loan, provided that the aggregate weighted average interest rate shall not at any time be less than the sum of one-month LIBOR plus 2.25%. The facility has an initial maturity date of March 29, 2014, subject to three one-year extension options, which may be exercised by us upon the satisfaction of certain conditions. We have guaranteed the obligations of our subsidiaries under the facility up to a maximum liability of 25% of the then-currently outstanding repurchase price of assets financed. As of March 31, 2013, SPM Sub-6-A had borrowed $8.0 million under this facility and the carrying value of the pledged collateral was $87.3 million.

 

Under the Wells Repurchase Agreement, the Second Wells Repurchase Agreement, the Third Wells Repurchase Agreement, the Fourth Wells Repurchase Agreement, the Second Goldman Repurchase Agreement, and the Citi Repurchase Agreement, the counterparty retains the sole discretion over both whether to purchase a loan or security from us and, subject to certain conditions, the market value of such loan or security for purposes of determining whether we are required to pay margin to the counterparty.

 

On December 3, 2010, SPT Real Estate Sub II, LLC (“SPT II”), our wholly owned subsidiary, entered into a term loan credit agreement (the “BAML Credit Agreement”) with Bank of America, N.A. (“Bank of America”) as administrative agent and as lender, and us and certain of our subsidiaries as guarantors. The BAML Credit Agreement, as amended and restated (the “Amended BAML Credit Agreement”), provided for loans of up to $141.6 million as of March 31, 2013. The initial draw under the BAML Credit Agreement in December 2010 was used, in part, to finance the acquisition of a $205.0 million participation (the “Participation”) in a senior secured loan due November 15, 2015. The Participation was converted into a security in June 2011 and was due from certain special purpose entities that were formed to hold substantially all of the assets of a worldwide operator of hotels, resorts and timeshare properties. In connection with a March 9, 2012 amendment, we borrowed an additional $81.0 million to partially finance the $125.0 million acquisition of additional participation interest in the senior secured loan.

 

Advances under the Amended BAML Credit Agreement accrue interest at a per annum rate based on LIBOR. The margin varied between 2.35% and 2.50% over LIBOR, based on the performance of the underlying hospitality collateral. The initial maturity date of the Amended BAML Credit Agreement was November 30, 2014. On March 27, 2013, the

 

23



 

securities pledged under the Amended BAML Credit Agreement were sold to a third party. As of March 31, 2013, $139.9 million was outstanding under the Amended BAML Credit Agreement as the trade settled on April 2, 2013 at which time the borrowings were repaid. See further disclosure in Note 17 to the consolidated financial statements.

 

On July 3, 2012, Starwood Property Mortgage Sub-9, L.L.C. (“SPM Sub-9”) and Starwood Property Mortgage Sub-9-A, L.L.C. (“SPM Sub-9-A”), our indirect wholly owned subsidiaries, entered into a Purchase and Repurchase Agreement and Securities Contract (“OneWest Repurchase Agreement”) with OneWest Bank, FSB (“OneWest”). At closing, SPM Sub-9 transferred loan investments to OneWest in exchange for a $78.3 million advance. Borrowings under the OneWest Repurchase Agreement accrue interest at a pricing rate of one-month LIBOR plus a margin of 3.0%. If an event of default (as such term is defined in the OneWest Repurchase Agreement) occurs and is continuing, amounts borrowed may become due and payable immediately and interest accrues at the default rate, which is equal to the pricing rate plus 5.0%. The initial maturity date of the facility is July 3, 2015 with two one-year extension options, subject to certain conditions. As of March 31, 2013, $64.7 million was outstanding under the OneWest Bank Repurchase Agreement and the carrying value of the pledged collateral was $93.5 million.

 

On August 3, 2012, Starwood Property Mortgage Sub-10, L.L.C. (“SPM Sub-10”) and Starwood Property Mortgage Sub-10-A, L.L.C. (“SPM Sub 10-A”), our indirect wholly owned subsidiaries, jointly entered into a $250.0 million Senior Secured Revolving Credit Facility (“Borrowing Base Facility”) arranged by Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPFS”). Lender participants in the facility include Bank of America, Citibank, Barclays Bank PLC, Deutsche Bank Trust Company Americas, Goldman Sachs Bank USA, and Stifel Bank & Trust.  The Borrowing Base Facility was amended on November 23, 2012 and February 1, 2013.  The initial maturity date of the Borrowing Base Facility is August 2, 2013, which initial maturity date may be extended from time to time subject to certain conditions, provided the aggregate term shall not exceed four years. Outstanding borrowings under the facility will be priced at LIBOR + 325 bps, with an unused fee of 30 to 35 bps per annum depending upon the usage of the facility. The facility will be used primarily to finance our purchase or origination of commercial mortgage loans for the time period between transaction closing and the time in which a financing of the loan can be closed with one of our existing secured warehouse facilities or the loan is syndicated or sold in whole or in part. The term of financing provided under the facility for any individual loan is limited in most instances to the lesser of six months or the maturity of the facility. The facility will be secured by each loan for which financing has been provided as well as a no less than $500.0 million in market value of additional preapproved unencumbered senior, subordinate, and mezzanine loan assets (“Additional Collateral Assets”). The facility is full recourse to us. As of March 31, 2013, there were no borrowings under the Borrowing Base and the carrying value of the pledged Additional Collateral Assets was $540.1 million.

