Starwood Property Trust, Inc.
591 West Putnam Avenue
Greenwich, Connecticut 06830
April 1, 2016
Dear Fellow Shareholders:
When we launched Starwood Property Trust, Inc. (NYSE: STWD) in the summer of 2009, we
sought to fill the void created by traditional commercial real estate lenders who had significantly
scaled back their business. Our goal at the time was to build a diversified commercial real estate
financing business that would outlast inevitable cycles and provide a safe and predictable dividend.
Six-plus years later, we have navigated among sectors, asset types and geographies to find the best
available risk-adjusted returns. We have delivered on our mandate by investing in quality assets in
great locations with great partners and consistently earning and paying our dividend—while not taking
a single dollar of realized loan loss on the more than $17 billion in capital we have deployed in our
core lending business to date.
In 2013, the acquisition of LNR Property added numerous new business lines to our existing
lending platform, allowing us to further diversify our income streams with profits from higher
return-on-equity activities: special servicing, conduit loan origination and securities investing. In the
last 18 months, we added another pillar to our business, the Property Segment, where we have
deployed over $800 million into attractive risk-reward cash flowing assets. While other companies
remain focused solely on a specific sector of the real estate markets, our dynamic model and deep
experience allow us to seek out fissures and mispricings across a much broader universe and move
seamlessly among sectors and opportunities, while utilizing the vast database and knowledge set within
Starwood Property Trust and our manager’s parent, Starwood Capital Group.
As a result, we have now built a multi-cylinder investment platform that positions us to
consistently deliver strong performance in any market—including the challenging environment that we
find ourselves in during the early part of 2016. Our scale and diversification benefit us now more than
ever, and we expect to take advantage of the many opportunities emerging from the increased
complexity and volatility of the current credit markets. In addition, our special servicing business
should outperform in times of credit stress or rising interest rates. Furthermore, we are poised to
benefit from uncertainty associated with potential regulatory changes coupled with the pending
maturities of the significant 2006 and 2007 CMBS loan originations.
Simply stated, we are built to outperform in uncertain times. We believe that the opportunities in
front of us are among the most exciting we have seen since our IPO.
Commercial real estate posted another strong year in 2015, with values up more than 12%—the
largest increase since 2005. The first half of the year saw continued equity inflows, record volumes
and a tightening of both cap rates and borrowing rates. More than $530 billion in commercial real
estate transactions were completed in 2015—a 23% year-over-year increase—and that velocity creates
opportunities for our platform as both a lender and an investor. While fears of a global slowdown,
volatility, weak commodity markets and a stronger dollar slowed the pace of new investments in the
latter portion of the year, interest rates stayed low and we believe that they will remain at these levels
for the foreseeable future. The commercial real estate markets have remained strong throughout the
economic recovery of the past six years as the supply/demand imbalance and liquid credit markets
have led to increased transaction volume.
Annual Sales Volume and Pricing Trends
billions
Individual
Portfolio
Entity
CPPI*
$600
$500
$400
$300
$200
$100
$0
240
180
120
60
0
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
Source: Real Capital Analytics
*RCA Commercial Property Price Index stats at 100 in December 2000
Our management team takes a top-down approach when identifying mispriced markets and sectors
and the team of over 1,500 global professionals at Starwood Capital Group then takes a bottom-up
approach to find the best investment opportunities. By leveraging our scale and global relationships,
we are able to identify and underwrite investment opportunities that cannot be sourced by many of
today’s market participants.
Another advantage of Starwood Property Trust’s scale is our ability to recognize changing market
dynamics and modify our investment approach accordingly. As a borrower, lender and active
participant in the real property, global finance and capital markets, we have a front-row seat to the
rapidly changing real estate markets. For example, as volatility rose following last summer’s China
currency devaluation and as global markets followed commodity markets lower in the fourth quarter,
we decreased our investing activity accordingly.
In 2015, the CMBS market saw $101 billion in new supply versus expectations of $124 billion,
and projections for 2016 have already been lowered by over 35% to approximately $70 billion. This
pullback will eventually create scarcity in the CMBS market that should help tighten spreads, which
have already started to normalize after widening in early 2016. This should ultimately create
opportunities for us as a lender.
There are also important changes coming to the CMBS market this year, with the introduction of
Dodd-Frank mandated risk-retention rules. Beginning on December 24, 2016, these new rules will
require a buyer of the most subordinate tranches of a CMBS transaction to own a larger portion of a
deal (i.e., 5%) for a longer period of time (i.e., a minimum of five years). Starwood Property Trust is
one of the few natural investors in this market and thus has the ability to achieve higher returns on
wider, safer securities going forward.
Our Lending Segment has a loan-to-value ratio of just 63% today—and based on our credit risk
metrics, this business is as healthy and insulated from market disruptions as it has ever been. With the
‘‘wall of CMBS maturities’’ directly in front of us, any further distress in the financing markets will
drive more loans in our special servicing book into default and create an opportunity for us to deploy
capital. As the named special servicer on $112 billion of CMBS and nearly one-third of the 2006 and
2007 ‘‘worst-in-class’’ vintages that will require refinancing over the next two years, we could
potentially see significant increases in our servicing revenue over the next two years.
We are seeing more transactions than ever before, and we are able to remain vigilant in deciding
where to invest with an effort to maximize return on invested capital. Our Lending Segment evaluated
over $100 billion in loans in 2015 and executed on just 3% of them. We will not reach for yield and
compromise on credit quality. Importantly, an outsized percentage of the loans we originated were
sourced directly by our global originations team as opposed to being obtained through third party
brokers.
We have always been a real estate-first firm and look at every debt deal through an equity lens,
which is supported by Starwood Capital Group’s more than 25 years of real estate investing. We
internally underwrite and asset manage every deal in our portfolio. Although this requires significant
time and resources, we think it helps explain our exemplary credit performance, with no realized loan
losses to date on over $17 billion in loan investments since inception. We also do not take unnecessary
interest rate risk and our predominantly floating rate loan book ensures that we will outperform if and
when interest rates finally do rise.
Our book has performed well and many of the loans that are maturing were originated at a time
when yields and spreads were lower than they are today, which will give us the opportunity to
re-invest capital from loan maturities on an accretive basis.
We think that 2016 will prove to be another exciting year for us. With the recent hiring of a new
Chief Originations Officer and expansion of our teams in San Francisco and London, we believe that
we are positioned to continue sourcing the best risk-adjusted investment opportunities amidst a variety
of market conditions, which should allow us to continue to deliver strong and consistent returns.
Once again, we thank our shareholders for their support and confidence in our team, our Board of
Directors for its leadership and all of our dedicated employees for their hard work and focus, which
allow us to continue to execute our business plan and create sustainable value for our shareholders.
Yours very truly,
Barry S. Sternlicht
Chairman and Chief Executive Officer
Jeffrey F. DiModica, CFA
President
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2015
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34436
Starwood Property Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
591 West Putnam Avenue
Greenwich, Connecticut
(Address of Principal Executive Offices)
27-0247747
(I.R.S. Employer
Identification Number)
06830
(Zip Code)
Registrant’s telephone number, including area code (203) 422-7700
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.01 par value per share
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
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 No
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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not
be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
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
Accelerated filer
Non-accelerated filer
(Do not check if a
smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
As of June 30, 2015, the aggregate market value of the voting stock held by non-affiliates was $5,022,364,171 based on the reported last sale
price of our common stock on June 30, 2015. Shares of our common stock held by affiliates, which includes officers and directors of the registrant, have
been excluded from this calculation. This calculation does not reflect a determination that persons are affiliates for any other purposes.
The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of February 19, 2016 was 237,031,645.
Documents Incorporated By Reference: The information required by Part III of this Form 10-K, to the extent not set forth herein or by
amendment, is incorporated by reference from the registrant’s definitive proxy statement to be filed with the Securities and Exchange Commission
pursuant to Regulation 14A on or prior to April 29, 2016.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
Part I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . .
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part III . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . . . . . .
Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Part IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Item 15. Exhibits and Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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2
Special Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K 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 respective 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 this Annual Report on Form 10-K, 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 or in which we invest;
availability of mortgage origination and acquisition opportunities acceptable to us;
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 Annual Report on Form 10-K 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.
3
Item 1. Business.
PART I
The following description of our business should be read in conjunction with the information included
elsewhere in this Annual Report on Form 10-K for the year ended December 31, 2015. This discussion contains
forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results
discussed in the forward-looking statements due to the factors set forth in “Risk Factors” and elsewhere in this Annual
Report on Form 10-K. References in this Annual Report on Form 10-K to “we,” “our,” “us,” or the “Company” refer
to Starwood Property Trust, Inc. and its subsidiaries.
General
Starwood Property Trust, Inc. (“STWD” and, 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 investments in both the U.S. and Europe. We refer to the following as our target assets:
commercial real estate mortgage loans, preferred equity interests, CMBS and other commercial real estate-related debt
investments. Our target assets may also include residential mortgage-backed securities (“RMBS”), certain residential
mortgage loans, distressed or non-performing commercial loans, commercial properties subject to net leases and equity
interests in commercial real estate. 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 three reportable business segments as of December 31, 2015:
• Real estate lending (the “Lending Segment”)—engages primarily in originating, acquiring, financing and
managing commercial first mortgages, subordinated mortgages, mezzanine loans, preferred equity, CMBS,
RMBS and other real estate and real estate-related debt investments in both the U.S. and Europe that are
held-for-investment.
• Real estate investing and servicing (the “Investing and Servicing Segment”) —includes (i) servicing
businesses in both the U.S. and Europe that manage and work out problem assets, (ii) an investment
business that selectively acquires and manages unrated, investment grade and non-investment grade rated
CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage
loan business which originates conduit loans for the primary purpose of selling these loans into
securitization transactions, and (iv) an investment business that selectively acquires commercial real estate
assets, including properties acquired from CMBS trusts. This segment excludes the consolidation of
securitization variable interest entities (“VIEs”).
• Real estate property (the “Property Segment”)—engages primarily in acquiring and managing equity
interests in stabilized commercial real estate properties, including multi-family properties, that are held for
investment.
On January 31, 2014, we completed the spin-off of our former single family residential (“SFR”) segment to our
stockholders as discussed further in Note 3 of our consolidated financial statements included herein (our “Consolidated
Financial Statements”).
On April 19, 2013, we acquired the equity of LNR Property LLC (“LNR”) and certain of its subsidiaries as
discussed further in Note 3 of our Consolidated Financial Statements.
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 also operate
4
our business in a manner that will permit us to maintain our exemption from registration under the Investment Company
Act of 1940 as amended (the “Investment Company Act” or “1940 Act”).
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.
Our corporate headquarters office is located at 591 West Putnam Avenue, Greenwich, Connecticut, and our
telephone number is (203) 422-7700.
Investment Strategy
We seek to attain attractive risk-adjusted returns for our investors over the long term by sourcing and managing
a diversified portfolio of target assets, financed in a manner that is designed to deliver attractive returns across a variety
of market conditions and economic cycles. Our investment strategy focuses on a few fundamental themes:
•
•
•
•
•
•
origination and acquisition of real estate debt assets with an implied basis sufficiently low to weather
declines in asset values;
focus on real estate markets and asset classes with strong supply and demand fundamentals and/or
barriers to entry;
structuring and financing each transaction in a manner that reflects the risk of the underlying asset’s
cash flow stream and credit risk profile, and efficiently managing and maintaining the transaction’s
interest rate and currency exposures at levels consistent with management’s risk objectives;
seeking situations where our size, scale, speed, and sophistication allow us to position ourselves as a
“one-stop” lending solution for real estate owner/operators;
utilizing the skills, expertise, and contacts developed by our Manager over the past 20 plus years as
one of the premier global real estate investment managers to correctly anticipate trends and identify
attractive risk-adjusted investment opportunities in U.S. and European real estate markets; and
utilizing the skills, expertise, and infrastructure we acquired through our acquisition of LNR, a market
leading diversified real estate investment management and loan servicing company, to expand and
diversify our presence in various segments of real estate, including:
•
•
•
•
origination of small and medium sized loan transactions ($10 million to $50 million) for both
investment and securitization/gain-on-sale;
investment in CMBS;
investment in commercial real estate; and
special servicing of commercial real estate loans in commercial real estate securitization
transactions.
In order to capitalize on the changing sets of investment opportunities that may be present in the various points
of an economic cycle, we may expand or refocus our investment strategy by emphasizing investments in different parts
of the capital structure and different sectors of real estate. Our investment strategy may be amended from time to time, if
recommended by our Manager and approved by our board of directors, without the approval of our stockholders. In
5
addition to our Manager making direct investments on our behalf, we may enter into joint venture, management or other
agreements with persons that have special expertise or sourcing capabilities.
Financing Strategy
Subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exemption
from registering under the 1940 Act, we may finance the acquisition of our target assets, to the extent available to us,
through the following methods:
•
•
•
sources of private and government sponsored financing, including long and short-term
repurchase agreements, warehouse and bank credit facilities, and mortgage loans on equity
interests in commercial real estate properties;
loan sales, syndications, and/or securitizations; and
public or private offerings of our equity and/or debt securities.
We may also utilize other sources of financing to the extent available to us.
Our Target Assets
We invest in target assets secured primarily by U.S. or European collateral. We focus primarily on originating
or opportunistically acquiring commercial mortgage whole loans, B-Notes, mezzanine loans, preferred equity and
mortgage-backed securities. We may invest in performing and non-performing mortgage loans and other real
estate-related loans and debt investments. We may acquire target assets through portfolio or other acquisitions. Our
Manager targets desirable markets where it has expertise in the real estate collateral underlying the assets being acquired.
Our target assets include the following types of loans and other investments with respect to commercial real estate:
• Whole mortgage loans: loans secured by a first mortgage lien on a commercial property that provide
mortgage financing to commercial property developers or owners generally having maturity dates ranging
from three to 10 years;
• B-Notes: typically a privately negotiated loan that is secured by a first mortgage on a single large
commercial property or group of related properties and subordinated to an A Note secured by the same first
mortgage on the same property or group;
• Mezzanine loans: loans made to commercial property owners that are secured by pledges of the borrower’s
ownership interests in the property and/or the property owner, subordinate to whole mortgage loans secured
by first or second mortgage liens on the property and senior to the borrower’s equity in the property;
• Construction or rehabilitation loans: mortgage loans and mezzanine loans to finance the cost of
construction or rehabilitation of a commercial property;
• CMBS: securities that are collateralized by commercial mortgage loans, including:
•
•
•
senior and subordinated investment grade CMBS,
below investment grade CMBS, and
unrated CMBS;
• Corporate bank debt: term loans and revolving credit facilities of commercial real estate operating or
finance companies, each of which are generally secured by such companies’ assets;
6
• Corporate bonds: debt securities issued by commercial real estate operating or finance companies that
may or may not be secured by such companies’ assets, including:
•
•
•
investment grade corporate bonds,
below investment grade corporate bonds, and
unrated corporate bonds;
• Equity: equity interests in commercial real estate properties.
We have also invested in the following types of loans and other debt investments relating to residential real
estate:
• Non-Agency RMBS: securities collateralized by residential mortgage loans that are not guaranteed by any
U.S. Government agency or federally chartered corporation; and
• Residential mortgage loans: loans secured by a first mortgage lien on residential property.
In addition, we may invest in the following real estate-related investments:
• Net leases: commercial properties subject to net leases, which leases typically have longer terms than
gross leases, require tenants to pay substantially all of the operating costs associated with the properties and
often have contractually specified rent increases throughout their terms;
• Agency RMBS: RMBS for which a U.S. government agency or a federally chartered corporation
guarantees payments of principal and interest on the securities;
• Commercial real estate owned (“REO”): commercial properties purchased from CMBS trusts; and
• Commercial non-performing loans (“NPLs”): as part of our efforts to attain additional servicing rights in
Europe, we may acquire a minority interest in portfolios of NPLs, alongside other majority investors.
Business Segments
We currently operate our business in three reportable segments: the Lending Segment, the Investing and
Servicing Segment and the Property Segment. Refer to Note 23 of our Consolidated Financial Statements for our results
of operations and financial position by business segment.
7
Lending Segment
The following table sets forth the amount of each category of investments we owned across various property
types within our Lending Segment as of December 31, 2015 and 2014 (amounts in thousands):
Face
Amount
Carrying
Value
Asset Specific
Financing
Net
Investment
Vintage
Unlevered
Return on Asset
416,713
850,024
392,563
862,693
December 31, 2015
First mortgages (1) . . . . . . . . $ 4,776,576 $ 4,723,852 $ 2,174,232 $ 2,549,620 1989-2015
386,542 1998-2015
Subordinated mortgages . . . .
862,693 2006-2015
Mezzanine loans (1) . . . . . . .
Loans transferred as secured
borrowings . . . . . . . . . . . . . .
Loan loss allowance . . . . . . .
RMBS—AFS (2) . . . . . . . . . .
HTM securities (3) . . . . . . . .
Equity security . . . . . . . . . . . .
Investments in unconsolidated
entities . . . . . . . . . . . . . . . . .
174,224 2003-2007
141,655 2013-2015
14,498
86,573
(6,029)
176,224
321,244
14,498
88,000
—
233,976
321,193
13,471
88,000
—
2,000
179,589
—
(1,427)
(6,029)
6,021
—
N/A
N/A
30,827
$ 6,699,953 $ 6,602,445 $ 2,449,842 $ 4,152,603
30,827
N/A
N/A
N/A
—
374,859
889,948
345,091
901,217
December 31, 2014
First mortgages (1) . . . . . . . . $ 4,599,841 $ 4,531,030 $ 2,051,504 $ 2,479,526 1989-2014
343,091 1998-2014
Subordinated mortgages . . . .
901,217 2006-2014
Mezzanine loans (1) . . . . . . .
Loans transferred as secured
borrowings . . . . . . . . . . . . . .
Loan loss allowance . . . . . . .
RMBS—AFS (2) . . . . . . . . . .
CMBS—AFS (2) . . . . . . . . . .
HTM securities (3) . . . . . . . .
Equity security . . . . . . . . . . . .
Investments in unconsolidated
entities (4) . . . . . . . . . . . . . .
105,167 2003-2007
100,349 2012-2013
344,892 2013-2014
15,120
129,427
(6,031)
207,053
100,349
441,995
15,120
129,441
—
101,886
—
97,103
—
129,570
—
270,783
93,686
440,253
14,237
(14)
(6,031)
2,000
—
N/A
N/A
22,537
$ 6,813,177 $ 6,687,788 $ 2,381,934 $ 4,305,854
22,537
N/A
N/A
N/A
—
6.9 %
11.2 %
10.9 %
11.9 %
6.5 %
6.9 %
11.0 %
11.4 %
12.3 %
12.1 %
8.6 %
(1) First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole,
the expected credit quality of these loans is more similar to that of a first mortgage loan. The application of this
methodology resulted in mezzanine loans with carrying values of $930.0 million and $704.2 million being classified
as first mortgages as of December 31, 2015 and 2014, respectively.
(2) RMBS and CMBS available-for-sale (“AFS”) securities.
(3) Mandatorily redeemable preferred equity interests in commercial real estate entities and CMBS held-to-maturity
(“HTM”).
(4) Retrospectively reclassified our $129.5 million investment in four regional shopping malls (the “Retail Fund”) to
our newly established Property Segment.
8
As of December 31, 2015 and 2014, our Lending Segment’s investment portfolio, excluding RMBS and other
investments, had the following characteristics based on carrying values:
Collateral Property Type
Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hospitality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mixed Use . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Geographic Location
North East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South East . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
South West . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Midwest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mid Atlantic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
As of December 31,
2015
2014
39.4 %
28.2 %
12.8 %
9.0 %
6.4 %
2.3 %
1.9 %
100.0 %
42.1 %
24.7 %
8.8 %
13.1 %
8.3 %
1.1 %
1.9 %
100.0 %
As of December 31,
2015
2014
28.8 %
23.2 %
17.3 %
13.1 %
7.1 %
6.4 %
4.1 %
100.0 %
26.8 %
25.6 %
12.4 %
14.2 %
6.1 %
8.5 %
6.4 %
100.0 %
Our investment process includes sourcing and screening of investment opportunities, assessing investment
suitability, conducting interest rate and prepayment analysis, evaluating cash flow and collateral performance, and
reviewing legal structure and servicer and originator information and investment structuring, as appropriate, to seek an
attractive return commensurate with the risk we are bearing. Upon identification of an investment opportunity, the
investment will be screened and monitored by us to determine its impact on maintaining our REIT qualification and our
exemption from registration under the 1940 Act. We will seek to make investments in sectors where we have strong core
competencies and believe market risk and expected performance can be reasonably quantified.
We evaluate each one of our investment opportunities based on its expected risk-adjusted return relative to the
returns available from other, comparable investments. In addition, we evaluate new opportunities based on their relative
expected returns compared to comparable positions held in our portfolio. The terms of any leverage available to us for
use in funding an investment purchase are also taken into consideration, as are any risks posed by illiquidity or
correlations with other securities in the portfolio. We also develop a macro outlook with respect to each target asset class
by examining factors in the broader economy such as gross domestic product, interest rates, unemployment rates and
availability of credit, among other things. We also analyze fundamental trends in the relevant target asset class sector to
adjust/maintain our outlook for that particular target asset class.
Our primary focus has been to build a portfolio of commercial mortgage and mezzanine loans with attractive
risk-adjusted returns by focusing on the underlying real estate fundamentals and credit analysis of the borrowers. We
continually monitor borrower performance and complete a detailed, loan-by-loan formal credit review on a quarterly basis.
The results of this review are incorporated into our quarterly assessment of the adequacy of the allowance for loan losses.
9
The weighted average coupon for first mortgages, subordinated mortgages and mezzanine loans originated and
acquired by the Lending Segment during the year ended December 31, 2015 was 4.4%, 8.3% and 10.5%, respectively.
The following table summarizes the activity in the Lending Segment’s loan portfolio and the associated changes in
future funding commitments associated with these loans during the year ended December 31, 2015 (amounts in
thousands):
Carrying
Value
Future Funding
Commitments
Balance at January 1, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,900,734 $ 2,101,003
418,752
Acquisitions/originations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(548,811)
Additional funding and expired commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Capitalized interest (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(351,868)
Basis of loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(90,849)
Loan maturities/principal repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Discount accretion/premium amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(24,338)
Unrealized foreign currency remeasurement (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Change in loan loss allowance, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to/from other asset classifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,059,652 $ 1,503,889
1,832,499
541,801
70,675
(632,285)
(1,642,500)
36,862
(51,278)
2
3,142
(1) Represents accrued interest income on loans whose terms do not require current payment of interest.
As of December 31, 2015, the Lending Segment’s loans held-for-investment and HTM securities had a
weighted-average maturity of 2.7 years, inclusive of extension options that management believes are probable of
exercise. The table below shows the carrying value expected to mature annually for our loans held-for-investment and
HTM securities (amounts in thousands, except number of investments maturing).
Number of
Year of Maturity
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investments
Maturing (1)
% of Total
Carrying
Value (1)
801,121
993,016
2,316,591
1,624,514
245,592
4,582
—
52,987
220,055
41,894
311 $ 6,300,352
35 $
60
94
84
15
1
—
4
17
1
12.7 %
15.8 %
36.8 %
25.8 %
3.9 %
0.1 %
— %
0.8 %
3.5 %
0.6 %
100.0 %
(1) Excludes loans transferred as secured borrowings, RMBS, equity security and investments in unconsolidated
entities. Carrying value also excludes loan loss allowance.
10
Investing and Servicing Segment
The following table sets forth the amount of each category of investments we owned within our Investing and
Servicing Segment as of December 31, 2015 and 2014 (amounts in thousands):
Face
Amount
Carrying
Value
Asset
Specific
Financing
Net
Investment
December 31, 2015
CMBS, fair value option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,704,136 $ 1,038,200 (1) $ 193,944 $ 844,256
134,153
Intangible assets - servicing rights . . . . . . . . . . . . . . . . . . . . .
14,621
Lease intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
57,082
Loans held-for-sale, fair value option . . . . . . . . . . . . . . . . . .
53,145
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . .
67,533
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 423,691 $ 1,170,790
134,153 (2)
14,621
203,865
53,145
150,497
$ 4,907,846 $ 1,594,481
—
—
146,783
—
82,964
N/A
N/A
203,710
N/A
N/A
December 31, 2014
CMBS, fair value option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,281,364 $ 753,553 (1) $
190,207 (2)
Intangible assets - servicing rights . . . . . . . . . . . . . . . . . . . . .
391,620
Loans held-for-sale, fair value option . . . . . . . . . . . . . . . . . .
7,931
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . .
48,693
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . .
39,854
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 4,681,391 $ 1,431,858
N/A
390,342
9,685
N/A
N/A
— $ 753,553
190,207
—
183,257
208,363
7,931
—
48,693
—
25,854
14,000
$ 222,363 $ 1,209,495
(1) Includes $825.2 million and $519.8 million of CMBS reflected in “VIE liabilities” in accordance with Accounting
Standards Codification (“ASC”) 810 as of December 31, 2015 and 2014, respectively.
(2) Includes $11.8 million and $46.1 million of servicing rights intangibles reflected in “VIE assets” in accordance with
ASC 810 as of December 31, 2015 and 2014, respectively.
As of December 31, 2015, the Investing and Servicing Segment’s CMBS had a weighted-average expected
maturity of 8.2 years. The table below shows the CMBS carrying value expected to mature annually over the next 10
years and thereafter (amounts in thousands, except number of investments maturing).
Year of Maturity
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2024 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2025 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number of
Investments
Maturing
% of Total
Carrying
Value
25,960
69 $
37,318
24
70,454
17
33,544
16
21,124
6
34,764
8
3,023
3
115,369
18
139,060
24
158
557,584
343 $ 1,038,200
2.5 %
3.6 %
6.8 %
3.2 %
2.0 %
3.4 %
0.3 %
11.1 %
13.4 %
53.7 %
100.0 %
11
Property Segment
The following table sets forth the amount of each category of investments, which are comprised of properties,
the Retail Fund and intangible lease assets and liabilities, held within our Property Segment as of December 31, 2015
and 2014 (amounts in thousands):
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 768,728
Lease intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,658
122,454
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 949,840
$
—
—
129,475
$ 129,475
The following table sets forth our net investment and other information regarding the Property Segment’s
properties and intangible lease assets and liabilities as of December 31, 2015 (dollar amounts in thousands):
As of December 31,
2015
2014
Investment
Office—Ireland Portfolio . . . . . . . . . . . . . . . . . . . . . . $ 464,528 $ 308,268 $ 156,260
Multi-family residential—Ireland Portfolio . . . . . . .
5,770
88,422
Multi-family residential—Woodstar Portfolio . . . . .
$ 827,386 $ 576,934 $ 250,452
16,824
346,034
11,054
257,612
Value
Net
Carrying
Asset
Specific
Financing
Net
Weighted Average
Occupancy
Rate
98.4 %
97.0 %
96.8 %
Remaining
Lease Term
10.6 years
0.6 years
0.5 years
Refer to Schedule III included in Item 8 of this Annual Report on Form 10-K for a detailed listing of the
properties held by the Company, including their respective geographic locations.
Regulation
Our operations are subject, in certain instances, to supervision and regulation by state and federal governmental
authorities and may be subject to various laws and judicial and administrative decisions imposing various requirements
and restrictions, which, among other things: (1) regulate credit granting activities; (2) establish maximum interest rates,
finance charges and other charges; (3) require disclosures to customers; (4) govern secured transactions; (5) set
collection, foreclosure, repossession and claims handling procedures and other trade practices; and (6) regulate
affordable housing rental activities. Although most states do not regulate commercial finance, certain states impose
limitations on interest rates and other charges and on certain collection practices and creditor remedies, and require
licensing of lenders and financiers and adequate disclosure of certain contract terms. We are also required to comply
with certain provisions of the Equal Credit Opportunity Act that are applicable to commercial loans and the Fair Housing
Act. We intend to conduct our business so that neither we nor any of our subsidiaries are required to register as an
investment company under the 1940 Act.
Competition
We are engaged in a competitive business. In our investment activities, we compete for opportunities with
numerous public and private investment vehicles, including financial institutions, specialty finance companies, mortgage
banks, pension funds, opportunity funds, hedge funds, insurance companies, REITs and other institutional investors, as
well as individuals. Many competitors are significantly larger than we are, have well established operating histories and
may have greater access to capital, more resources and other advantages over us. These competitors may be willing to
accept lower returns on their investments or to compromise underwriting standards and, as a result, our origination
volume and profit margins could be adversely affected.
12
Our Manager
We are externally managed and advised by our Manager and benefit from the personnel, relationships and
experience of our Manager’s executive team and other personnel of Starwood Capital Group. Pursuant to the terms of a
management agreement between our Manager and us, our Manager provides us with our management team and
appropriate support personnel. Pursuant to an investment advisory agreement between our Manager and Starwood
Capital Group Management, LLC, our Manager has access to the personnel and resources of Starwood Capital Group
necessary for the implementation and execution of our business strategy.
Our Manager is an affiliate of Starwood Capital Group, a privately-held private equity firm founded and
controlled by Mr. Sternlicht. Starwood Capital Group has invested in most major classes of real estate, directly and
indirectly, through operating companies, portfolios of properties and single assets, including multifamily, office, retail,
hotel, residential entitled land and communities, senior housing, mixed-use and golf courses. Starwood Capital Group
invests at different levels of the capital structure, including equity, preferred equity, mezzanine debt and senior debt,
depending on the asset risk profile and return expectation.
Our Manager draws upon the experience and expertise of Starwood Capital Group’s team of professionals and
support personnel operating in 12 cities across six countries. Our Manager also benefits from Starwood Capital Group’s
dedicated asset management group operating in offices located in the U.S. and abroad. We also benefit from Starwood
Capital Group’s portfolio management, finance and administration functions, which address legal, compliance, investor
relations and operational matters, asset valuation, risk management and information technologies in connection with the
performance of our Manager’s duties.
Employees
As of December 31, 2015, the Company has 450 full-time employees, the majority of which are real estate
professionals located throughout the U.S. and Europe.
Taxation of the Company
We have elected to be taxed as a REIT under the Code, for federal income tax purposes. We generally must
distribute annually at least 90% of our taxable income, subject to certain adjustments and excluding any net capital gain,
in order for federal corporate income tax not to apply to our earnings that we distribute. To the extent that we satisfy this
distribution requirement, but distribute less than 100% of our taxable income, we will be subject to federal corporate
income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the
actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under
federal tax laws. Our qualification as a REIT also depends on our ability to meet various other requirements imposed by
the Code, which relate to organizational structure, diversity of stock ownership and certain restrictions with regard to
owned assets and categories of income. If we qualify for taxation as a REIT, we will generally not be subject to U.S.
federal corporate income tax on our taxable income that is currently distributed to stockholders.
Even if we qualify as a REIT, we may be subject to certain federal excise taxes and state and local taxes on our
income and property. If we fail to qualify as a REIT in any taxable year, we will be subject to federal income taxes at
regular corporate rates (including any applicable alternative minimum tax) and will not be able to qualify as a REIT for
four subsequent taxable years. REITs are subject to a number of organizational and operational requirements under the
Code.
We utilize taxable REIT subsidiaries (“TRSs”) to reduce the impact of the prohibited transaction tax and to
avoid penalty for the holding of assets not qualifying as real estate assets for purposes of the REIT asset tests. Any
income associated with a TRS is fully taxable because a TRS is subject to federal and state income taxes as a domestic C
corporation based upon its net income.
See Item 1A—“Risk Factors—Risks Related to Our Taxation as a REIT” for additional tax status information.
13
Leverage Policies
Refer to Item 7—“Management Discussion and Analysis of Financial Condition and Results of Operations—
Leverage Policies.”
Investment Guidelines
Our board of directors has adopted the following investment guidelines:
•
•
•
•
•
our investments will be in our target assets unless otherwise approved by our board of directors;
no investment shall be made that would cause us to fail to qualify as a REIT for federal income tax
purposes;
no investment shall be made that would cause us or any of our subsidiaries to be required to be registered
as an investment company under the 1940 Act;
not more than 25% of our equity will be invested in any individual asset without the consent of a majority
of our independent directors; and
any investment of up to $50 million requires the approval of our Manager’s Investment Committee; any
investment in excess of $50 million also requires the approval of our Chief Executive Officer; any
investment from $150 million to $250 million also requires the approval of the Investment Committee of
our board of directors; and any investment in excess of $250 million also requires the approval of our board
of directors.
These investment guidelines may be changed from time to time by our board of directors without the approval
of our stockholders. In addition, both our Manager and our board of directors must approve any change in our
investment guidelines that would modify or expand the types of assets in which we invest.
Available Information
Our website address is www.starwoodpropertytrust.com. We make available free of charge through our website
our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, all amendments to
those reports and other filings as soon as reasonably practicable after such material is electronically filed with or
furnished to the Securities and Exchange Commission (the “SEC”), and also make available on our website the charters
for the Audit, Compensation and Nominating and Corporate Governance Committees of our board of directors and our
Code of Business Conduct and Ethics and Code of Ethics for Principal Executive Officer and Senior Financial Officers,
as well as our corporate governance guidelines. Copies in print of these documents are available upon request to our
Corporate Secretary at the address indicated on the cover of this report. The information on our website is not a part of,
nor is it incorporated by reference into, this Annual Report on Form 10-K.
We intend to post on our website any amendment to, or waiver of, a provision of our Code of Business Conduct
and Ethics or Code of Ethics for Principal Executive Officer and Senior Financial Officers that applies to our Chief
Executive Officer, Chief Financial Officer or persons performing similar functions and that relates to any element of the
code of ethics definition set forth in Item 406 of Regulation S-K of the Securities Act of 1933, as amended.
To communicate with our board of directors electronically, we have established an e-mail address,
BoardofDirectors@stwdreit.com, to which stockholders may send correspondence to our board of directors or any such
individual directors or group or committee of directors.
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Item 1A. Risk Factors.
Risks Related to Our Relationship with Our Manager
We are dependent on Starwood Capital Group, including our Manager, and their key personnel, who provide services
to us through the management agreement, and we may not find a suitable replacement for our Manager and
Starwood Capital Group if the management agreement is terminated, or for these key personnel if they leave
Starwood Capital Group or otherwise become unavailable to us.
