Edgar Filing: STARWOOD PROPERTY TRUST, INC.

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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 June 30, 2014

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 the definitions of “large accelerated filer”, “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 August 1, 2014 was 222,602,294.

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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, 2013, this Quarterly Report on Form 10-Q and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2014, including those set forth under the captions “Risk Factors” and “Business”;

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

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

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

· our ability to fully integrate LNR Property LLC, a Delaware limited liability company (“LNR”), which was acquired on April 19, 2013, into our business and achieve the benefits that 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 and residential 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 and securities investing activities;

· 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.

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TABLE OF CONTENTS

		Page
Part I	Financial Information
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Income	6
	Condensed Consolidated Statements of Equity	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	10
	Note 1 Business and Organization	10
	Note 2 Summary of Significant Accounting Policies	11
	Note 3 Acquisitions and Divestitures	14
	Note 4 Loans	16
	Note 5 Investment Securities	18
	Note 6 Investment in Unconsolidated Entities	22
	Note 7 Goodwill and Intangible Assets	23
	Note 8 Secured Financing Agreements	24
	Note 9 Convertible Senior Notes	25
	Note 10 Loan Securitization/Sale Activities	26
	Note 11 Derivatives and Hedging Activity	27
	Note 12 Offsetting Assets and Liabilities	29
	Note 13 Variable Interest Entities	29
	Note 14 Related-Party Transactions	30
	Note 15 Stockholders’ Equity	31
	Note 16 Earnings per Share	32
	Note 17 Accumulated Other Comprehensive Income	34
	Note 18 Fair Value	35
	Note 19 Income Taxes	40
	Note 20 Commitments and Contingencies	41
	Note 21 Segment Data	42
	Note 22 Subsequent Events	48
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	49
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	68
Item 4.	Controls and Procedures	70
Part II	Other Information
Item 1.	Legal Proceedings	71
Item 1A.	Risk Factors	71
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	71
Item 3.	Defaults Upon Senior Securities	71
Item 4.	Mine Safety Disclosures	71
Item 5.	Other Information	71
Item 6.	Exhibits	73

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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 June 30, 2014			As of December 31, 2013
Assets:
Cash and cash equivalents	$	518,627		$	317,627
Restricted cash	44,561			69,052
Loans held-for-investment, net	4,885,854			4,363,718
Loans held-for-sale, at fair value	154,412			206,672
Loans transferred as secured borrowings	142,867			180,414
Investment securities ($532,328 and $566,789 held at fair value)	902,424			935,107
Intangible assets—servicing rights ($138,318 and $150,149 held at fair value)	156,846			177,173
Residential real estate, net	—			749,214
Non-performing residential loans	—			215,371
Investment in unconsolidated entities	118,621			122,954
Goodwill	140,437			140,437
Derivative assets	4,681			7,769
Accrued interest receivable	37,483			37,630
Other assets	165,532			95,813
Variable interest entity (“VIE”) assets, at fair value	114,091,158			103,151,624
Total Assets	$	121,363,503		$	110,770,575
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	140,809		$	225,374
Related-party payable	24,475			17,793
Dividends payable	108,012			90,171
Derivative liabilities	26,294			24,192
Secured financing agreements, net	2,561,267			2,257,560
Convertible senior notes, net	1,003,847			997,851
Secured borrowings on transferred loans	142,815			181,238
VIE liabilities, at fair value	113,541,151			102,649,263
Total Liabilities	117,548,670			106,443,442
Commitments and contingencies (Note 20)
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, 223,224,144 issued and 222,598,294 outstanding as of June 30, 2014 and 196,139,045 issued and 195,513,195 outstanding as of December 31, 2013	2,232			1,961
Additional paid-in capital	3,784,575			4,300,479
Treasury stock (625,850 shares)	(10,642		)	(10,642		)
Accumulated other comprehensive income	74,962			75,449
Accumulated deficit	(49,686		)	(84,719		)
Total Starwood Property Trust, Inc. Stockholders’ Equity	3,801,441			4,282,528
Non-controlling interests in consolidated subsidiaries	13,392			44,605
Total Equity	3,814,833			4,327,133
Total Liabilities and Equity	$	121,363,503		$	110,770,575