 

On August 17, 2012, we entered into a Master Repurchase Agreement with Goldman Sachs Lending Partners, LLC (the “Third Goldman Repurchase Agreement”). At closing, we borrowed $158.8 million under the Third Goldman Repurchase Agreement to finance the acquisition of $250.0 million participation interest in a mezzanine note that is expected to mature on November 15, 2015. The mezzanine note was issued by certain special purpose entities that were formed to hold substantially all of the assets of a worldwide operator of hotels, resorts and timeshare properties. Advances under the Third Goldman Repurchase Agreement accrue interest at a per annum rate of one-month LIBOR plus a spread of 3.70%. The maturity date of the Third Goldman Repurchase Agreement is September 15, 2015. The carrying value of the mezzanine note was $237.7 million and the amount outstanding under the facility was $158.4 million at March 31, 2013.

 

The following table sets forth our five-year principal repayments schedule for the secured financings, assuming no defaults or expected extensions and excluding the loan transfer secured borrowings (amounts in thousands). Our credit facilities generally require principal to be paid down prior to the facilities’ respective maturities if and when we receive principal payments on, or sell, the investment collateral that we have pledged. The amount reflected in 2013 includes principal repayments on our credit facilities that would be required if (i) we received the repayments that we expect to receive on the investments that have been pledged as collateral under the credit facilities, as applicable, and (ii) if the credit facilities that are expected to have amounts outstanding at their initial maturity dates in 2013 are not extended or if the respective amounts outstanding are not otherwise refinanced:

 

2013 (remainder of)

 

$

 530,613

 

2014

 

185,404

 

2015

 

311,803

 

2016

 

 

2017 and thereafter

 

 

Total

 

$

 1,027,820

 

 

Secured financing maturities for 2013 primarily relate to $260.5 million of financings on the Second Wells Repurchase Agreement, $73.1 million on the Third Wells Repurchase Agreement, $34.4 million on the OneWest Bank Repurchase Agreement, and $139.9 million on the BAML Credit Agreement . Of the maturities in 2013, we expect to extend the Second and Third Wells Repurchase Agreements beyond initial maturity with amended extension options available to us upon meeting certain criteria.

 

24



 

7. Convertible Senior Notes

 

On February 15, 2013, we issued $600.0 million of 4.55% Convertible Senior Notes due 2018. The notes were sold to the underwriters at a discount of 2.05%, resulting in net proceeds to us of $587.7 million.

 

The following summarizes the unsecured convertible senior notes outstanding as of March 31, 2013 (amounts in thousands, except exchange rates):

 

 

 

Principal 
Amount

 

Coupon/Stated
Rate

 

Effective 
Rate (1)

 

Exchange 
Rate (2)

 

Maturity 
Date

 

Remaining Period of
Amortization

 

4.55% Convertible Senior Notes

 

$

600,000

 

4.55

%

6.08

%

35.5391

 

2/15/2018

 

5 years

 

 

 

 

Three months ended
March 31, 2013

 

Total principal

 

$

600,000

 

Net unamortized discount

 

39,577

 

Total

 

$

560,423

 

 

 

 

 

Conversion option basis

 

$

28,118

 

 


(1)         Effective rate includes the effects of underwriter purchase discount and the adjustment for the conversion option, the value of which reduced the initial liability and was recorded in additional paid-in-capital.

(2)         The initial exchange rate is 35.5391 shares per $1,000 principal amount of the notes (or an initial exchange price of approximately $28.138 per share of our common stock).