Our Manager has significant discretion as to the implementation of our investment and operating policies and
strategies. Accordingly, we believe that our success depends to a significant extent upon the efforts, experience,
diligence, skill and network of business contacts of the officers and key personnel of our Manager. The officers and key
personnel of our Manager evaluate, negotiate, close and monitor a substantial portion of our investments; therefore, our
success depends on their continued service. The departure of any of the officers or key personnel of our Manager could
have a material adverse effect on our performance.
We offer no assurance that our Manager will remain our investment manager or that we will continue to have
access to our Manager’s officers and key personnel. The initial term of our management agreement with our Manager,
and the initial term of the investment advisory agreement between our Manager and Starwood Capital Group
Management, LLC, expired on August 17, 2012, with automatic one-year renewals thereafter; provided, however, that
our Manager may terminate the management agreement annually upon 180 days prior notice. If the management
agreement and the investment advisory agreement are terminated and no suitable replacement is found to manage us, we
may not be able to continue to execute our business plan.
There are various conflicts of interest in our relationship with Starwood Capital Group, including our Manager,
which could result in decisions that are not in the best interests of our stockholders.
We are subject to conflicts of interest arising out of our relationship with Starwood Capital Group, including
our Manager. Specifically, Mr. Sternlicht, our Chairman and Chief Executive Officer, Jeffrey G. Dishner, one of our
directors, and certain of our executive officers are executives of Starwood Capital Group.
Our Manager and executive officers may have conflicts between their duties to us and their duties to, and
interests in, Starwood Capital Group and its other investment funds. Currently, Starwood Global Opportunity Fund X
(the “Starwood Private Real Estate Fund”) has a right to invest 25% of the equity capital proposed to be invested by any
investment vehicle managed by an entity controlled by Starwood Capital Group in debt interests relating to real estate.
Our co-investment rights are subject to, among other things, (i) the determination by our Manager that the proposed
investment is suitable for us and (ii) our Manager’s sole discretion as to whether or not to exclude from our investment
portfolio at any time any “medium-term loan to own” investment, which our Manager considers to be mortgage loans or
other real estate-related loan or debt investments where the proposed originator or acquirer of any such investment has
the intent and/or expectation of foreclosing on, or otherwise acquiring the real property securing the loan or investment
at any time between 18 and 48 months of its origination or acquisition of the loan or investment. In addition, in the case
of opportunities to invest in a portfolio of assets including both equity and debt real estate-related investments, we would
not have the co-investment rights described above if our Manager determines that less than 50% of the aggregate
anticipated investment returns from the portfolio is expected to come from our target assets. Since we are subject to the
judgment of our Manager in the application of our co-investment rights, we may not always be allocated 75% of each
co-investment opportunity in our target asset classes. Our independent directors periodically review our Manager’s and
Starwood Capital Group’s compliance with the co-investment provisions described above, but they do not approve each
co-investment by the Starwood Private Real Estate Fund and us unless the amount of capital we invest in the proposed
co-investment otherwise requires the review and approval of our independent directors pursuant to our investment
guidelines. Pursuant to the exclusivity provisions of the Starwood Private Real Estate Fund, our investment strategy may
not include either (i) equity interests in real estate or (ii) “near-term loan to own” investments, in each case (of both
(i) and (ii)) if such investments are expected, at the time such investment is made, to produce an internal rate of return
(“IRR”) in excess of 14%. Therefore, our board of directors does not have the flexibility to expand our investment
strategy to include equity interests in real estate or “near- term loan to own” investments with such an IRR expectation.
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Our Manager, Starwood Capital Group and their respective affiliates may sponsor or manage a U.S. publicly
traded investment vehicle that invests generally in real estate assets but not primarily in our target assets, or a potential
competing vehicle. Our Manager and Starwood Capital Group have also agreed that for so long as the management
agreement is in effect and our Manager and Starwood Capital Group are under common control, no entity controlled by
Starwood Capital Group will sponsor or manage a potential competing vehicle or private or foreign competing vehicle
unless Starwood Capital Group adopts a policy that either (i) provides for the fair and equitable allocation of investment
opportunities among all such vehicles and us or (ii) provides us the right to co-invest with such vehicles, in each case
subject to the suitability of each investment opportunity for the particular vehicle and us and each such vehicle’s and our
availability of cash for investment. To the extent that we have co-investment rights with these vehicles in the future,
there can be no assurance that these future rights will entitle us to a similar percentage allocation as we currently have
with respect to the Starwood Private Real Estate Fund.
To the extent that our Manager and Starwood Capital Group adopt the investment allocation policy described in
the preceding paragraph in the future, we may nonetheless compete with one or more of these vehicles for investment
opportunities sourced by our Manager and Starwood Capital Group. As a result, we may either not be presented with the
opportunity or may have to compete with these vehicles to acquire these investments. Some or all of our executive
officers, the members of the investment committee of our Manager and other key personnel of our Manager would likely
be responsible for selecting investments for these vehicles and they may choose to allocate favorable investments to one
or more of these vehicles instead of to us.
Our board of directors has adopted a policy with respect to any proposed investments by our directors or
officers or the officers of our Manager, which we refer to as the covered persons, in any of our target asset classes. This
policy provides that any proposed investment by a covered person for his or her own account in any of our target asset
classes will be permitted if the capital required for the investment does not exceed the personal investment limit. To the
extent that a proposed investment exceeds the personal investment limit, we expect that our board of directors will only
permit the covered person to make the investment (i) upon the approval of the disinterested directors or (ii) if the
proposed investment otherwise complies with terms of any other related party transaction policy our board of directors
has adopted. Subject to compliance with all applicable laws, these individuals may make investments for their own
account in our target assets which may present certain conflicts of interest not addressed by our current policies.
We pay our Manager substantial base management fees regardless of the performance of our portfolio. Our
Manager’s entitlement to a base management fee, which is not based upon performance metrics or goals, might reduce
its incentive to devote its time and effort to seeking investments that provide attractive risk-adjusted returns for our
portfolio. This in turn could hurt both our ability to make distributions to our stockholders and the market price of our
common stock.
Excluding our operating subsidiaries, we do not have any employees except for Andrew Sossen, our Chief
Operating Officer, Executive Vice President, General Counsel and Chief Compliance Officer, and Rina Paniry, our
Chief Financial Officer, Treasurer and Chief Accounting Officer, whom Starwood Capital Group has seconded to us
exclusively. Mr. Sossen and Ms. Paniry are also employees of other entities affiliated with our Manager and, as a result,
are subject to potential conflicts of interest in service as our employees and as employees of such entities.
The management agreement with our Manager was not negotiated on an arm’s-length basis and may not be as
favorable to us as if it had been negotiated with an unaffiliated third party and may be costly and difficult to
terminate.
Certain of our executive officers and two of our six directors are executives of Starwood Capital Group. Our
management agreement with our Manager was negotiated between related parties and its terms, including fees payable,
may not be as favorable to us as if it had been negotiated with an unaffiliated third party.
Termination of the management agreement with our Manager without cause is difficult and costly. Our
independent directors will review our Manager’s performance and the management fees annually and the management
agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent directors based
upon: (i) our Manager’s unsatisfactory performance that is materially detrimental to us, or (ii) a determination that the
16
management fees payable to our Manager are not fair, subject to our Manager’s right to prevent termination based on
unfair fees by accepting a reduction of management fees agreed to by at least two-thirds of our independent directors.
Our Manager will be provided 180 days prior notice of any such a termination. Additionally, upon such a termination,
the management agreement provides that we will pay our Manager a termination fee equal to three times the sum of the
average annual base management fee and incentive fee received by our Manager during the prior 24-month period before
such termination, calculated as of the end of the most recently completed fiscal quarter. These provisions may increase
the cost to us of terminating the management agreement and adversely affect our ability to terminate our Manager
without cause.
The initial term of our management agreement with our Manager, and the initial term of the investment
advisory agreement between our Manager and Starwood Capital Group Management, LLC, expired on August 17, 2012,
with automatic one-year renewals thereafter; provided, however, that our Manager may terminate the management
agreement annually upon 180 days prior notice. If the management agreement is terminated and no suitable replacement
is found to manage us, we may not be able to continue to execute our business plan.
Pursuant to the management agreement, our Manager does not assume any responsibility other than to render
the services called for thereunder and is not responsible for any action of our board of directors in following or declining
to follow its advice or recommendations. Our Manager maintains a contractual as opposed to a fiduciary relationship
with us. Under the terms of the management agreement, our Manager, its officers, members, personnel, any person
controlling or controlled by our Manager and any person providing sub-advisory services to our Manager will not be
liable to us, any subsidiary of ours, our directors, our stockholders or any subsidiary’s stockholders or partners for acts or
omissions performed in accordance with and pursuant to the management agreement, except because of acts constituting
bad faith, willful misconduct, gross negligence, or reckless disregard of their duties under the management agreement. In
addition, we have agreed to indemnify our Manager, its officers, stockholders, members, managers, directors, personnel,
any person controlling or controlled by our Manager and any person providing sub-advisory services to our Manager
with respect to all expenses, losses, damages, liabilities, demands, charges and claims arising from acts or omissions of
our Manager not constituting bad faith, willful misconduct, gross negligence, or reckless disregard of duties, performed
in good faith in accordance with and pursuant to the management agreement.
The incentive fee payable to our Manager under the management agreement is payable quarterly and is based on our
core earnings and, therefore, may cause our Manager to select investments in more risky assets to increase its
incentive compensation.
Our Manager is entitled to receive incentive compensation based upon our achievement of targeted levels of
core earnings. In evaluating investments and other management strategies, the opportunity to earn incentive
compensation based on core earnings may lead our Manager to place undue emphasis on the maximization of core
earnings at the expense of other criteria, such as preservation of capital, in order to achieve higher incentive
compensation. Investments with higher yield potential are generally riskier or more speculative. This could result in
increased risk to the value of our investment portfolio.
Core earnings is not a measure calculated in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) and is defined within Item 7 – Non-GAAP Financial Measures in this Annual
Report on Form 10-K.
Certain agreements with Colony Starwood Homes (formerly known as Starwood Waypoint Residential Trust) may not
reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third parties.
As described above, on January 31, 2014, we distributed all of the common shares of Colony Starwood Homes
(formerly known as Starwood Waypoint Residential Trust), our former wholly-owned subsidiary, to our stockholders of
record on January 24, 2014, which completed the spin-off of our former SFR segment. The terms of the agreements
related to the separation, including a separation and distribution agreement, dated January 16, 2014 (the “Separation
Agreement”), were negotiated in the context of the separation while Colony Starwood Homes was still a part of us and,
accordingly, may not reflect terms that would have resulted from arm’s-length negotiations among unaffiliated third
parties.
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In the Separation Agreement, we agreed to indemnify Colony Starwood Homes and its affiliates and
representatives against losses arising from: (a) any liability of ours or our subsidiaries (excluding any liabilities related to
Colony Starwood Homes); (b) any failure of us and our subsidiaries (other than Colony Starwood Homes and its
subsidiaries) (collectively, the “Starwood Group”) to pay, perform or otherwise promptly discharge any liability listed
under (a) above in accordance with their respective terms, whether prior to, at or after the time of effectiveness of the
Separation Agreement; (c) any breach by any member of the Starwood Group of any provision of the Separation
Agreement and any agreements ancillary thereto (if any), subject to any limitations of liability provisions and other
provisions applicable to any such breach set forth therein; and (d) any untrue statement or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact required to be stated therein or necessary to make
the statements therein not misleading, with respect to all information contained in Colony Starwood Homes’ information
statement or the registration statement of which Colony Starwood Homes’ information statement is a part that relates
solely to any assets owned, directly or indirectly by us, other than Colony Starwood Homes’ initial portfolio of assets,
which included all of our single-family rental homes and distressed and non-performing residential mortgage loans and
certain cash transferred to Colony Starwood Homes or its subsidiaries by us. Any indemnification payments that we may
be required to make could have a significantly negative effect on our liquidity and results of operations.
Our conflicts of interest policy may not adequately address all of the conflicts of interest that may arise with respect to
our investment activities and also may limit the allocation of investments to us.
In order to avoid any actual or perceived conflicts of interest with our Manager, Starwood Capital Group, any
of their affiliates or any investment vehicle sponsored or managed by Starwood Capital Group or any of its affiliates,
which we refer to as the Starwood parties, we have adopted a conflicts of interest policy to specifically address some of
the conflicts relating to our investment opportunities. Although under this policy the approval of a majority of our
independent directors is required to approve (i) any purchase of our assets by any of the Starwood parties and (ii) any
purchase by us of any assets of any of the Starwood parties, there is no assurance that this policy will be adequate to
address all of the conflicts that may arise or will address such conflicts in a manner that results in the allocation of a
particular investment opportunity to us or is otherwise favorable to us. In addition, the Starwood Private Real Estate
Fund currently, and additional competing vehicles may in the future, participate in some of our investments, possibly at a
more senior level in the capital structure of the underlying borrower and related real estate than our investment. Our
interests in such investments may also conflict with the interests of these entities in the event of a default or restructuring
of the investment. Participating investments will not be the result of arm’s length negotiations and will involve potential
conflicts between our interests and those of the other participating entities in obtaining favorable terms. Since certain of
our executives are also executives of Starwood Capital Group, the same personnel may determine the price and terms for
the investments for both us and these entities and there can be no assurance that any procedural protections, such as
obtaining market prices or other reliable indicators of fair value, will prevent the consideration we pay for these
investments from exceeding their fair value or ensure that we receive terms for a particular investment opportunity that
are as favorable as those available from an independent third party.
Our board of directors has approved very broad investment guidelines for our Manager and does not approve each
investment and financing decision made by our Manager unless required by our investment guidelines.
Our Manager is authorized to follow very broad investment guidelines which enable our Manager to make
investments on our behalf in a wide array of assets. Our board of directors will periodically review our investment
guidelines and our investment portfolio but will not, and will not be required to, review all of our proposed investments,
except if the investment requires us to commit either at least $150 million of capital or 25% of our equity in any
individual asset. In addition, in conducting periodic reviews, our board of directors may rely and may make investments
through affiliates primarily on information provided to them by our Manager. Furthermore, our Manager may use
complex strategies, and transactions entered into by our Manager may be costly, difficult or impossible to unwind by the
time they are reviewed by our board of directors. Our Manager (or such affiliates) has great latitude within the broad
parameters of our investment guidelines in determining the types and amounts of target assets it decides are attractive
investments for us, which could result in investment returns that are substantially below expectations or that result in
losses, which would materially and adversely affect our business operations and results. Further, decisions made and
investments and financing arrangements entered into by our Manager may not fully reflect the best interests of our
stockholders.
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New investments may not be profitable (or as profitable as we expect), may increase our exposure to certain
industries, may increase our exposure to interest rate, foreign currency, real estate market or credit market fluctuations,
may divert managerial attention from more profitable opportunities, and may require significant financial resources. A
change in our investment strategy may also increase any guarantee obligations we agree to incur or increase the number
of transactions we enter into with affiliates. Moreover, new investments may present risks that are difficult for us to
adequately assess, given our lack of familiarity with a particular type of investment or other reasons. The risks related to
new investments or the financing risks associated with such investments could adversely affect our results of operations,
financial condition and liquidity, and could impair our ability to make distributions to our stockholders.
Risks Related to Our Company
Our board of directors has in the past and may in the future at any time change one or more of our investment
strategy or guidelines, financing strategy or leverage policies without stockholder consent.
Our board of directors has in the past and may in the future at any time change one or more of our investment
strategy or guidelines, financing strategy or leverage policies with respect to investments, acquisitions, growth,
operations, indebtedness, capitalization and distributions without the consent of our stockholders, which could result in
an investment portfolio with a different risk profile. Any change in our investment strategy may increase our exposure to
interest rate risk, default risk and real estate market fluctuations. These changes could adversely affect our financial
condition, results of operations, the market price of our common stock and our ability to make distributions to our
stockholders.
We are highly dependent on information systems and systems failures could significantly disrupt our business, which
may, in turn, negatively affect the market price of our common stock and our ability to make distributions to our
stockholders.
Our business is highly dependent on communications and information systems of Starwood Capital Group. Any
failure or interruption of Starwood Capital Group’s systems could cause delays or other problems, which could have a
material adverse effect on our operating results and negatively affect the market price of our common stock and our
ability to make distributions to our stockholders.
Terrorist attacks and other acts of violence or war may affect the real estate industry and our business, financial
condition and results of operations.
The terrorist attacks on September 11, 2001 disrupted the U.S. financial markets, including the real estate
capital markets, and negatively impacted the U.S. economy in general. Any future terrorist attacks, the anticipation of
any such attacks, the consequences of any military or other response by the U.S. and its allies, and other armed conflicts
could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide
financial markets and economy. The economic impact of these events could also adversely affect the credit quality of
some of our loans and investments and the properties underlying our interests.
We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely
impact our performance and may cause the market value of our common stock to decline or be more volatile. A
prolonged economic slowdown, a recession or declining real estate values could impair the performance of our
investments and harm our financial condition and results of operations, increase our funding costs, limit our access to the
capital markets or result in a decision by lenders not to extend credit to us. We cannot predict the severity of the effect
that potential future terrorist attacks would have on us. Losses resulting from these types of events may not be fully
insurable.
We have not established a minimum distribution payment level and no assurance can be given that we will be able to
make distributions to our stockholders in the future at current levels or at all.
We are generally required to distribute to our stockholders at least 90% of our taxable income each year for us
to qualify as a REIT under the Code, which requirement we currently intend to satisfy through quarterly distributions of
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all or substantially all of our REIT taxable income in such year, subject to certain adjustments. We have not established a
minimum distribution payment level, and our ability to pay distributions may be adversely affected by a number of
factors, including the risk factors contained in this Annual Report on Form 10-K. Although we have made, and anticipate
continuing to make, quarterly distributions to our stockholders, our board of directors has the sole discretion to
determine the timing, form and amount of any future distributions to our stockholders, and such determination will
depend on our earnings, our financial condition, debt covenants, maintenance of our REIT qualification and other factors
as our board of directors may deem relevant from time to time. We believe that a change in any one of the following
factors could adversely affect our results of operations and impair our ability to continue to pay distributions to our
stockholders:
•
•
the profitability of the investment of the net proceeds from our equity offerings;
our ability to make profitable investments;
• margin calls or other expenses that reduce our cash flow;
•
•
defaults in our asset portfolio or decreases in the value of our portfolio; and
the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from
estimates.
As a result, no assurance can be given that we will be able to continue to make distributions to our stockholders
in the future or that the level of any future distributions we do make to our stockholders will achieve a market yield or
increase or even be maintained over time, any of which could materially and adversely affect us.
In addition, distributions that we make to our stockholders are generally taxable to our stockholders as ordinary
income. However, a portion of our distributions may be designated by us as long-term capital gains to the extent that
they are attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they
exceed our earnings and profits as determined for tax purposes. A return of capital is not taxable, but has the effect of
reducing the basis of a stockholder’s investment in our common stock.
Changes in accounting rules could occur at any time and could impact us in significantly negative ways that we are
unable to predict or protect against.
As has been widely publicized, the SEC, the Financial Accounting Standards Board and other regulatory bodies
that establish the accounting rules applicable to us have proposed or enacted a wide array of changes to accounting rules
over the last several years. Moreover, in the future these regulators may propose additional changes that we do not
currently anticipate. Changes to accounting rules that apply to us could significantly impact our business or our reported
financial performance in negative ways that we cannot predict or protect against. We cannot predict whether any
changes to current accounting rules will occur or what impact any codified changes will have on our business, results of
operations, liquidity or financial condition.
Failure to maintain effective internal control over financial reporting in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our business and stock price.
As a public company, we are required to maintain effective internal control over financial reporting in
accordance with Section 404 of the Sarbanes-Oxley Act of 2002. Internal control over financial reporting is complex and
may be revised over time to adapt to changes in our business or changes in applicable accounting rules. We cannot
assure you that our internal control over financial reporting will be effective in the future or that a material weakness will
not be discovered with respect to a prior period for which we believe that internal controls were effective. If we are not
able to maintain or document effective internal control over financial reporting, our independent registered public
accounting firm may not be able to certify as to the effectiveness of our internal control over financial reporting as of the
required dates. Matters impacting our internal controls may cause us to be unable to report our financial information on a
timely basis, or may cause us to restate previously issued financial information, and thereby subject us to adverse
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regulatory consequences, including sanctions or investigations by the SEC, or violations of applicable stock exchange
listing rules. There could also be a negative reaction in the financial markets due to a loss of investor confidence in us
and the reliability of our financial statements. Confidence in the reliability of our financial statements is also likely to
suffer if we or our independent registered public accounting firm reports a material weakness in our internal control over
financial reporting. This could materially and adversely affect us by, for example, leading to a decline in our stock price
and impairing our ability to raise capital.
Risks Related to Sources of Financing
Our access to sources of financing may be limited and thus our ability to maximize our returns may be adversely
affected.
Our financing sources currently include our credit agreements, our master repurchase agreements, our
convertible senior notes, our mortgage debt on certain investment properties and common stock offerings. Subject to
market conditions and availability, we may seek additional sources of financing in the form of bank credit facilities
(including term loans and revolving facilities), repurchase agreements, warehouse facilities, structured financing
arrangements, public and private equity and debt issuances and derivative instruments, in addition to transaction or asset
specific funding arrangements.
Our access to additional sources of financing will depend upon a number of factors, over which we have little
or no control, including:
•
•
•
•
•
general market conditions;
the market’s view of the quality of our assets;
the market’s perception of our growth potential;
our current and potential future earnings and cash distributions; and
the market price of the shares of our common stock.
A dislocation and/or weakness in the capital and credit markets could adversely affect one or more private
lenders and could cause one or more of our private lenders to be unwilling or unable to provide us with financing or to
increase the costs of that financing. In addition, if regulatory capital requirements imposed on our private lenders
change, they may be required to limit, or increase the cost of, financing they provide to us. In general, this could
potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or
price.
To the extent structured financing arrangements are unavailable, we may have to rely more heavily on
additional equity issuances, which may be dilutive to our stockholders, or on less efficient forms of debt financing that
require a larger portion of our cash flow from operations, thereby reducing funds available for our operations, future
business opportunities, cash distributions to our stockholders and other purposes. We cannot assure you that we will
have access to such equity or debt capital on favorable terms (including, without limitation, cost and term) at the desired
times, or at all, which may cause us to curtail our asset acquisition activities and/or dispose of assets, which could
negatively affect our results of operations.
Our significant indebtedness subjects us to increased risk of loss and may reduce cash available for distributions to
our stockholders.
We currently have a significant amount of indebtedness outstanding. As of December 31, 2015, our total
consolidated indebtedness was $5.4 billion. Our outstanding indebtedness currently includes our credit agreements, our
repurchase agreements, our convertible senior notes and mortgage debt on certain investment properties. Subject to
market conditions and availability, we may incur additional debt through bank credit facilities (including term loans and
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revolving facilities), repurchase agreements, warehouse facilities and structured financing arrangements, public and
private debt issuances and derivative instruments, in addition to transaction or asset specific funding arrangements. The
percentage of leverage we employ will vary depending on our available capital, our ability to obtain and access financing
arrangements with lenders and the lenders’ and rating agencies’ estimate of the stability of our investment portfolio’s
cash flow. Our governing documents contain no limitation on the amount of debt we may incur. We may significantly
increase the amount of leverage we utilize at any time without approval of our board of directors. However, under our
current repurchase agreements and bank credit facility, our total leverage may not exceed 75% of total assets (as defined
therein), as adjusted to remove the impact of bona-fide loan sales that are accounted for as financings and the
consolidation of VIEs pursuant to GAAP. In addition, we may leverage individual assets at substantially higher levels.
Incurring substantial debt subjects us to many risks that, if realized, would materially and adversely affect us, including
the risk that:
•
our cash flow from operations may be insufficient to make required payments of principal of and interest on the
debt or we may fail to comply with all of the other covenants contained in the debt, which is likely to result in
(i) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision) that
we may be unable to repay from internal funds or to refinance on favorable terms, or at all, (ii) our inability to
borrow unused amounts under our financing arrangements, even if we are current in payments on borrowings
under those arrangements and/or (iii) the loss of some or all of our assets to foreclosure or sale;
•
our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that
investment yields will increase with higher financing costs;
• we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt,
thereby reducing funds available for operations, future business opportunities, stockholder distributions or other
purposes; and
• we may not be able to refinance debt that matures prior to the investment it was used to finance on favorable
terms, or at all.
We are subject to margin calls from our lenders under our financing facilities.
Subject to certain conditions, our credit facility lenders retain the sole discretion over the market value of loans
and/or securities that serve as collateral for the borrowings under our financing facilities for purposes of determining
whether we are required to pay margin to such lenders.
Interest rate fluctuations could significantly decrease our results of operations and cash flows and the market value
of our investments.
Our primary interest rate exposures relate to the following:
•
•
•
•
•
changes in interest rates may affect the yield on our investments and the financing cost of our debt, as well as
the performance of our interest rate swaps that we utilize for hedging purposes, which could result in operating
losses for us should interest expense exceed interest income;
declines in interest rates may reduce the yield on existing floating rate assets and/or the yield on prospective
investments;
changes in the level of interest rates may affect our ability to source investments;
increases in the level of interest rates may negatively impact the value of our investments and our ability to
realize gains from the disposition of assets;
increases in the level of interest rates may (x) increase the credit risk of our assets by negatively impacting the
ability of our borrowers to pay debt service on our floating rate loan assets or our ability to refinance our assets
22
upon maturity, and (y) negatively impact the value of the real estate collateral supporting our investments
through the impact such increases can have on property valuation capitalization rates; and
•
changes in interest rates and/or the differential between U.S. dollar interest rates and those of non-dollar
currencies in which we invest can adversely affect the value of our non-dollar assets and/or associated currency
hedging transactions.
Our warehouse facilities may limit our ability to acquire assets, and we may incur losses if the collateral is liquidated.
We utilize warehouse facilities pursuant to which we accumulate mortgage loans in anticipation of a
securitization financing, which assets are pledged as collateral for such facilities until the securitization transaction is
consummated. In order to borrow funds to acquire assets under any additional warehouse facilities, we expect that our
lenders thereunder would have the right to review the potential assets for which we are seeking financing. We may be
unable to obtain the consent of a lender to acquire assets that we believe would be beneficial to us and we may be unable
to obtain alternate financing for such assets. In addition, no assurance can be given that a securitization transaction
would be consummated with respect to the assets being warehoused. If the securitization is not consummated, the lender
could liquidate the warehoused collateral and we would then have to pay any amount by which the original purchase
price of the collateral assets exceeds its sale price, subject to negotiated caps, if any, on our exposure. In addition,
regardless of whether the securitization is consummated, if any of the warehoused collateral is sold before the
consummation, we would have to bear any resulting loss on the sale. No assurance can be given that we will be able to
obtain additional warehouse facilities on favorable terms, or at all.
The utilization of any of our repurchase facilities is subject to the pre-approval of the lender.
We utilize repurchase agreements to finance the purchase of certain investments. In order for us to borrow
funds under a repurchase agreement, our lender must have the right to review the potential assets for which we are
seeking financing and approve such assets in its sole discretion. Accordingly, we may be unable to obtain the consent of
a lender to finance an investment and alternate sources of financing for such asset may not exist.
A failure to comply with restrictive covenants in our repurchase agreements and financing facilities would have a
material adverse effect on us, and any future financings may require us to provide additional collateral or pay down
debt.
We are subject to various restrictive covenants contained in our existing financing arrangements and may
become subject to additional covenants in connection with future financings. Our credit agreement contains covenants
that restrict our ability to incur additional debt or liens, make certain investments or acquisitions, merge, consolidate or
transfer or dispose of substantially all of our assets or otherwise dispose of property and assets, pay dividends and make
certain other restricted payments, change the nature of our business, or enter into transactions with affiliates. The credit
agreement, as well as our master repurchase agreements, each requires us to maintain compliance with various financial
covenants, including a minimum tangible net worth and cash liquidity, and specified financial ratios, such as total debt to
total assets and EBITDA to fixed charges. These covenants may limit our flexibility to pursue certain investments or
incur additional debt. If we fail to meet or satisfy any of these covenants, we would be in default under these agreements,
and our lenders could elect to declare outstanding amounts due and payable, terminate their commitments, require the
posting of additional collateral and enforce their interests against existing collateral. We may also be subject to
cross-default and acceleration rights and, with respect to collateralized debt, the posting of additional collateral and
foreclosure rights upon default. Further, this could also make it difficult for us to satisfy the distribution requirements
necessary to maintain our status as a REIT for U.S. federal income tax purposes.
These types of financing arrangements also involve the risk that the market value of the loans pledged or sold
by us to the repurchase agreement counterparty or provider of the bank credit facility may decline in value, in which case
the lender may require us to provide additional collateral or to repay all or a portion of the funds advanced. We may not
have the funds available to repay our debt at that time, which would likely result in defaults unless we are able to raise
the funds from alternative sources, which we may not be able to achieve on favorable terms or at all. Posting additional
collateral would reduce our liquidity and limit our ability to leverage our assets. If we cannot meet these requirements,
23
the lender could accelerate our indebtedness, increase the interest rate on advanced funds and terminate our ability to
borrow funds from them, which could materially and adversely affect our financial condition and ability to continue to
implement our business plan. In addition, in the event that the lender files for bankruptcy or becomes insolvent, our
loans may become subject to bankruptcy or insolvency proceedings, thus depriving us, at least temporarily, of the benefit
of these assets. Such an event could restrict our access to bank credit facilities and increase our cost of capital.
If one or more of our Manager’s executive officers are no longer employed by our Manager, the financial institutions
providing us financing may not provide future financing to us, which could materially and adversely affect us.
If financial institutions with whom we seek to finance our investments require that one or more of our
Manager’s executives continue to serve in such capacity and if one or more of our Manager’s executives are no longer
employed by our Manager, it may constitute an event of default and the financial institution providing the arrangement
may have acceleration rights with respect to outstanding borrowings and termination rights with respect to our ability to
finance our future investments with that institution. If we are unable to obtain financing for our accelerated borrowings
and for our future investments under such circumstances, we could be materially and adversely affected.
We directly or indirectly utilize non-recourse securitizations, and such structures expose us to risks that could result
in losses to us.
We utilize non-recourse securitizations of our investments in mortgage loans to the extent consistent with the
maintenance of our REIT qualification and exemption from the Investment Company Act in order to generate cash for
funding new investments and/or to leverage existing assets. In most instances, this involves us transferring our loans to a
special purpose securitization entity in exchange for cash. In some sale transactions, we also retain a subordinated
interest in the loans sold. The securitization of our portfolio investments might magnify our exposure to losses on those
portfolio investments because the subordinated interest we retain in the loans sold would be subordinate to the senior
interest in the loans sold, and we would, therefore, absorb all of the losses sustained with respect to a loan sold before the
owners of the senior interest experience any losses. Moreover, we cannot be assured that we will be able to access the
securitization market in the future, or be able to do so at favorable rates. The inability to consummate securitizations of
our portfolio investments to finance our investments on a long-term basis could require us to seek other forms of
potentially less attractive financing or to liquidate assets at an inopportune time or price, which could adversely affect
our performance and our ability to continue to grow our business.
We may not have the ability to raise funds on acceptable terms necessary to settle conversions of our outstanding
convertible senior notes or to purchase our outstanding convertible senior notes upon a fundamental change.
As of December 31, 2015, we had $1.4 billion in principal amount of convertible senior notes outstanding. If a
fundamental change within the meaning of our outstanding convertible senior notes occurs, holders of those notes will
have the right to require us to purchase for cash any or all of their notes. The fundamental change purchase price will
equal 100% of the principal amount of the notes to be purchased, plus accrued and unpaid interest thereon. In addition,
upon conversion of the convertible senior notes, we will be required to make cash payments in respect of the notes being
converted, unless we elect to settle the conversion entirely in shares of our common stock. However, we may not have
sufficient funds at the time we are required to purchase the notes surrendered therefor or to make cash payments on the
notes being converted, and we may not be able to arrange necessary financing on acceptable terms. If we were unable to
raise necessary funding on acceptable terms, our operating results and financial position could be negatively impacted if
we were required to repurchase the notes or to pay cash upon conversion.
Risks Related to Hedging
We enter into hedging transactions that could expose us to contingent liabilities in the future.
Subject to maintaining our qualification as a REIT, part of our investment strategy involves entering into
hedging transactions that require us to fund cash payments in certain circumstances (such as the early termination of the
hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to
request margin securities it is contractually owed under the terms of the hedging instrument). The amount due would be
24
equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees
and charges. These economic losses will be reflected in our results of operations, and our ability to fund these
obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these
obligations could adversely impact our financial condition.
Hedging may adversely affect our earnings, which could reduce our cash available for distribution to our
stockholders.
Subject to maintaining our qualification as a REIT, we pursue various hedging strategies to seek to reduce our
exposure to adverse changes in interest rates. Our hedging activity varies in scope based on the level and volatility of
interest rates, exchange rates, the types of assets held and other changing market conditions. Hedging may fail to protect
or could adversely affect us because, among other things:
•
•
•
•
•
interest rate, currency and/or credit hedging can be expensive and may result in us receiving less interest
income;
available interest rate hedges may not correspond directly with the interest rate risk for which protection is
sought;
due to a credit loss, prepayment or asset sale, the duration of the hedge may not match the duration of the
related asset or liability;
the amount of income that a REIT may earn from hedging transactions (other than hedging transactions that
satisfy certain requirements of the Code or that are done through a TRS) to offset losses is limited by U.S.
federal tax provisions governing REITs;
the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent
that it impairs our ability to sell or assign our side of the hedging transaction; and
•
the hedging counterparty owing money in the hedging transaction may default on its obligation to pay.
In addition, we may fail to recalculate, readjust or execute hedges in an efficient manner.
Any hedging activity in which we engage may materially and adversely affect our results of operations and cash
flows. Therefore, while we may enter into such transactions seeking to reduce risks, unanticipated changes in interest
rates, credit spreads or currencies may result in poorer overall investment performance than if we had not engaged in any
such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a
hedging strategy and price movements in the portfolio positions or liabilities being hedged may vary materially.
Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments
and the portfolio positions or liabilities being hedged. Any such imperfect correlation may prevent us from achieving the
intended hedge and expose us to risk of loss.
Hedging instruments often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house,
or regulated by any U.S. or foreign governmental authorities and involve risks and costs that could result in material
losses.