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

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

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Revenues:
Interest income from loans	$	105,455		$	74,936		$	210,365		$	142,626
Interest income from investment securities	27,620			18,577			57,074			34,817
Servicing fees	32,681			39,135			66,892			39,135
Other revenues	4,994			1,795			8,398			1,874
Total revenues	170,750			134,443			342,729			218,452
Costs and expenses:
Management fees	25,085			16,146			52,906			31,215
Interest expense	37,695			22,648			75,526			40,074
General and administrative	43,094			44,335			89,195			48,373
Business combination costs	—			13,420			—			17,616
Acquisition and investment pursuit costs	771			916			1,165			997
Depreciation and amortization	5,154			2,228			9,790			2,228
Loan loss allowance, net	(139		)	725			358			755
Other expense	6,026			196			7,715			229
Total costs and expenses	117,686			100,614			236,655			141,487
Income before other income, income taxes and non-controlling interests	53,064			33,829			106,074			76,965
Other income:
Income of consolidated VIEs, net	47,028			31,949			103,032			31,949
Change in fair value of servicing rights	(5,523		)	2,898			(10,774		)	2,898
Change in fair value of investment securities, net	4,959			(1,392		)	13,320			(987		)
Change in fair value of mortgage loans held-for-sale, net	11,608			458			32,501			458
Earnings from unconsolidated entities	9,563			3,770			9,627			4,511
Gain (loss) on sale of investments, net	10,078			(18		)	11,633			13,506
(Loss) gain on derivative financial instruments, net	(9,790		)	6,158			(17,656		)	22,386
Foreign currency gain (loss), net	3,777			1,580			5,254			(6,085		)
Total other-than-temporary impairment (“OTTI”)	(800		)	(846		)	(1,992		)	(1,373		)
Noncredit portion of OTTI recognized in other comprehensive income	3			487			982			972
Net impairment losses recognized in earnings	(797		)	(359		)	(1,010		)	(401		)
Other income, net	692			39			710			39
Total other income	71,595			45,083			146,637			68,274
Income from continuing operations before income taxes	124,659			78,912			252,711			145,239
Income tax provision	(4,277		)	(11,343		)	(9,897		)	(11,958		)
Income from continuing operations	120,382			67,569			242,814			133,281
Loss from discontinued operations, net of tax (Note 3)	—			(6,058		)	(1,551		)	(8,346		)
Net income	120,382			61,511			241,263			124,935
Net income attributable to non-controlling interests	(2,514		)	(1,057		)	(2,794		)	(2,238		)
Net income attributable to Starwood Property Trust, Inc.	$	117,868		$	60,454		$	238,469		$	122,697

Earnings per share data attributable to Starwood Property Trust, Inc.:
Basic:
Income from continuing operations	$	0.53		$	0.41		$	1.14		$	0.87
Loss from discontinued operations	—			(0.04		)	(0.01		)	(0.05		)
Net income	$	0.53		$	0.37		$	1.13		$	0.82
Diluted:
Income from continuing operations	$	0.52		$	0.41		$	1.12		$	0.87
Loss from discontinued operations	—			(0.04		)	(0.01		)	(0.05		)
Net income.	$	0.52		$	0.37		$	1.11		$	0.82

Dividends declared per common share	$	0.48		$	0.46		$	0.96		$	0.90

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, amounts in thousands)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2014			2013			2014			2013
Net income	$	120,382		$	61,511		$	241,263		$	124,935
Other comprehensive loss (net change by component):
Cash flow hedges	(93		)	1,501			29			1,780
Available-for-sale securities	(9,618		)	(11,778		)	(6,120		)	(14,127		)
Foreign currency remeasurement	4,558			18			5,604			(7,043		)
Other comprehensive loss	(5,153		)	(10,259		)	(487		)	(19,390		)
Comprehensive income	115,229			51,252			240,776			105,545
Less: Comprehensive income attributable to non-controlling interests	(2,514		)	(1,057		)	(2,794		)	(2,238		)
Comprehensive income attributable to Starwood Property Trust, Inc.	$	112,715		$	50,195		$	237,982		$	103,307

See notes to condensed consolidated financial statements.

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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, 2014	196,139,045	$	1,961	$	4,300,479		625,850	$	(10,642	)	$	(84,719	)	$	75,449		$	4,282,528		$	44,605		$	4,327,133
Proceeds from public offering of common stock	25,300,000	253		564,442			—	—			—			—			564,695			—			564,695
Proceeds from ATM Agreement	759,000	8		18,338			—	—			—			—			18,346			—			18,346
Proceeds from DRIP Plan	481	—		12			—	—			—			—			12			—			12
Equity offering costs	—	—		(1,636		)	—	—			—			—			(1,636		)	—			(1,636		)
Stock-based compensation	735,014	7		14,724			—	—			—			—			14,731			—			14,731
Manager incentive fee paid in stock	290,604	3		6,959			—	—			—			—			6,962			—			6,962
Net income	—	—		—			—	—			238,469			—			238,469			2,794			241,263
Dividends declared, $0.48 per share	—	—		—			—	—			(203,436		)	—			(203,436		)	—			(203,436		)
Spin-off of SWAY	—	—		(1,118,743		)	—	—			—			—			(1,118,743		)	(1,594		)	(1,120,337		)
Other comprehensive income, net	—	—		—			—	—			—			(487		)	(487		)	—			(487		)
VIE non-controlling interests	—	—		—			—	—			—			—			—			996			996
Distribution to non-controlling interests	—	—		—			—	—			—			—			—			(33,409		)	(33,409		)
Balance, June 30, 2014	223,224,144	$	2,232	$	3,784,575		625,850	$	(10,642	)	$	(49,686	)	$	74,962		$	3,801,441		$	13,392		$	3,814,833