 

ASC 470-20 requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. ASC 470-20 requires that the initial proceeds from the sale of these notes be allocated between a liability component and an equity component in a manner that reflects interest expense at the interest rate of similar nonconvertible debt that could have been issued by the Company at such time. The Company measured the fair value of the debt components of the 4.55% convertible senior notes for the period presented based on effective interest rate of 6.08%.  The aggregate carrying amount of the debt component was approximately $560.4 million at March 31, 2013. As a result, the Company attributed an aggregate of approximately $28.7 million of the proceeds to the equity component of the notes, which represents the excess proceeds received over the fair value of the notes at the date of issuance. The equity component of the notes has been reflected within Additional Paid-in Capital in the Consolidated Balance Sheets. The Company reclassified approximately $620 thousand of the convertible debt discount and deferred fees to Additional Paid-in Capital, which represented the costs attributable to the equity components of the notes. The carrying amount of the equity component was approximately $28.1 million at March 31, 2013. The resulting debt discount will be amortized over the period during which the debt is expected to be outstanding (the maturity date) as additional non-cash interest expense. The additional non-cash interest expense attributable to each debt security will increase in subsequent reporting periods through the maturity date as the notes accrete to their par value over the same period. The aggregate contractual interest expense was approximately $3.3 million for the quarter ended March 31, 2013. As a result of applying ASC 470-20, the Company reported additional non-cash interest expense of approximately $841 thousand for the quarter ended March 31, 2013.

 

Prior to the close of business on the business day immediately preceding September 1, 2017, the notes will be convertible only upon satisfaction of one or more of the following conditions: (i) satisfaction of sale price condition, (ii) satisfaction of trading price condition, and (iii) specified corporate events. On or after September 1, 2017, holders may convert each of their notes at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date irrespective of the foregoing conditions. Capitalized terms used below and not otherwise defined shall have the respective meanings ascribed to them in the prospectus supplement (“the Prospectus”) dated February 11, 2013.

 

Conversion Upon Satisfaction Of Sale Price Condition

 

A Holder may surrender Securities for conversion during any fiscal quarter commencing after March 31, 2013 (and only during such fiscal quarter) if the Last Reported Sale Price of the Common Stock for at least 20 Trading Days (whether or not consecutive) during the period of 30 consecutive Trading Days ending on the last Trading Day of the immediately preceding fiscal quarter is greater than or equal to 130% of the Conversion Price in effect on each Trading Day.

 

25



 

Conversion Upon Satisfaction Of Trading Price Condition

 

A Holder may surrender Securities for conversion during the five Business Day period after any five consecutive Trading Day period (the “Measurement Period”) in which the Trading Price per $1,000 principal amount of Securities, as determined following a request by a Holder in accordance with the procedures set forth in the Prospectus, for each Trading Day of such Measurement Period was less than 98% of the product of (i) the Conversion Rate in effect on such Trading Day and (ii) the Last Reported Sale Price of the Common Stock on such Trading Day.

 

Conversion Upon Specified Corporate Events

 

Certain Distributions. If the Company elects to: (i) issue to all or substantially all holders of the Common Stock rights, options or warrants entitling them for a period of not more than 45 calendar days after the date of such issuance to subscribe for or purchase shares of the Common Stock, at a price per share less than the average of the Last Reported Sale Prices of the Common Stock for the 10 consecutive Trading Day period ending on the Trading Day immediately preceding the date of announcement of such issuance; or (ii) distribute to all or substantially all holders of the Common Stock the Company’s assets, debt securities or rights to purchase the Company’s securities, which distribution has a per-share value, as reasonably determined by the Board of Directors, exceeding 10% of the Last Reported Sale Price of the Common Stock on, and including, the Trading Day immediately preceding the date of announcement for such distribution, then, the Company must deliver notice of such issuance or distribution, and of the Ex-Dividend Date for such issuance or distribution, to the Holders at least 50 Scheduled Trading Days prior to the Ex-Dividend Date for such issuance or distribution. Holders may surrender their Securities for conversion at any time during the period beginning on the 45th Scheduled Trading Day immediately prior to the Ex-Dividend Date for such issuance or distribution and ending on the earlier of (a) the Close of Business on the Business Day immediately preceding the Ex-Dividend Date for such issuance or distribution or (b) its announcement that such issuance or distribution will not take place, even if the Securities are not otherwise convertible at such time; provided, however, that Holders may not convert their Securities if the Company provides that Holders shall participate, at the same time and upon the same terms as holders of the Common Stock, and as a result of holding the Securities, in the relevant issuance or distribution without having to convert their Securities as if they held a number of shares of the Common Stock equal to the Conversion Rate in effect on the Ex-Dividend Date for such issuance or distribution multiplied by the principal amount (expressed in thousands) of Securities held by such Holder on the Ex-Dividend Date for such issuance or distribution.