The cost of using hedging instruments increases as the period covered by the instrument increases and during
periods of rising and volatile interest rates. In addition, some hedging instruments involve risk because they often are not
traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign
governmental authorities. Consequently, in many cases, there are no requirements with respect to record keeping,
financial responsibility or segregation of customer funds and positions. Furthermore, the enforceability of agreements
underlying hedging transactions may depend on compliance with applicable securities, commodity and other regulatory
requirements and, depending on the identity of the counterparty, applicable international requirements. The business
failure of a hedging counterparty with whom we enter into a hedging transaction that is not cleared on a regulated
25
centralized clearing house will most likely result in its default. Default by a party with whom we enter into a hedging
transaction may result in the loss of unrealized profits and force us to cover our commitments, if any, at the then current
market price. Although generally we will seek to reserve the right to terminate our hedging positions, it may not always
be possible to dispose of or close out a hedging position without the consent of the hedging counterparty and we may not
be able to enter into an offsetting contract in order to cover our risk. We cannot assure you that a liquid secondary
market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise
or expiration, which could result in significant losses.
We may fail to qualify for, or choose not to elect, hedge accounting treatment.
We record derivative and hedging transactions in accordance with GAAP. Under these standards, we may fail
to qualify for, or choose not to elect, hedge accounting treatment for a number of reasons, including if we use
instruments that do not meet the definition of a derivative (such as short sales), we fail to satisfy hedge documentation
and hedge effectiveness assessment requirements or our instruments are not highly effective. If we fail to qualify for, or
choose not to elect, hedge accounting treatment, our operating results may be volatile because changes in the fair value
of the derivatives that we enter into may not be offset by a change in the fair value of the related hedged transaction or
item.
We enter into derivative contracts that could expose us to contingent liabilities in the future.
Subject to maintaining our qualification as a REIT, we enter into derivative contracts that could require us to
fund cash payments in the future under certain circumstances (e.g., the early termination of the derivative agreement
caused by an event of default or other early termination event, or the decision by a counterparty to request margin
securities it is contractually owed under the terms of the derivative contract). The amount due would be equal to the
unrealized loss of the open swap positions with the respective counterparty and could also include other fees and
charges. These economic losses may materially and adversely affect our results of operations and cash flows.
Risks Related to Our Investments
We may not be able to identify additional assets that meet our investment objective.
We cannot assure you that we will be able to identify additional assets that meet our investment objective, that
we will be successful in consummating any investment opportunities we identify or that one or more investments we
may make will yield attractive risk-adjusted returns. Our inability to do any of the foregoing likely would materially and
adversely affect our results of operations and cash flows and our ability to make distributions to our stockholders.
The lack of liquidity in our investments may adversely affect our business.
The lack of liquidity of our investments in real estate loans and investments, other than certain of our
investments in mortgage-backed securities (“MBS”), may make it difficult for us to sell such investments if the need or
desire arises. Many of the securities we purchase are not registered under the relevant securities laws, resulting in a
prohibition against their transfer, sale, pledge or their disposition except in a transaction that is exempt from the
registration requirements of, or otherwise in accordance with, those laws. In addition, certain investments such as
B-Notes, mezzanine loans and bridge and other loans are also particularly illiquid investments due to their short life,
their potential unsuitability for securitization and/or the greater difficulty of recovery in the event of a borrower default.
As a result, many of our current investments are, and our future investments will be, illiquid and if we are required to
liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we have
previously recorded our investments. Further, we may face other restrictions on our ability to liquidate an investment in
a business entity to the extent that we or our Manager has or could be attributed with material non-public information
regarding such business entity. As a result, our ability to vary our portfolio in response to changes in economic and other
conditions may be relatively limited, which could adversely affect our results of operations and financial condition.
26
Our investments may be concentrated and are subject to risk of default.
While we seek to diversify our portfolio of investments, we are not required to observe specific diversification
criteria, except as may be set forth in the investment guidelines adopted by our board of directors. Therefore, our
investments in our target assets may at times be concentrated in certain property types that are subject to higher risk of
foreclosure, or secured by properties concentrated in a limited number of geographic locations. To the extent that our
portfolio is concentrated in any one region or type of asset, downturns relating generally to such region or type of asset
may result in defaults on a number of our investments within a short time period, which may reduce our net income and
the value of our common stock and accordingly reduce our ability to make distributions to our stockholders.
Difficult conditions in the mortgage, commercial and residential real estate markets may cause us to experience
market losses related to our holdings.
Our results of operations are materially affected by conditions in the real estate markets, the financial markets
and the economy generally. Concerns about the real estate market, as well as inflation, energy costs, geopolitical issues
and the availability and cost of credit, have contributed to increased volatility and diminished expectations for the
economy and markets going forward. The residential mortgage market has been affected by changes in the lending
landscape and there is no assurance that these conditions have stabilized or that they will not worsen. The disruption in
the residential mortgage market has an impact on new demand for homes, which weigh on future home price
performance. There is a strong correlation between home price growth rates and mortgage loan delinquencies.
Deterioration in the real estate market may cause us to experience losses related to our assets and to sell assets at a loss.
Declines in the market values of our investments may adversely affect our results of operations and credit availability,
which may reduce earnings and, in turn, cash available for distribution to our stockholders.
Our preferred equity investments involve a greater risk of loss than conventional debt financing.
We make preferred equity investments. These investments involve a higher degree of risk than conventional
debt financing due to a variety of factors, including their non-collateralized nature and subordinated ranking to other
loans and liabilities of the entity in which such preferred equity is held. Accordingly, if the issuer defaults on our
investment, we would only be able to proceed against such entity in accordance with the terms of the preferred security,
and not against any property owned by such entity. Furthermore, in the event of bankruptcy or foreclosure, we would
only be able to recoup our investment after all lenders to, and other creditors of, such entity are paid in full. As a result,
we may lose all or a significant part of our investment, which could result in significant losses.
Our commercial construction lending may expose us to increased lending risks.
Our commercial construction lending may expose us to increased lending risks. At December 31, 2015, our
loan portfolio consisted of $1.3 billion of commercial real estate construction loans. Construction loans generally expose
a lender to greater risk of non-payment and loss than permanent commercial mortgage loans because repayment of the
loans often depends on the borrower’s ability to secure permanent “take-out” financing, which requires the successful
completion of construction and stabilization of the project, or operation of the property with an income stream sufficient
to meet operating expenses, including debt service on such replacement financing. For construction loans, increased
risks include the accuracy of the estimate of the property’s value at completion of construction and the estimated cost of
construction—all of which may be affected by unanticipated construction delays and cost over-runs. Such loans typically
involve an expectation that the borrower’s sponsors will contribute sufficient equity funds in order to keep the loan “in
balance,” and the sponsors’ failure or inability to meet this obligation could result in delays in construction or an
inability to complete construction. Commercial construction loans also expose the lender to additional risks of contractor
non-performance, or borrower disputes with contractors resulting in mechanic’s or materialmen’s liens on the property
and possible further delay in construction. In addition, since such loans generally entail greater risk than mortgage loans
on income producing property, we may need to increase our allowance for loan losses in the future to account for the
likely increase in probable incurred credit losses associated with such loans. Further, as the lender under a construction
loan, we may be obligated to fund all or a significant portion of the loan at one or more future dates. We may not have
the funds available at such future date(s) to meet our funding obligations under the loan. In that event, we would likely
be in breach of the loan unless we are able to raise the funds from alternative sources, which we may not be able to
27
achieve on favorable terms or at all. In addition, many of our construction loans have multiple lenders and if another
lender fails to fund we could be faced with the choice of either funding for that defaulting lender or suffering a delay or
protracted interruption in the progress of construction.
We operate in a highly competitive market for investment opportunities and competition may limit our ability to
acquire desirable investments in our target assets and could also affect the pricing of these securities.
We operate in a highly competitive market for investment opportunities. Our profitability depends, in large part,
on our ability to acquire our target assets at attractive prices. In acquiring our target assets, we compete with a variety of
institutional investors, including other REITs, commercial and investment banks, specialty finance companies, public
and private funds (including other funds managed by Starwood Capital Group), commercial finance and insurance
companies and other financial institutions. Many of our competitors are substantially larger and have considerably
greater financial, technical, marketing and other resources than we do. Several other REITs have recently raised
significant amounts of capital and may have investment objectives that overlap with ours, which may create additional
competition for investment opportunities. Some competitors may have a lower cost of funds and access to funding
sources that may not be available to us, such as funding from the U.S. government, if we are not eligible to participate in
programs established by the U.S. government. Many of our competitors are not subject to the operating constraints
associated with REIT tax compliance or maintenance of an exemption from the Investment Company Act. In addition,
some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to
consider a wider variety of investments and establish more relationships than us. Furthermore, competition for
investments in our target assets may lead to the price of such assets increasing, which may further limit our ability to
generate desired returns. We cannot assure you that the competitive pressures we face will not have a material adverse
effect on our business, financial condition and results of operations. Also, as a result of this competition, desirable
investments in our target assets may be limited in the future and we may not be able to continue to take advantage of
attractive investment opportunities from time to time, as we can provide no assurance that we will be able to identify and
make additional investments that are consistent with our investment objectives.
The commercial mortgage loans we originate or acquire and the mortgage loans underlying our CMBS investments
are subject to the ability of the commercial property owner to generate net income from operating the property as well
as the risks of delinquency and foreclosure.
Commercial mortgage loans are secured by multifamily or commercial property and are subject to risks of
delinquency and foreclosure, and risks of loss that may be greater than similar risks associated with loans made on the
security of single-family residential property. The ability of a borrower to repay a loan secured by an income-producing
property typically is dependent primarily upon the successful operation of such property rather than upon the existence
of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s
ability to repay the loan may be impaired. Net operating income of an income-producing property can be adversely
affected by, among other things,
•
•
•
•
•
•
•
tenant mix;
success of tenant businesses;
property management decisions;
property location, condition and design;
competition from comparable types of properties;
changes in laws that increase operating expenses or limit rents that may be charged;
changes in national, regional or local economic conditions and/or specific industry segments, including the
credit and securitization markets;
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•
•
•
•
•
•
declines in regional or local real estate values;
declines in regional or local rental or occupancy rates;
increases in interest rates, real estate tax rates and other operating expenses;
costs of remediation and liabilities associated with environmental conditions;
the potential for uninsured or underinsured property losses;
changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental
legislation and the related costs of compliance; and
•
acts of God, terrorist attacks, social unrest and civil disturbances.
In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss of principal to
the extent of any deficiency between the value of the collateral and the principal and accrued interest of the mortgage
loan, which could have a material adverse effect on our cash flow from operations and limit amounts available for
distribution to our stockholders. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such
borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of
bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the
avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state
law. Foreclosure of a mortgage loan can be an expensive and lengthy process, which could have a substantial negative
effect on our anticipated return on the foreclosed mortgage loan.
Our investments in CMBS are generally subject to losses.
Our investments in CMBS are subject to losses. In general, losses on a mortgaged property securing a mortgage
loan included in a securitization will be borne first by the equity holder of the property, then by a cash reserve fund or
letter of credit, if any, then by the holder of a mezzanine loan or B-Note, if any, then by the “first loss” subordinated
security holder (generally, the “B-Piece” buyer) and then by the holder of a higher-rated security. In the event of default
and the exhaustion of any equity support, reserve fund, letter of credit, mezzanine loans or B-Notes, and any classes of
securities junior to those in which we invest, we will not be able to recover all of our investment in the securities we
purchase. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values
subsequently decline and, as a result, less collateral is available to satisfy interest and principal payments due on the
related CMBS, there would be an increased risk of loss. The prices of lower credit quality securities are generally less
sensitive to interest rate changes than more highly rated investments, but more sensitive to adverse economic downturns
or individual issuer developments.
Dislocations, illiquidity and volatility in the market for commercial real estate as well as the broader financial
markets could adversely affect the performance and value of commercial mortgage loans, the demand for CMBS and
the value of CMBS investments.
In past years, the real estate and securitization markets, as well as global financial markets and the economy
generally, have experienced significant dislocations, illiquidity and volatility. While the United States economy may
technically be out of the recession, any recovery could be fragile and may not be sustainable for any specific period of
time. In particular, the pace of progress, or the lack of progress, of federal deficit reduction talks in the United States
may cause continued volatility. Furthermore, many state and local governments in the United States are experiencing,
and are expected to continue to experience, severe budgetary constraints. Recently enacted financial reform legislation in
the United States, including associated risk retention rules, could also adversely affect the availability of credit for
commercial real estate. Further, the global financial markets have recently experienced increased volatility due to
uncertainty surrounding the level and sustainability of the sovereign debt of various countries. We cannot assure you that
dislocations in the commercial mortgage loan market will not occur in the future.
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Challenging economic conditions have affected the financial strength of many commercial, multi-family and
other tenants and have resulted in increased rent delinquencies and decreased occupancy. Continuing economic
challenges may lead to decreased occupancy, decreased rents or other declines in income from, or the value of,
commercial, multi-family and manufactured housing community real estate.
In past years, declining commercial real estate values, coupled with tighter underwriting standards for
commercial real estate loans, prevented many commercial borrowers from refinancing their mortgages, which resulted in
increased delinquencies and defaults on commercial, multi-family and other mortgage loans. Past declines in commercial
real estate values have also resulted in reduced borrower equity, further hindering borrowers’ ability to refinance in an
environment of increasingly restrictive lending standards and giving them less incentive to cure delinquencies and avoid
foreclosure. The lack of refinancing opportunities in past years has impacted and could impact in the future, in particular,
mortgage loans that do not fully amortize and on which there is a substantial balloon payment due at maturity, because
borrowers generally expect to refinance these types of loans on or prior to their maturity date. There are substantial
amounts of U.S. mortgage loans with balloon payment obligations in excess of their respective current property values
that are maturing over the next two years. Finally, declining commercial real estate values and the associated increases in
loan-to-value ratios would result in lower recoveries on foreclosure and an increase in losses above those that would
have been realized had commercial property values remained the same or increased. Continuing defaults, delinquencies
and losses would further decrease property values, thereby resulting in additional defaults by commercial mortgage
borrowers, further credit constraints and further declines in property values.
In addition to credit factors previously affecting CMBS, the fallout from the downturn in the RMBS market and
markets for other asset-backed and structured products in past years could re-emerge and affect the CMBS market by
contributing to a decline in the market value and liquidity of securitized investments such as CMBS, even if such CMBS
are performing as expected. All of these factors may impact the demand for CMBS and the value of CMBS investments,
especially subordinated classes of CMBS.
If our Manager overestimates the yields or incorrectly prices the risks of our investments, we may experience losses.
Our Manager values our potential investments based on yields and risks, taking into account estimated future
losses on the mortgage loans and the underlying collateral included in the securitization’s pools, and the estimated
impact of these losses on expected future cash flows and returns. Our Manager’s loss estimates may not prove accurate,
as actual results may vary from estimates. In the event that our Manager underestimates the asset level losses relative to
the price we pay for a particular investment, we may experience losses with respect to such investment.
Real estate valuation is inherently subjective and uncertain.
The valuation of real estate and therefore the valuation of any underlying security relating to loans made by us
is inherently subjective due to, among other factors, the individual nature of each property, its location, the expected
future rental revenues from that particular property and the valuation methodology adopted. In addition, where we invest
in construction loans, initial valuations will assume completion of the project. As a result, the valuations of the real
estate assets against which we will make loans are subject to a degree of uncertainty and are made on the basis of
assumptions and methodologies that may not prove to be accurate, particularly in periods of volatility, low transaction
flow or restricted debt availability in the commercial or residential real estate markets.
Any investments in corporate bank debt and debt securities of commercial real estate operating or finance companies
are subject to the specific risks relating to the particular companies and to the general risks of investing in real
estate-related loans and securities, which may result in significant losses.
We may invest in corporate bank debt and in debt securities of commercial real estate operating or finance
companies. These investments involve special risks relating to the particular company, including its financial condition,
liquidity, results of operations, business and prospects. In particular, the debt securities are often non-collateralized and
may also be subordinated to its other obligations. We also invest in debt securities of companies that are not rated or are
rated non-investment grade by one or more rating agencies. Investments that are not rated or are rated non-investment
grade have a higher risk of default than investment grade rated assets and therefore may result in losses to us. We have
30
not adopted any limit on such investments.
These investments also subject us to the risks inherent with real estate-related investments, including:
risks of delinquency and foreclosure, and risks of loss in the event thereof;
the dependence upon the successful operation of, and net income from, real property;
risks generally incident to interests in real property; and
risks specific to the type and use of a particular property.
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These risks may adversely affect the value of our investments in commercial real estate operating and finance
companies and the ability of the issuers thereof to make principal and interest payments in a timely manner, or at all, and
could result in significant losses.
Investments in non-conforming and non-investment grade rated loans or securities involve increased risk of loss.
Many of our investments do not conform to conventional loan standards applied by traditional lenders and
either are not rated or rated as non-investment grade by the rating agencies. The non-investment grade ratings for these
assets typically result from the overall leverage of the loans, the lack of a strong operating history for the properties
underlying the loans, the borrowers’ credit history, the properties’ underlying cash flow or other factors. As a result,
these investments have a higher risk of default and loss than investment grade rated assets. Any loss we incur may be
significant and may reduce distributions to our stockholders and adversely affect the market value of our common stock.
There are no limits on the percentage of unrated or non-investment grade rated assets we may hold in our investment
portfolio.
Any credit ratings assigned to our investments are subject to ongoing evaluations and revisions and we cannot assure
you that those ratings will not be downgraded.
Some of our investments are rated by Moody’s Investors Service, Inc., Fitch Ratings, Inc., Standard & Poor’s
Ratings Services, DBRS, Inc., Kroll Bond Rating Agency, Inc. or Morningstar Credit Ratings, LLC. Any credit ratings
on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such
ratings will not be changed or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If
rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw,
their ratings of our investments in the future, the value of these investments could significantly decline, which would
adversely affect the value of our investment portfolio and could result in losses upon disposition or the failure of
borrowers to satisfy their debt service obligations to us.
The B-Notes that we acquire may be subject to additional risks related to the privately negotiated structure and terms
of the transaction, which may result in losses to us.
We invest in B-Notes. A B-Note is a mortgage loan typically (i) secured by a first mortgage on a single large
commercial property or group of related properties and (ii) subordinated to an A-Note secured by the same first
mortgage on the same collateral. As a result, if a borrower defaults, there may not be sufficient funds remaining for a
B-Note holder after payment to the A-Note holder. However, because each transaction is privately negotiated, B-Notes
can vary in their structural characteristics and risks. For example, the rights of holders of B-Notes to control the process
following a borrower default may vary from transaction to transaction. Further, B-Notes typically are secured by a single
property and so reflect the risks associated with significant concentration. Significant losses related to our B-Notes
would result in operating losses for us and may limit our ability to make distributions to our stockholders.
Our mezzanine loans involve greater risks of loss than senior loans secured by income-producing properties.
We invest in mezzanine loans, which sometimes take the form of subordinated loans secured by second
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mortgages on the underlying property or more commonly take the form of loans secured by a pledge of the ownership
interests of either the entity owning the property or a pledge of the ownership interests of the entity that owns the interest
in the entity owning the property. These types of assets involve a higher degree of risk than long-term senior mortgage
lending secured by income-producing real property because the loan may become unsecured as a result of foreclosure by
the senior lender. In the event of a bankruptcy of the entity providing the pledge of its ownership interests as security, we
may not have full recourse to the assets of such entity, or the assets of the entity may not be sufficient to satisfy our
mezzanine loan. If a borrower defaults on our mezzanine loan or debt senior to our loan, or in the event of a borrower
bankruptcy, our mezzanine loan will be satisfied only after the senior debt. As a result, we may not recover some or all
of our investment. In addition, mezzanine loans may have higher loan-to-value ratios than conventional mortgage loans,
resulting in less equity in the property and increasing the risk of loss of principal. Significant losses related to our
mezzanine loans would result in operating losses for us and may limit our ability to make distributions to our
stockholders.
Bridge loans involve a greater risk of loss than traditional investment-grade mortgage loans with fully insured
borrowers.
We may acquire bridge loans secured by first lien mortgages on a property to borrowers who are typically
seeking short-term capital to be used in an acquisition, construction or rehabilitation of a property, or other short-term
liquidity needs. The typical borrower under a bridge loan has usually identified an undervalued asset that has been
under-managed and/or is located in a recovering market. If the market in which the asset is located fails to recover
according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management and/or
the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the bridge loan, and we bear
the risk that we may not recover some or all of our initial expenditure.
In addition, borrowers usually use the proceeds of a conventional mortgage to repay a bridge loan. A bridge
loan therefore is subject to the risk of a borrower’s inability to obtain permanent financing to repay the bridge loan.
Bridge loans are also subject to risks of borrower defaults, bankruptcies, fraud, losses and special hazard losses that are
not covered by standard hazard insurance. In the event of any default under bridge loans held by us, we bear the risk of
loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage
collateral and the principal amount and unpaid interest of the bridge loan. To the extent we suffer such losses with
respect to our bridge loans, the value of our company and the price of our shares of common stock may be adversely
affected.
We purchase securities backed by subprime or alternative documentation residential mortgage loans, which are
subject to increased risks.
We own non-agency RMBS backed by collateral pools of mortgage loans that have been originated using
underwriting standards that are less restrictive than those used in underwriting “prime” mortgage loans. These lower
standards include mortgage loans made to borrowers having imperfect or impaired credit histories, mortgage loans
where the amount of the loan at origination is 80% or more of the value of the mortgaged property, mortgage loans made
to borrowers with low credit scores, mortgage loans made to borrowers who have other debt that represents a large
portion of their income and mortgage loans made to borrowers whose income is not required to be disclosed or verified.
Due to economic conditions, including increased interest rates and lower home prices, as well as aggressive lending
practices, subprime mortgage loans have in recent periods experienced increased rates of delinquency, foreclosure,
bankruptcy and loss, and they are likely to continue to experience delinquency, foreclosure, bankruptcy and loss rates
that are higher, and that may be substantially higher, than those experienced by mortgage loans underwritten in a more
traditional manner. Thus, because of the higher delinquency rates and losses associated with subprime mortgage loans
and alternative documentation, or Alt-A, mortgage loans, the performance of non-agency RMBS backed by subprime
mortgage loans and Alt-A mortgage loans that we acquire could be correspondingly adversely affected, which could
adversely impact our results of operations, financial condition and business.
The residential mortgage loans that underlie the RMBS we acquire, are subject to risks particular to investments
secured by mortgage loans on residential property.
Residential mortgage loans are secured by single family residential property and are subject to risks of
delinquency and foreclosure and risks of loss. The ability of a borrower to repay a loan secured by a residential property
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typically is dependent upon the income and/or assets of the borrower. A number of factors may impair borrowers’
abilities to repay their loans, including:
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changes in the borrowers’ income or assets;
acts of God, which may result in uninsured losses;
acts of war or terrorism, including the consequences of such events;
adverse changes in national and local economic and market conditions;
changes in governmental laws and regulations, including fiscal policies, zoning ordinances and environmental
legislation and the related costs of compliance;
costs of remediation and liabilities associated with environmental conditions; and
the potential for uninsured or under-insured property losses.
In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to such borrower will be deemed
to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the
bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy
trustee or debtor-in-possession to the extent the lien is unenforceable under state law.
We may acquire non-agency RMBS, which are backed by residential property but, in contrast to agency RMBS,
their principal and interest are not guaranteed by federally chartered entities such as the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation and, in the case of the Government National Mortgage
Association, the U.S. government. Our investments in RMBS are subject to the risks of defaults, foreclosure timeline
extension, fraud, home price depreciation and unfavorable modification of loan principal amount, interest rate and
amortization of principal, accompanying the underlying residential mortgage loans. To the extent that assets underlying
our investments are concentrated geographically, by property type or in certain other respects, we may be subject to
certain of the foregoing risks to a greater extent. In the event of defaults on the residential mortgage loans that underlie
our investments in agency RMBS and the exhaustion of any underlying or any additional credit support, we may not
realize our anticipated return on our investments and we may incur a loss on these investments.
Prepayment rates may adversely affect the value of our investment portfolio.
The value of our investment portfolio is affected by prepayment rates on our mortgage assets. In many cases,
borrowers are not prohibited from making prepayments on their mortgage loans. Prepayment rates are influenced by
changes in interest rates and a variety of economic, geographic and other factors beyond our control, including, without
limitation, housing and financial markets and relative interest rates on fixed rate mortgage loans, and adjustable rate
mortgage loans, or ARMs, and consequently prepayment rates cannot be predicted.
We generally receive payments from principal payments that are made on our mortgage assets, including
residential mortgage loans underlying the agency RMBS or the non-agency RMBS that we acquire. When borrowers
prepay their mortgage loans faster than expected, it results in prepayments that are faster than expected. Faster than
expected prepayments could adversely affect our profitability and our ability to recoup our cost of certain investments
purchased at a premium over par value, including in the following ways:
• We may purchase RMBS that have a higher interest rate than the prevailing market interest rate at the time. In
exchange for this higher interest rate, we may pay a premium over the par value to acquire our mortgage asset.
In accordance with GAAP, we may amortize this premium over the estimated term of our mortgage asset. If our
mortgage asset is prepaid in whole or in part prior to its maturity date, however, we may be required to expense
the allocable portion of the premium at the time of the prepayment.
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•
Prepayment rates generally increase when interest rates fall and decrease when interest rates rise, making it
unlikely that we would be able to reinvest the proceeds of any prepayment in mortgage assets of similar quality
and terms (including yield). If we are unable to invest in similar mortgage assets, we would be adversely
affected.
While we seek to minimize prepayment risk to the extent practical, in selecting investments we must balance
prepayment risk against other risks and the potential returns of each investment. No strategy can completely insulate us
from prepayment risk.
Interest rate mismatches between our agency RMBS backed by ARMs and our borrowings used to fund our
purchases of these assets may reduce our net interest income and cause us to suffer a loss during periods of rising
interest rates.
To the extent that we invest in agency RMBS backed by ARMs, we may finance these investments with
borrowings that have interest rates that adjust more frequently than the interest rates of those agency RMBS or the
ARMs that back those RMBS. Accordingly, if short-term interest rates increase, our borrowing costs may increase faster
than the interest rates on agency RMBS backed by ARMs adjust. As a result, in a period of rising interest rates, we could
experience a decrease in net income or a net loss. In most cases, the interest rates on our agency RMBS and on our
borrowings will not be identical, thereby potentially creating an interest rate mismatch between our investments and our
borrowings. While the historical spread between relevant short-term interest rate indices has been relatively stable, there
have been periods when the spread between these indices was volatile. During periods of changing interest rates, these
interest rate index mismatches could reduce our net income or produce a net loss, and adversely affect our ability to
make distributions and the market price of our common stock.
In addition, agency RMBS backed by ARMs are typically subject to lifetime interest rate caps which limit the
amount that interest rates can increase through the maturity of the agency RMBS. However, our borrowings under
repurchase agreements typically are not subject to similar restrictions. Accordingly, in a period of rapidly increasing
interest rates, the interest rates paid on our borrowings could increase without limitation while caps could limit the
interest rates on these types of agency RMBS. This problem is magnified for agency RMBS backed by ARMs that are
not fully indexed. Further, some agency RMBS backed by ARMs may be subject to periodic payment caps that result in
a portion of the interest being deferred and added to the principal outstanding. As a result, we may receive less cash
income on these types of agency RMBS than we need to pay interest on our related borrowings. These factors could
reduce our net interest income and cause us to suffer a loss during periods of rising interest rates.
Risks of cost overruns and noncompletion of renovation of the properties underlying rehabilitation loans may result
in significant losses.
The renovation, refurbishment or expansion by a borrower under a mortgaged property involves risks of cost
overruns and noncompletion. Estimates of the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove inaccurate. Other risks may include
rehabilitation costs exceeding original estimates, possibly making a project uneconomical, environmental risks and
rehabilitation and subsequent leasing of the property not being completed on schedule. If such renovation is not
completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of
net operating income and may not be able to make payments on our investment, which could result in significant losses.
Interest rate fluctuations could reduce our ability to generate income on our investments and may cause losses.
Changes in interest rates affect our net interest income, which is the difference between the interest income we
earn on our interest-earning investments and the interest expense we incur in financing these investments. Changes in the
level of interest rates also may affect our ability to originate and acquire assets, the value of our assets and our ability to
realize gains from the disposition of assets. Changes in interest rates may also affect borrower default rates. In a period
of rising interest rates, our interest expense could increase, while the interest we earn on our fixed-rate debt investments
would not change, adversely affecting our profitability. Our operating results depend in large part on differences
between the income from our assets, net of credit losses, and our financing costs. We anticipate that for any period
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during which our assets are not match-funded, the income from such assets will respond more slowly to interest rate
fluctuations than the cost of our borrowings. Consequently, changes in interest rates may significantly influence our net
income. Interest rate fluctuations resulting in our interest expense exceeding interest income would result in operating
losses for us.
We may invest in distressed and non-performing commercial loans which could subject us to increased risks relative
to performing loans, which may result in losses to us.
We may invest in distressed and non-performing commercial mortgage loans, which are subject to increased
risks of loss. Such loans may be or become non-performing for a variety of reasons, including, without limitation,
because the underlying property is too highly leveraged or the borrower falls upon financial distress, in either case,
resulting in the borrower being unable to meet its debt service obligations. Such loans may require a substantial amount
of workout negotiations and/or restructuring, which may divert the attention of our Manager from other activities and
may entail, among other things, a substantial reduction in the interest rate and a substantial write-down of the principal
of the loan. Moreover, the ability to implement a successful restructuring entails a high degree of uncertainty, and there
can be no assurance that our Manager would be able to implement any such restructuring on favorable terms or at all.
The financial or operating difficulties relating to the distressed or non-performing loan may never be overcome
and may cause the borrower to become subject to bankruptcy or other similar administrative proceedings. In connection
with any such proceeding, we may incur substantial or total losses on our investments and may become subject to certain
additional potential liabilities that may exceed the value of our original investment therein. For example, under certain
circumstances, a lender that has inappropriately exercised control over the management and policies of a debtor may
have its claims subordinated or disallowed or may be found liable for damages suffered by parties as a result of such
actions. In addition, under certain circumstances, payments to us may be reclaimed if any such payment is later
determined to have been a fraudulent conveyance, preferential payment, or similar transaction under applicable
bankruptcy and insolvency laws.
Alternatively, in the future, we may find it necessary or desirable to foreclose on one of these loans, and the
foreclosure process may be lengthy and expensive. Borrowers or junior lenders may resist mortgage foreclosure actions
by asserting numerous claims, counterclaims and defenses against us. Any costs or delays involved in the effectuation of
a foreclosure of the loan or a liquidation of the underlying property, or defending challenges brought after the
completion of a foreclosure, will further reduce the proceeds and thus increase our loss.
We may experience a decline in the fair value of our assets.
A decline in the fair value of our assets may require us to recognize an “other-than-temporary” impairment
against such assets under GAAP if we were to determine that, with respect to any assets in unrealized loss positions, we
do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to
the amortized cost of such assets. If such a determination were to be made, we would recognize unrealized losses
through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such
assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash
losses at the time of recognition; subsequent disposition or sale of such assets could further affect our future losses or
gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at
the time of sale.
Some of our portfolio investments are recorded at fair value and, as a result, there is uncertainty as to the value of
these investments.
Some of our portfolio investments are in the form of positions or securities that are not publicly traded. The fair
value of securities and other investments that are not publicly traded may not be readily determinable. We value these
investments quarterly at fair value, as determined in accordance with GAAP, which include consideration of
unobservable inputs. Because such valuations are subjective, the fair value of certain of our assets may fluctuate over
short periods of time and our determinations of fair value may differ materially from the values that would have been
used if a ready market for these securities existed. The value of our common stock could be adversely affected if our
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determinations regarding the fair value of these investments were materially higher than the values that we ultimately
realize upon their disposal.
Liability relating to environmental matters may impact the value of properties that we may purchase or acquire.
We may be subject to environmental liabilities arising from properties we own. Under various U.S. federal,
state and local laws, an owner or operator of real property may become liable for the costs of removal of certain
hazardous substances released on its property. These laws often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the release of such hazardous substances.
The presence of hazardous substances may adversely affect an owner’s ability to sell real estate or borrow using
real estate as collateral. To the extent that an owner of a property underlying one of our debt investments becomes liable
for removal costs, the ability of the owner to make payments to us may be reduced, which in turn may adversely affect
the value of the relevant mortgage asset held by us and our ability to make distributions to our stockholders.
The presence of hazardous substances on a property we own may adversely affect our ability to sell the property
and we may incur substantial remediation costs, thus harming our financial condition. The discovery of material
environmental liabilities attached to such properties could have a material adverse effect on our results of operations and
financial condition and our ability to make distributions to our stockholders.
We invest in commercial properties subject to net leases, which could subject us to losses.
We invest in commercial properties subject to net leases. Typically, net leases require the tenants to pay
substantially all of the operating costs associated with the properties. As a result, the value of, and income from,
investments in commercial properties subject to net leases will depend, in part, upon the ability of the applicable tenant
to meet its obligations to maintain the property under the terms of the net lease. If a tenant fails or becomes unable to so
maintain a property, we will be subject to all risks associated with owning the underlying real estate. Under many net
leases, however, the owner of the property retains certain obligations with respect to the property, including, among
other things, the responsibility for maintenance and repair of the property, to provide adequate parking, maintenance of
common areas and compliance with other affirmative covenants in the lease. If we were to fail to meet any such
obligations, the applicable tenant could abate rent or terminate the applicable lease, which could result in a loss of our
capital invested in, and anticipated profits from, the property.
We expect that some commercial properties subject to net leases in which we invest generally will be occupied
by a single tenant and, therefore, the success of these investments will be materially dependent on the financial stability
of each such tenant. A default of any such tenant on its lease payments to us would cause us to lose the revenue from the
property and cause us to have to find an alternative source of revenue to meet any mortgage payment and prevent a
foreclosure if the property is subject to a mortgage. In the event of a default, we may experience delays in enforcing our
rights as landlord and may incur substantial costs in protecting our investment and re-letting our property. If a lease is
terminated, we may also incur significant losses to make the leased premises ready for another tenant and experience
difficulty or a significant delay in re-leasing such property.
In addition, net leases typically have longer lease terms and, thus, there is an increased risk that contractual
rental increases in future years will fail to result in fair market rental rates during those years.