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
Proceeds from public offering of common stock	30,475,000	305		822,063			—	—			—			—			822,368			—			822,368
Equity offering costs	—	—		(617		)	—	—			—			—			(617		)	—			(617		)
Convertible senior notes	—	—		28,107			—	—			—			—			28,107			—			28,107
Stock-based compensation	350,002	4		8,825			—	—			—			—			8,829			—			8,829
Manager incentive fee paid in stock	13,188	—		365			—	—			—			—			365			—			365
Net income	—	—		—			—	—			122,697			—			122,697			2,238			124,935
Dividends declared, $0.90 per share	—	—		—			—	—			(137,046		)	—			(137,046		)	—			(137,046		)
Other comprehensive loss, net	—	—		—			—	—			—			(19,390		)	(19,390		)	—			(19,390		)
Non-controlling interest assumed through LNR acquisition	—	—		—			—	—			—			—			—			8,277			8,277
Contributions from non-controlling interests	—	—		—			—	—			—			—			—			1,007			1,007
Distribution to non-controlling interests	—	—		—			—	—			—			—			—			(47,534		)	(47,534		)
Balance, June 30, 2013	166,963,546	$	1,670	$	3,580,096		625,850	$	(10,642	)	$	(86,750	)	$	60,285		$	3,544,659		$	41,847		$	3,586,506

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

	For the Six Months Ended June 30,
	2014			2013
Cash Flows from Operating Activities:
Net income	$	241,263		$	124,935
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs	5,543			4,986
Amortization of convertible debt discount and deferred fees	6,209			2,652
Accretion of net discount on investment securities	(11,680		)	(16,568		)
Accretion of net deferred loan fees and discounts	(10,147		)	(14,243		)
Amortization of premium from secured borrowings on transferred loans	(824		)	(731		)
Share-based compensation	14,731			8,829
Share-based component of incentive fees	6,962			365
Change in fair value of fair value option investment securities	(13,320		)	988
Change in fair value of consolidated VIEs	(25,610		)	(11,132		)
Change in fair value of servicing rights	10,774			(2,898		)
Change in fair value of loans held-for-sale	(32,501		)	(458		)
Change in fair value of derivatives	16,494			(23,760		)
Foreign currency (gain) loss, net	(5,464		)	5,867
Gain on non-performing loans and sale of investments	(12,575		)	(15,666		)
Other-than-temporary impairment	1,010			859
Loan loss allowance, net	358			755
Depreciation and amortization	10,550			3,366
Earnings from unconsolidated entities	(9,627		)	(1,919		)
Distributions of earnings from unconsolidated entities	6,016			787
Changes in operating assets and liabilities:
Related-party payable, net	6,682			22,093
Accrued interest receivable, less purchased interest	(18,840		)	(4,985		)
Other assets	(10,535		)	(4,969		)
Accounts payable, accrued expenses and other liabilities	(29,787		)	30,393
Originations of loans held-for-sale, net of principal collections	(582,033		)	(390,669		)
Proceeds from sale of loans held-for-sale	666,793			476,453
Net cash provided by operating activities	230,442			195,330
Cash Flows from Investing Activities:
Spin-off of Starwood Waypoint Residential Trust	(111,960		)	—
Purchase of LNR, net of cash acquired	—			(586,383		)
Purchase of investment securities	(53,453		)	(59,476		)
Proceeds from sales of investment securities	50,219			235,904
Proceeds from principal collections on investment securities	19,114			40,124
Origination and purchase of loans held-for-investment	(1,277,636		)	(651,897		)
Proceeds from principal collections on loans	587,018			140,478
Proceeds from loans sold	202,514			97,490
Acquisition and improvement of single family homes	(61,901		)	(262,315		)
Proceeds from sale of single family homes	1,784			4,095
Purchase of other assets	(15,502		)	(136		)
Purchase of non-performing loans	—			(132,957		)
Proceeds from sale of non-performing loans	1,153			10,742
Investment in unconsolidated entities	(21,973		)	(5,000		)
Distribution of capital from unconsolidated entities	30,544			1,569
Payments for purchase or termination of derivatives	(14,253		)	(39		)
Proceeds from termination of derivatives	2,092			3,544
Return of investment basis in purchased derivative asset	798			1,028
Increase in restricted cash, net	(5,941		)	(41,797		)
Net cash used in investing activities	(667,383		)	(1,205,026		)