 

Certain Corporate Events. If (i) a Make-Whole Fundamental Change occurs or (ii) the Company is a party to (a) a consolidation, merger, binding share exchange, pursuant to which the Common Stock would be converted into cash, securities or other assets or (b) a sale, conveyance, transfer or lease of all or substantially all of the assets of the Company and its Subsidiaries, on a consolidated basis, to another person (other than any of the Company’s Subsidiaries), the Securities may be surrendered for conversion at any time from or after the date that is 45 Scheduled Trading Days prior to the anticipated Fundamental Change Effective Date or the anticipated effective date of such sale, conveyance, transfer or lease, as the case may be (or, if later, the Business Day after the Company gives notice of such transaction) until the Close of Business (i) if such transaction is a Fundamental Change, on the Business Day immediately preceding the Fundamental Change Purchase Date, and, (ii) otherwise, on the 35th Business Day immediately following the effective date for such transaction. The Company will notify the Holders of any such transaction: (A) as promptly as practicable following the date the Company publicly announces such transaction but in no event less than 55 Scheduled Trading Days prior to the anticipated effective date of such transaction; or (B) if the Company does not have knowledge of such transaction at least 55 Scheduled Trading Days prior to the anticipated effective date of such transaction, within one Business Day of the date upon which the Company receives notice, or otherwise becomes aware, of such transaction, but in no event later than the actual effective date of such transaction.

 

8. Loan Securitization/Sale Activities

 

The secured financing liability relates to two loans contributed to a commercial mortgage securitization in 2010 and one loan sold in the third quarter of 2012 that did not qualify for sale treatment under GAAP. As of March 31, 2013, the balance of the loans transferred as secured borrowings was $85.8 million and loan transfer secured borrowings was $87.5 million. As of December 31, 2012, the balance of the loans transferred as secured borrowings was $85.9 million loan transfer secured borrowings was $87.9 million.

 

During the first quarter of 2012, we sold six loans with a carrying value of $122.7 million to an independent third party resulting in proceeds, net of financing repayments, of $40.6 million. Control of the loans was surrendered in the loan transfer and it was therefore treated as a sale under GAAP, resulting in a realized gain of $9.4 million. The net economic gain of this transaction, including a realized loss of $8.4 million on the termination of the corresponding interest rate hedge, was $1.0 million. Additionally, we sold 50% of our Euro denominated loan to a strategic partner resulting in proceeds of $28.8 million and a realized loss of $2.1 million; however, this transaction was earnings neutral after considering the realized gains on the related currency hedges of $2.1 million that were terminated in connection with the sale.

 

26



 

During the three months ended March 31, 2013, a related party venture that we consolidate (refer to Note 11) sold its first mortgage loan to independent third parties.  We immediately thereafter purchased a pari-passu participation in the loan such that our economic interest in the loan was effectively unchanged. We did not recognize any gain on sale from these transactions given that we held the same economic interest in the first mortgage loan after they were consummated.

 

9. Derivatives and Hedging Activity

 

Risk Management Objective of Using Derivatives

 

We are exposed to certain risk arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, foreign exchange, liquidity, and credit risk primarily by managing the amount, sources, and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates, credit spreads, and foreign exchange rates. Our derivative financial instruments are used to manage differences in the amount, timing, and duration of the known or expected cash receipts and known or expected cash payments principally related to our investments, anticipated level of loan sales, and borrowings.

 

Cash Flow Hedges of Forecasted Interest Payments

 

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

In connection with our repurchase agreements, we have entered nine outstanding interest rate swaps that have been designated as cash flow hedges of the interest rate risk associated with forecasted interest payments. As of March 31, 2013, the aggregate notional of our interest rate swaps designated as cash flow hedges totaled $211.8 million.  Under these agreements, we will pay monthly coupons at a fixed rates ranging from 0.557% to 2.228% of the notional amount to the counterparty and receive floating rate LIBOR. Our interest rate swaps designated as cash flow hedges have maturities ranging from August 2013 to May 2021.

 

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended March 31, 2013 and 2012, we recorded no hedge ineffectiveness in earnings.

 

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the associated variable-rate debt. Over the next twelve months, we estimate that an additional $1.5 million will be reclassified as an increase to interest expense.  We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 99 months.