We may acquire these investments through sale-leaseback transactions, which involve the purchase of a
property and the leasing of such property back to the seller thereof. If we enter into a sale-leaseback transaction, our
Manager will seek to structure any such sale-leaseback transaction such that the lease will be characterized as a “true
lease” for U.S. federal income tax purposes, thereby allowing us to be treated as the owner of the property for U.S.
federal income tax purposes. However, we cannot assure you that the Internal Revenue Service, or the IRS, will not
challenge such characterization. In the event that any such sale-leaseback transaction is challenged and recharacterized
as a financing transaction or loan for U.S. federal income tax purposes, deductions for depreciation and cost recovery
relating to such property would be disallowed. If a sale-leaseback transaction were so recharacterized, we might fail to
satisfy the REIT qualification “asset tests” or “income tests” and, consequently, lose our REIT status effective with the
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year of recharacterization. Alternatively, the amount of our REIT taxable income could be recalculated, which might
also cause us to fail to meet the REIT distribution requirement for a taxable year.
Investments outside the U.S. that are denominated in foreign currencies subject us to foreign currency risks and to
the uncertainty of foreign laws and markets, which may adversely affect our distributions and our REIT status.
Our investments outside the U.S. denominated in foreign currencies subject us to foreign currency risk due to
potential fluctuations in exchange rates between foreign currencies and the U.S. dollar. As a result, changes in exchange
rates of any such foreign currency to U.S. dollars may affect our income and distributions and may also affect the book
value of our assets and the amount of stockholders’ equity. In addition, these investments subject us to risks of multiple
and conflicting tax laws and regulations, and other laws and regulations that may make foreclosure and the exercise of
other remedies in the case of default more difficult or costly compared to U.S. assets, and political and economic
instability abroad, any of which factors could adversely affect our receipt of returns on and distributions from these
investments.
Changes in foreign currency exchange rates used to value a REIT’s foreign assets may be considered changes in
the value of the REIT’s assets. These changes may adversely affect our status as a REIT. Further, bank accounts in
foreign currency which are not considered cash or cash equivalents may adversely affect our status as a REIT.
The ongoing Eurozone crisis may have an adverse effect on investments in Europe, and the break-up of the
Eurozone, or the exit of any member state, would create uncertainty and could affect our investments directly.
Certain of our investments are secured by European collateral. The ongoing situation relating to the high levels
of sovereign debt of several countries, including Greece, Ireland, Italy, Spain and Portugal, the relatively low levels of
economic growth in these countries and the undercapitalization and liquidity problems of many banks in the Eurozone,
together with the risk of contagion to other, more financially stable countries, has continued to negatively impact the
global financial markets. The situation has also raised a number of uncertainties regarding the stability and overall
standing of the European Union. Any further deterioration in the global or Eurozone economy could have a significant
adverse effect on our activities and the value of our European collateral.
In addition, we currently hold, and may acquire additional, assets that are denominated in Euros (including
loans secured by such assets), such as assets in continental Europe. Any further deterioration in the Eurozone economy
could have a material adverse effect on the value of our investment in such assets and amplify the currency risks faced
by us.
If any country were to leave the Eurozone, or if the Eurozone were to break up entirely, the treatment of debt
obligations previously denominated in Euros is uncertain. A number of issues would be raised, such as whether
obligations which are expressed to be payable in Euros would be re-denominated into a new currency. The answer to this
and other questions is uncertain and would depend on the way in which the break-up occurred and also on the nature of
the transaction; the law governing it; which courts have jurisdiction in relation to it; the place of payment; and the place
of incorporation of the payor. If we were to hold any investments in Euros at the time of any Eurozone exit or break-up,
this uncertainty and potential re-denomination could have a material adverse effect on the value of our investments and
the income from them.
We invest in equity interests in commercial real estate assets, which subjects us to the general risks of owning
commercial real estate.
We acquire and manage equity interests in commercial real estate assets. The economic performance and value
of these investments can be adversely affected by many factors that are generally applicable to most real estate,
including the following:
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changes in the national, regional, local and international economic climate;
local conditions, such as oversupply of space or a reduction in demand for real estate in the areas in which they
are located;
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competition from other available space;
the attractiveness of the real estate to tenants;
increases in operating costs if these costs cannot be passed through to tenants;
the financial condition of tenants and the ability to collect rent from tenants;
vacancies, changes in market rental rates and the need to periodically renovate, repair and re-let space;
changes in interest rates and the availability of financing;
changes in zoning laws and taxation, government regulation and potential liability under environmental or other
laws or regulations;
acts of God, including, without limitation, earthquakes, hurricanes and other natural disasters, or acts of war or
terrorism, in each case which may result in uninsured or underinsured losses; and
decreases in the underlying value of real estate.
Certain significant expenditures associated with an investment in commercial real estate assets (such as
mortgage payments, real estate taxes and maintenance costs) generally do not decline when circumstances cause a
reduction in income from the asset. Because real estate investments are relatively illiquid, our ability to vary any
investments in commercial real estate assets promptly in response to economic or other conditions would be limited.
This relative illiquidity could impede our ability to respond to adverse changes in the performance of such investments.
No assurances can be given that the value of our equity investments in commercial real estate assets will not decrease in
the future.
We face risks associated with acquisitions of commercial real estate assets.
Our acquisition of equity interests in commercial real estate assets is subject to, and the success of those assets
may be adversely affected by, various risks, including those described below:
• we and our Manager may be unable to meet required closing conditions;
• we may be unable to finance acquisitions on favorable terms or at all;
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acquired assets may fail to perform as expected;
our Manager’s estimates of the costs of repositioning or renovating acquired commercial real estate assets may
be inaccurate;
• we may not be able to obtain adequate insurance coverage for acquired commercial real estate assets;
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acquisitions may be located in markets where we and our Manager have a lack of market knowledge or
understanding of the local economy, lack of business relationships in the area and unfamiliarity with local
governmental and permitting procedures;
our Manager may be unable to quickly and efficiently integrate new acquisitions of commercial real estate
assets into our existing operations and, therefore, our results of operations and financial condition could be
adversely affected; and
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• we may acquire equity interests in commercial real estate assets through a joint venture, and such investments
could be adversely affected by our lack of sole decision-making authority and reliance upon a co-venturer’s
financial condition. In addition, if we co-invest with affiliates of our Manager, we may be obligated to pay fees
to such affiliates and would be subject to a variety of conflicts of interest with such affiliates, including
conflicts similar to those described under the section captioned “—Risks Related to Our Relationship with Our
Manager.”
We make equity investments in commercial real estate assets subject to both known and unknown liabilities and
without any recourse, or with only limited recourse to the seller thereof. As a result, if a liability were asserted against us
arising from our ownership of those assets, we might have to pay substantial sums to settle it, which could adversely
affect us. Unknown liabilities with respect to commercial real estate assets may include:
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claims by tenants, vendors or other persons arising from dealing with the former owners of the assets;
liabilities incurred in the ordinary course of business;
claims for indemnification by general partners, directors, officers and others indemnified by the former owners
of the assets; and
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liabilities for clean-up of undisclosed environmental contamination.
Risks Related to Our Investing and Servicing Segment and Our Acquisition of LNR
The business activities of our Investing and Servicing Segment, particularly our special servicing business, expose us
to risks that we did not face prior to our acquisition of LNR.
Our Investing and Servicing Segment includes all business activities that we obtained in connection with our
acquisition of LNR in April 2013 (excluding the consolidation of securitization VIEs). In our Investing and Servicing
Segment, we derive a substantial portion of our cash flows from the special servicing of pools of commercial mortgage
loans. As special servicer, we typically receive fees based upon the outstanding balance of the loans that are being
specially serviced by us. The balance of loans in special servicing where we act as special servicer could decline
significantly and as such our servicing fees could likewise decline materially. The special servicing industry is highly
competitive, and our inability to compete successfully with other firms to maintain our existing servicing portfolio and
obtain future servicing opportunities could have a material and adverse impact on our future cash flows and results of
operations. Because the right to appoint the special servicer for securitized mortgage loans generally resides with the
holder of the “controlling class” position in the relevant trust and may migrate to holders of different classes of securities
as additional losses are realized, our ability to maintain our existing servicing rights and obtain future servicing
opportunities may require, in many cases, the acquisition of additional CMBS. Accordingly, our ability to compete
effectively may depend, in part, on the availability of additional debt or equity capital to fund these purchases.
Additionally, our existing servicing portfolio is subject to “run off,” meaning that mortgage loans serviced by us may be
prepaid prior to maturity, refinanced with a mortgage not serviced by us, or liquidated through foreclosure, deed-in-lieu
of foreclosure or other liquidation processes, or repaid through standard amortization of principal, resulting in lower
servicing fees and/or lower returns on the subordinated securities owned by us. Improving economic conditions and
property prices and declines in interest rates and greater availability of mortgage financing could reduce the incidence of
assets going into special servicing and reduce our revenues from special servicing, including as a result of lower fees
under new arrangements. The fair value of our servicing rights may decrease under the foregoing circumstances,
resulting in losses.
The conduit operations in our Investing and Servicing Segment are subject to volatile market conditions and
significant competition. In addition, the conduit business may suffer losses as a result of ineffective or inadequate hedges
and credit issues.
The business activities in our Investing and Servicing Segment outside the United States subject us to currency
risks. Most of the European investments and liabilities are denominated in currencies other than U.S. dollars, and we
generally do not hedge currency risk with respect to our Investing and Servicing Segment. As a result, unfavorable
changes in exchange rates could result in losses independent of the performance of the underlying business.
We operate a special servicing business, which has certain unique risks.
In connection with the special servicing of mortgage loans, a special servicer may, at the direction of the
directing certificateholder, generally take actions with respect to the specially serviced mortgage loans that could
adversely affect the holders of some or all of the more senior classes of CMBS. We may hold subordinated CMBS and
we may or may not be the directing holder in any CMBS transaction in which we also act as special servicer. We may
have conflicts of interest in exercising our rights as holder of subordinated classes of CMBS and in owning the entity
that also acts as the special servicer for such transactions. It is possible that we, acting as the directing certificateholder
for a CMBS transaction, may direct special servicer actions that conflict with the interests of certain other classes of the
CMBS issued in that transaction. The special servicer is not permitted to take actions that are prohibited by law or that
violate the applicable servicing standard or the terms of the applicable CMBS documentation or the applicable mortgage
loan documentation, and we are subject to the risk of claims asserted by mortgage loan borrowers and the holders of
other classes of CMBS that we have violated applicable law or, if applicable, the servicing standard and our other
obligations under such CMBS documentation or mortgage loan documentation, as a result of actions we may take.
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The business activities in our Investing and Servicing Segment are subject to an evolving regulatory environment that
may affect certain aspects of these activities.
In our Investing and Servicing Segment, we acquire subordinated securities issued by and act as special servicer
for securitizations. As a result of the dislocation of the credit markets, the securitization industry has become subject to
additional regulation. In particular, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the
“Dodd-Frank Act”), various federal agencies have promulgated a rule that generally requires issuers in securitizations to
retain 5% of the risk associated with the securities. While the rule as adopted generally allows the purchase of the CMBS
“B-Piece” by a party not affiliated with the issuer to satisfy the risk retention requirement, current CMBS B-Pieces are
generally not large enough to fully satisfy the 5% requirement. The CMBS industry is currently in negotiations with
those federal agencies to allow additional third parties to partner with traditional B-Piece buyers and purchase the
securities immediately senior to the B-Piece in order to satisfy the 5% requirement in the rule. No assurance can be given
that the agencies will permit such an arrangement. Accordingly, buyers of B-Pieces such as us may be required to
purchase larger B-Pieces, potentially reducing returns on such investments. Additionally, the SEC recently promulgated
additional regulations with respect to securitizations, which regulations generally include additional disclosure and
reporting requirements. The additional regulations took effect in late November 2014, and certain compliance dates for
the additional regulations occurred in late November 2015, with the remaining compliance dates set to occur in late
November 2016. Certain of the regulations could pose additional risks to our participation in future securitizations or
could reduce the economic incentives of participating in future securitizations.
One of the business activities in our Investing and Servicing Segment is investment in subordinated CMBS. The risks
of investment in CMBS are magnified in the case of our Investing and Servicing Segment, where the principal
payments received by the CMBS trust are made in priority to the higher rated securities.
CMBS are subject to the various risks that relate to the pool of underlying commercial mortgage loans and any
other assets in which the CMBS represents an interest. In addition, CMBS are subject to additional risks arising from the
geographic, property type and other types of concentrations in the pool of underlying commercial mortgage loans, which
risks are magnified by the subordinated nature of the CMBS in which we invest in our Investing and Servicing Segment.
In the event of defaults on the mortgage loans in the CMBS trusts, we bear a risk of loss on our related subordinated
CMBS to the extent of deficiencies between the value of the collateral and the principal, accrued interest and unpaid fees
and expenses on the mortgage loans, which may be offset to some extent by the special servicing fees received by us on
those mortgage loans. The yield to maturity on the CMBS depends largely upon the price paid for the CMBS, which are
generally sold at a discount at issuance and trade at even steeper discounts in the secondary markets. Further, the yield to
maturity on CMBS depends, in significant part, upon the rate and timing of principal payments on the underlying
mortgage loans, including both voluntary prepayments, if permitted, and involuntary prepayments, such as prepayments
resulting from casualty or condemnation, defaults and liquidations or repurchases upon breaches of representations and
warranties or document defects. Any changes in the weighted average lives of CMBS may adversely affect yield on the
CMBS. Prepayments resulting in a shortening of weighted average lives of CMBS may be made at a time of low interest
rates when we may be unable to reinvest the resulting payment of principal on the CMBS at a rate comparable to that
being earned on the CMBS, while delays and extensions resulting in a lengthening of those weighted average lives may
occur at a time of high interest rates when we may have been able to reinvest scheduled principal payments at higher
rates.
The exercise of remedies and successful realization of liquidation proceeds relating to commercial mortgage
loans underlying CMBS may be highly dependent on our performance as special servicer. We attempt to underwrite
investments on a “loss-adjusted” basis, which projects a certain level of performance. However, there can be no
assurance that this underwriting accurately predicts the timing or magnitude of such losses. To the extent that this
underwriting has incorrectly anticipated the timing or magnitude of losses, our business may be adversely affected.
Some of the mortgage loans underlying the CMBS are already in default and additional loans may default in the future.
In the case of such defaults, cash flows of CMBS investments held by us may be adversely affected as any reduction in
the mortgage payments or principal losses on liquidation of any mortgage loan may be applied to the class of CMBS
securities relating to such defaulted loans that we hold.
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The market value of CMBS could fluctuate materially as a result of various risks that are out of our control and may
result in significant losses.
The market value of CMBS investments could fluctuate materially over time as the result of changes in
mortgage spreads, treasury bond interest rates, capital market supply and demand factors, and many other factors that
affect high-yield fixed income products. These factors are out of our control and could impair our ability to obtain
short-term financing on the CMBS. CMBS investments, especially subordinated classes of CMBS, may have no, or only
a limited, trading market. The financial markets in the past have experienced and could in the future experience a period
of volatility and reduced liquidity, which may reoccur or continue and reduce the market value of CMBS. Some or all of
the CMBS, especially subordinated classes of CMBS, may be subject to restrictions on transfer and may be considered
illiquid.
Mortgage loan servicing is an increasingly regulated business.
The mortgage loan servicing activities of our Investing and Servicing Segment are subject to a still evolving set
of regulations, including regulations being promulgated under the Dodd-Frank Act. In addition, various governmental
authorities have recently increased their investigative focus on the activities of mortgage loan servicers. As a result, we
may have to spend additional resources and devote additional management time to address any regulatory concerns,
which may reduce the resources available to grow our business. In addition, if we fail to operate the servicing activities
of our Investing and Servicing Segment in compliance with existing and future regulations, our business, reputation,
financial condition or results of operations could be materially and adversely affected.
Many of the assets in our Investing and Servicing Segment are held through, or are ownership interests in, entities
subject to entity level or foreign taxes, which cannot be passed through to, or used by, our stockholders to reduce
taxes they owe.
Most of the assets in our Investing and Servicing Segment are held through a TRS, which is subject to entity
level taxes on income that it earns. Such taxes have materially increased the taxes paid by our TRSs. In addition, certain
of the assets in our Investing and Servicing Segment include entities organized or assets located in foreign jurisdictions.
Taxes that we or such entities pay in foreign jurisdictions may not be passed through to, or used by, our stockholders as a
foreign tax credit or otherwise.
In connection with our prior acquisition of LNR, we may have to bear the costs of certain pre-closing taxes.
The acquisition of LNR involved the purchase of the LNR companies, a significant portion of which were
historically C-corporations for U.S. federal income tax purposes. While the sellers of LNR generally agreed to pay (or
indemnify us) for any pre-closing tax liabilities, such indemnity obligations are generally limited to the amount of the
purchase price for LNR and, in certain situations, limited to certain maximum amounts with respect to certain LNR
entities, as agreed upon by the sellers and us. Furthermore, there can be no assurance that we would be able to enforce
payment or indemnification by the sellers of or with respect to any such pre-closing tax liabilities. While the sponsors of
the sellers provided a limited guarantee on certain pre-closing tax liabilities, such guarantee is limited to certain specified
entities and certain specified amounts, as agreed to between us, the sellers and such sponsors. Accordingly, such LNR
companies may become liable for pre-closing taxes, which pre-closing taxes may, in the event of an inability to enforce
the indemnity or in the event of a tax liability in excess of the agreed upon caps on such liabilities, be borne by us.
Our Consolidated Financial Statements changed materially following our acquisition of LNR, as we became required
to consolidate the assets and liabilities of CMBS pools in which we own the controlling class of subordinated
securities and are considered the “primary beneficiary.”
Following our acquisition of LNR, we became required to consolidate the assets and liabilities of certain CMBS
pools in which we own the controlling class of subordinated securities into our financial statements, even though the
value of the subordinated securities may represent a small interest relative to the size of the pool. Under GAAP,
companies are required to consolidate VIEs in which they are determined to be the primary beneficiary. A VIE must be
consolidated only by its primary beneficiary, which is defined as the party who, along with its affiliates and agents, has a
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potentially significant interest in the entity and controls the entity’s significant decisions. As a result of the foregoing,
our financial statements are more complex and may be more difficult to understand than if we did not consolidate the
CMBS pools.
Risks Related to Our Organization and Structure
Certain provisions of Maryland law could inhibit changes in control.
Certain provisions of the Maryland General Corporation Law, or the MGCL, may have the effect of deterring a
third party from making a proposal to acquire us or of impeding a change in control under circumstances that otherwise
could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing
market price of our common stock. We are subject to the “business combination” provisions of the MGCL that, subject
to limitations, prohibit certain business combinations (including a merger, consolidation, share exchange, or, in
circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities) between us
and an “interested stockholder” (defined generally as any person who beneficially owns 10% or more of our then
outstanding voting capital stock or an affiliate or associate of ours who, at any time within the two-year period prior to
the date in question, was the beneficial owner of 10% or more of our then outstanding voting capital stock) or an affiliate
thereof for five years after the most recent date on which the stockholder becomes an interested stockholder. After the
five-year prohibition, any business combination between us and an interested stockholder generally must be
recommended by our board of directors and approved by the affirmative vote of at least (i) 80% of the votes entitled to
be cast by holders of outstanding shares of our voting capital stock and (ii) two-thirds of the votes entitled to be cast by
holders of voting capital stock of the corporation other than shares held by the interested stockholder with whom or with
whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested
stockholder. These super-majority voting requirements do not apply if our common stockholders receive a minimum
price, as defined under Maryland law, for their shares in the form of cash or other consideration in the same form as
previously paid by the interested stockholder for its shares. These provisions of the MGCL also do not apply to business
combinations that are approved or exempted by a board of directors prior to the time that the interested stockholder
becomes an interested stockholder. Pursuant to the statute, our board of directors has by resolution exempted business
combinations between us and any other person, provided that such business combination is first approved by our board
of directors (including a majority of our directors who are not affiliates or associates of such person).
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The “control share” provisions of the MGCL provide that “control shares” of a Maryland corporation (defined
as shares which, when aggregated with other shares controlled by the stockholder (except solely by virtue of a revocable
proxy), entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired
in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of “control shares”)
have no voting rights except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of
all the votes entitled to be cast on the matter, excluding votes entitled to be cast by the acquirer of control shares, our
officers and our personnel who are also our directors. Our bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of shares of our stock. There can be no assurance that this
provision will not be amended or eliminated at any time in the future.
The “unsolicited takeover” provisions of the MGCL permit our board of directors, without stockholder approval
and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses, some of which
(for example, a classified board) we do not yet have. These provisions may have the effect of inhibiting a third party
from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of us under the
circumstances that otherwise could provide the holders of shares of common stock with the opportunity to realize a
premium over the then current market price.
Our authorized but unissued shares of common and preferred stock may prevent a change in control.
Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In
addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number
of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify
or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the
classified or reclassified shares. As a result, our board of directors may establish a series of shares of common or
preferred stock that could delay or prevent a transaction or a change in control that might involve a premium price for
our shares of common stock or otherwise be in the best interest of our stockholders.
Maintenance of our exemption from registration under the Investment Company Act imposes significant limits on
our operations.
We intend to continue to conduct our operations so that neither we nor any of our subsidiaries are required to
register as an investment company under the Investment Company Act. Because we are a holding company that
conducts our businesses primarily through wholly-owned subsidiaries, the securities issued by these subsidiaries that are
excepted from the definition of “investment company” under Section 3(c)(1) or Section 3(c)(7) of the Investment
Company Act, together with any other investment securities we own, may not have a combined value in excess of 40%
of the value of our adjusted total assets on an unconsolidated basis. This requirement limits the types of businesses in
which we may engage through our subsidiaries. In addition, the assets we and our subsidiaries may acquire are limited
by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment
Company Act, which may adversely affect our performance.
If the value of securities issued by our subsidiaries that are excepted from the definition of “investment
company” by Section 3(c)(1) or 3(c)(7) of the Investment Company Act, together with any other investment securities
we own, exceeds 40% of our adjusted total assets on an unconsolidated basis, or if one or more of such subsidiaries fail
to maintain an exception or exemption from the Investment Company Act, we could, among other things, be required
either (i) to substantially change the manner in which we conduct our operations to avoid being required to register as an
investment company or (ii) to register as an investment company under the Investment Company Act, either of which
could have an adverse effect on us and the market price of our securities. If we were required to register as an investment
company under the Investment Company Act, we would become subject to substantial regulation with respect to our
capital structure (including our ability to use leverage), management, operations, transactions with affiliated persons (as
defined in the Investment Company Act), portfolio composition, including restrictions with respect to diversification and
industry concentration, and other matters.
In August 2011, the SEC solicited public comment on a wide range of issues relating to Section 3(c)(5)(C) of
the Investment Company Act, including the nature of the assets that qualify for purposes of the exemption and whether
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mortgage REITs should be regulated in a manner similar to investment companies. There can be no assurance that the
laws and regulations governing the Investment Company Act status of REITs, including the Division of Investment
Management of the SEC providing more specific or different guidance regarding these exemptions, will not change in a
manner that adversely affects our operations. If we or our subsidiaries fail to maintain an exception or exemption from
the Investment Company Act, we could, among other things, be required to (i) change the manner in which we conduct
our operations to avoid being required to register as an investment company, (ii) effect sales of our assets in a manner
that, or at a time when, we would not otherwise choose to do so, or (iii) register as an investment company (which,
among other things, would require us to comply with the leverage constraints applicable to investment companies), any
of which could negatively affect the value of our common stock, the sustainability of our business model, and our ability
to make distributions to our stockholders, which could, in turn, materially and adversely affect us and the market price of
our common stock.
Rapid changes in the values of our real estate-related investments may make it more difficult for us to maintain our
qualification as a REIT or exemption from the Investment Company Act.
If the market value or income potential of real estate-related investments declines as a result of increased
interest rates, prepayment rates or other factors, we may need to increase our real estate investments and income and/or
liquidate our non-qualifying assets in order to maintain our REIT qualification or exemption from the Investment
Company Act. If the decline in real estate asset values and/or income occurs quickly, this may be especially difficult to
accomplish. This difficulty may be exacerbated by the illiquid nature of any non-qualifying assets that we may own. We
may have to make investment decisions that we otherwise would not make absent the REIT and Investment Company
Act considerations.
Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could
limit your recourse in the event of actions not in your best interests.
Under Maryland law generally, a director’s actions will be upheld if he or she performs his or her duties in good
faith, in a manner he or she reasonably believes to be in our best interests and with the care that an ordinarily prudent
person in a like position would use under similar circumstances. In addition, our charter limits the liability of our
directors and officers to us and our stockholders for money damages, except for liability resulting from:
•
•
actual receipt of an improper benefit or profit in money, property or services; or
active and deliberate dishonesty by the director or officer that was established by a final judgment as being
material to the cause of action adjudicated.
Our charter authorizes us to indemnify our directors and officers for actions taken by them in those capacities to
the maximum extent permitted by Maryland law. Our bylaws require us to indemnify each director or officer, to the
maximum extent permitted by Maryland law, in the defense of any proceeding to which he or she is made, or threatened
to be made, a party by reason of his or her service to us. In addition, we may be obligated to fund the defense costs
incurred by our directors and officers. As a result, we and our stockholders may have more limited rights against our
directors and officers than might otherwise exist absent the current provisions in our charter and bylaws or that might
exist with other companies.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our
stockholders to effect changes to our management.
Our charter provides that a director may only be removed for cause upon the affirmative vote of holders of
two-thirds of the votes entitled to be cast in the election of directors. Vacancies may be filled only by a majority of the
remaining directors in office, even if less than a quorum. These requirements make it more difficult to change our
management by removing and replacing directors and may prevent a change in control of our company that is in the best
interests of our stockholders.
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Ownership limitations may restrict change of control or business combination opportunities in which our
stockholders might receive a premium for their shares.
In order for us to qualify as a REIT, no more than 50% in value of our outstanding capital stock may be owned,
directly or indirectly, by five or fewer individuals during the last half of any calendar year. “Individuals” for this purpose
include natural persons, private foundations, some employee benefit plans and trusts, and some charitable trusts. To
preserve our REIT qualification, our charter generally prohibits any person from directly or indirectly owning more than
9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our capital stock or
more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of our common
stock. This ownership limitation could have the effect of discouraging a takeover or other transaction in which holders of
our common stock might receive a premium for their shares over the then prevailing market price or which holders
might believe to be otherwise in their best interests.
Risks Related to Our Taxation as a REIT
If we do not qualify as a REIT or fail to remain qualified as a REIT, we will be subject to tax as a regular corporation
and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our
stockholders.
We intend to continue to operate in a manner that will allow us to qualify as a REIT for U.S. federal income tax
purposes. We have not requested nor obtained a ruling from the IRS as to our REIT qualification. Qualification as a
REIT involves the application of highly technical and complex Code provisions for which only limited judicial and
administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our
qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder
ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis
of the characterization and fair values of our assets, some of which are not susceptible to a precise determination, and for
which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset
requirements also depends upon our ability to successfully manage the composition of our income and assets on an
ongoing basis. Moreover, the proper classification of an instrument as debt or equity for U.S. federal income tax
purposes may be uncertain in some circumstances, which could affect the application of the REIT qualification
requirements as described below. In addition, our ability to satisfy the requirements to qualify as a REIT depends in part
on the actions of third parties over which we have no control or only limited influence, including in cases where we own
an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes. Accordingly, there
can be no assurance that the IRS will not contend that our interests in subsidiaries or in securities of other issuers will not
cause a violation of the REIT requirements.
If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax,
including any applicable alternative minimum tax, on our taxable income at regular corporate rates, and distributions
made to our stockholders would not be deductible by us in computing our taxable income. Any resulting corporate tax
liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in
turn could have an adverse impact on the value of our common stock. Unless we were entitled to relief under certain
Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year in
which we failed to qualify as a REIT.
Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.
The maximum tax rate applicable to income from “qualified dividends” payable to domestic stockholders that
are individuals, trusts and estates is currently 20%. Dividends payable by REITs, however, generally are not eligible for
the reduced rates. Although this legislation does not adversely affect the taxation of REITs or dividends payable by
REITs, the more favorable rates applicable to regular corporate qualified dividends could cause investors who are
individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the
stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs,
including our common stock.
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REIT distribution requirements could adversely affect our ability to continue to execute our business plan.
We generally must distribute annually at least 90% of our taxable income, subject to certain adjustments and
excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that we distribute.
To the extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will
be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a
4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a
minimum amount specified under U.S. federal tax laws. We intend to continue to make distributions to our stockholders
to comply with the REIT requirements of the Code.
From time to time, we may generate taxable income greater than our income for financial reporting purposes
prepared in accordance with GAAP, or differences in timing between the recognition of taxable income and the actual
receipt of cash may occur. For example, we may be required to accrue income from mortgage loans, MBS, and other
types of debt securities or interests in debt securities before we receive any payments of interest or principal on such
assets. We may also acquire distressed debt investments that are subsequently modified by agreement with the borrower.
If the amendments to the outstanding debt are “significant modifications” under the applicable U.S. Treasury
regulations, the modified debt may be considered to have been reissued to us at a gain in a debt-for-debt exchange with
the borrower, with gain recognized by us to the extent that the principal amount of the modified debt exceeds our cost of
purchasing it prior to modification.
We may also be required under the terms of indebtedness that we incur to use cash received from interest
payments to make principal payments on that indebtedness, with the effect of recognizing income but not having a
corresponding amount of cash available for distribution to our stockholders.
As a result, we may find it difficult or impossible to meet distribution requirements from our ordinary
operations in certain circumstances. In particular, where we experience differences in timing between the recognition of
taxable income and the actual receipt of cash, the requirement to distribute a substantial portion of our taxable income
could cause us to: (i) sell assets in adverse market conditions, (ii) borrow on unfavorable terms, (iii) distribute amounts
that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable
distribution of our shares, as part of a distribution in which stockholders may elect to receive shares (subject to a limit
measured as a percentage of the total distribution), in order to comply with REIT requirements. These alternatives could
increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow,
which could adversely affect the value of our common stock.
We may choose to make distributions to our stockholders in our own stock, or make a distribution of a subsidiary’s
common stock, in which case our stockholders could be required to pay income taxes in excess of the cash dividends
they receive.
We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at
the election of each stockholder. We may also determine to distribute a taxable dividend in the stock of a subsidiary in
connection with a spin-off or other transaction, as in the case of our spin-off of our former SFR segment on January 31,
2014. Taxable stockholders receiving such distributions will be required to include the full amount of the distribution as
ordinary income to the extent of our current and accumulated earnings and profits for U.S. federal income tax purposes.
As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash
dividends received. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sale
proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of
our stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we may be required to
withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable
in stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to
pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.
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It is unclear whether and to what extent we will be able to pay taxable dividends in cash and stock. Moreover,
various aspects of such a taxable cash/stock dividend are uncertain and have not yet been addressed by the IRS. No
assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable
cash/stock dividends, including on a retroactive basis, or assert that the requirements for such taxable cash/stock
dividends have not been met.
The stock ownership limit imposed by the Code for REITs and our charter may restrict our business combination
opportunities.
In order for us to maintain our qualification as a REIT under the Code, not more than 50% in value of our
outstanding stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Code to include
certain entities) at any time during the last half of each taxable year following our first year. Our charter, with certain
exceptions, authorizes our board of directors to take the actions that are necessary and desirable to preserve our
qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% of the aggregate
value of our outstanding capital stock. Our board may grant an exemption in its sole discretion, subject to such
conditions, representations and undertakings as it may determine. The ownership limits imposed by the tax law are based
upon direct or indirect ownership by “individuals,” but only during the last half of a tax year. The ownership limits
contained in our charter key off the ownership at any time by any “person,” which term includes entities. These
ownership limitations in our charter are common in REIT charters and are intended to provide added assurance of
compliance with the tax law requirements, and to minimize administrative burdens. However, these ownership limits
might also delay or prevent a transaction or a change in our control that might involve a premium price for our common
stock or otherwise be in the best interest of our stockholders.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local
taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities
conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording
taxes. In addition, in order to continue to meet the REIT qualification requirements, prevent the recognition of certain
types of non-cash income, or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from
dealer property or inventory, we may hold a significant amount of our assets through our TRSs or other subsidiary
corporations that will be subject to corporate-level income tax at regular rates. In addition, if we lend money to a TRS,
the TRS may be unable to deduct all or a portion of the interest paid to us, which could result in an even higher
corporate-level tax liability. Any of these taxes would decrease cash available for distribution to our stockholders.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
To qualify as a REIT for U.S. federal income tax purposes, we must satisfy ongoing tests concerning, among
other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our
stockholders and the ownership of our stock. We may be required to make distributions to stockholders at
disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue
investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification
requirements for qualifying as a REIT. In addition, in certain cases, the modification of a debt instrument could result in
the conversion of the instrument from a qualifying real estate asset to a wholly or partially non-qualifying asset that must
be contributed to a TRS or disposed of in order for us to maintain our REIT status. Compliance with the
source-of-income requirements may also limit our ability to acquire debt instruments at a discount from their face
amount. Thus, compliance with the REIT requirements may hinder our ability to make, and in certain cases to maintain
ownership of, certain attractive investments.
Complying with REIT requirements may force us to liquidate otherwise attractive investments.
To qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our
assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain
mortgage loans and certain kinds of MBS. The remainder of our investment in securities (other than government
47
securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of
any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general,
no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist
of the securities of any one issuer, and no more than 25% of the value (20% for taxable years beginning after 2017) of
our total securities can be represented by securities of one or more TRSs. If we fail to comply with these requirements at
the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify
for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As
a result, we may be required to liquidate from our portfolio otherwise attractive investments. These actions could have
the effect of reducing our income and amounts available for distribution to our stockholders.
The failure of assets subject to repurchase agreements to qualify as real estate assets could adversely affect our ability
to qualify as a REIT.
We have entered into financing arrangements that are structured as sale and repurchase agreements pursuant to
which we would nominally sell certain of our assets to a counterparty and simultaneously enter into an agreement to
repurchase these assets at a later date in exchange for a purchase price. Economically, these agreements are financings
which are secured by the assets sold pursuant thereto. We believe that we would be treated for REIT asset and income
test purposes as the owner of the assets that are the subject of any such sale and repurchase agreement notwithstanding
that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It
is possible, however, that the IRS could assert that we did not own the assets during the term of the sale and repurchase
agreement, in which case we could fail to qualify as a REIT.