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

	For the Six Months Ended June 30,
	2014			2013
Cash Flows from Financing Activities:
Borrowings under financing agreements	$	1,807,229		$	1,614,133
Proceeds from issuance of convertible senior notes	—			587,700
Principal repayments on borrowings	(1,510,052		)	(1,650,974		)
Payment of deferred financing costs	(7,881		)	(8,529		)
Proceeds from secured borrowings	—			95,000
Proceeds from common stock issuances	583,053			822,368
Payment of equity offering costs	(1,636		)	(617		)
Payment of dividends	(185,594		)	(133,944		)
Contributions from non-controlling interests	—			1,007
Distributions to non-controlling interests	(33,409		)	(47,534		)
Issuance of debt of consolidated VIEs	71,756			—
Repayment of debt of consolidated VIEs	(99,763		)	(81,870		)
Distributions of cash from consolidated VIEs	13,413			2,124
Net cash provided by financing activities	637,116			1,198,864
Net increase in cash and cash equivalents	200,175			189,168
Cash and cash equivalents, beginning of period	317,627			177,671
Effect of exchange rate changes on cash	825			(52		)
Cash and cash equivalents, end of period	$	518,627		$	366,787
Supplemental disclosure of cash flow information:
Cash paid for interest	$	65,229		$	22,580
Income taxes paid	14,792			2,214
Supplemental disclosure of non-cash investing and financing activities:
Net assets distributed in spin-off of Starwood Waypoint Residential Trust	$	1,008,377		$	—
Dividends declared, but not yet paid	108,012			76,900
Consolidation of VIEs (VIE asset/liability additions)	23,991,532			10,674,125
Deconsolidation of VIEs (VIE asset/liability reductions)	6,038,375			584,460
Fair value of assets acquired	—			1,152,360
Fair value of liabilities assumed	—			562,279
Unsettled trades and loans receivable	52,815			—

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of June 30, 2014

(Unaudited)

1. Business and Organization

Starwood Property Trust, Inc. (“STWD” together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering (“IPO”). We are focused primarily on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (“CMBS”), and other commercial real estate-related debt investments in both the U.S. and Europe. We refer to the following as our target assets:

· commercial real estate mortgage loans, including preferred equity interests;

· CMBS; and

· other commercial real estate-related debt investments.

We may also invest in residential mortgage-backed securities (“RMBS”), certain residential mortgage loans, distressed or non-performing commercial loans, commercial properties subject to net leases and commercial real estate owned. 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.

We have two reportable business segments as of June 30, 2014:

· Real estate investment lending (the “Lending Segment”)—includes all business activities of the Company, excluding the LNR business, which generally represents investments in real estate-related loans and securities that are held-for-investment.

· LNR—includes all business activities of the acquired LNR Property LLC (“LNR”) business excluding the consolidation of securitization VIEs.

On April 19, 2013, we acquired the equity of LNR and certain of its subsidiaries for an initial agreed upon purchase price of approximately $859 million, which was reduced for transaction expenses and distributions occurring after September 30, 2012, resulting in cash consideration of approximately $730 million. Immediately prior to the acquisition, an affiliate of the Company acquired the remaining equity comprising LNR’s commercial property division for a purchase price of $194 million. The portion of the LNR business acquired by us includes the following: (i) servicing businesses in both the U.S. and Europe that manage and work out problem assets, (ii) a finance business that is focused on selectively acquiring and managing real estate finance investments, including unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and resecuritization transactions, and high yielding real estate loans; and (iii) a mortgage loan business which originates conduit loans for the primary purpose of selling these loans into securitization transactions.

On January 31, 2014, we completed the spin-off of our former single family residential (“SFR”) segment to our stockholders. The newly-formed real estate investment trust, Starwood Waypoint Residential Trust (“SWAY”), is listed on the New York Stock Exchange (“NYSE”) and trades under the ticker symbol “SWAY.” Our stockholders received one common share of SWAY for every five shares of our common stock held at the close of business on January 24, 2014. As part of the spin-off, we contributed $100 million to the unlevered balance sheet of SWAY to fund its growth and operations. As of January 31, 2014, SWAY held net assets of $1.1 billion. The net assets of SWAY consisted of approximately 7,200 units of single-family homes and residential non-performing mortgage loans as of January 31, 2014. In connection with the spin-off, 40.1 million shares of SWAY were issued. Refer to Note 3 herein for additional information regarding SFR segment financial information, which has been presented within discontinued operations in the condensed consolidated statements of operations included herein.

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

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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.

In connection with the LNR acquisition, we established additional taxable REIT subsidiaries (“TRSs”). TRSs permit us to participate in certain activities from which REITs are generally precluded, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Code, and are conducted in entities which elect to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, we will continue to maintain our qualification as a REIT.

These TRSs engage in various real estate related operations, including special servicing of commercial real estate, originating and securitizing commercial mortgage loans, and investing in entities which engage in real estate related operations. As of June 30, 2014, $854.5 million of the LNR assets were owned by TRS entities. Our TRSs are not consolidated for federal income tax purposes, but are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred taxes is established for the portion of earnings recognized by us with respect to our interest in TRSs.

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.

2. Summary of Significant Accounting Policies

Balance Sheet Presentation of LNR Variable Interest Entities

The acquisition of LNR substantially changed the presentation of our financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”). As noted above, LNR operates a finance business that acquires unrated, investment grade and non-investment grade rated CMBS. These securities represent interests in securitization structures (commonly referred to as special purpose entities, or “SPEs”). These SPEs are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. Under GAAP, SPEs typically qualify as variable interest entities (“VIEs”). These are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.