 

Non-designated Hedges

 

Derivatives not designated as hedges are derivatives that do not meet the criteria for hedge accounting under GAAP or which we have not elected to designate as hedges.  We do not use these derivatives for speculative purposes but are instead they are used to manage our exposure to foreign exchange rates, interest rate changes, and certain credit spreads.  Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in net (losses) gains on interest rate hedges in the consolidated statements of operations. During 2010, we entered into a series of forward contracts whereby we agree to sell an amount of GBP for agreed upon amounts of USD at various dates through October 2013. These forward contracts were executed to economically fix the USD amounts of GBP-denominated cash flows expected to be received by us related to a GBP-denominated loan investment.

 

During 2011, we entered into a series of forward contracts whereby we agreed to sell an amount of EUR for an agreed upon amount of USD at various dates through June of 2014. These forward contracts were executed to economically fix the USD amount of EUR-denominated cash flows expected to be received by us related to a mezzanine loan investment in Germany. During 2012, we

 

27



 

terminated a portion of our contracts to sell EUR. The purpose of the terminations was to reduce the amount of EUR we were to sell at future dates as a result of the refinancing of our EUR-denominated loan investment.

 

During 2012, we entered into positions to buy GBP for an agreed upon amount of USD at various dates through October 2013 to fix the future value of our losses on pre-existing GBP forward positions. We also entered into a new series of forward contracts whereby we agreed to sell GBP for an agreed upon amount of USD at various dates through March 2016. We also entered into a series of forward contracts whereby we agreed to sell an amount of EUR for an agreed upon amount of USD at various dates through January of 2014. These forward contracts were executed to economically fix the USD amount of EUR-denominated cash flows expected to be received by us related to a second EUR denominated mezzanine loan.

 

During the three months ended March 31, 2013, we entered into a series of forward contracts whereby we agree to sell an amount of GBP for agreed upon amounts of USD at various dates through January 2018. These forward contracts were executed to economically fix the USD amounts of GBP-denominated cash flows expected to be received by us related to a GBP-denominated loan investment.

 

As of March 31, 2013, we had 39 foreign exchange forward derivatives to sell GBP with a total notional amount of GBP 199.1 million, 3 foreign exchange forward derivatives to buy GBP with a total notional amount of GBP 65.2 million and 10 foreign exchange forward derivatives to sell EUR with a total notional of EUR 90.1 million that were not designated as hedges in qualifying hedging relationships.

 

During 2011, we entered into several interest rate swaps that were not designated as hedges. Under these agreements, we pay coupons at fixed rates ranging from 0.716% to 2.505% of the notional amount to the counterparty and receive floating rate LIBOR. These interest rate swaps are used to limit the price exposure of certain assets due to changes in benchmark USD-LIBOR swap rates from which the pricing of these assets is derived. As of March 31, 2013, the aggregate notional amount of these interest rate swaps totaled $165.0 million. Changes in the fair value of these interest rate swaps are recorded directly in earnings.

 

In connection with our acquisition on a loan portfolio from an international bank during the fourth quarter of 2011, we entered into nine interest rate swaps whereby we receive fixed coupons ranging from 6.28% to 2.86% of the notional amount and pay floating rate LIBOR.  We acquired these swaps at a cost of $7.5 million.  The premium paid reflects the fact that these swaps had above market rates which we receive.   These swaps effectively convert certain floating rate loans we acquired to fixed rates.  As of March 31, 2013, the aggregate notional amount of these swaps totaled $69.6 million. Changes in the fair value of these interest rate swaps are recorded directly in earnings.

 

The table below presents the fair value of our derivative financial instruments as well as their classification on the balance sheet as of March 31, 2013 and December 31, 2012 (amounts in thousands).

 

Tabular Disclosure of Fair Values of Derivative Instruments (amounts in thousands)

 

 

 

Derivatives in an Asset Position

 

Derivatives in a Liability Position

 

 

 

As of March 31, 2013

 

As of December 31, 2012

 

As of March 31, 2013

 

As of December 31, 2012

 

 

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Balance
Sheet
Location

 

Fair
Value

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Derivative Assets

 

$

—-

 

N/A

 

$

 

Derivative Liabilities

 

$

2,292

 

Derivative Liabilities

 

$

2,571

 

Total derivatives designated as hedging instruments

 

 

 

$

 

 

 

$

 

 

 

$

2,292

 

 

 

$

2,571

 

Derivatives not designated as hedging instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps

 

Derivative Assets

 

$

4,320

 

Derivative Assets

 

$

4,892

 

Derivative Liabilities

 

$

1,478

 

Derivative Liabilities

 

$

1,772

 

Foreign exchange contracts

 

Derivative Assets

 

10,613

 

Derivative Assets

 

4,335