We may be required to report taxable income for certain investments in excess of the economic income we ultimately
realize from them.
We may acquire debt instruments in the secondary market for less than their face amount. The discount at
which such debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market
interest rates. The amount of such discount will nevertheless generally be treated as “market discount” for U.S. federal
income tax purposes. Accrued market discount is reported as income when, and to the extent that, any payment of
principal of the debt instrument is made. Payments on residential mortgage loans are ordinarily made monthly, and
consequently accrued market discount may have to be included in income each month as if the debt instrument were
assured of ultimately being collected in full. If we collect less on the debt instrument than our purchase price plus the
market discount we had previously reported as income, we may not be able to benefit from any offsetting loss
deductions. In addition, we may acquire distressed debt investments that are subsequently modified by agreement with
the borrower. If the amendments to the outstanding debt are “significant modifications” under applicable U.S. Treasury
regulations, the modified debt may be considered to have been reissued to us at a gain in a debt-for-debt exchange with
the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the
modified debt exceeds our adjusted tax basis in the unmodified debt, even if the value of the debt or the payment
expectations have not changed.
Moreover, some of the MBS that we acquire may have been issued with original issue discount. We will be
required to report such original issue discount based on a constant yield method and will be taxed based on the
assumption that all future projected payments due on such MBS will be made. If such MBS turns out not to be fully
collectible, an offsetting loss deduction will become available only in the later year that collectability is provable.
Finally, in the event that any debt instruments or MBS acquired by us are delinquent as to mandatory principal
and interest payments, or in the event payments with respect to a particular debt instrument are not made when due, we
may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as
to its ultimate collectability. Similarly, we may be required to accrue interest income with respect to subordinate MBS at
its stated rate regardless of whether corresponding cash payments are received or are ultimately collectible. In each case,
while we would in general ultimately have an offsetting loss deduction available to us when such interest was
determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year
or thereafter.
48
The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the
manner in which we effect future securitizations.
Securitizations could result in the creation of taxable mortgage pools for U.S. federal income tax purposes. As a
REIT, so long as we own 100% of the equity interests in a taxable mortgage pool, we generally would not be adversely
affected by the characterization of the securitization as a taxable mortgage pool. Certain categories of stockholders,
however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and
certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on
a portion of their dividend income from us that is attributable to the taxable mortgage pool. In addition, to the extent that
our stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable
remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion
of our income from the taxable mortgage pool. In that case, we may reduce the amount of our distributions to any
disqualified organization whose stock ownership gave rise to the tax. Moreover, we would be precluded from selling
equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these
securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from
using certain techniques to maximize our returns from securitization transactions.
The tax on prohibited transactions will limit our ability to engage in transactions, including certain methods of
securitizing mortgage loans, which would be treated as sales for U.S. federal income tax purposes.
A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions
are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held primarily
for sale to customers in the ordinary course of business. We might be subject to this tax if we were to dispose of or
securitize loans in a manner that was treated as a sale of the loans for U.S. federal income tax purposes. Therefore, in
order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans at the REIT level,
and may limit the structures we utilize for our securitization transactions, even though the sales or structures might
otherwise be beneficial to us.
Our investments in construction loans require us to make estimates about the fair value of land improvements that
may be challenged by the IRS.
We invest in construction loans, the interest from which is qualifying income for purposes of the REIT income
tests, provided that the loan value of the real property securing the construction loan is equal to or greater than the
highest outstanding principal amount of the construction loan during any taxable year. For purposes of construction
loans, the loan value of the real property is the fair value of the land plus the reasonably estimated cost of the
improvements or developments (other than personal property) that secure the loan and that are to be constructed from the
proceeds of the loan. There can be no assurance that the IRS would not challenge our estimate of the loan value of the
real property.
The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to qualify as a REIT.
We invest in mezzanine loans, for which the IRS has provided a safe harbor but not rules of substantive law.
Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate
asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying
mortgage interest for purposes of the REIT 75% income test. We may acquire mezzanine loans that do not meet all of
the requirements of this safe harbor. In the event we own a mezzanine loan that does not meet the safe harbor, the IRS
could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests and, if such a
challenge were sustained, we could fail to qualify as a REIT.
Liquidation of assets may jeopardize our REIT qualification.
To qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we
are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these
requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant
49
gain if we sell assets that are treated as dealer property or inventory.
Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code substantially limit our ability to hedge our liabilities. Any income from a
hedging transaction we enter into to manage risk of interest rate changes with respect to borrowings made or to be made
to acquire or carry real estate assets does not constitute “gross income” for purposes of the 75% or 95% gross income
tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to
be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we intend
to limit our use of advantageous hedging techniques or implement those hedges through a domestic TRS. This could
increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks
associated with changes in interest rates than we would otherwise want to bear. In addition, losses in our TRS will
generally not provide any tax benefit, except for being carried forward against future taxable income in the TRS.
Newly enacted legislation with respect to partnership tax audits could increase the tax liability borne by us in the
event of a U.S. federal income tax audit of a subsidiary partnership.
Recent legislation may alter who bears the liability in the event any subsidiary partnership is audited and an
adjustment is assessed. Congress recently revised the rules applicable to U.S. federal income tax audits of partnerships
(such as certain of our subsidiaries) and the collection of any tax resulting from any such audits or other tax proceedings,
generally for taxable years beginning after December 31, 2017. Under the new rules, the partnership itself may be liable
for a hypothetical increase in partner-level taxes (including interest and penalties) resulting from an adjustment of
partnership tax items on audit, regardless of changes in the composition of the partners (or their relative ownership)
between the year under audit and the year of the adjustment. The new rules also include an elective alternative method
under which the additional taxes resulting from the adjustment are assessed from the affected partners, subject to a
higher rate of interest than otherwise would apply. Many questions remain as to how the new rules will apply, especially
with respect to partners that are REITs, and it is not clear at this time what effect this new legislation will have on
us. However, these changes could increase the U.S. federal income tax, interest, and/or penalties otherwise borne by us
in the event of a U.S. federal income tax audit of a subsidiary partnership.
Risks Related to Our Common Stock
The market price and trading volume of our common stock could be volatile and the market price of our common
stock could decline, resulting in a substantial or complete loss of your investment.
The stock markets, including the NYSE, which is the exchange on which our common stock is listed, have
experienced significant price and volume fluctuations. Overall weakness in the economy and other factors have recently
contributed to extreme volatility of the equity markets generally, including the market price of our common stock. As a
result, the market price of our common stock has been and may continue to be volatile, and investors in our common
stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance
or prospects. Some of the factors that could negatively affect our stock price or result in fluctuations in the price or
trading volume of our common stock include:
•
•
•
our actual or projected operating results, financial condition, cash flows and liquidity, or changes in business
strategy or prospects;
actual or perceived conflicts of interest with our Manager or Starwood Capital Group and individuals, including
our executives;
equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may
occur;
•
actual or anticipated accounting problems;
50
•
•
•
•
•
•
•
•
•
•
•
publication of research reports about us or the real estate industry;
changes in market valuations of similar companies;
adverse market reaction to the level of leverage we employ;
additions to or departures of our Manager’s or Starwood Capital Group’s key personnel;
speculation in the press or investment community;
our failure to meet, or the lowering of, our earnings estimates or those of any securities analysts;
increases in market interest rates, which may lead investors to demand a higher distribution yield for our
common stock and would result in increased interest expenses on our debt;
failure to maintain our REIT qualification;
uncertainty regarding our exemption from the Investment Company Act;
price and volume fluctuations in the stock market generally; and
general market and economic conditions, including the current state of the credit and capital markets.
In the past, securities class action litigation has often been instituted against companies following periods of
volatility in their share price. This type of litigation could result in substantial costs and divert our Manager’s attention
and resources.
There may be future dilution of our common stock as a result of additional issuances of our securities, which could
adversely impact our stock price.
Our board of directors is authorized under our charter to, among other things, authorize the issuance of
additional shares of our common stock or the issuance of shares of preferred stock or additional securities convertible or
exchangeable into equity securities, without stockholder approval. Future issuances of our common stock or shares of
preferred stock or securities convertible or exchangeable into equity securities may dilute the ownership interest of our
existing stockholders. Because our decision to issue additional equity or convertible or exchangeable securities in any
future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the
amount, timing or nature of our future issuances. Additionally, any convertible or exchangeable securities that we issue
may have rights, preferences and privileges more favorable than those of our common stock. Also, we cannot predict the
effect, if any, of future sales of our common stock, or the availability of shares for future sales, on the market price of
our common stock. Sales of substantial amounts of common stock or the perception that such sales could occur may
adversely affect the prevailing market price for our common stock.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
The Company occupies office space in Greenwich, CT; Miami Beach, FL; San Francisco, CA; New York, NY;
Atlanta, GA; Los Angeles, CA; Charlotte, NC; London, UK and Frankfurt, DE. Our headquarters is located in
Greenwich, CT in office space leased by our Manager. Refer to Schedule III included in Item 8 of this Annual Report on
Form 10-K for a listing of investment properties owned as of December 31, 2015.
51
Item 3. Legal Proceedings.
Currently, no material legal proceedings are pending or, to our knowledge, threatened against us.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities.
Market Information and Dividends
The Company’s common stock has been listed on the NYSE and is traded under the symbol “STWD” since its
IPO in August 2009. The table below sets forth the quarterly high and low prices for our common stock as reported by
the NYSE, and dividends made by the Company to holders of the Company’s common stock for each quarter for the
years ended December 31, 2015 and 2014.
2015
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24.79 $ 23.12 $ 0.48
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24.70 $ 21.54 $ 0.48
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22.74 $ 20.01 $ 0.48
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 21.44 $ 19.30 $ 0.48
High
Low
Dividend
2014
First quarter (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 30.67 $ 22.92 $ 0.48
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24.60 $ 22.18 $ 0.48
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24.06 $ 21.79 $ 0.48
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24.06 $ 21.53 $ 0.48
High
Low
Dividend
(1) On January 31, 2014, we completed the spin-off of our SFR segment and our stockholders received one common
share of Starwood Waypoint Residential Trust (now Colony Starwood Homes following its January 2016 merger
with Colony American Homes) for every five shares of our common stock held at the close of business on
January 24, 2014, effectively a non-cash dividend of $5.77 per share. On the date of the spin-off, the book value of
SWAY’s assets was estimated to be $1.1 billion.
On February 25, 2016, our board of directors declared a dividend of $0.48 per share for the period ended
March 31, 2016, which dividend is payable on April 15, 2016 to common stockholders of record as of March 31, 2016.
On February 19, 2016, the closing price of our common stock, as reported by the NYSE, was $17.63 per share.
We intend to make regular quarterly distributions to holders of our common stock and distribution equivalents
to holders of restricted stock units which are settled in shares of common stock. U.S. federal income tax law generally
requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for
dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually
distributes less than 100% of its net taxable income. We generally intend over time to pay quarterly distributions in an
amount equal to our taxable income.
52
Holders
As of February 19, 2016, there were 155 holders of record of the Company’s 237,031,645 shares of common
stock outstanding. One of the holders of record is Cede & Co., which holds shares as nominee for The Depository Trust
Company which itself holds shares on behalf of other beneficial owners of our common stock.
Securities Authorized for Issuance Under Equity Compensation Plans
The information required by this item is set forth under Item 12 of this Annual Report on Form 10-K and is
incorporated herein by reference.
Stock Performance Graph
CUMULATIVE TOTAL RETURN
Based upon initial investment of $100 on January 1, 2011(1)
12/31/2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12/31/2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12/31/2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12/31/2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12/31/2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
12/31/2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
100.00 $
94.17 $
126.93 $
164.16 $
185.32 $
178.99 $
(1) Dividend reinvestment is assumed at quarter end.
Sales of Unregistered Securities
Starwood Property
Trust
S&P © 500
Bloomberg REIT
Mortgage Index
100.00
85.60
89.34
77.93
83.69
67.40
100.00 $
100.00 $
113.40 $
146.97 $
163.71 $
162.52 $
There were no unregistered sales of securities during the year ended December 31, 2015.
53
Issuer Purchases of Equity Securities
The following table provides information regarding our purchases of common stock during the quarter ended
December 31, 2015:
Period
December 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average
repurchase
Total number of
shares purchased price per share
19.76
547,023 $
Value of shares
Number of shares
available for
purchased as part of purchase under
the program
publicly announced
(in thousands)
program(1)
547,023 $
251,832
(1) In September 2014, our board of directors authorized and announced the repurchase of up to $250 million of our
outstanding common stock over a period of one year. Subsequent amendments to the repurchase program approved
by our board of directors in December 2014 and June 2015, resulted in the program being (i) amended to increase
maximum repurchases to $450.0 million, (ii) expanded to allow for the repurchase of our outstanding convertible
senior notes under the program and (iii) extended through June 2016. In January 2016, our board of directors
authorized a $50.0 million increase in the maximum repurchase amount to $500.0 million and an extension of our
share repurchase program through January 2017.
54
Item 6. Selected Financial Data.
The following selected financial data should be read in conjunction with Item 7, “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” and our Consolidated Financial Statements, including
the notes thereto, included elsewhere herein. All amounts are in thousands, except per share data.
Operating Data:
Revenues (1) . . . . . . . . . . . . . . . . . . . . . . $
Costs and expenses . . . . . . . . . . . . . . . . .
Other income (loss) (2) . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . .
Income from continuing operations . . . .
Loss from discontinued operations,
net of tax. . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Starwood
Property Trust, Inc. . . . . . . . . . . . . . . . .
Basic earnings per share:
Continuing operations . . . . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . . $
Diluted earnings per share:
Continuing operations . . . . . . . . . . . . $
Net income . . . . . . . . . . . . . . . . . . . . . $
2015
2014
2013
2012
2011
For the year ended December 31,
735,877 $
536,279
269,791
(17,206)
452,183
702,875 $
484,009
307,319
(24,096)
502,089
549,495 $
373,166
177,653
(23,858)
330,124
307,294 $ 206,452
80,420
121,761
(4,634)
21,025
(790)
(871)
120,608
205,687
—
452,183
(1,551)
500,538
(19,794)
310,330
(2,005)
203,682
—
120,608
450,697
495,021
305,030
201,195
119,377
1.92 $
1.92 $
1.91 $
1.91 $
2.29 $
2.28 $
2.25 $
2.24 $
1.94 $
1.82 $
1.77 $
1.76 $
1.94 $
1.82 $
1.77 $
1.76 $
1.38
1.38
1.38
1.38
1.92 $
1.92 $
1.82 $
233,419
Dividends declared per share of common
stock (3) . . . . . . . . . . . . . . . . . . . . . . . . . $
Weighted-average basic shares of
common stock outstanding . . . . . . . . . .
Balance Sheet Data:
4,750,804 $ 3,000,335 $ 2,447,508
Investments in loans . . . . . . . . . . . . . . . . $ 6,263,517 $
353,003
724,947
Investments in securities (4) . . . . . . . . . .
—
919,225
Investments in properties . . . . . . . . . . . .
Total assets (5) . . . . . . . . . . . . . . . . . . . . . 85,738,138 116,099,297 110,770,575 4,324,373 2,997,447
Total financing arrangements . . . . . . . . .
3,436,649 1,393,705 1,156,716
Total liabilities (5) . . . . . . . . . . . . . . . . . . 81,567,195 112,216,385 106,443,442 1,527,168 1,232,300
Total Starwood Property Trust, Inc.
Stockholders’ Equity . . . . . . . . . . . . . . .
4,140,316
Total Equity . . . . . . . . . . . . . . . . . . . . . . . $ 4,170,943 $
4,282,528 2,719,346 1,759,488
4,327,133 $ 2,797,205 $ 1,765,147
6,300,285 $
998,248
39,854
3,860,856
3,882,912 $
935,107
749,214
884,254
99,115
4,685,252
5,432,278
166,356
113,721
214,945
1.86 $
84,975
1.74
(1) During the years ended December 31, 2015, 2014 and 2013, servicing fees and interest income of $230.8 million,
$159.3 million and $92.7 million, respectively, are eliminated in consolidation pursuant to ASC 810.
(2) During the years ended December 31, 2015, 2014 and 2013, other income includes $232.0 million, $162.0 million
and $93.6 million, respectively, of additive net eliminations in consolidation pursuant to ASC 810.
(3) On January 31, 2014, we completed the spin-off of our SFR segment and 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,
effectively a non-cash dividend of $5.77 per share. On the date of the spin-off, the book value of SWAY’s assets
was estimated to be $1.1 billion.
(4) December 31, 2015, 2014 and 2013 balances exclude $825.2 million, $519.8 million and $409.3 million,
respectively, of CMBS that are eliminated in consolidation pursuant to ASC 810.
(5) December 31, 2015 balances include $76.7 billion of VIE assets and $75.8 billion of VIE liabilities consolidated
pursuant to ASC 810. December 31, 2014 balances include $107.8 billion of VIE assets and $107.2 billion of VIE
55
liabilities consolidated pursuant to ASC 810. December 31, 2013 balances include $103.1 billion of VIE assets and
$102.6 billion of VIE liabilities consolidated pursuant to ASC 810.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of the
Company should be read in conjunction with Item 6, “Selected Financial Data,” and our accompanying Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K (this “Form 10-K”). Certain statements we
make under this Item 7 constitute “forward-looking statements” under the Private Securities Litigation Reform Act of
1995. See “Special Note Regarding Forward-Looking Statements” preceding Part I of this Form 10-K. You should
consider our forward-looking statements in light of our Consolidated Financial Statements and other financial
information appearing elsewhere in this Form 10-K and our other filings with the SEC.
Business Objectives and Outlook
Our objective is to provide attractive risk-adjusted returns to our investors over the long-term, primarily through
dividends and secondarily through capital appreciation. We intend to achieve this objective by originating and acquiring
target assets to create a diversified investment portfolio that is financed in a manner that is designed to deliver attractive
returns across a variety of market conditions and economic cycles. We are focused on our three core competencies:
transaction access, asset analysis and selection, and identification of attractive relative values within the real estate debt
and equity markets.
In the initial 18 months following our IPO in August 2009, we capitalized on the dislocation in the credit
markets and depressed levels of available capital by acquiring real estate debt assets from distressed sellers at historically
high risk-adjusted returns, and to a lesser extent by originating new loans in a marketplace with lower levels of
competition. As the real estate and capital markets have recovered, we have evolved from a company focused on
opportunistic acquisitions to that of a full-service commercial real estate finance platform that is primarily focused on the
origination and acquisition of real estate debt and equity investments across the capital structure, in both the U.S. and
Europe. With the Starwood brand, market presence, and lending/asset management platform that we have developed, we
are focused primarily on the following opportunities:
(1) Continue to expand our investment activities in subordinate CMBS and revenues from special servicing;
(2) Continue to expand our market presence in the medium-sized commercial real estate lending market (loans
in the $10 million to $50 million range) by leveraging our Investing and Servicing Segment’s sourcing and
credit underwriting capabilities. This will significantly expand our overall footprint in the commercial real
estate debt markets;
(3) Continue to expand our market presence as a leading provider of acquisition, refinance, development and
expansion capital to large real estate projects (greater than $75 million) in infill locations, and other
attractive market niches where our size and scale give us an advantage to provide a “one-stop” lending
solution for real estate developers, owners and operators;
(4) Continue to expand our capabilities in syndication and securitization, which serve as a source of
attractively priced, matched-term financing; and
(5) Expand our investment activities in targeted real estate equity investments.
There can be no assurance that we will continue to find appropriate investment opportunities.
56
Recent Developments
Developments During the Fourth Quarter of 2015
Woodstar Portfolio Acquisition
During the fourth quarter, we acquired 18 of the 32 affordable housing communities which comprise our
“Woodstar Portfolio.” The Woodstar Portfolio in its entirety is comprised of 8,948 units concentrated primarily in the
Tampa, Orlando and West Palm Beach metropolitan areas and are 98% occupied. Due to the lack of supply and resulting
high demand for affordable housing product generally, coupled with the fact that these properties represent some of the
highest quality low income properties in the state, we expect occupancy levels in this portfolio to remain high.
The 18 affordable housing communities acquired during the fourth quarter comprise 5,238 units for an
aggregate acquisition price of $324.0 million. Financing of $257.6 million was utilized to fund these acquisitions which
includes third party debt of $248.6 million and assumed state sponsored financing of $9.0 million. Twelve of the
remaining 14 properties not acquired during the fourth quarter of 2015 were acquired prior to February 25, 2016, with
the acquisitions of the remaining two properties expected to close during the first quarter of 2016, subject to customary
closing conditions. The 14 properties to be acquired during the first quarter of 2016 have an aggregate gross purchase
price of $242.2 million, which will be funded with a combination of existing cash on hand and debt totaling
approximately $147.9 million, including third party debt and the assumption of pre-existing federal, state and county
sponsored financing.
Other Developments
• The Lending Segment originated the following loans during the quarter, including:
•
•
•
$240.5 million first mortgage and mezzanine loan for the acquisition of a 6,616-room, 53-property
extended stay hotel portfolio located throughout the United States, of which the Company funded
$206.1 million during the fourth quarter.
$155.0 million first mortgage and mezzanine loan for the acquisition and renovation of a 1,242-room
hotel and five-story parking garage located in Atlanta, Georgia, of which the Company funded $142.8
million during the fourth quarter.
$115.2 million first mortgage for the acquisition of Class A office and retail properties located in
Phoenix, Arizona, of which the Company funded $88.2 million during the fourth quarter.
• Funded $146.8 million of previously originated loan commitments during the fourth quarter.
• Received proceeds of $562.7 million and $63.6 million from maturities, sales and principal repayments on
loans and preferred equity, respectively, during the fourth quarter.
• Sold $140.9 million of previously originated senior loans, inclusive of unfunded commitments, while retaining
the subordinated loan.
• Named special servicer on four new issue CMBS deals, and, in each case, we acquired a portion of the B-
pieces, with a total unpaid principal balance of $4.0 billion.
• Purchased $141.0 million of CMBS, including $115.9 million in new issue B-pieces.
• Originated new conduit loans of $423.4 million and received proceeds of $655.6 million from sales of conduit
loans.
57
• Acquired commercial real estate from CMBS trusts for a gross purchase price of $78.1 million.
• Repurchased 547,023 shares of common stock at a total cost of $10.8 million.
• Executed a $1.0 billion repurchase facility that carries a three year initial term with two one-year extension
options and an annual interest rate of LIBOR +2.50%.
• Amended an existing revolving repurchase facility to upsize available borrowings from $325.0 million to
$500.0 million and extend the maturity from October 2018 to October 2020, assuming exercise of available
extension options.
Developments During 2015
• Acquired 18 of the 32 affordable housing communities comprising our Woodstar Portfolio as discussed above
in our “Developments During the Fourth Quarter of 2015.”
• Acquired 12 office properties and one multi-family residential property, all located in Dublin, Ireland, which
together comprise our “Ireland Portfolio.” The aggregate purchase price for the Ireland Portfolio, which
collectively comprises approximately 600,000 square feet, was $217.7 million. In connection with the
acquisition, we extinguished $283.0 million of debt assumed, and obtained new financings totaling $328.6
million from the Ireland Portfolio Mortgage (as defined in Note 10 of our Consolidated Financial Statements).
• The Lending Segment originated or acquired the following loans during the year, including:
•
•
•
•
•
•
•
•
$257.9 million first mortgage for the development of a 194-acre coastal residential community in
Orange County, California, of which $76.3 million was funded during the year.
$240.5 million first mortgage and mezzanine loan for the acquisition of a 6,616-room, 53-property
extended stay hotel portfolio located throughout the United States, of which $206.1 million was funded
during the year.
$175.0 million first mortgage and mezzanine loan for the refinancing of a 1,054-room, five-property
hotel portfolio located in California, of which $170.0 million was funded during the year.
$156.2 million first mortgage and mezzanine loan for the acquisition and renovation of a 29-property,
1.6 million square foot portfolio of office buildings located in the Greater Philadelphia area, of which
$133.4 million was funded during the year.
$155.0 million first mortgage and mezzanine loan for the acquisition and renovation of a 1,242-room
hotel and five-story parking garage located in Atlanta, Georgia, of which $142.8 million was funded
during the year.
$115.2 million first mortgage for the acquisition of Class A office and retail properties located in
Phoenix, Arizona, of which $88.2 million was funded during the year.
$111.6 million first mortgage and mezzanine loan for the acquisition of a 129-acre office park in Boca
Raton, Florida, of which $85.0 million was funded during the year.
$105.6 million mezzanine loan secured by a 6,530-room, 24-property U.S. hotel portfolio.
• Funded $541.8 million of previously originated loan commitments.
58
• Received proceeds of $1.7 billion from maturities, sales and principal repayments on loans held-for-investment.
• Sold $819.4 million of previously originated loans, inclusive of unfunded commitments.
• Sold a commercial real estate asset from our Investing and Servicing Segment for a gain of $17.8 million.
• Named special servicer on 12 new issue CMBS deals, 11 of which we acquired a portion of the B-pieces, with a
total unpaid principal balance of $12.2 billion.
• Purchased $354.2 million of CMBS, including $246.1 million in new issue B-pieces.
• Originated new conduit loans of $1.8 billion and received proceeds of $2.1 billion from sales of conduit loans.
• Acquired commercial real estate from CMBS trusts for a gross purchase price of $144.0 million.
• Repurchased 2,340,246 shares of common stock at a total cost of $48.7 million and $118.6 million par value of
our 4.00% Convertible Senior Notes due 2019 (the “2019 Notes”) for $136.3 million, recognizing a loss on
extinguishment of debt of $5.9 million.
• Executed various new and amended debt agreements which resulted in a net increase of $2.7 billion to our
maximum borrowing capacity.
Subsequent Events
Refer to Note 25 to the Consolidated Financial Statements for disclosure regarding significant transactions that
occurred subsequent to December 31, 2015.
Results of Operations
The discussion below is based on GAAP and therefore reflects the elimination of certain key financial
statement line items related to the consolidation of VIEs, particularly within revenues and other income, as discussed in
Note 2 to the Consolidated Financial Statements. For a discussion of our results of operations excluding the impact of
ASC 810 as it relates to the consolidation of VIEs, refer to the Non-GAAP Financial Measures section herein.
59
The following table compares our summarized results of operations for the years ended December 31, 2015,
2014 and 2013 by business segment (amounts in thousands):
For the Year Ended December 31,
2014
2015
2013
$ Change
$ Change
2015 vs.2014 2014 vs.2013
Revenues:
Lending Segment . . . . . . . . . . . . . . . . . . . . . . . . $ 529,449 $ 489,767 $ 393,478 $ 39,682 $ 96,289
123,685
411,806
Investing and Servicing Segment . . . . . . . . . . .
—
25,445
Property Segment . . . . . . . . . . . . . . . . . . . . . . . .
(66,594)
(230,823)
Investing and Servicing VIEs . . . . . . . . . . . . . .
153,380
735,877
372,393
—
(159,285)
702,875
39,413
25,445
(71,538)
33,002
248,708
—
(92,691)
549,495
Costs and expenses (1):
Lending Segment . . . . . . . . . . . . . . . . . . . . . . . .
Investing and Servicing Segment . . . . . . . . . . .
Property Segment . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing and Servicing VIEs . . . . . . . . . . . . . .
Other income (loss):
Lending Segment . . . . . . . . . . . . . . . . . . . . . . . .
Investing and Servicing Segment . . . . . . . . . . .
Property Segment . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing and Servicing VIEs . . . . . . . . . . . . . .
Income (loss) from continuing operations
before income taxes:
Lending Segment . . . . . . . . . . . . . . . . . . . . . . . .
Investing and Servicing Segment . . . . . . . . . . .
Property Segment . . . . . . . . . . . . . . . . . . . . . . . .
Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing and Servicing VIEs . . . . . . . . . . . . . .
106,331
157,055
36,199
235,749
945
536,279
2,901
24,043
16,711
(5,904)
232,040
269,791
93,665
177,291
—
212,160
893
484,009
22,180
120,985
2,176
—
161,978
307,319
84,017
147,559
—
140,945
645
373,166
25,911
58,171
—
—
93,571
177,653
12,666
(20,236)
36,199
23,589
52
52,270
9,648
29,732
—
71,215
248
110,843
(19,279)
(96,942)
14,535
(5,904)
70,062
(37,528)
(3,731)
62,814
2,176
—
68,407
129,666
426,019
278,794
5,957
(241,653)
272
469,389
(17,206)
—
418,282
316,087
2,176
(212,160)
1,800
526,185
(24,096)
(1,551)
335,372
159,320
—
(140,945)
235
353,982
(23,858)
(19,794)
7,737
(37,293)
3,781
(29,493)
(1,528)
(56,796)
6,890
1,551
82,910
156,767
2,176
(71,215)
1,565
172,203
(238)
18,243
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of tax . . . .
Net income attributable to non-controlling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Starwood Property
Trust, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 450,697 $ 495,021 $ 305,030 $ (44,324) $ 189,991
(5,517)
(5,300)
(1,486)
4,031
(217)
(1) Allocations of certain prior period costs and expenses among segments have been reclassified to a newly-established
separate presentation for corporate overhead to conform to our current period presentation of both GAAP and non-
GAAP financial measures. Refer to Note 23 of our Consolidated Financial Statements for further information.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Lending Segment
Revenues
For the year ended December 31, 2015, revenues of our Lending Segment increased $39.6 million to $529.4
million, compared to $489.8 million for the year ended December 31, 2014. This increase was primarily due to an
increase in interest income from loans resulting from higher average loan balances during 2015 and higher loan fee
income driven by increased levels of loan prepayments during 2015.
60
Costs and Expenses
For the year ended December 31, 2015, costs and expenses of our Lending Segment increased $12.6 million to
$106.3 million, compared to $93.7 million for the year ended December 31, 2014. The increase was primarily due to a
$15.8 million increase in interest expense associated with the various secured financing facilities used to fund the growth
of our investment portfolio, partially offset by a decrease of $2.0 million in our loan loss allowance. The outstanding
balance under the Lending Segment’s secured financing facilities increased $67.9 million between December 31, 2014
and 2015.
Net Interest Income (amounts in thousands)
Interest income from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income from investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2015
460,365
68,059
(81,676)
446,748
2014
Change
420,683 $ 39,682
(289)
68,348
(65,913)
(15,763)
423,118 $ 23,630
$
$
For the Year ended December 31,
For the year ended December 31, 2015, net interest income of our Lending Segment increased $23.6 million to
$446.7 million compared to $423.1 million for the year ended December 31, 2014. The increase primarily reflects
higher average loan balances during 2015 and higher loan fee income driven by increased levels of loan prepayments
during 2015.
During the year ended December 31, 2015, the weighted average unlevered and levered yields on the Lending
Segment’s loans and investment securities were 8.0% and 10.6%, respectively. During the year ended December 31,
2014, the weighted average unlevered and levered yields on the Lending Segment’s loans and investment securities were
8.2% and 10.6%, respectively. The slight decrease in the weighted average unlevered yields is primarily due to a gradual
tightening of interest rate spreads in credit markets during 2015. Corresponding decreases in our borrowing rates
resulted in the weighted average levered yields remaining unchanged.
During the years ended December 31, 2015 and 2014, the Lending Segment’s weighted average secured
borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 3.5% and
3.7%, respectively. This decrease in borrowing rates reflects lower interest rate spreads on both our new and amended
debt facilities over the last 12 months.
Other Income
For the year ended December 31, 2015, other income of our Lending Segment decreased $19.3 million to $2.9
million, from income of $22.2 million for the year ended December 31, 2014. The decrease was primarily due to an $8.0
million decrease in gain on sale of investments due to higher sales activity, particularly of RMBS, in 2014, a $7.8
million increase in foreign currency loss and a $3.4 million decrease in equity in earnings of unconsolidated entities.
Investing and Servicing Segment and VIEs
Revenues
For the year ended December 31, 2015, revenues of our Investing and Servicing Segment decreased $32.1
million to $181.0 million after consolidated VIE eliminations of $230.8 million, compared to $213.1 million after
consolidated VIE eliminations of $159.3 million for the year ended December 31, 2014. The VIE eliminations are
merely a function of the number of CMBS trusts consolidated in any given period, and as such, are not a meaningful
indicator of the operating results for this segment. The decrease in revenues was due to decreases of $18.6 million in
servicing fees and $18.1 million in interest income from CMBS investments, all partially offset by increases of $3.6
million in interest income from loans and $1.0 million in rental and other revenues. The $18.1 million decrease in
CMBS interest income is after a $64.6 million increase in VIE eliminations related to the CMBS trusts we consolidate.
Excluding the effect of these eliminations, CMBS interest income increased by $46.5 million.
61
Costs and Expenses
For the year ended December 31, 2015, costs and expenses of our Investing and Servicing Segment decreased
$20.2 million to $158.0 million, compared to $178.2 million for the year ended December 31, 2014. The VIE
eliminations were nominal for both periods. The decrease in costs and expenses was primarily due to (i) lower incentive
and other compensation and (ii) accruals for contingencies and legal fees incurred in the 2014 period which did not recur
in the 2015 period, partially offset by a $5.6 million increase in interest expense related to higher balances under our
conduit loan, CMBS and mortgage financing facilities.
Other Income
For the year ended December 31, 2015, other income of our Investing and Servicing Segment decreased $26.9
million to $256.1 million including additive net VIE eliminations of $232.0 million, from $283.0 million including
additive net VIE eliminations of $162.0 million for the year ended December 31, 2014. The decrease in other income
was primarily due to lesser increases of $27.0 million in the value of net assets related to consolidated VIEs, $11.4
million in the fair value of CMBS securities and $6.1 million in the fair value of loans held-for-sale, all partially offset
by a $17.8 million gain on sale of a commercial real estate asset. The change in net assets related to consolidated VIEs
reflects amounts associated with the Investing and Servicing Segment’s variable interests in CMBS trusts it consolidates,
including special servicing fees, interest income, and changes in fair value of CMBS and servicing rights. As noted
above, this number is merely a function of the number of CMBS trusts consolidated in any given period, and as such, is
not a meaningful indicator of the operating results for this segment. Before VIE eliminations, there was a decrease in
fair value of CMBS securities of $10.0 million in the year ended December 31, 2015 and an increase in fair value of
$97.7 million in the year ended December 31, 2014.