Because LNR often serves as the special servicer of the trusts in which it invests, consolidation of these structures is required pursuant to GAAP as outlined in detail below. This results in a consolidated balance sheet which presents the gross assets and liabilities of the SPEs. The assets and other instruments held by these SPEs are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the SPEs do not have any recourse to the general credit of any other consolidated entities, nor to us as the consolidator of these SPEs.

The SPE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the consolidated VIEs are also eliminated. Finally, an allocable portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.

Please refer to the segment data in Note 21 herein for a presentation of the LNR business without consolidation of these VIEs.

Basis of Accounting and Principles of Consolidation

The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries and VIEs. Intercompany amounts have been eliminated in consolidation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows have been included.

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 fiscal year ended December 31, 2013 (the “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2014 are not necessarily indicative of the operating results for the full year.

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Refer to our Form 10-K for a description of our recurring accounting policies. We have included disclosure in this Note 2 regarding principles of consolidation and other accounting policies that (i) are required to be disclosed quarterly, (ii) we view as critical, or (iii) became significant since December 31, 2013 due to a corporate action or increase in the significance of the underlying business activity.

Variable Interest Entities

We evaluate all of our interests in VIEs for consolidation. When our interests are determined to be variable interests, we assess whether we are deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. ASC 810, Consolidation, defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. We consider our variable interests as well as any variable interests of our related parties in making this determination. Where both of these factors are present, we are deemed to be the primary beneficiary and we consolidate the VIE. Where either one of these factors is not present, we are not the primary beneficiary and do not consolidate the VIE.

To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes first, identifying the activities that most significantly impact the VIE’s economic performance; and second, identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE.

To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests, including debt and equity investments, servicing fees, and other arrangements deemed to be variable interests in the VIE. This assessment requires that we apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by us.

Our purchased investment securities include CMBS, which are unrated and non-investment grade rated securities issued by CMBS trusts. In certain cases, we may contract to provide special servicing activities for these CMBS trusts, or, as holder of the controlling class, we may have the right to name and remove the special servicer for these trusts. In our role as special servicer, we provide services on defaulted loans within the trusts, such as foreclosure or work-out procedures, as permitted by the underlying contractual agreements. In exchange for these services, we receive a fee. These rights give us the ability to direct activities that could significantly impact the trust’s economic performance. However, in those instances where an unrelated third party has the right to unilaterally remove us as special servicer, we do not have the power to direct activities that most significantly impact the trust’s economic performance. We evaluated all of our positions in such investments for consolidation.

For VIEs in which we are determined to be the primary beneficiary, all of the underlying assets, liabilities and equity of the structures are recorded on our books, and the initial investment, along with any associated unrealized holding gains and losses, are eliminated in consolidation. Similarly, the interest income earned from these structures, as well as the fees paid by these trusts to us in our capacity as special servicer, are eliminated in consolidation. Further, an allocable portion of the identified servicing intangible asset associated with the servicing fee streams, and the corresponding allocable amortization or change in fair value of the servicing intangible asset, are also eliminated in consolidation.

We perform ongoing reassessments of: (1) whether any entities previously evaluated under the majority voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework, and (2) whether changes in the facts and circumstances regarding our involvement with a VIE causes our consolidation conclusion regarding the VIE to change.

We have elected the fair value option in measuring the assets and liabilities of any VIEs we consolidate. Fluctuations in the fair values of the VIE assets and liabilities, along with trust interest income and trust interest and administrative expenses, are presented net in income of consolidated VIEs in our consolidated statements of operations.

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Discontinued Operations

On January 31, 2014, we completed the spin-off of our former SFR segment to our stockholders as discussed in Note 1. In accordance with Accounting Standards Codification (“ASC”) Topic 205, Presentation of Financial Statements, the results of the SFR segment are presented within discontinued operations in our condensed consolidated statements of operations for the six months ended June 30, 2014 and the three and six months ended June 30, 2013.

Fair Value Option

The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in our consolidated balance sheets from those instruments using another accounting method.

We have elected the fair value option for eligible financial assets and liabilities of our consolidated VIEs, loans held-for-sale originated by LNR’s conduit platform, purchased CMBS issued by VIEs we could consolidate in the future and certain investments in marketable equity securities. The fair value elections for VIE and securitization related items were made in order to mitigate accounting mismatches between the carrying value of the instruments and the related assets and liabilities that we consolidate at fair value. The fair value elections for mortgage loans held-for-sale originated by LNR’s conduit platform were made due to the short-term nature of these instruments. The fair value elections for investments in marketable equity securities were made because the shares are listed on an exchange, which allows us to determine the fair value using a quoted price from an active market.

Loans Receivable and Provision for Loan Losses

In our Lending Segment we purchase and originate commercial real estate debt and related instruments generally to be held as long-term investments at amortized cost. We are required to periodically evaluate each of these loans for possible impairment. Impairment is indicated 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 determined to be impaired, we write down the loan through a charge to the provision for loan losses. Actual losses, if any, could ultimately differ from these estimates.

We perform a quarterly review of our portfolio of loans. In connection with this review, we assess the performance of each loan and assign a risk rating based on several factors including risk of loss, loan-to-value ratio (“LTV”), collateral performance, structure, exit plan, and sponsorship. Loans are rated “1” through “5”, from less risk to greater risk, in connection with this review.

Use of Estimates

The preparation of financial statements in conformity with 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 loans, investment securities and intangible assets, 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 assets and liabilities that are estimated using a discounted cash flows method is significantly impacted by the rates at which we estimate market participants would discount the expected cash flows.

Reclassifications and Measurement Period Adjustments

As a result of the spin-off, the results from our SFR segment have been reclassified as discontinued operations in our condensed consolidated statements of operations for the three and six months ended June 30, 2013. In addition, certain prior period amounts have been reclassified to conform to the current period presentation, which had no effect on our previously reported net income. In that regard, we reclassified $177.0 million of proceeds from sales of loans held-for-sale by LNR to cash flows from operating activities in the condensed consolidated statement of cash flows for the six months ended June 30, 2013 in order to conform to the current period presentation, which is also consistent with the presentation in our Form 10-K. These proceeds were previously reported as a non-cash financing activity and reflected net against principal repayments on borrowings for the related repurchase agreements that were settled net with those proceeds.

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The prior period financial statements included herein reflect the retrospective measurement period adjustment related to the LNR acquisition as described in Note 3 to the consolidated financial statements included in our Form 10-K. Such adjustment reduced earnings from unconsolidated entities and net income by $1.8 million in the three and six months ended June 30, 2013.

Recent Accounting Developments

On April 10, 2014 the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which requires only those disposals which represent a strategic shift that has or will have a major impact on an entity’s operations or financial results be presented as discontinued operations. The ASU is effective for annual periods beginning on or after December 15, 2014, and interim periods within those annual periods, and requires prospective application. Early adoption is permitted for disposals not already reported in previously issued financial statements. We do not expect the application of this ASU to materially impact the Company.

On May 28, 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which establishes key principles by which an entity determines the amount and timing of revenue recognized from customer contracts. The ASU is effective for the first interim or annual period beginning after December 15, 2016. Early application is not permitted. We do not expect the application of this ASU to materially impact the Company.

On June 12, 2014 the FASB issued ASU 2014-11, Transfers and Servicing (Topic 860): Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, which requires entities to account for repurchase-to-maturity transactions as secured borrowings rather than as sales and expands disclosure requirements related to certain transfers of financial assets. The ASU is effective for the first interim or annual period beginning after December 15, 2014. Early application is not permitted. We do not expect the application of this ASU to materially impact the Company.

On July 16, 2014, the FASB ratified Emerging Issues Task Force (“EITF”) Issue No. 12-G, Measuring the Financial Liabilities of a Consolidated Collateralized Financing Entity. Final issuance of the ASU is pending. At its June 2014 meeting, the EITF reached a consensus which enables the application of a measurement alternative for collateralized financing entities (“CFEs”). This measurement alternative allows qualifying entities to measure both the CFE’s financial assets and financial liabilities based on the fair value of the financial assets or financial liabilities, whichever is more observable. The measurement alternative is only available upon initial consolidation of the CFE or adoption of 12-G and can be applied on a CFE-by-CFE basis. We expect to be eligible to apply the measurement alternative and will elect to do so. Application of this alternative is consistent with our current accounting treatment for consolidated CFEs.

3. Acquisitions and Divestitures

SFR Spin-off

As described in Note 1, on January 31, 2014, we completed the spin-off of our former SFR segment to our stockholders. The results of operations for the SFR segment are presented within discontinued operations in our condensed consolidated statements of operations for all periods presented. We have no continuing involvement with the SFR segment following the spin-off. Subsequent to the spin-off, SWAY entered into a management agreement with an affiliate of our Manager. The following table presents the summarized consolidated results of operations for the SFR segment prior to the spin-off, excluding segment allocations during the six months ended June 30, 2014 (in thousands):

	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2014		2013			2014			2013
Total revenues	$	—	$	2,594		$	3,876		$	3,758
Total costs and expenses	—		9,870			6,369			13,495
Loss before other income and income taxes	—		(7,276		)	(2,493		)	(9,737		)
Total other income	—		1,068			942			1,403
Loss before income taxes	—		(6,208		)	(1,551		)	(8,334		)
Income tax benefit (provision)	—		150			—			(12		)
Net loss	$	—	$	(6,058	)	$	(1,551	)	$	(8,346	)

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The following table presents the summarized consolidated balance sheet of the SFR segment as of January 31, 2014, the date of the spin-off (in thousands):

	January 31, 2014
Assets:
Cash and cash equivalents	$	111,960
Restricted cash	189
Residential real estate, net	812,017
Non-performing residential loans	211,019
Other assets	9,498
Total Assets	$	1,144,683

Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	24,346
Equity:
Additional paid-in capital	1,130,405
Accumulated deficit	(11,662		)
Total Stockholders’ Equity	1,118,743
Non-controlling interests in consolidated subsidiaries	1,594
Total Equity	1,120,337
Total Liabilities and Equity	$	1,144,683

LNR Acquisition

As described in Note 1, on April 19, 2013, we acquired the equity of LNR for an initial agreed upon purchase price of $859 million, which was reduced for transaction expenses and distributions occurring after September 30, 2012, resulting in cash consideration of approximately $730 million. We applied the provisions of ASC 805 in accounting for our acquisition of LNR. Refer to Note 3 to the consolidated financial statements included in our Form 10-K for further discussion of the LNR acquisition including the final purchase price allocation and retrospective measurement period adjustments.