Income Tax Provision
Most of our consolidated income tax provision relates to the taxable nature of the Investing and Servicing
Segment’s loan servicing and loan conduit businesses, which are housed in TRSs. Our tax provision for the year ended
December 31, 2015, as well as the overall effective tax rate, is lower than for the year ended December 31, 2014
primarily due to a decrease in the taxable income of our TRSs.
Property Segment
During the year ended December 31, 2014, there was no activity in the Property Segment except for equity in
earnings of the Retail Fund which we acquired in the 2014 fourth quarter. Therefore, a comparison of results of this
segment for the year ended December 31, 2014 to the year ended December 31, 2015 is not meaningful.
Revenues
For the year ended December 31, 2015, revenues of our Property Segment of $25.4 million consisted of rental
income of $19.2 million relating to our Ireland Portfolio and $6.2 million relating to our Woodstar Portfolio.
Costs and Expenses
For the year ended December 31, 2015, costs and expenses of our Property Segment of $36.2 million consisted
of $9.0 million of acquisition and investment pursuit costs, of which $3.4 million and $3.2 million relate to the
acquisitions of the Ireland Portfolio and Woodstar Portfolio, respectively, and $27.2 million of other rental related costs,
including $15.0 million of depreciation and amortization and $5.6 million of interest expense on our secured financing
for the Ireland Portfolio and the Woodstar Portfolio.
Other Income
For the year ended December 31, 2015, other income of our Property Segment of $16.7 million consisted
primarily of $10.1 million of equity in earnings from the Retail Fund and a $7.0 million gain on foreign currency
62
contracts that economically hedge our Euro currency exposure with respect to the Ireland Portfolio, partially offset by a
$1.9 million loss on interest rate derivatives related to the debt financing for the Ireland Portfolio. For the year ended
December 31, 2014, other income of $2.2 million consisted solely of equity in earnings from the Retail Fund.
Corporate
For the year ended December 31, 2015, corporate expenses increased $23.5 million to $235.7 million,
compared to $212.2 million for the year ended December 31, 2014. The increase was primarily due to a $14.5 million
increase in interest expense related to our October 2014 issuance of our 3.75% Convertible Senior Notes due 2017 (the
“2017 Notes”) and an $8.1 million increase in management fees. The increase in management fees reflects the impacts
of (i) higher levels of invested capital which resulted in an increased base management fee and (ii) higher levels of Core
Earnings (see “Non-GAAP Financial Measures” section below) which resulted in an increased incentive fee. Corporate
other loss of $5.9 million for the year ended December 31, 2015 represents a loss on the repurchase of $118.6 million
principal amount of our 2019 Notes.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Lending Segment
Revenues
For the year ended December 31, 2014, revenues of our Lending Segment increased $96.3 million to
$489.8 million, compared to $393.5 million for the year ended December 31, 2013. This increase was primarily due to
(i) an $85.6 million increase in interest income from loans, which reflects a $1.4 billion net increase in loan investments
of our Lending Segment between December 31, 2013 and 2014, mainly resulting from new loan originations and (ii) a
$10.5 million increase in interest income from investment securities principally related to a preferred equity investment
we originated in the fourth quarter of 2013.
Costs and Expenses
For the year ended December 31, 2014, costs and expenses of our Lending Segment increased $9.7 million to
$93.7 million, compared to $84.0 million for the year ended December 31, 2013. The increase was primarily due to
higher legal fees principally associated with the administration of our financing facilities and higher compensation
expense.
Net Interest Income (amounts in thousands)
Interest income from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Interest income from investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2014
420,683
68,348
(65,913)
423,118
2013
Change
335,078 $ 85,605
10,546
57,802
(906)
(65,007)
327,873 $ 95,245
$
$
For the Year ended December 31,
For the year ended December 31, 2014, net interest income of our Lending Segment increased $95.2 million to
$423.1 million compared to $327.9 million for the year ended December 31, 2014. The increase primarily reflects a
$1.4 billion net increase in investments of our Lending Segment between December 31, 2013 and 2014 which was
funded in part by unallocated corporate-level debt.
During the year ended December 31, 2014, the weighted average unlevered and levered yields on the Lending
Segment’s loans and investment securities were 8.2% and 10.6%, respectively. During the year ended December 31,
2013, the weighted average unlevered and levered yields on the Lending Segment’s loans and investment securities were
8.5% and 10.6%, respectively. The slight decrease in the weighted average unlevered yields is primarily due to a gradual
tightening of interest rate spreads in credit markets during 2014. Corresponding decreases in our borrowing rates
resulted in weighted average levered yields remaining unchanged.
63
Other Income
For the year ended December 31, 2014, other income of our Lending Segment decreased $3.7 million to
$22.2 million, from $25.9 million for the year ended December 31, 2013. This decrease was primarily due to a
$12.2 million decrease in gain on sales of investments, partially offset by a $2.7 million increase in earnings from
unconsolidated entities. A $44.0 million favorable swing in gain (loss) on derivatives, primarily foreign exchange
contracts, was substantially offset by a $39.6 million unfavorable swing in foreign currency gain (loss).
Investing and Servicing Segment and VIEs
The Company acquired LNR on April 19, 2013. Therefore, a comparison of results of the Investing and
Servicing Segment and VIEs for the year ended December 31, 2014 to the year ended December 31, 2013 is not
meaningful as 2014 had an additional 108 days of operational activity.
Revenues
For the years ended December 31, 2014 and 2013, revenues of our Investing and Servicing Segment were
$213.1 million and $156.0 million, respectively, after consolidated VIE eliminations of $159.3 million and $92.7 million,
respectively. For the year ended December 31, 2014, these revenues primarily consisted of $135.2 million of servicing
fees and $57.6 million of interest income from investment securities and loans, after consolidated VIE eliminations of
$91.9 million and $66.2 million, respectively. For the year ended December 31, 2013, these revenues primarily consisted
of $124.7 million of servicing fees and $26.1 million of interest income from investment securities and loans, after
consolidated VIE eliminations of $54.3 million and $37.5 million, respectively. The VIE eliminations are merely a
function of the number of CMBS trusts consolidated in any given period, and as such, are not a meaningful indicator of
the operating results for this segment. The increase in revenues of $123.7 million (before VIE eliminations) is not only
attributable to an additional 108 days of operational activity in 2014, but also to improved performance of the CMBS
portfolio.
Costs and Expenses
For the years ended December 31, 2014 and 2013, costs and expenses of our Investing and Servicing Segment
were $178.2 million and $148.2 million, respectively, including nominal VIE eliminations. For the year ended
December 31, 2014, these costs and expenses consisted of G&A expenses of $142.2 million, depreciation and
amortization of $16.6 million (including $13.6 million related to the European servicing rights intangible), interest
expense of $4.8 million and other expenses of $14.6 million. For the year ended December 31, 2013, these costs and
expenses consisted of G&A expenses of $133.2 million, depreciation and amortization of $9.7 million (including
$8.1 million related to the European servicing rights intangible), interest expense of $3.1 million and other expenses of
$2.2 million.
Other Income
For the years ended December 31, 2014 and 2013, other income of our Investing and Servicing Segment was
$283.0 million and $151.7 million, respectively, including additive net VIE eliminations of $162.0 million and
$93.6 million, respectively. For the year ended December 31, 2014, other income primarily consisted of $212.5 million
of income of consolidated VIEs and $84.7 million of net increases in fair value of investment securities and mortgage
loans held-for-sale, which are accounted for using the fair value option, all partially offset by a $16.8 million decrease in
fair value of our domestic servicing rights, which reflects the expected amortization of this deteriorating asset, net of
increases in fair value due to the attainment of new servicing contracts. For the year ended December 31, 2013, other
income primarily consisted of $116.4 million of income of consolidated VIEs and $35.1 million of net increases in fair
value of investment securities and mortgage loans held-for-sale. Income of consolidated VIEs reflects amounts
associated with the Investing and Servicing Segment’s variable interests in the CMBS trusts it consolidates, including
special servicing fees, interest income, and changes in fair value of CMBS and servicing rights. As noted above, this
number is merely a function of the number of CMBS trusts consolidated in any given period, and as such, is not a
meaningful indicator of the operating results for this segment.
64
Income Tax Provision
Most of our consolidated income tax provision relates to the taxable nature of the Investing and Servicing
Segment’s loan servicing and loan conduit businesses which are housed in TRSs. Our overall effective tax rate for the
year ended December 31, 2014 is lower than for the year ended December 31, 2013.
Property Segment
During the year ended December 31, 2014, the only activity in the Property Segment consisted of $2.2 million
of equity in earnings of the Retail Fund which we acquired in the 2014 fourth quarter. There was no activity in the
Property Segment during the year ended December 31, 2013.
Corporate
For the year ended December 31, 2014, corporate expenses increased $71.2 million to $212.2 million,
compared to $141.0 million for the year ended December 31, 2013. The increase was primarily due to (i) a $46.7
million increase in interest expense related to our issuance of $1.1 billion of convertible senior notes in 2013 and
$431.3 million of convertible senior notes in 2014 as well as an increase in the weighted average term loan balance
outstanding and (ii) a $41.8 million increase in management fees, all partially offset by the absence of $18.0 million of
business combination costs incurred in the 2013 period associated with the LNR acquisition. The increase in
management fees reflects the impacts of (i) higher levels of Core Earnings (see “Non-GAAP Financial Measures”
section below) which resulted in an increased incentive fee, (ii) higher manager stock compensation expense resulting
from awards granted in the first quarter of 2014 and (iii) higher levels of invested capital which resulted in an increased
base management fee in 2014.
Discontinued Operations
Loss from discontinued operations for the years ended December 31, 2014 and 2013 reflects the results of our
SFR segment, which was spun off to our stockholders on January 31, 2014, as discussed further in Note 3 of our
Consolidated Financial Statements.
Non-GAAP Financial Measures
Core Earnings is a non-GAAP financial measure. We calculate Core Earnings as GAAP net income (loss)
excluding the following:
(i)
non-cash equity compensation expense;
(ii)
incentive fees due under our management agreement;
(iii)
depreciation and amortization of real estate and associated intangibles;
(iv)
losses on extinguishment of debt;
(v)
acquisition costs associated with successful acquisitions (effective July 1, 2015); and
(vi)
any unrealized gains, losses or other non-cash items recorded in net income for the period, regardless
of whether such items are included in other comprehensive income or loss, or in net income.
We believe that Core Earnings provides an additional measure of our core operating performance by
eliminating the impact of certain non-cash expenses and facilitating a comparison of our financial results to those of
other comparable REITs with fewer or no non-cash adjustments and comparison of our own operating results from
period to period. Our management uses Core Earnings in this way, and also uses Core Earnings to compute the incentive
fee due under our management agreement. The Company believes that its investors also use Core Earnings or a
65
comparable supplemental performance measure to evaluate and compare the performance of the Company and its peers,
and as such, the Company believes that the disclosure of Core Earnings is useful to (and expected by) its investors.
However, the Company cautions that Core Earnings does not represent cash generated from operating activities
in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with
GAAP), or an indication of our cash flows from operating activities (determined in accordance with GAAP), a measure
of our liquidity, or an indication of funds available to fund our cash needs, including our ability to make cash
distributions. In addition, our methodology for calculating Core Earnings may differ from the methodologies employed
by other REITs to calculate the same or similar supplemental performance measures, and accordingly, our reported Core
Earnings may not be comparable to the Core Earnings reported by other REITs.
In assessing the appropriate weighted average diluted share count to apply to Core Earnings for purposes of
determining Core Earnings per share (“EPS”), management considered the following attributes of our current GAAP
diluted share methodology: (i) our unvested stock awards representing participating securities were determined to be
anti-dilutive and were thus excluded from the denominator of the EPS calculation; and (ii) the portion of the convertible
senior notes that are “in-the-money” (referred to as the “conversion spread value”), representing the value that would be
delivered to investors in shares upon an assumed conversion, is included in the denominator. Because compensation
expense related to unvested stock awards is added back for Core Earnings purposes pursuant to the definition above,
there is no dilution to Core Earnings resulting from the associated expense recognition. As a result, for purposes of
determining Core EPS, our GAAP EPS methodology was adjusted to include (instead of exclude) such unvested awards.
Further, conversion of the convertible senior notes is an event that is contingent upon numerous factors, none of which
are in our control, and is an event that may or may not occur. Consistent with the treatment of other unrealized
adjustments to Core Earnings, our GAAP EPS methodology was adjusted to exclude (instead of include) the conversion
spread value in determining Core EPS until a conversion actually occurs. The following table presents our diluted
weighted average shares used in our GAAP EPS calculation reconciled to our diluted weighted average shares used in
our Core EPS calculation (amounts in thousands):
For the Year Ended December 31,
Diluted weighted average shares - GAAP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234,142
Add: Unvested stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,132
Less: Conversion spread value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted weighted average shares - Core . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015
2014
218,781
2,650
(3,432)
236,177 217,999
(97)
2013
166,495
828
—
167,323
The definition of Core Earnings allows management to make adjustments, subject to the approval of a majority
of the independent directors, in situations where such adjustments are considered appropriate in order for Core Earnings
to be calculated in a manner consistent with its definition and objective. We encountered certain of these situations
during 2015 as follows:
(i) Loss on extinguishment of debt upon repurchase of our convertible senior notes – In 2015, we repurchased
$118.6 million of our 2019 Notes for total consideration of $136.3 million. The resulting GAAP loss for the year ended
December 31, 2015 of $5.9 million reflects the difference between the book value of the liability component and the
related allocable liability component of the repurchase price. The portion of the repurchase price attributable to the
equity component during the year ended December 31, 2015 totaled $17.7 million, of which $3.8 million reflects a
write-off of the unamortized conversion discount. For the year ended December 31, 2015, the $3.8 million write-off is
already included in the GAAP loss of $5.9 million and as such, is already reflected in Core Earnings. For the remaining
$13.9 million reduction to equity for the year ended December 31, 2015, we believe this amount is effectively a
reduction of the $20.4 million equity balance that was recognized upon issuance of the 2019 Notes. This portion will not
be considered realized until the earlier of (a) the entire issuance of the 2019 Notes has been extinguished; or (b) the
66
$20.4 million has been fully amortized. As a result, for the year ended December 31, 2015, we reflected the $13.9
million as accelerated amortization of our original $20.4 million. If and when the original equity balance is fully
amortized, the incremental equity component differential, if any, will be reflected as an adjustment to Core Earnings.
(ii) Acquisition costs related to successful property related purchases – GAAP requires these costs to be
expensed as incurred, although they arguably benefit the asset over a longer period. We modified the definition of Core
Earnings to allow these costs to be capitalized and amortized over the property’s estimated useful life. During the year
ended December 31, 2015, we incurred costs of $3.9 million related to successful acquisitions that were added back to
Core Earnings pursuant to this modified definition.
The following table summarizes our quarterly Core Earnings per weighted average diluted share for the years
ended December 31, 2015, 2014 and 2013:
Core Earnings For the Three-Month Periods Ended
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.55
0.61
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.43
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 31
June 30 September 30 December 31
0.55
$ 0.53
0.50
0.52
0.62
0.42
0.56
0.55
0.61
$
$
Annual Core Earnings per weighted average diluted share may not equal the sum of each quarter’s Core
Earnings per weighted average diluted share due to rounding and other computational factors.
67
The following table presents our summarized results of operations and reconciliation to Core Earnings for the
year ended December 31, 2015, by business segment (amounts in thousands):
Investing
Lending
Segment
and Servicing Property
Segment
Segment
Corporate
Total
(36,199)
16,711
5,957
—
—
(106,331)
2,901
426,019
(242)
(1,389)
(157,055)
24,043
278,794
(16,964)
175
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 529,449 $ 411,806 $ 25,445 $
Costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . .
Income attributable to non-controlling interests . . . .
Net income (loss) attributable to Starwood
Property Trust, Inc. . . . . . . . . . . . . . . . . . . . . . . . .
Add / (Deduct):
Non-cash equity compensation expense . . . . . . . . . .
Management incentive fee . . . . . . . . . . . . . . . . . . . . .
Acquisition and investment pursuit costs . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . .
Loan loss allowance, net . . . . . . . . . . . . . . . . . . . . . . .
Interest income adjustment for securities . . . . . . . . .
Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . .
Reversal of unrealized (gains) / losses on:
—
—
2,918
14,861
—
—
(249)
3,465
—
1,020
3,837
—
(3,218)
(789)
2,314
—
—
—
(2)
(958)
—
424,388
262,005
5,957
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from unconsolidated entities . . . . . . . . .
—
(209)
(33,930)
36,956
—
(64,320)
9,952
10,441
296
(13,042)
—
—
(5,060)
(31)
—
Recognition of realized gains / (losses) on:
— $ 966,700
(535,334)
37,751
469,117
(17,206)
(1,214)
(235,749)
(5,904)
(241,653)
—
—
(241,653)
450,697
32,763
37,717
3,938
18,698
(2)
(4,176)
(1,038)
(64,320)
9,743
(28,549)
37,221
(13,042)
26,984
37,717
—
—
—
—
—
—
—
—
—
—
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from unconsolidated entities . . . . . . . . .
Core Earnings (Loss) . . . . . . . . . . . . . . . . . . . . . .
Core Earnings (Loss) per Weighted Average
Diluted Share . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
—
—
19,887
(21,252)
—
65,443
(22,064)
7,019
(22,083)
9,787
$ 427,194 $ 249,022 $ 18,488 $ (176,952) $ 517,752
65,443
(22,064)
(12,929)
(862)
9,787
—
—
61
31
—
—
—
—
—
—
1.81 $
1.05 $
0.08 $
(0.75) $
2.19
68
The following table presents our summarized results of operations and reconciliation to Core Earnings for the
year ended December 31, 2014, by business segment (amounts in thousands):
Lending
Segment
Investing
and Servicing Property
Segment
$
Single
Family
Residential
Total
Corporate
— $
—
2,176
— $
(212,160)
—
— $ 862,160
(483,116)
—
145,341
—
316,087
(22,620)
418,282
(1,476)
(93,665)
22,180
Segment
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 489,767 $ 372,393
(177,291)
Costs and expenses (1) . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . .
120,985
Income (loss) from continuing operations
before income taxes . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of
tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income attributable to non-controlling
interests . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to
Starwood Property Trust, Inc. . . . . . . . .
Add / (Deduct):
Non-cash equity compensation expense . . .
Management incentive fee . . . . . . . . . . . . . .
Change in Control Plan . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . .
Loan loss allowance, net . . . . . . . . . . . . . . . .
Interest income adjustment for securities . .
Other non-cash items . . . . . . . . . . . . . . . . . .
Reversal of unrealized (gains) / losses on:
—
—
—
2,047
(1,136)
—
10,555
250
1,279
2,107
413,089
293,467
(3,717)
—
881
949
Loans held-for-sale . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency . . . . . . . . . . . . . . . . . . . .
Earnings from unconsolidated entities . .
—
(12,238)
(31,678)
29,139
—
(70,420)
(97,723)
7,019
803
(13,610)
Recognition of realized gains / (losses) on:
Loans held-for-sale . . . . . . . . . . . . . . . . . .
66,814
Securities . . . . . . . . . . . . . . . . . . . . . . . . . .
12,103
Derivatives . . . . . . . . . . . . . . . . . . . . . . . .
(5,312)
Foreign currency . . . . . . . . . . . . . . . . . . . .
(803)
6,780
Earnings from unconsolidated entities . .
Core Earnings (Loss) . . . . . . . . . . . . . . . $ 408,240 $ 214,258
Core Earnings (Loss) per Weighted
—
10,992
(1,316)
(1,540)
—
—
—
2,176
—
(212,160)
—
—
—
524,385
(24,096)
—
—
—
—
—
(1,551)
(1,551)
—
—
(3,717)
2,176
(212,160)
(1,551)
495,021
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
26,792
34,374
—
—
—
—
—
—
—
—
1,540
—
—
—
28,622
34,374
1,279
3,647
2,047
9,419
250
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(70,420)
(109,961)
(24,659)
29,942
(13,610)
—
66,814
—
23,095
—
(6,628)
—
(2,343)
6,780
—
(11) $ 473,669
$ 2,176 $ (150,994) $
Average Diluted Share . . . . . . . . . . . . $
1.87 $
0.98
$ 0.01 $
(0.69) $
— $
2.17
(1)
Allocations of certain prior period costs and expenses among segments have been reclassified to a newly-
established separate presentation for corporate overhead to conform to our current period presentation of both
GAAP and non-GAAP financial measures. Refer to Note 23 of our Consolidated Financial Statements for
further information.
69
The following table presents our summarized results of operations and reconciliation to Core Earnings for the
year ended December 31, 2013, by business segment (amounts in thousands):
Lending
Segment
(84,017)
25,911
Investing
and Servicing
Segment
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 393,478 $ 248,708
(147,559)
Costs and expenses (1) . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58,171
Income (loss) from continuing operations before
income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of tax . . . . . . . .
Income attributable to non-controlling interests . . . . . .
Net income (loss) attributable to Starwood
Property Trust, Inc. . . . . . . . . . . . . . . . . . . . . . . . . . .
Add / (Deduct):
Non-cash equity compensation expense . . . . . . . . . . . .
Management incentive fee . . . . . . . . . . . . . . . . . . . . . . .
Change in Control Plan . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . .
Loan loss allowance, net . . . . . . . . . . . . . . . . . . . . . . . . .
Interest income adjustment for securities . . . . . . . . . . .
Other non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reversal of unrealized (gains) / losses on:
437
—
—
—
1,923
(1,227)
—
—
—
22,382
763
447
11,253
—
335,372
1,722
—
(5,065)
159,320
(25,580)
—
—
332,029
133,740
Single
Family
Residential
$
Corporate
—
$
(140,945)
—
Total
— $ 642,186
(372,521)
—
84,082
—
(140,945)
—
(11,688)
—
—
—
(8,106)
—
353,747
(23,858)
(19,794)
(5,065)
(152,633)
(8,106)
305,030
15,836
11,573
—
—
—
—
—
—
—
—
6,106
—
—
—
16,273
11,573
22,382
6,869
2,370
10,026
—
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from unconsolidated entities . . . . . . . . . . .
—
1,163
12,554
(10,478)
—
(43,849)
(23,149)
(4,508)
95
(4,502)
—
—
—
—
—
—
—
—
—
—
(43,849)
(21,986)
8,046
(10,383)
(4,502)
Recognition of realized gains / (losses) on:
46,276
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,510
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,542
Derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(95)
Foreign currency . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,449
Earnings from unconsolidated entities . . . . . . . . . . .
Core Earnings (Loss) . . . . . . . . . . . . . . . . . . . . . . . . $ 334,486 $ 145,354
Core Earnings (Loss) per Weighted Average
—
(1,466)
(264)
(185)
—
—
—
—
—
—
$ (125,224)
—
—
—
—
—
46,276
44
2,278
(280)
2,449
$ (2,000) $ 352,616
Diluted Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2.00 $
0.87
$
(0.75)
$ (0.01) $
2.11
(1)
Allocations of certain prior period costs and expenses among segments have been reclassified to a newly-
established separate presentation for corporate overhead to conform to our current period presentation of both
GAAP and non-GAAP financial measures. Refer to Note 23 of our consolidated financial statement for further
information.
Year Ended December 31, 2015 Compared to Year Ended December 31, 2014
Lending Segment
The Lending Segment’s Core Earnings increased by $19.0 million, from $408.2 million during the year ended
December 31, 2014 to $427.2 million during the year ended December 31, 2015. After making adjustments for the
calculation of Core Earnings, revenues were $528.5 million, costs and expenses were $104.0 million and other income
was $4.3 million.
70
Core revenues, consisting principally of interest income on loans, increased by $39.9 million in 2015 due to
higher average loan balances during 2015 and higher loan fee income driven by increased levels of loan prepayments
during 2015.
Core costs and expenses increased by $13.3 million, principally due to an increase in interest expense
associated with the various facilities utilized to fund the growth of our investment portfolio. The outstanding balance of
the Lending Segment’s secured financing agreements increased by $67.9 million since December 31, 2014.
Core other income decreased by $11.2 million, principally due to gains on sales of RMBS during the 2014
period not recurring during the 2015 period. The nature and timing of investment sales will depend upon a variety of
factors, including our current outlook and strategy with respect to an investment, other available investment
opportunities, and market pricing. As a result, gains (or losses) from sales of our investments have fluctuated over time,
and we would expect this variability to continue for the foreseeable future.
Investing and Servicing Segment
The Investing and Servicing Segment’s Core Earnings increased by $34.7 million, from $214.3 million during
the year ended December 31, 2014 to $249.0 million during the year ended December 31, 2015. After making
adjustments for the calculation of Core Earnings, revenues were $408.7 million, costs and expenses were $149.0 million,
other income was $6.2 million and income taxes were $17.0 million.
Core revenues increased by $25.8 million, primarily due to increases of $32.8 million in interest income from
our CMBS portfolio and $3.6 million in interest income on our conduit loans partially offset by a decrease of $11.4
million in servicing fees. The treatment of CMBS interest income on a GAAP basis is complicated by our application of
the ASC 810 consolidation rules. In an attempt to treat these securities similar to the trust’s other investment securities,
we compute core interest income pursuant to an effective yield methodology. In doing so, we segregate the portfolio into
various categories based on the components of the bonds’ cash flows and the volatility related to each of these
components. We then accrete interest income on an effective yield basis using the components of cash flows that are
reliably estimable. Other minor adjustments are made to reflect management’s expectations for other components of the
projected cash flow stream.
Core costs and expenses decreased by $23.6 million, primarily due to accruals for contingencies and legal fees
incurred in the 2014 period, which did not recur in the 2015 period, and lower incentive and other compensation, all
partially offset by an increase of $5.6 million in interest expense on our conduit loan, CMBS and mortgage financing
facilities.
Core other income includes profit realized upon securitization of loans by our conduit business, gains on sales
of CMBS, gains and losses on derivatives that were either effectively terminated or novated, and earnings from
unconsolidated entities. These items are typically offset by a decrease in the fair value of our domestic servicing rights
intangible which reflects the expected amortization of this deteriorating asset, net of increases in fair value due to the
attainment of new servicing contracts. Derivatives include instruments which hedge interest rate risk and credit risk on
our conduit loans. For GAAP purposes, the loans, CMBS and derivatives are accounted for at fair value, with all changes
in fair value (realized or unrealized) recognized in earnings. The adjustments to Core Earnings outlined above are also
applied to the GAAP earnings of our unconsolidated entities. Core other income decreased by $20.4 million, primarily
due to lower gains on CMBS sales and increased losses on derivatives relating to our conduit loans, partially offset by a
gain on sale of a commercial real estate asset.
Income taxes, which principally relate to the operating results of our servicing and conduit businesses which are
held in TRSs, decreased $5.6 million due to a net decrease in the taxable income of our TRSs.
71
Property Segment
During the year ended December 31, 2014, there was only one quarter of activity in the Property Segment
consisting of $2.2 million of Core Earnings from our investment in the Retail Fund. Therefore, a comparison of results
of this segment for the year ended December 31, 2015 to the year ended December 31, 2014 is not meaningful.
The Property Segment contributed Core Earnings of $18.5 million during the year ended December 31, 2015.
After making adjustments for the calculation of Core Earnings, revenues were $25.0 million, costs and expenses were
$18.2 million and other income was $11.7 million.
Core revenues consisted of $25.0 million of rental income from the Ireland Portfolio and Woodstar Portfolio
following their respective acquisitions during 2015.
Core costs and expenses of $18.2 million consisted of (i) acquisition and investment pursuit costs of $6.0
million, of which $3.4 million and $0.3 million related to the Ireland Portfolio and Woodstar Portfolio, respectively, (ii)
$5.6 million of interest expense on secured financing for the Ireland Portfolio and Woodstar Portfolio and (iii) $6.6
million of other rental related costs.
Core other income of $11.7 million consisted primarily of equity in earnings of the Retail Fund.
Corporate
Core corporate costs and expenses increased by $26.0 million, from $151.0 million during the year ended
December 31, 2014 to $177.0 million during the year ended December 31, 2015. This increase was primarily due to a
$14.5 million increase in interest expense primarily related to our October 2014 issuance of the 2017 Notes, a $5.9
million loss on extinguishment of a portion of our 2019 Notes and a $4.7 million increase in base management fees.
Single Family Residential Segment
As discussed in Note 3 of our Consolidated Financial Statements, our former SFR segment was spun off to our
stockholders on January 31, 2014.
Year Ended December 31, 2014 Compared to Year Ended December 31, 2013
Lending Segment
The Lending Segment’s Core Earnings increased by $73.7 million, from $334.5 million during the year ended
December 31, 2013 to $408.2 million during the year ended December 31, 2014. After making adjustments for the
calculation of Core Earnings, revenues were $488.6 million, costs and expenses were $90.7 million, other income was
$15.5 million and income taxes were $1.5 million.
Core revenues, consisting principally of interest income on loans, increased by $96.4 million due to growth of
$1.4 billion in our loan portfolio since December 31, 2013.
Core costs and expenses increased by $9.1 million, primarily due to higher legal fees principally associated
with the administration of our financing facilities and higher compensation expense.
Core other income decreased by $11.7 million on a net basis principally due to lower gains on sales of
investments.
72
Investing and Servicing Segment
The Company acquired LNR on April 19, 2013. Therefore, a comparison of the Investing and Servicing
Segment Core Earnings for the year ended December 31, 2014 to the year ended December 31, 2013 is not meaningful
as the current year period has an additional 108 days of operational activity.
The Investing and Servicing Segment contributed Core Earnings of $214.3 million during the year ended
December 31, 2014. After making adjustments for the calculation of Core Earnings, revenues were $382.9 million, costs
and expenses were $172.6 million, other income was $26.6 million and income taxes were $22.6 million.
Core revenues benefited from servicing fees of $227.1 million, CMBS interest income of $120.4 million,
interest income on our conduit loans of $14.0 million, and $21.4 million of other revenues, including $11.2 million of
management fees and $9.8 million of rental income. Our U.S. servicing operation earned $181.4 million in fees during
the period while our European servicer earned $45.7 million.
Included in core costs and expenses were G&A expenses of $140.1 million, amortization expense of $13.6
million, cost of rental operations of $5.9 million and interest expense of $4.8 million. Amortization expense represents
the amortization of the European special servicing rights intangible, which reflects the deterioration of this asset as fees
are earned.
Core other income includes profit realized upon securitization of loans by our conduit business, gains on sales
of CMBS, gains and losses on derivatives that were either effectively terminated or novated, and earnings from
unconsolidated entities. These items are typically offset by a decrease in the fair value of our domestic servicing rights
intangible which reflects the expected amortization of this deteriorating asset, net of increases in fair value due to the
attainment of new servicing contracts. Derivatives include instruments which hedge interest rate risk and credit risk on
our conduit loans. For GAAP purposes, the loans, CMBS and derivatives are accounted for at fair value, with all changes
in fair value (realized or unrealized) recognized in earnings. The adjustments to Core Earnings outlined above are also
applied to the GAAP earnings of our unconsolidated entities.
Income taxes principally relate to the operating results of our servicing and conduit businesses, which are held
in TRSs.
Property Segment
The Property Segment contributed Core Earnings of $2.2 million during the year ended December 31, 2014,
which consisted of equity in earnings of the Retail Fund. During the year ended December 31, 2013, there was no
activity in the Property Segment.
Corporate
Core corporate costs and expenses increased by $25.8 million, from $125.2 million during the year ended
December 31, 2013 to $151.0 million during the year ended December 31, 2014. This increase was primarily due to (i) a
$40.3 million increase in interest expense primarily related to our issuances of convertible senior notes during 2013 and
2014 as well as an increase in the weighted average balance outstanding under our term loan and (ii) a $3.0 million
increase in base management fees, all partially offset by the absence of $18.0 million of costs associated with the LNR
acquisition in 2013.
SFR Segment
As discussed in Note 3 of our Consolidated Financial Statements, the SFR segment was spun off to our
stockholders on January 31, 2014.
73
Liquidity and Capital Resources
Liquidity is a measure of our ability to meet our cash requirements, including ongoing commitments to repay
borrowings, fund and maintain our assets and operations, make new investments where appropriate, pay dividends to our
stockholders, and other general business needs. We closely monitor our liquidity position and believe that we have
sufficient current liquidity and access to additional liquidity to meet our financial obligations for at least the next
12 months. Our primary sources of liquidity are as follows:
Cash and Cash Equivalents
As of December 31, 2015, we had cash and cash equivalents of $368.8 million.
Cash Flows for the Year Ended December 31, 2015
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Investing Activities:
$
GAAP
612,506 $
VIE
Excluding Investing
Adjustments and Servicing VIEs
612,314
(192) $
Origination and purchase of loans held-for-investment. . . . . . . . . . . .
Proceeds from principal collections and sale of loans . . . . . . . . . . . . .
Purchase of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales and collections of investment securities . . . . . . .
Real estate business combinations, net of cash acquired . . . . . . . . . . .
Proceeds from sale of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash flows from other investments and assets . . . . . . . . . . . . . . . .
Decrease in restricted cash, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Financing Activities:
(2,360,225)
2,189,546
(182,018)
434,979
(555,051)
35,576
6,329
30,069
(400,795)
(13,610)
—
(339,541)
44,464
(111,700)
—
—
—
(420,387)
Borrowings under financing agreements . . . . . . . . . . . . . . . . . . . . . . .
Principal repayments on and repurchases of borrowings . . . . . . . . . .
Payment of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from common stock issuances, net of offering costs . . . . . .
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Contributions from non-controlling interests . . . . . . . . . . . . . . . . . . . .
Distributions to non-controlling interests . . . . . . . . . . . . . . . . . . . . . . .
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of debt of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of debt of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . .
Distributions of cash from consolidated VIEs . . . . . . . . . . . . . . . . . . .
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . .
Net increase in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of period . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of period . . . . . . . . . . . . . . . . . . . . . . . . . $
4,817,394
(4,335,654)
(21,701)
38,925
325,483
(446,847)
71
(2,121)
(48,746)
9,132
(464,243)
34,724
(93,583)
118,128
255,187
(4,500)
368,815 $
—
—
—
—
—
—
—
—
—
(9,132)
464,243
(34,724)
420,387
(192)
(786)
—
(978) $
(2,373,835)
2,189,546
(521,559)
479,443
(666,751)
35,576
6,329
30,069
(821,182)
4,817,394
(4,335,654)
(21,701)
38,925
325,483
(446,847)
71
(2,121)
(48,746)
—
—
—
326,804
117,936
254,401
(4,500)
367,837
The discussion below is on a non-GAAP basis, after removing adjustments principally resulting from the
consolidation of the Investing and Servicing Segment’s VIEs under ASC 810. These adjustments principally relate to
(i) purchase of CMBS and real estate from consolidated VIEs, which are reflected as repayments of VIE debt on a
GAAP basis and (ii) sales of CMBS related to consolidated VIEs, which are reflected as VIE distributions on a GAAP
basis. There is no significant net impact to cash flows from operations or to overall cash resulting from these
consolidations. Refer to Note 2 of our Consolidated Financial Statements for further discussion.
74
Cash and cash equivalents increased by $117.9 million during the year ended December 31, 2015, reflecting net
cash provided by operating activities of $612.3 million and net cash provided by financing activities of $326.8 million
partially offset by net cash used in investing activities of $821.2 million.
Net cash provided by operating activities of $612.3 million for the year ended December 31, 2015 related
primarily to cash interest income of $614.5 million from our loan origination and conduit programs, plus cash interest
income on investment securities of $205.0 million. Servicing fees provided cash of $216.2 million, rental income
provided cash of $25.0 million and other revenues provided $29.2 million. Offsetting these revenues were cash interest
expense of $160.4 million, general and administrative expenses of $118.6 million, management fees of $76.2 million, a
net change in operating assets and liabilities of $79.8 million, income tax payments of $29.2 million and acquisition and
investment pursuit costs of $13.4 million.
Net cash used in investing activities of $821.2 million for the year ended December 31, 2015 related primarily
to the origination and acquisition of new loans held-for-investment of $2.4 billion, the purchase of investment securities
of $521.6 million and the purchase of real estate property of $666.8 million, partially offset by proceeds received from
principal collections and sales of loans of $2.2 billion and investment securities of $479.4 million.
Net cash provided by financing activities of $326.8 million for the year ended December 31, 2015 related
primarily to net borrowings after repayments and repurchases of our secured debt and convertible senior notes of $520.7
million and proceeds from the issuance of common stock of $325.5 million, partially offset by dividend distributions of
$446.8 million, share repurchases of $48.7 million and payment of deferred financing costs of $21.7 million.
Financing Arrangements
We utilize a variety of financing arrangements to finance certain assets. We generally utilize three types of
financing arrangements:
1) Repurchase Agreements: Repurchase agreements effectively allow us to borrow against loans and
securities that we own. Under these agreements, we sell our loans and securities to a counterparty and agree
to repurchase the same loans and securities from the counterparty at a price equal to the original sales price
plus interest. The counterparty retains the sole discretion over both whether to purchase the loan and
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. Generally, if the lender determines
(subject to certain conditions) that the market value of the collateral in a repurchase transaction has
decreased by more than a defined minimum amount, we would be required to repay any amounts borrowed
in excess of the product of (i) the revised market value multiplied by (ii) the applicable advance rate.
During the term of a repurchase agreement, we receive the principal and interest on the related loans and
securities and pay interest to the counterparty. As of December 31, 2015, we have various repurchase
agreements, with details referenced in the table provided below.
2) Bank Credit Facilities: We use bank credit facilities (including term loans and revolving facilities) to
finance our assets. These financings may be collateralized or non-collateralized and may involve one or
more lenders. Credit facilities typically have maturities ranging from two to five years and may accrue
interest at either fixed or floating rates. The lender retains the sole discretion, subject to certain conditions,
over the market value of such note for purposes of determining whether we are required to pay margin to
the lender.
3) Loan Sales, Syndications and Securitizations: We seek non-recourse long-term financing from loan sales,
syndications and/or securitizations of our investments in mortgage loans. The sales, syndications or
securitizations generally involve a senior portion of our loan, but may involve the entire loan. Loan sales
and syndications generally involve the sale of a senior note component or participation interest to a third
party lender. Securitization generally involves transferring notes to a special purpose vehicle (or the issuing
entity), which then issues one or more classes of non-recourse notes pursuant to the terms of an indenture.
The notes are secured by the pool of assets. In exchange for the transfer of assets to the issuing entity, we
receive cash proceeds from the sale of non-recourse notes. Sales, syndications or securitizations of our
75
portfolio investments might magnify our exposure to losses on those portfolio investments because the
retained subordinate interest in any particular overall loan would be subordinate to the loan components
sold and we would, therefore, absorb all losses sustained with respect to the overall loan before the owners
of the senior notes experience any losses with respect to the loan in question.
4) Secured Property Financings: We use long-term mortgage facilities from commercial lenders and
government sponsors of affordable housing loans to finance many of the investment properties that we
hold. These facilities accrue interest at either fixed or floating rates. We typically hedge our exposure to
floating interest rate changes on these facilities through the use of interest rate swap and cap derivatives.
The following table is a summary of our financing facilities as of December 31, 2015 (dollar amounts in
thousands):
Lender 1 Repo 1 . . . . . . . .
Lender 2 Repo 1 . . . . . . . .
Lender 3 Repo 1 . . . . . . . .
Lender 4 Repo 1 . . . . . . . .
Lender 4 Repo 2 . . . . . . . .
Lender 6 Repo 1 . . . . . . . .
Lender 7 Secured Financing
Conduit Repo 1 . . . . . . . . .
Conduit Repo 2 . . . . . . . . .
Conduit Repo 3 . . . . . . . . .
CMBS Repo 1 . . . . . . . . . .
CMBS Repo 2 . . . . . . . . . .
CMBS Repo 3 . . . . . . . . . .
RMBS Repo 1 . . . . . . . . . .
Investing and Servicing
Segment Property
Mortgages . . . . . . . . . . . .
Ireland Portfolio Mortgage .
Woodstar Portfolio
Mortgages . . . . . . . . . . . .
Woodstar Portfolio
Government Financing . .
Term Loan . . . . . . . . . . . .
FHLB Advances . . . . . . . .
Current
Maturity
(d)
Oct 2017
May 2017
Oct 2016
Dec 2018
Aug 2018
Jul 2018
Sep 2016
Nov 2016
Feb 2018
(h)
Dec 2016
(i)
(j)
June 2018 to
Dec 2025
May 2020
Nov 2025 to
Jan 2026
Mar 2026 to
Dec 2043
Apr 2020
Nov 2016
Pledged
Asset
Carrying
Value
Maximum
Facility
Size
Outstanding
Balance
Pricing
Extended
Maturity(a)
(d)
LIBOR + 1.85% to 5.25% $ 1,427,281 $ 1,600,000 $
Oct 2020 LIBOR + 1.75% to 2.75%
May 2019 LIBOR + 2.50% to 2.85%
Oct 2017
Dec 2020
N/A
Jul 2019
N/A
N/A
Feb 2019
(h)
N/A
(i)
N/A
LIBOR + 2.00%
LIBOR + 2.50%
LIBOR + 2.50% to 3.00%
LIBOR + 2.75% (f)
LIBOR + 1.95% to 3.35%
LIBOR + 2.10%
LIBOR + 2.10%
LIBOR + 1.90%
LIBOR + 2.35% to 2.70%
LIBOR + 1.40% to 1.85%
LIBOR + 1.90%
326,292
185,917
394,945
—
708,071
157,716
107,580
—
88,266
—
159,111
341,422
180,192
500,000
131,997
309,498
1,000,000 (e)
500,000
650,000 (g)
150,000
150,000
150,000
—
120,850
243,434
125,000
Approved
but
Unallocated
Financing
Undrawn
Capacity(b) Amount(c)
48,894 $ 575,371
266,295
—
—
1,000,000
4,469
611,945
69,259
150,000
83,959
—
—
—
20,933
—
—
—
—
4,268
—
—
—
—
—
—
—
102,067
975,735 $
233,705
131,997
309,498
—
491,263
38,055
80,741
—
66,041
—
120,850
243,434
2,000
N/A
N/A
N/A
N/A
N/A
N/A
Various
EURIBOR + 1.69%
153,356
506,500
90,055
319,322
82,964
319,322
3.72% to 3.81%
327,967
248,630
248,630
3.00%
LIBOR + 2.75% (f)
LIBOR + 0.37%
99,007
3,254,640
10,832
8,982
658,270
9,250
8,982
656,568 (k)
9,250
—
—
—
—
—
—
7,091
—
—
—
—
—
$
8,429,095 $ 6,965,288
$ 4,019,035
$
155,229 $ 2,789,322
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
Subject to certain conditions as defined in the respective facility agreement.
Approved but undrawn capacity represents the total draw amount that has been approved by the lender related to those assets that have been
pledged as collateral, less the drawn amount.
Unallocated financing amount represents the maximum facility size less the total draw capacity that has been approved by the lender.
Maturity date for borrowings collateralized by loans of January 2017 before extension options and January 2019 assuming initial extension
options. Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain
specified conditions and not to exceed January 2023.
The initial maximum facility size of $600.0 million may be increased to $1.0 billion at our option, subject to certain conditions.
Subject to borrower’s option to choose alternative benchmark based rates pursuant to the terms of the credit agreement. The term loan is also
subject to a 75 basis point floor.
The initial maximum facility size of $450.0 million may be increased to $650.0 million at our option, subject to certain conditions.
Facility carries a rolling 11 month term which may reset monthly with the lender’s consent. This facility carries no maximum facility size.
Amount herein reflects the zero outstanding balance as of December 31, 2015.
Facility carries a rolling 12 month term which may reset monthly with the lender’s consent. Current maturity is December 2016. This facility
carries no maximum facility size. Amount herein reflects the outstanding balance as of December 31, 2015.
The date that is 180 days after the buyer delivers notice to seller, subject to a maximum date of March 2017.
Term loan outstanding balance is net of $1.7 million of unamortized discount.
76
New Credit Facilities and Amendments
Refer to Note 10 of our Consolidated Financial Statements for a detailed discussion of new credit facilities and
amendments to existing credit facilities executed during the year ended December 31, 2015.
Variance between Average and Quarter-End Credit Facility Borrowings Outstanding
The following tables compare the average amount outstanding of our secured financing agreements during each
quarter and the amount outstanding as of the end of each quarter, together with an explanation of significant variances
(dollar amounts in thousands):
Quarter-End Balance During
Weighted-Average
Explanations
for Significant
Quarter Ended
March 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,711,834 $
3,579,503
June 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3,682,274
September 30, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,019,035
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance
Quarter
3,455,082 $ 256,752
3,509,209
70,294
101,192
3,581,082
209,369
3,809,666
(a)
(b)
(c)
(d)
Variance Variances
(a) Variance primarily due to the following: (i) $131.7 million drawn on the CMBS Repo 3 facility in March 2015; (ii)
$67.7 million drawn on the Lender 1 Repo 1 facility in March 2015; and (iii) $63.1 million drawn on Lender 2 Repo
1 facility in March 2015.
(b) Variance primarily due to the following: (i) $245.6 million drawn on the Ireland Portfolio Mortgage in May 2015;
partially offset by (ii) $82.0 million repaid on the Lender 7 Secured Financing facility in May 2015.
(c) Variance primarily due to the following: (i) $83.0 million drawn on Ireland Portfolio Mortgage in July 2015; and (ii)
$40.6 million draw on Conduit Repo 1 in September 2015.
(d) Variance primarily due to the following: (i) $139.6 million drawn on the Lender 6 Repo 1 facility in December
2015; and (ii) $100.7 million of Woodstar Portfolio Mortgages in December 2015.
Quarter Ended
March 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,601,062 $
June 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
September 30, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,561,267
2,708,108
3,137,789
Quarter-End
Balance
Variance
Weighted-Average
Balance During
Quarter
2,536,926 $ 64,136
2,366,435 194,832
2,766,428 (58,320)
2,745,631 392,158
(a)
(b)
(c)
(d)
Explanations
for Significant
Variances
(a) Variance primarily due to the following: (i) $281.6 million drawn on the Lender 1 Repo 1 facility subsequent to its
upsizing in January 2014; partially offset by (ii) $146.0 million repayment on the Lender 7 Secured Financing
facility in March 2014.
(b) Variance primarily due to the following: (i) $90.0 million drawn on the Lender 1 Repo 1 facility in June 2014;
(ii) $84.4 million drawn on the Lender 7 Secured Financing facility in June 2014; and (iii) $43.5 million drawn on
the Lender 2 Repo 1 facility in June 2014.
(c) Variance primarily due to the following: (i) $51.2 million repayment on the Lender 1 Repo 1 facility in
September 2014; (ii) $137.7 million repayment on the Conduit Repo 2 facility in August 2014; offset by (iii) $116.5
million draw on the Lender 7 Secured Financing facility in September 2014.
(d) Variance primarily due to the following: (i) $125.8 million drawn on the Lender 1 Repo 1 facility in
December 2014; (ii) $153.7 drawn on the Lender 7 Secured Financing facility in December 2014; (iii) $87.0 million
drawn on the Conduit Repo 2 facility in December 2014; and (iv) $71.0 million drawn on the Lender 6 Repo 1
facility in December 2014; offset by (v) $119.4 million repayment of the Lender 1 Repo 3 facility in December
2014; and (vi) $89.1 million repayment of the Lender 7 Secured Financing facility in November 2014.
77
Borrowings under Convertible Senior Notes
The following table is a summary of our unsecured convertible senior notes outstanding as of December 31,
2015 (amounts in thousands, except rates):
2017 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 431,250
2018 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 599,981
2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 341,363
3.75 %
4.55 %
4.00 %
Principal
Amount
Coupon Effective Conversion Maturity
Rate
Rate
Remaining
Period of
Rate
Amortization
5.87 % 41.7397 10/15/2017 1.8 years
6.10 % 46.1565
3/1/2018 2.2 years
5.37 % 48.9439 1/15/2019 3.0 years
Date
During the years ended December 31, 2015 and 2014, the weighted average effective borrowing rates on our
convertible senior notes were 5.7% and 5.5%, respectively. These effective borrowing rates include the effects of
underwriter purchase discount and the adjustment for the conversion option, the initial value of which reduced the
balance of the notes.
Refer to Note 11 of our Consolidated Financial Statements for further disclosure regarding the terms of our
convertible senior notes.
Scheduled Principal Repayments on Investments and Overhang on Financing Facilities
The following scheduled and/or projected principal repayments on our investments were based upon the
amounts outstanding and contractual terms of the financing facilities in effect as of December 31, 2015 (amounts in
thousands):
Scheduled Principal Scheduled/Projected Projected/Required Scheduled Principal
Repayments on Loans Principal Repayments Repayments of
and HTM Securities
Inflows Net of
Financing Outflows
on RMBS and CMBS
Financing
First Quarter 2016 . . . . . . . . . . . . . . . . . . $
Second Quarter 2016 . . . . . . . . . . . . . . . .
Third Quarter 2016 . . . . . . . . . . . . . . . . .
Fourth Quarter 2016 . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
300,804 $
71,250
355,637
453,629
1,181,320 $
23,384 $
33,805
25,850
55,785
138,824 $
(152,620) $
(8,128)
(123,482)
(560,698)
(844,928) $
171,568
96,927
258,005
(51,284)
475,216
In the normal course of business, the Company is in discussions with its lenders to extend or amend any
financing facilities which contain near term expirations.
Issuances of Equity Securities
We may raise funds through capital market transactions by issuing capital stock. There can be no assurance,
however, that we will be able to access the capital markets at any particular time or on any particular terms. We have
authorized 100,000,000 shares of preferred stock and 500,000,000 shares of common stock. At December 31, 2015, we
had 100,000,000 shares of preferred stock available for issuance and 262,509,221 shares of common stock available for
issuance.
Refer to Note 17 of our Consolidated Financial Statements for a discussion of our issuances of equity securities
during the year ended December 31, 2015.
Other Potential Sources of Financing
In the future, we may also use other sources of financing to fund the acquisition of our target assets, including
other secured as well as unsecured forms of borrowing and sale of certain investment securities which no longer meet
our return requirements.
78
Repurchases of Equity Securities and Convertible Senior Notes
In September 2014, our board of directors authorized and announced the repurchase of up to $250 million of
our outstanding common stock over a period of one year. Subsequent amendments to the repurchase program approved
by our board of directors in December 2014 and June 2015 resulted in the program being (i) amended to increase
maximum repurchases to $450.0 million, (ii) expanded to allow for the repurchase of our outstanding convertible senior
notes under the program and (iii) extended through June 2016. Purchases made pursuant to the program are made in
either the open market or in privately negotiated transactions from time to time as permitted by federal securities laws
and other legal requirements. The timing, manner, price and amount of any repurchases are discretionary and will be
subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program
may be suspended or discontinued at any time. During the year ended December 31, 2015, we repurchased $118.6
million aggregate principal amount of our 2019 Notes for $136.3 million plus related transaction expenses of $0.1
million. During the year ended December 31, 2015, we also repurchased $48.7 million of common stock under the
repurchase program. As of December 31, 2015, we have $251.8 million of remaining capacity to repurchase common
stock and/or convertible senior notes under the repurchase program. In January 2016, our board of directors authorized a
$50.0 million increase in the maximum repurchase amount to $500.0 million and an extension of our share repurchase
program through January 2017.
Off-Balance Sheet Arrangements
We have relationships with unconsolidated entities and financial partnerships, such as entities often referred to
as VIEs. We are not obligated to provide, nor have we provided, any financial support for any VIEs. As such, the risk
associated with our involvement is limited to the carrying value of our investment in the entity. Refer to Note 15 of our
Consolidated Financial Statements for further discussion.
Dividends
We intend to continue to make regular quarterly distributions to holders of our common stock. U.S. federal
income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without
regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to
the extent that it annually distributes less than 100% of its net taxable income. We intend to continue to pay regular
quarterly dividends to our stockholders in an amount approximating our net taxable income, if and to the extent
authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or
otherwise, we must first meet both our operating and debt service requirements. If our cash available for distribution is
less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we
may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt
securities. Refer to Note 17 of our Consolidated Financial Statements for a detailed dividend history.
The tax treatment for our aggregate distributions per share of common stock paid with respect to the 2015 tax
year is as follows:
Record Date
Payable Date
12/31/2014 . . . . . 1/15/2015
3/31/2015 . . . . . . 4/15/2015
6/30/2015 . . . . . . 7/15/2015
9/30/2015 . . . . . . 10/15/2015
1/15/2016
12/31/2015 . . . . .
Per Share
Dividend Paid
$ 0.4800 $
0.4800
0.4800
0.4800
0.1506
$ 2.0706 $
Ordinary
Taxable
Dividends
0.4410 $
0.4410
0.4410
0.4410
0.1384
1.9024 $
Taxable
Qualified
Dividends
0.0391
0.0391
0.0391
0.0391
0.0122
0.1686
Capital Gain
Distribution
$
Unrecaptured
1250 Gain
0.0390 $
0.0390
0.0390
0.0390
0.0122
0.1682 $
$
Nondividend
Distributions
—
—
—
—
—
—
— $
—
—
—
—
— $
To the extent that total dividends for the 2015 tax year exceeded 2015 taxable income, the portion of the fourth
quarter dividend paid in January of 2016 that is equal to such excess is treated as a 2016 dividend for federal tax
purposes.
79
On February 25, 2016, our board of directors declared a dividend of $0.48 per share for the first quarter of
2015, which is payable on April 15, 2016 to common stockholders of record as of March 31, 2016.
Leverage Policies
We employ leverage, to the extent available, to fund the acquisition of our target assets, increase potential
returns to our stockholders, or provide temporary liquidity. Leverage can be either direct by utilizing private third party
financing, or indirect through originating, acquiring, or retaining subordinated mortgages, B-Notes, subordinated loan
participations or mezzanine loans. Although the type of leverage we deploy is dependent on the underlying asset that is
being financed, we intend, when possible, to utilize leverage whose maturity is equal to or greater than the maturity of
the underlying asset and minimize to the greatest extent possible exposure to the Company of credit losses associated
with any individual asset. In addition, we intend to mitigate the impact of potential future interest rate increases on our
borrowings through utilization of hedging instruments, primarily interest rate swap agreements.
The amount of leverage we deploy for particular investments in our target assets depends upon our Manager’s
assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the assets in our
investment portfolio, the potential for losses and extension risk in our portfolio, the gap between the duration of our
assets and liabilities, including hedges, the availability and cost of financing the assets, our opinion of the
creditworthiness of our financing counterparties, the health of the U.S. and European economy and commercial and
residential mortgage markets, our outlook for the level, slope, and volatility of interest rates, the credit quality of our
assets, the collateral underlying our assets, and our outlook for asset spreads relative to the LIBOR curve. Under our
current repurchase agreements and bank credit facility, our total leverage may not exceed 75% of total assets (as
defined), as adjusted to remove the impact of bona-fide loan sales that are accounted for as financings and the
consolidation of VIEs pursuant to GAAP. As of December 31, 2015, our total debt to assets ratio was 54.4%.
Contractual Obligations and Commitments
Contractual obligations as of December 31, 2015 are as follows (amounts in thousands):
Less than
More than
5 years
Secured financings (a) . . . . . . . . . . . . . . . . . . . . . $ 4,020,738 $ 844,928 $ 1,149,752 $ 1,635,607 $ 390,451
1,372,594
—
Convertible senior notes . . . . . . . . . . . . . . . . . .
111,118
—
Secured borrowings on transferred loans (b) . . .
—
1,273,327
Loan funding commitments (c) . . . . . . . . . . . . .
Future lease commitments . . . . . . . . . . . . . . . .
2,647
35,314
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,813,091 $ 1,627,320 $ 2,727,505 $ 2,065,168 $ 393,098
1,031,231
35,000
498,028
13,494
341,363
76,118
—
12,080
—
—
775,299
7,093
3 to 5 years
1 to 3 years
1 year
Total
(a) Includes available extension options.
(b) These amounts relate to financial asset sales that were required to be accounted for as secured borrowings. As a
result, the assets we sold remain on our consolidated balance sheet for financial reporting purposes. Such assets are
expected to provide match funding for these liabilities.
(c) Excludes $230.6 million of loan funding commitments in which management projects the Company will not be
obligated to fund in the future due to repayments made by the borrower either earlier than, or in excess of,
expectations. In addition, this amount excludes any funding commitments which may be required pursuant to
Company guarantees. In limited instances, specifically with loans involving multiple construction lenders, the
Company has guaranteed the future funding obligations of certain third party lenders in the event that such third
parties fail to fund their proportionate share of the obligation in a timely manner. We are currently unaware of any
circumstances which would require us to make payments under any of these guarantees and, as a result, have not
included any such amounts in the above table.
The table above does not include interest payable, amounts due under our management agreement or derivative
agreements as those contracts do not have fixed and determinable payments.
80
Critical Accounting Estimates
Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and
assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. We believe that all of the decisions and
assessments upon which our financial statements are based were reasonable at the time made, based upon information
available to us at that time. The following discussion describes the critical accounting estimates that apply to our
operations and require complex management judgment. This summary should be read in conjunction with a more
complete discussion of our accounting policies included in Note 2 of our Consolidated Financial Statements.
Loan Impairment
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 through the provision for loan losses 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.
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 is 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.
Significant judgment is required when evaluating loans for impairment; therefore, actual results over time could
be materially different. As of December 31, 2015, the Lending Segment had $6.0 billion of loans held-for-investment, of
which none are considered impaired. Historically, this segment has not had any realized losses on individual loans.
However, we have established a general loan loss allowance based on our risk classification of the loans in our portfolio,
as discussed in Note 5 of our Consolidated Financial Statements. The general loan loss allowance was $6.0 million as of
December 31, 2015.
Classification and Impairment Evaluation of Investment Securities
Our investment securities consist primarily of RMBS that we classify as available-for-sale, CMBS and
mandatorily redeemable preferred equity interests in commercial real estate entities which we expect to hold to maturity
and CMBS for which we have elected the fair value option. Investments classified as available-for-sale are carried at
their fair value. For securities where we have not elected the fair value option, changes in fair value are recorded through
accumulated other comprehensive income, a component of stockholders’ equity, rather than through earnings. We do not
hold any of our investment securities for trading purposes.
When the estimated fair value of a security for which we have not elected to apply the fair value option 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 our cost basis even if
we do not intend to sell the security or do not 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
81
impairment loss is recognized in earnings equal to the 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 do not 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 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.
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 borrowers,
(ii) credit rating of the security, (iii) key terms of the security, (iv) performance of the loan or underlying loans, including
debt service coverage and loan-to-value ratios, (v) the value of the collateral for the loan or 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. As of December 31, 2015, we held $176.2 million of available-for-sale RMBS which
had gross unrealized gains of $37.6 million and $0.3 million of unrealized losses. We also had $321.2 million of
held-to-maturity securities which had gross unrealized losses of $6.2 million and gross unrealized gains of $0.3 million
as of December 31, 2015. We recognized OTTI charges against earnings with respect to our investment securities of
$0.3 million and $1.0 million during the years ended December 31, 2014 and 2013, respectively. There were no OTTI
charges recognized during the year ended December 31, 2015.
Valuation of Financial Assets and Liabilities Carried at Fair Value
We measure our VIE assets and liabilities, mortgage-backed securities, derivative assets and liabilities,
domestic servicing rights intangible asset and any assets or liabilities where we have elected the fair value option at fair
value. When actively quoted observable prices are not available, we either use implied pricing from similar assets and
liabilities or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for
liquidity, credit, market and/or other risk factors. See Note 20 of our Consolidated Financial Statements for details
regarding the various methods and inputs we use in measuring the fair value of our financial assets and liabilities. As of
December 31, 2015, we had $77.4 billion and $75.8 billion of financial assets and liabilities, respectively, that are
measured at fair value, including $76.7 billion of VIE assets and $75.8 billion of VIE liabilities we consolidate pursuant
to ASC 810.
We measure the assets and liabilities of consolidated VIEs at fair value pursuant to our election of the fair value
option. The VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active
management of the underlying assets. In determining the fair value of the assets and liabilities of the VIE, we maximize
the use of observable inputs over unobservable inputs. We also acknowledge that our principal market for selling CMBS
assets is the securitization market where the market participant is considered to be a CMBS trust or a collateralized debt
obligation (“CDO”). This methodology results in the fair value of the assets of a static CMBS trust being equal to the
fair value of its liabilities. As a result, the methods and inputs we use in measuring the fair value of the assets and
liabilities of our VIEs affect our earnings only to the extent of their impact on our direct investment in the VIEs.
Derivative Instruments and Hedging Activities
We record all derivatives on our consolidated balance sheets at fair value. The accounting for changes in the
fair value of derivatives depends on 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. The designation of derivative contracts as hedges, the measurement of
82
their effectiveness, and the estimate of the fair value of the contracts all may involve significant judgments by our
management, and changes to those judgments could significantly impact our reported results of operations. As of
December 31, 2015, we had $45.1 million of derivative assets and $5.2 million of derivative liabilities. We recognized
net gains on derivatives of $21.6 million and $20.5 million for the years ended December 31, 2015 and 2014,
respectively, and net losses on derivatives of $11.2 million for the year ended December 31, 2013. As of December 31,
2015, we had $0.1 million of net unrecognized losses on derivatives designated as hedges.
Goodwill Impairment
Our goodwill at December 31, 2015 of $140.4 million represents the excess of consideration transferred over
the fair value of LNR’s net assets acquired on April 19, 2013. In testing goodwill for impairment, we follow ASC 350,
Intangibles—Goodwill and Other, which permits a qualitative assessment of whether it is more likely than not that the
fair value of a reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines
that it is not more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill,
then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it
is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill, we
compare the fair value of that reporting unit with its carrying value, including goodwill (“Step One”). If the carrying
value of a reporting unit exceeds its fair value, goodwill is considered impaired with the impairment loss equal to the
amount by which the carrying value of the goodwill exceeds the implied fair value of that goodwill.
Based on our qualitative assessment during the 2015 fourth quarter, we believe that the Investing and Servicing
Segment reporting unit to which all of our goodwill was attributed is not currently at risk of failing Step One of the
impairment test. This qualitative assessment required judgment to be applied in evaluating the effects of multiple factors,
including actual and projected financial performance of the reporting unit, macroeconomic conditions, industry and
market conditions, and relevant entity specific events in determining whether it is more likely than not that the fair value
of the reporting unit is less than its carrying amount, including goodwill.
Property Impairment
We review properties for impairment whenever events or changes in circumstances indicate that the carrying
amount of the asset may not be recoverable. Recoverability is determined by comparing the carrying amount of the
property to the undiscounted future net cash flows it is expected to generate. If such carrying amount exceeds the
expected undiscounted future net cash flows, we adjust the carrying amount of the property to its estimated fair value.
The estimation of future net cash flows and fair values of our properties involves significant judgments by our
management, and changes to these judgments could significantly impact our reported results of operation. As of
December 31, 2015 we held properties with a carrying value of $919.2 million, none of which we determined were
impaired at any point during the year ended December 31, 2015.
Recent Accounting Developments
Refer to Note 2 of our Consolidated Financial Statements for a discussion of recent accounting developments
and the expected impact to the Company.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment
speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive
risk-adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe
the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient
compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake.
83
Credit Risk
Our loans and investments are subject to credit risk. The performance and value of our loans and investments
depend upon the owners’ ability to operate the properties that serve as our collateral so that they produce cash flows
adequate to pay interest and principal due to us. To monitor this risk, our Manager’s asset management team reviews our
investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and
enforcing our rights as necessary.
We seek to further manage credit risk associated with our loans held-for-sale through the purchase of credit
index instruments. The following table presents our credit index instruments as of December 31, 2015 and December 31,
2014 (dollar amounts in thousands):
Face Value of
Aggregate Notional Value of
Loans Held-for-Sale Credit Index Instruments
Number of
Credit Index Instruments
December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . $
203,710 $
390,342 $
40,000
45,000
11
12
Refer to Note 6 of our Consolidated Financial Statements for a discussion of weighted average ratings of our
investment securities.
Capital Market Risk
We are exposed to risks related to the equity capital markets, and our related ability to raise capital through the
issuance of our common stock or other equity instruments. We are also exposed to risks related to the debt capital
markets, and our related ability to finance our business through borrowings under repurchase obligations or other debt
instruments. As a REIT, we are required to distribute a significant portion of our taxable income annually, which
constrains our ability to accumulate operating cash flow and therefore requires us to utilize debt or equity capital to
finance our business. We seek to mitigate these risks by monitoring the debt and equity capital markets to inform our
decisions on the amount, timing, and terms of capital we raise.
Interest Rate Risk
Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and
international economic and political considerations, as well as other factors beyond our control. We are subject to
interest rate risk in connection with our investments and the related financing obligations. In general, we seek to match
the interest rate characteristics of our investments with the interest rate characteristics of any related financing
obligations such as repurchase agreements, bank credit facilities, term loans, revolving facilities and securitizations. In
instances where the interest rate characteristics of an investment and the related financing obligation are not matched, we
mitigate such interest rate risk through the utilization of interest rate swaps of the same duration. The following table
presents financial instruments where we have utilized interest rate derivatives to hedge interest rate risk and the related
interest rate derivatives as of December 31, 2015 and 2014 (dollar amounts in thousands):
Aggregate Notional
Value of Interest
Hedged Instruments Rate Derivatives
Face Value of
Number of Interest
Rate Derivatives
Instrument hedged as of December 31, 2015
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RMBS, available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured financing agreements . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Instrument hedged as of December 31, 2014
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RMBS, available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured financing agreements . . . . . . . . . . . . . . . . . . . . . . . . . .
$
84
8,000 $
203,710
233,976
518,505
964,191 $
9,000 $
390,342
270,783
220,729
890,854 $
8,000
162,700
74,000
519,142
763,842
9,000
338,500
74,000
218,165
639,665
1
27
3
14
45
2
54
3
8
67
The following table summarizes the estimated annual change in net investment income for our LIBOR-based
investments and our LIBOR-based debt assuming increases or a decrease in LIBOR and adjusted for the effects of our
interest rate hedging activities (amounts in thousands):
Income (Expense) Subject to Interest Rate Sensitivity
Variable-rate
investments and
indebtedness
3.0%
Increase
2.0%
Increase
1.0%
1.0%
Increase Decrease (1)
Investment income from variable-rate investments . $ 5,378,901 $ 177,263 $ 116,196 $ 55,852 $ (16,443)
Interest expense from variable-rate debt . . . . . . . . . .
Net investment income from variable rate instruments $ 1,664,056 $
Impact per diluted average shares outstanding . . . . . .
$
(3,714,845)
(111,445)
14,165
(74,297) (37,148)
65,818 $ 41,899 $ 18,704 $ (2,278)
(0.01)
0.18 $
0.08 $
0.28 $
(1) Assumes LIBOR does not go below 0%.
Prepayment Risk
Prepayment risk is the risk that principal will be repaid at a different rate than anticipated, causing the return on
certain investments to be less than expected. As we receive prepayments of principal on our assets, any premiums paid
on such assets are amortized against interest income. In general, an increase in prepayment rates accelerates the
amortization of purchase premiums, thereby reducing the interest income earned on the assets. Conversely, discounts on
such assets are accreted into interest income. In general, an increase in prepayment rates accelerates the accretion of
purchase discounts, thereby increasing the interest income earned on the assets.
Extension Risk
Our Manager computes the projected weighted-average life of our assets based on assumptions regarding the
rate at which the borrowers will prepay the mortgages or extend. If prepayment rates decrease in a rising interest rate
environment or extension options are exercised, the life of the fixed-rate assets could extend beyond the term of the
secured debt agreements. This could have a negative impact on our results of operations. In some situations, we may be
forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.
Fair Value Risk
The estimated fair value of our investments fluctuates primarily due to changes in interest rates and other
factors. Generally, in a rising interest rate environment, the estimated fair value of the fixed-rate investments would be
expected to decrease; conversely, in a decreasing interest rate environment, the estimated fair value of the fixed-rate
investments would be expected to increase. As market volatility increases or liquidity decreases, the fair value of our
assets recorded and/or disclosed may be adversely impacted. Our economic exposure is generally limited to our net
investment position as we seek to fund fixed rate investments with fixed rate financing or variable rate financing hedged
with interest rate swaps.