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4. Loans

Our loans held-for-investment are accounted for at amortized cost and our loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option. The following tables summarize our investments in mortgages and loans by subordination class as of June 30, 2014 and December 31, 2013 (amounts in thousands):

	Carrying Value			Face Amount		Weighted Average Coupon		Weighted Average Life (“WAL”) (years)(2)
June 30, 2014
First mortgages	$	3,259,428		$	3,317,358	5.4	%	3.9
Subordinated mortgages(1)	355,561			388,449		8.6	%	4.1
Mezzanine loans	1,275,207			1,281,518		10.6	%	3.3
Total loans held-for-investment	4,890,196			4,987,325
Loans held-for-sale, fair value option elected	154,412			153,724		4.7	%	9.8
Loans transferred as secured borrowings	142,867			142,883		5.5	%	2.8
Total gross loans	5,187,475			5,283,932
Loan loss allowance (loans held-for-investment)	(4,342		)	—
Total net loans	$	5,183,133		$	5,283,932

December 31, 2013
First mortgages	$	2,714,512		$	2,766,217	5.5	%	4.3
Subordinated mortgages(1)	407,462			442,475		9.7	%	4.2
Mezzanine loans	1,245,728			1,246,841		11.7	%	3.5
Total loans held-for-investment	4,367,702			4,455,533
Loans held-for-sale, fair value option elected	206,672			209,099		5.3	%	9.6
Loans transferred as secured borrowings	180,414			180,483		5.4	%	2.9
Total gross loans	4,754,788			4,845,115
Loan loss allowance (loans held-for-investment)	(3,984		)	—
Total net loans	$	4,750,804		$	4,845,115

(1) Subordinated mortgages include B-notes and junior participations in first mortgages where we do not own the senior A-note or senior participation. If we own both the A-note and B-note we categorize the loan as a first mortgage loan.

(2) Represents the WAL of each respective group of loans as of the respective balance sheet date. 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 using the contractually extended maturity dates of the assets. Assumptions for the calculation of the WAL are adjusted as necessary for changes in projected principal repayments and/or maturity dates of the loan.

As of June 30, 2014, approximately $3.9 billion, or 74.8%, of the loans were variable rate and paid interest principally at LIBOR plus a weighted-average spread of 5.65%. The following table summarizes our investments in floating rate loans (amounts in thousands):

	June 30, 2014			December 31, 2013
Index	Base Rate	Carrying Value		Base Rate	Carrying Value
1 Month LIBOR	0.1552%	$	137,092	0.1677%	$	150,076
3 Month LIBOR	0.5525%	406,392		0.5253%	392,950
LIBOR Floor	0.15% - 3.00%(1)	3,333,849		0.19% - 3.00%(1)	2,688,308
Total		$	3,877,333		$	3,231,334

(1) The weighted-average LIBOR Floor was 0.36% and 0.49% as of June 30, 2014 and December 31, 2013, respectively.

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As of June 30, 2014, the risk ratings for loans subject to our rating system, which are described in our Form 10-K and excludes loans on the cost recovery method and loans for which the fair value option has been elected, by class of loan were as follows (amounts in thousands):

	Balance Sheet Classification
	Loans Held-For-Investment										Loans
Risk Rating Category	First Mortgages		Subordinated Mortgages		Mezzanine Loans		Cost Recovery Loans		Loans Held- For-Sale		Transferred As Secured Borrowings		Total
1	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2	101,875		104,821		209,690		—		—		12,971		429,357
3	3,010,516		218,685		950,268		—		—		129,896		4,309,365
4	142,166		32,055		115,249		—		—		—		289,470
5	—		—		—		—		—		—		—
N/A	455		—		—		4,416		154,412		—		159,283
	$	3,255,012	$	355,561	$	1,275,207	$	4,416	$	154,412	$	142,867	$	5,187,475

As of December 31, 2013, the risk ratings for loans subject to our rating system by class of loan were as follows (amounts in thousands):

	Balance Sheet Classification
	Loans Held-For-Investment										Loans
Risk Rating Category	First Mortgages		Subordinated Mortgages		Mezzanine Loans		Cost Recovery Loans		Loans Held- For-Sale		Transferred As Secured Borrowings		Total
1	$	—	$	—	$	—	$	—	$	—	$	—	$	—
2	94,981		103,369		153,119		—		—		13,022		364,491
3	2,452,763		272,375		1,012,674		—		—		167,392		3,905,204
4	153,987		31,718		79,935		—		—		—		265,640
5	—		—		—		—		—		—		—
N/A	—		—		—		12,781		206,672		—		219,453
	$	2,701,731	$	407,462	$	1,245,728	$	12,781	$	206,672	$	180,414	$	4,754,788

After completing our impairment evaluation process as described in our Form 10-K, we concluded that no impairment charges were required on any individual loans held-for-investment as of June 30, 2014 or December 31, 2013. As of June 30, 2014, approximately $4.4 million of our loans held-for-investment were in default, all of which are within the LNR Segment and were acquired as non-performing loans prior to the April 19, 2013 acquisition.

In accordance with our policies, we record 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 5.6% of our loan portfolios as of both June 30, 2014 and December 31, 2013. The following table presents the activity in our allowance for loan losses (amounts in thousands):

	For the Six Months Ended June 30,
	2014			2013
Allowance for loan losses at January 1	$	3,984		$	2,061
Provision for loan losses	577			755
Charge-offs	—			—
Recoveries	(219		)	—
Allowance for loan losses at June 30	$	4,342		$	2,816
Recorded investment in loans related to the allowance for loan loss	$	289,470		$	160,893

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The activity in our loan portfolio was as follows (amounts in thousands):

	For the Six Months Ended June 30,
	2014			2013
Balance at January 1	$	4,750,804		$	3,000,335
Acquisitions/originations/additional funding	1,860,026			1,308,602
Capitalized interest(1)	19,022			5,279
Basis of loans sold(2)	(868,804		)	(573,825		)
Loan maturities/principal repayments	(633,425		)	(140,596		)
Discount accretion/premium amortization	10,147			14,243
Changes in fair value	32,501			458
Unrealized foreign currency remeasurement gain (loss)	16,462			(4,572		)
Capitalized costs written off	—			(1,517		)
Loan loss allowance, net	(358		)	(755		)
Transfer to other assets	(3,242		)	—
Balance at June 30	$	5,183,133		$	3,607,652

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

(2) See Note 10 for additional disclosure on these transactions.

5. Investment Securities

Investment securities were comprised of the following as of June 30, 2014 and December 31, 2013 (amounts in thousands):

	Carrying Value as of
	June 30, 2014			December 31, 2013
RMBS, available-for-sale	$	231,605		$	296,236
Single-borrower CMBS, available-for-sale	116,071			114,346
CMBS, fair value option (1)	638,069			550,282
Held-to-maturity (“HTM”) securities	370,096			368,318
Equity security, fair value option	16,104			15,247
Subtotal - Investment securities	1,371,945			1,344,429
VIE eliminations (1)	(469,521		)	(409,322		)
Total investment securities	$	902,424		$	935,107

(1) Certain fair value option CMBS are eliminated in consolidation against VIE liabilities pursuant to ASC 810.

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Purchases, sales and principal collections for all investment securities were as follows (amounts in thousands):

Three Months ended	Available-for-sale					CMBS, fair		HTM		Equity
June 30, 2014	RMBS			CMBS		value option		Securities		Security		Total
Purchases	$	—		$	—	$	43,563	$	—	$	—	$	43,563
Sales	53,236			—		13,548		—		—		66,784
Principal collections	10,466			421		—		—		—		10,887

June 30, 2013
Purchases	20,090			—		1,618		—		—		21,708
Sales	—			—		10,072		—		—		10,072
Principal collections	15,771			2,627		—		—		—		18,398

Six Months ended
June 30, 2014
Purchases	$	—		$	—	$	53,453	$	—	$	—	$	53,453
Sales	62,546		(1)	—		32,032		—		—		94,578
Principal collections	18,285			829		—		—		—		19,114

June 30, 2013
Purchases	20,090			—		1,618		37,190		—		58,898
Sales	12,712			206,608		10,072		—		6,769		236,161
Principal collections	32,638			7,484		—		—		—		40,122

(1) Settlement of $44.4 million occurred subsequent to June 30, 2014. We account for all investment securities transactions on a trade-date basis.

RMBS and Single-borrower CMBS, Available-for-Sale

With the exception of one CMBS classified as HTM, the Company classified all of its RMBS and CMBS investments where the fair value option has not been elected as available-for-sale as of June 30, 2014 and December 31, 2013. These RMBS and CMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (“AOCI”).

The tables below summarize various attributes of our investments in available-for-sale RMBS and single-borrower CMBS where the fair value option has not been elected as of June 30, 2014 and December 31, 2013 (amounts in thousands):

								Unrealized Gains or (Losses) Recognized in AOCI
	Purchase Amortized Cost		Credit OTTI			Recorded Amortized Cost		Non-Credit OTTI			Gross Unrealized Gains		Gross Unrealized Losses	Net Fair Value Adjustment	Fair Value
June 30, 2014
RMBS	$	193,084	$	(10,322	)	$	182,762	$	(3	)	$	49,529