Foreign Currency Risk
We intend to hedge our currency exposures in a prudent manner. However, our currency hedging strategies may
not eliminate all of our currency risk due to, among other things, uncertainties in the timing and/or amount of payments
received on the related investments, and/or unequal, inaccurate, or unavailability of hedges to perfectly offset changes in
future exchange rates. Additionally, we may be required under certain circumstances to collateralize our currency hedges
for the benefit of the hedge counterparty, which could adversely affect our liquidity.
Consistent with our strategy of hedging foreign currency exposure on certain investments, we typically enter
into a series of forwards to fix the U.S. dollar amount of foreign currency denominated cash flows (interest income,
rental income and principal payments) we expect to receive from our foreign currency denominated investments.
85
Accordingly, the notional values and expiration dates of our foreign currency hedges approximate the amounts and
timing of future payments we expect to receive on the related investments.
The following table represents our current currency hedge exposure as it relates to our investments denominated
in foreign currencies, along with the aggregate notional amount of the hedges in place (amounts in thousands except for
number of contracts, using the December 31, 2015 pound sterling (“GBP”) closing rate of 1.4738, Euro (“EUR”) closing
rate of 1.0861, Swedish Krona (“SEK”) closing rate of 0.1184, Norwegian Krone (“NOK”) closing rate of 0.1131 and
Danish Krone (“DKK”) closing rate of 0.1455):
Carrying Value
of Net
Investment
Local Currency
GBP
GBP
GBP
GBP
50,110
47,448
10,341
59,482
5,901 EUR, DKK, NOK, SEK
87,759
2,660
167,841
14,498
39,238
54,175
539,453
GBP
GBP
EUR
GBP
EUR
EUR
$
Number of Foreign
Exchange Contracts
12
13
10
10
4
6
3
54 (1)
10
9
19
150
$
$
$
(1)
Aggregate Notional Value
of Hedges Applied
66,073
54,149
10,027
71,791
6,991
98,980
4,317
Expiration Range of Contracts
July 2016
January 2017
January 2016 – March 2016
January 2018
December 2016
January 2016 – April 2017
June 2016 – March 2018
275,149 March 2016 – June 2020
15,592 January 2016 – January 2018
37,764 February 2016 – October 2016
58,462 February 2016 – October 2016
699,295
As of December 31, 2015, we held 54 foreign exchange contracts to hedge our Euro currency exposure created
by our acquisition of the Ireland Portfolio. These contracts have an aggregate notional of $275.1 million and
varying maturities through June 2020.
Real Estate Risk
The market values of commercial and residential mortgage assets are subject to volatility and may be affected
adversely by a number of factors, including, but not limited to, national, regional and local economic conditions (which
may be adversely affected by industry slowdowns and other factors); local real estate conditions; changes or continued
weakness in specific industry segments; construction quality, age and design; demographic factors; and retroactive
changes to building or similar codes. In addition, decreases in property values reduce the value of the collateral and the
potential proceeds available to a borrower to repay the underlying loans, which could also cause us to suffer losses.
Inflation Risk
Most of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors
influence our performance significantly more than inflation does. Changes in interest rates may correlate with inflation
rates and/or changes in inflation rates. Our financial statements are prepared in accordance with GAAP and our
distributions are determined by our board of directors consistent with our obligation to distribute to our stockholders at
least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our
activities and balance sheet are measured with reference to historical cost and/or fair value without considering inflation.
86
Item 8. Financial Statements and Supplementary Data.
Index to Financial Statements and Schedules
Financial Statements
Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets as of December 31, 2015 and 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the Years Ended December 31, 2015, 2014 and 2013 . . . . . . . .
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2015, 2014 and
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Equity for the Years Ended December 31, 2015, 2014 and 2013 . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the Years Ended December 31, 2015, 2014 and 2013 . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 1 Business and Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 2 Summary of Significant Accounting Policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 3 Acquisitions and Divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 4 Restricted Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 5 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 6 Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 7 Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 8 Investment in Unconsolidated Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 9 Goodwill and Intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 10 Secured Financing Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 11 Convertible Senior Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 12 Loan Securitization/Sale Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 13 Derivatives and Hedging Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 14 Offsetting Assets and Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 15 Variable Interest Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 16 Related-Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 17 Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 18 Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 19 Accumulated Other Comprehensive Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 20 Fair Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 21 Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 22 Commitments and Contingencies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 23 Segment and Geographic Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 24 Quarterly Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note 25 Subsequent Events . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Schedule III—Real Estate and Accumulated Depreciation as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . .
Schedule IV—Mortgage Loans on Real Estate as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
88
90
91
92
93
94
96
96
97
108
111
112
117
121
122
123
125
128
130
131
133
134
135
139
143
144
145
152
154
154
160
161
162
164
All other schedules are omitted because they are not required or the required information is shown in the
financial statements or the notes thereto.
87
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Starwood Property Trust, Inc.
Greenwich, Connecticut
We have audited the accompanying consolidated balance sheets of Starwood Property Trust, Inc. and
subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations,
comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2015. Our
audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and
financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial
position of Starwood Property Trust, Inc. and subsidiaries as of December 31, 2015 and 2014, and the results of their
operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with
accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in
all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the Company’s internal control over financial reporting as of December 31, 2015, based on the criteria
established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission and our report dated February 25, 2016 expressed an unqualified opinion on the Company’s
internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
February 25, 2016
88
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Starwood Property Trust, Inc.
Greenwich, Connecticut
We have audited the internal control over financial reporting of Starwood Property Trust, Inc. and subsidiaries (the
“Company”) as of December 31, 2015, based on criteria established in Internal Control—Integrated Framework (2013) issued
by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management Report on Internal Control Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the
company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the
company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that
(1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions
of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion
or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected
on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to
future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as
of December 31, 2015, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31,
2015 of the Company and our report dated February 25, 2016 expressed an unqualified opinion on those financial statements
and financial statement schedules.
/s/ DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
February 25, 2016
89
Starwood Property Trust, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except share data)
Assets:
As of December 31,
2015
2014
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-investment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans transferred as secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities ($403,703 and $556,253 held at fair value) . . . . . . . . . . . .
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets ($119,698 and $132,303 held at fair value) . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Variable interest entity (“VIE”) assets, at fair value . . . . . . . . . . . . . . . . . . . . . . .
368,815 $
23,069
5,973,079
203,865
86,573
724,947
919,225
201,570
199,201
140,437
45,091
34,314
142,263
76,675,689
255,187
48,704
5,779,238
391,620
129,427
998,248
39,854
144,152
193,983
140,437
26,628
40,102
95,652
107,816,065
$ 85,738,138 $ 116,099,297
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . $
Related-party payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured financing agreements, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Convertible senior notes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Secured borrowings on transferred loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIE liabilities, at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies (Note 22)
Equity:
Starwood Property Trust, Inc. Stockholders’ Equity:
Preferred stock, $0.01 per share, 100,000,000 shares authorized, no shares issued
156,805 $
40,955
114,947
5,196
4,019,035
1,325,243
88,000
75,817,014
81,567,195
144,516
40,751
108,189
5,476
3,137,789
1,418,022
129,441
107,232,201
112,216,385
and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
Common stock, $0.01 per share, 500,000,000 shares authorized, 241,044,775
issued and 237,490,779 outstanding as of December 31, 2015 and 224,752,053
issued and 223,538,303 outstanding as of December 31, 2014 . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock (3,553,996 shares and 1,213,750 shares) . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Starwood Property Trust, Inc. Stockholders’ Equity . . . . . . . . . . . . . . . . . .
Non-controlling interests in consolidated subsidiaries . . . . . . . . . . . . . . . . . . . . . . .
Total Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,410
4,192,844
(72,381)
29,729
(12,286)
4,140,316
30,627
4,170,943
2,248
3,835,725
(23,635)
55,896
(9,378)
3,860,856
22,056
3,882,912
$ 85,738,138 $ 116,099,297
See notes to consolidated financial statements.
90
Starwood Property Trust, Inc. and Subsidiaries
Consolidated Statements of Operations
(Amounts in thousands, except per share data)
Revenues:
For the Year Ended December 31,
2015
2014
2013
Interest income from loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 477,931 $ 434,662 $ 344,640
112,016
Interest income from investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
74,312
135,565 124,726
Servicing fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6
Rental income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,811
702,875 549,495
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
93,665
117,068
36,622
10,591
735,877
9,831
10,801
Costs and expenses:
124,733
202,550
154,628
—
13,429
11,542
29,010
(2)
389
536,279
199,598
76,816
117,732
161,104 111,803
169,661 150,019
17,958
3,648
—
9,701
1,923
1,298
484,009 373,166
218,866 176,329
—
3,681
5,938
16,627
2,047
7,219
Management fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business combination costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and investment pursuit costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of rental operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan loss allowance, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before other income, income taxes and non-controlling interests . . . . . . . . . . . . . .
Other income:
Change in net assets related to consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of investment securities, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of mortgage loans held-for-sale, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investments and other assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain (loss) on derivative financial instruments, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency (loss) gain, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other-than-temporary impairment (“OTTI”) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncredit portion of OTTI recognized in other comprehensive income . . . . . . . . . . . . . . . .
Net impairment losses recognized in earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
212,506 116,377
(6,844)
(16,787)
(8,884)
15,077
43,849
70,420
8,841
19,932
12,886
25,063
20,451 (11,170)
10,383
(2,076)
1,062
(1,014)
—
1,052
307,319 177,653
526,185 353,982
(24,096) (23,858)
502,089 330,124
(1,551) (19,794)
500,538 310,330
Net income attributable to non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(5,300)
Net income attributable to Starwood Property Trust, Inc. . . . . . . . . . . . . . . . . . . . . . . . $ 450,697 $ 495,021 $ 305,030
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from discontinued operations, net of tax (Note 3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185,490
(12,605)
3,084
64,320
26,674
22,664
21,598
(37,221)
(12)
12
—
(5,921)
1,708
269,791
469,389
(17,206)
452,183
—
452,183
(1,486)
(29,942)
(1,788)
732
(1,056)
—
3,832
(5,517)
Earnings per share data attributable to Starwood Property Trust, Inc.:
Basic:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.92 $
—
1.92 $
2.29 $
(0.01)
2.28 $
Diluted:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.91 $
—
1.91 $
2.25 $
(0.01)
2.24 $
1.94
(0.12)
1.82
1.94
(0.12)
1.82
See notes to consolidated financial statements.
91
Starwood Property Trust, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income
(Amounts in thousands)
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income (loss) (net change by component):
Cash flow hedges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency remeasurement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: Comprehensive income attributable to non-controlling interests .
Comprehensive income attributable to Starwood Property Trust, Inc. .
For the Year Ended December 31,
2013
2015
2014
$ 452,183 $ 500,538 $ 310,330
507
1,967
32
(6,376) (15,680)
(22,883)
9,487
(3,316) (13,684)
(26,167) (19,553)
(4,226)
426,016 480,985 306,104
(5,300)
$ 424,530 $ 475,468 $ 300,804
(1,486)
(5,517)
See notes to consolidated financial statements.
92
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Starwood Property Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
For the Year Ended December 31,
2013
2014
2015
Cash Flows from Operating Activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Adjustments to reconcile net income to net cash provided by operating activities:
452,183 $
500,538 $
310,330
Amortization of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of convertible debt discount and deferred fees . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of net discount on investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of net deferred loan fees and discounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of net discount (premium) from secured borrowings on transferred loans . . . . . . . .
Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Share-based component of incentive fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of fair value option investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency loss (gain), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale of investments and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Impairment of real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other-than-temporary impairment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan loss allowance, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributions of earnings from unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized costs written off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Originations of loans held-for-sale, net of principal collections . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in operating assets and liabilities:
14,613
20,832
(24,556)
(36,862)
4
32,146
17,379
(3,084)
45,646
12,605
(64,320)
(28,549)
37,110
(22,664)
—
—
(2)
27,232
(26,674)
23,082
5,921
—
(1,848,141)
2,100,216
11,747
14,665
(25,023)
(21,286)
(893)
28,622
11,123
(15,077)
(52,559)
16,787
(70,420)
(24,646)
29,366
(13,829)
—
1,056
2,047
16,622
(19,932)
15,245
—
—
(1,785,050)
1,670,522
9,727
8,538
(30,235)
(44,643)
(1,655)
16,344
2,752
8,884
(23,687)
6,844
(43,849)
7,836
(10,375)
(40,315)
1,095
1,015
1,923
14,925
(8,841)
6,808
—
1,517
(1,232,920)
1,326,602
Related-party payable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued and capitalized interest receivable, less purchased interest . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable, accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from principal collections on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sales of investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from principal collections on investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate business combinations, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution of capital from unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payments for purchase or termination of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from termination of derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return of investment basis in purchased derivative asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in restricted cash, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spin-off of Starwood Waypoint Residential Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition and improvement of single family homes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of LNR, net of cash acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See notes to consolidated financial statements.
94
204
(65,972)
(28,485)
(27,358)
612,506
22,958
(52,514)
1,591
(40,951)
220,709
15,997
(32,387)
18,686
35,398
326,314
(2,360,225)
1,552,422
637,124
(182,018)
6,410
428,569
(555,051)
35,576
(1,920)
(32,436)
30,855
(27,054)
36,547
337
30,069
—
—
—
—
—
(2,663,267)
769,650
435,818
(479,843)
463,428
70,417
—
13,617
(2,157)
(30,562)
6,515
(17,389)
10,289
1,948
(17,275)
—
(642,099)
(186,263)
25,954
(586,383)
(400,795) (1,714,830) (2,827,602)
(3,034,696)
1,192,823
501,988
(189,422)
100,166
54,295
—
1,784
(37,879)
(183,043)
62,013
(19,928)
5,996
1,513
2,268
(111,960)
(61,901)
—
1,153
—
Starwood Property Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Continued)
(Amounts in thousands)
Cash Flows from Financing Activities:
For the Year Ended December 31,
2013
2014
2015
Borrowings under financing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,817,394 $ 4,320,738 $ 4,391,114
1,037,926
Proceeds from issuance of convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(3,884,972)
Principal repayments on and repurchases of borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(26,309)
Payment of deferred financing costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95,000
Proceeds from secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,513,519
Proceeds from common stock issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(1,390)
Payment of equity offering costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(300,973)
Payment of dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,599
Contributions from non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(48,104)
Distributions to non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Purchase of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
13,993
Issuance of debt of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(180,652)
Repayment of debt of consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29,411
Distributions of cash from consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,640,162
138,874
177,671
1,082
317,627
Net cash (used in) provided by financing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Supplemental disclosure of cash flow information:
—
(4,335,654)
(21,701)
38,925
326,428
(945)
(446,847)
71
(2,121)
(48,746)
9,132
(464,243)
34,724
(93,583)
118,128
255,187
(4,500)
368,815 $
421,547
(3,419,957)
(16,514)
—
600,998
(1,535)
(401,661)
—
(33,880)
(12,993)
89,354
(136,115)
27,531
1,437,513
(56,608)
317,627
(5,832)
255,187 $
Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
160,386 $
29,171
131,917 $
34,611
79,190
43,080
Supplemental disclosure of non-cash investing and financing activities:
Fair value of assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Fair value of liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired from consolidated VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividends declared, but not yet paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidation of VIEs (VIE asset/liability additions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deconsolidation of VIEs (VIE asset/liability reductions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets distributed in spin-off of Starwood Waypoint Residential Trust . . . . . . . . . . . . . . . .
Contributions from non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest only security received in connection with securitization . . . . . . . . . . . . . . . . . . . . . . . .
883,172 $
(328,121)
125,309
14,530
114,947
12,050,421
(7,825,212)
—
—
—
— $ 1,152,360
562,279
—
—
—
18,867
—
90,171
108,189
25,165,354
29,363,132
1,218,514
9,392,128
—
1,008,377
—
7,267
1,889
—
See notes to consolidated financial statements.
95
Starwood Property Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
As of December 31, 2015
1. Business and Organization
Starwood Property Trust, Inc. (“STWD” and, 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 investments in both the U.S. and Europe. We refer to the following as our target assets: commercial real estate
mortgage loans, preferred equity interests, CMBS and other commercial real estate-related debt investments. Our target
assets may also include residential mortgage-backed securities (“RMBS”), certain residential mortgage loans, distressed
or non-performing commercial loans, commercial properties subject to net leases and equity interests in commercial real
estate. 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 three reportable business segments as of December 31, 2015:
• Real estate lending (the “Lending Segment”)—engages primarily in originating, acquiring, financing and
managing commercial first mortgages, subordinated mortgages, mezzanine loans, preferred equity, CMBS,
RMBS and other real estate and real estate-related debt investments in both the U.S. and Europe that are
held-for-investment.
• Real estate investing and servicing (the “Investing and Servicing Segment”) —includes (i) servicing
businesses in both the U.S. and Europe that manage and work out problem assets, (ii) an investment
business that selectively acquires and manages unrated, investment grade and non-investment grade rated
CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage
loan business which originates conduit loans for the primary purpose of selling these loans into
securitization transactions, and (iv) an investment business that selectively acquires commercial real estate
assets, including properties acquired from CMBS trusts. This segment excludes the consolidation of
securitization variable interest entities (“VIEs”).
• Real estate property (the “Property Segment”)—engages primarily in acquiring and managing equity
interests in stabilized commercial real estate properties, including multi-family properties, that are held for
investment.
On January 31, 2014, we completed the spin-off of our former single family residential (“SFR”) segment to our
stockholders as discussed further in Note 3.
On April 19, 2013, we acquired the equity of LNR Property LLC (“LNR”) and certain of its subsidiaries as
discussed further in Note 3.
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.
96
2. Summary of Significant Accounting Policies
Balance Sheet Presentation of the Investing and Servicing Segment’s Variable Interest Entities
As noted above, the Investing and Servicing Segment operates an investment 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
accounting principles generally accepted in the United States of America (“GAAP”), SPEs typically qualify as 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 the Investing and Servicing Segment 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 VIEs. The assets and other instruments
held by these VIEs are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations
of the VIEs do not have any recourse to the general credit of any other consolidated entities, nor to us as the consolidator
of these VIEs.
The VIE 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 23 for a presentation of the Investing and Servicing Segment without
consolidation of these VIEs.
Basis of Accounting and Principles of Consolidation
The accompanying consolidated financial statements include our accounts and those of our consolidated
subsidiaries and VIEs. Intercompany amounts have been eliminated in consolidation.
Entities not deemed to be VIEs are consolidated if we own a majority of the voting securities or interests or hold
the general partnership interest, except in those instances in which the minority voting interest owner or limited partner
effectively participates through substantive participative rights. Substantive participative rights include the ability to
select, terminate and set compensation of the investee’s management, if applicable, and the ability to participate in
capital and operating decisions of the investee, including budgets, in the ordinary course of business.
We invest in entities with varying structures, many of which do not have voting securities or interests, such as
general partnerships, limited partnerships, and limited liability companies. In many of these structures, control of the
entity rests with the general partners or managing members, while other members hold passive interests. The general
partner or managing member may hold anywhere from a relatively small percentage of the total financial interests to a
majority of the financial interests. For entities not deemed to be VIEs, where we serve as the sole general partner or
managing member, we are considered to have the controlling financial interest and therefore the entity is consolidated,
regardless of our financial interest percentage, unless there are other limited partners or investing members that
effectively participate through substantive participative rights. In those circumstances where we, as majority controlling
interest owner, cannot cause the entity to take actions that are significant in the ordinary course of business, because such
actions could be vetoed by the minority controlling interest owner, we do not consolidate the entity.
When we consolidate entities other than VIEs, the ownership interests of any minority parties are reflected as
non-controlling interests. A non-controlling interest in a consolidated subsidiary is defined as “the portion of the equity
97
(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. When we consolidate VIEs, beneficial interests payable to third
parties are reflected as liabilities when the interests are legally issued in the form of debt.
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. Accounting Standards Codification (“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.
98
We elect the fair value option for initial and subsequent recognition of the assets and liabilities of our
consolidated VIEs. Interest income and interest expense associated with these VIEs are no longer relevant on a
standalone basis because these amounts are already reflected in the fair value changes. We have elected to present these
items in a single line on our consolidated statements of operations. The residual difference shown on our consolidated
statements of operations in the line item “Change in net assets related to consolidated VIEs” represents our beneficial
interest in the VIEs.
We separately present the assets and liabilities of our consolidated VIEs as individual line items on our
consolidated balance sheets. The liabilities of our consolidated VIEs consist solely of obligations to the bondholders of
the related CMBS trusts, and are thus presented as a single line item entitled “VIE liabilities.” The assets of our
consolidated VIEs consist principally of loans, but at times, also include foreclosed loans which have been temporarily
converted into real estate owned (“REO”). These assets in the aggregate are likewise presented as a single line item
entitled “VIE assets.”
Loans comprise the vast majority of our VIE assets and are carried at fair value due to the election of the fair
value option. When an asset becomes REO, it is due to nonperformance of the loan. Because the loan is already at fair
value, the carrying value of an REO asset is also initially at fair value. Furthermore, when we consolidate a CMBS trust,
any existing REO would be consolidated at fair value. Once an asset becomes REO, its disposition time is relatively
short. As a result, the carrying value of an REO generally approximates fair value under GAAP.
In addition to sharing a similar measurement method as the loans in a CMBS trust, the VIE assets as a whole
can only be used to settle the obligations of the consolidated VIE. The assets of our VIEs are not individually accessible
by the bondholders, which creates inherent limitations from a valuation perspective. Also creating limitations from a
valuation perspective is our role as special servicer, which provides us very limited visibility, if any, into the performing
loans of a CMBS trust.
REO assets generally represent a very small percentage of the overall asset pool of a CMBS trust. In a new
issue CMBS trust there are no REO assets. We estimate that REO assets constitute approximately 4% of our
consolidated VIE assets, with the remaining 96% representing loans. However, it is important to note that the fair value
of our VIE assets is determined by reference to our VIE liabilities as permitted under Accounting Standards Update
(“ASU”) 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a
Consolidated Collateralized Financing Entity. In other words, our VIE liabilities are more reliably measurable than the
VIE assets, resulting in our current measurement methodology which utilizes this value to determine the fair value of our
VIE assets as a whole. As a result, these percentages are not necessarily indicative of the relative fair values of each of
these asset categories if the assets were to be valued individually.
Due to our accounting policy election under ASU 2014-13, separately presenting two different asset categories
would result in an arbitrary assignment of value to each, with one asset category representing a residual amount, as
opposed to its fair value. However, as a pool, the fair value of the assets in total is equal to the fair value of the
liabilities.
For these reasons, the assets of our VIEs are presented in the aggregate.
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.
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We have elected the fair value option for eligible financial assets and liabilities of our consolidated VIEs, loans
held-for-sale originated by the Investing and Servicing Segment’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 the Investing and Servicing Segment’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.
Fair Value Measurements
We measure our mortgage-backed securities, derivative assets and liabilities, domestic servicing rights
intangible asset and any assets or liabilities where we have elected the fair value option at fair value. When actively
quoted observable prices are not available, we either use implied pricing from similar assets and liabilities or valuation
models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity, credit, market
and/or other risk factors.
As discussed above, we measure the assets and liabilities of consolidated VIEs at fair value pursuant to our
election of the fair value option. The VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there
is no active management of the underlying assets. In determining the fair value of the assets and liabilities of the VIE, we
maximize the use of observable inputs over unobservable inputs. We also acknowledge that our principal market for
selling CMBS assets is the securitization market where the market participant is considered to be a CMBS trust or a
collateralized debt obligation (“CDO”). This methodology results in the fair value of the assets of a static CMBS trust
being equal to the fair value of its liabilities. Refer to Note 20 for further discussion regarding our fair value
measurements.
Business Combinations
Under ASC 805, Business Combinations, the acquirer in a business combination must recognize, with certain
exceptions, the fair values of assets acquired, liabilities assumed, and non-controlling interests when the acquisition
constitutes a change in control of the acquired entity. As goodwill is calculated as a residual, all goodwill of the acquired
business, not just the acquirer’s share, is recognized under this “full goodwill” approach.
We also apply the provisions of ASC 805 in accounting for the acquisition of a controlling interest in a
previously unconsolidated entity. Such transactions are treated as a business combination achieved in stages, whereby
the acquirer remeasures its previously held equity interest in the acquiree at its acquisition date fair value and recognizes
the resulting gain or loss in earnings.
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.
Loans Held-for-Investment and Provision for Loan Losses
Loans that are held-for-investment are carried at cost, net of unamortized acquisition premiums or discounts,
loan fees, and origination 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 through the provision for loan losses 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. Actual losses, if any, could ultimately differ from these estimates.
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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 is 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.
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-collateral 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.
Loans Held-For-Sale
Our 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 apply the fair value option at origination or purchase.
The Investing and Servicing Segment’s conduit business originates fixed rate commercial mortgage loans for future sale
to multi-seller securitization trusts. We periodically enter into derivative financial instruments to hedge unpredictable
changes in fair value of this loan portfolio, including changes resulting from both interest rates and credit quality.
Because these derivatives are not designated, changes in their fair value are recorded in earnings. In order to best reflect
the results of the hedged loan portfolio in earnings, we have elected the fair value option for these loans. As a result,
changes in the fair value of the loans are also recorded in earnings.
Investment Securities
We designate investment 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 where we have not elected
to apply the fair value option 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
where we have not elected the fair value option are reported as a component of accumulated other comprehensive
income (loss) (“AOCI”) in stockholders’ equity.
When the estimated fair value of a security for which we have not elected the fair value option is less than its
amortized cost, we consider whether there is 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 do not 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 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 do not 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 earnings, and the portion of the loss related to other
factors, such as changes in interest rates, continues to be recognized in AOCI. 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
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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.
Properties
Our properties consist of commercial real estate properties held-for-investment and are recorded at cost, less
accumulated depreciation and impairments, if any. Properties consist primarily of land, buildings and improvements.
Land is not depreciated, and buildings and improvements are depreciated on a straight-line basis over their estimated
useful lives. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments are
capitalized and depreciated on a straight-line basis over their estimated useful lives. We review properties for
impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be
recoverable. Recoverability is determined by comparing the carrying amount of the property to the undiscounted future
net cash flows it is expected to generate. If such carrying amount exceeds the expected undiscounted future net cash
flows, we adjust the carrying amount of the property to its estimated fair value.
Servicing Rights Intangibles
Our identifiable intangible assets include special servicing rights for both our domestic and European servicing
operations. The fair value measurement method has been elected for measurement of our domestic servicing asset.
Election of this method is necessary to conform to our election of the fair value option for measuring the assets and
liabilities of the VIEs consolidated pursuant to ASC 810. The amortization method has been elected for our European
servicing asset. This asset is amortized in proportion to and over the period of estimated net servicing income, and is
tested for impairment whenever events or changes in circumstances suggest that its carrying value may not be
recoverable.
For purposes of testing our European servicing intangible for impairment, we compare the fair value of the
servicing intangible with its carrying value. The estimated fair value of the intangible is determined using discounted
cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows.
If the carrying value of the intangible exceeds its fair value, the intangible is considered impaired and an impairment loss
is recognized for the amount by which carrying value exceeds fair value.
Lease Intangibles
In connection with the Ireland portfolio acquisition, Woodstar portfolio acquisition (refer to Note 3 for further
discussion) and certain properties acquired from CMBS trusts, we recognized intangible lease assets and liabilities
associated with certain noncancelable operating leases of the acquired properties. These intangible lease assets and
liabilities include in-place lease intangible assets, favorable lease intangible assets and unfavorable lease liabilities. In-
place lease intangible assets reflect the acquired benefit of purchasing properties with in-place leases and are measured
based on estimates of direct costs associated with leasing the property and lost rental income during projected lease-up
and free rent periods, both of which are avoided due to the presence of in-place leases at the acquisition date. Favorable
and unfavorable lease intangible assets and liabilities reflect the terms of in-place tenant leases being either favorable or
unfavorable relative to market terms at the acquisition date. The estimated fair values of our favorable and unfavorable
lease assets and liabilities at the respective acquisition dates represent the discounted cash flow differential between the
contractual cash flows of such leases and the estimated cash flows that comparable leases at market terms would
generate. Our intangible lease assets and liabilities are recognized within intangible assets and other liabilities,
respectively, in our consolidated balance sheet. Our in-place lease intangible assets are amortized to amortization
expense while our favorable and unfavorable lease intangible assets and liabilities are amortized to rental income, except
in the case of our unfavorable lease liability associated with office space occupied by the Company, which is amortized
to general and administrative expense. Both our favorable and unfavorable lease intangible assets and liabilities are
amortized over the remaining noncancelable term of the respective leases on a straight-line basis.
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Investment 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 in which our
interest is so minor that we have virtually no 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.
Goodwill
Goodwill is not amortized, but rather tested for impairment annually or more frequently if events or changes in
circumstances indicate potential impairment. Goodwill at December 31, 2015 and 2014 represents the excess of the
consideration paid in connection with the acquisition of LNR over the fair value of net assets acquired.
In testing goodwill for impairment, we follow ASC 350, Intangibles—Goodwill and Other, which permits a
qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying
value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of
a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist for the
reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the
reporting unit is less than its carrying value including goodwill, we compare the fair value of that reporting unit with its
carrying value, including goodwill. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered
impaired with the impairment loss equal to the amount by which the carrying value of the goodwill exceeds the implied
fair value of that goodwill.
Derivative Instruments and Hedging Activities
We record all derivatives on our consolidated balance sheets at fair value. The accounting for changes in the fair
value of derivatives depends on 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.
Generally, our derivatives are subject to master netting arrangements, though we elect to present all derivative
assets and liabilities on a gross basis within our consolidated balance sheets.
Convertible Senior Notes
ASC 470, Debt, requires the liability and equity components of convertible debt instruments that may be settled
in cash upon conversion 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
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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 equity components of the convertible
senior notes have been reflected within additional paid-in capital in our consolidated balance sheets. The resulting debt
discount is being amortized over the period during which the convertible senior notes are expected to be outstanding (the
maturity date) as additional non-cash interest expense.
Upon repurchase of convertible debt instruments, ASC 470-20 requires the issuer to allocate total settlement
consideration, inclusive of transaction costs, amongst the liability and equity components of the instrument based on the
fair value of the liability component immediately prior to repurchase. The difference between the settlement
consideration allocated to the liability component and the net carrying value of the liability component, including
unamortized debt issuance costs, is recognized as gain (loss) on extinguishment of debt in our consolidated statements of
operations. The remaining settlement consideration allocated to the equity component is recognized as a reduction of
additional paid-in capital in our consolidated balance sheets.
Revenue Recognition
Interest Income
Interest income on performing loans and financial instruments is accrued based on the outstanding principal
amount and contractual terms of the instrument. For loans where we do not elect the fair value option, 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 the fair value option, origination fees and direct loan costs are recorded directly
in income and are not deferred. Discounts or premiums associated with the purchase of non-performing 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. For loans and CMBS in which we expect
to collect all contractual amounts due, we do not adjust the projected cash flows to reflect anticipated credit losses.
For the majority of our RMBS, which have been purchased at a discount to par value, we do 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, which is referred to as non-accretable yield. This amount of
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.
Upon the sale of loans or securities which are not accounted for pursuant to the fair value option, the excess (or
deficiency) of net proceeds over the net carrying value of such loans or securities is recognized as a realized gain/loss.
Servicing Fees
We typically seek to be the special servicer on CMBS transactions in which we invest. When we are appointed
to serve in this capacity, we earn special servicing fees from the related activities performed, which consist primarily of
overseeing the workout of under-performing and non-performing loans underlying the CMBS transactions. These fees
are recognized in income in the period in which the services are performed and the revenue recognition criteria have
been met.
Rental Income
Rental income is recognized when earned from tenants. For leases that provide rent concessions or fixed
escalations over the lease term, rental income is recognized on a straight-line basis over the noncancelable term of the
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lease. In net lease arrangements, costs reimbursable from tenants are recognized in rental income in the period in which
the related expenses are incurred as we are generally the primary obligor with respect to purchasing goods and services
for property operations.
Securitizations, Sales and Financing Arrangements
We periodically sell our financial assets, such as commercial mortgage loans, CMBS, RMBS 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 in accordance with 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 the assets by allocating the carrying value of the sold asset between the sold asset
and the interests retained based on their relative 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 sold asset. If the sold asset is being accounted
for pursuant to the fair value option, there is no gain or loss.
Deferred Financing Costs
Costs incurred in connection with debt issuance are capitalized and amortized to interest expense over the terms
of the respective debt agreements.
Acquisition and Investment Pursuit Costs
Costs incurred in connection with acquiring properties, investments, loans and businesses, as well as in pursuing
unsuccessful acquisitions and investments, are recorded within acquisition and investment pursuit costs in our
consolidated statements of operations when incurred. These costs reflect services performed by third parties and
principally include due diligence and legal services.
Share-based Payments
The fair value of the restricted stock (“RSAs”) or restricted stock units (“RSUs”) granted is recorded as 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.
Foreign Currency Translation
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 average exchange
rates for each reporting period. The effects of translating the assets, liabilities and income of our foreign investments held
by entities with a U.S. dollar functional currency are included in foreign currency gain (loss) in the consolidated
statements of operations or other comprehensive income (“OCI”) for securities available-for-sale for which the fair value
option has not been elected. The effects of translating the assets, liabilities and income of our foreign investments held
by entities with functional currencies other than the U.S. dollar are included in OCI. Realized foreign currency gains and
losses and changes in the value of foreign currency denominated monetary assets and liabilities are included in the
determination of net income and are reported as foreign currency gain (loss) in our consolidated statements of operations.
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Income Taxes
The Company has elected to be qualified and taxed as a REIT under the Code. The Company is subject to
federal income taxation at corporate rates on its REIT taxable income, however, the Company is allowed a deduction for
the amount of dividends paid to its stockholders, thereby subjecting the distributed net income of the Company to
taxation at the stockholder level only. The Company intends to continue to operate in a manner consistent with and to
elect to be treated as a REIT for tax purposes.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. The Company evaluates
the realizability of its deferred tax assets and recognizes a valuation allowance if, based on the available evidence, both
positive and negative, it is more likely than not that some portion or all of its deferred tax assets will not be realized.
When evaluating the realizability of its deferred tax assets, the Company considers, among other matters, estimates of
expected future taxable income, nature of current and cumulative losses, existing and projected book/tax differences, tax
planning strategies available, and the general and industry specific economic outlook. This realizability analysis is
inherently subjective, as it requires the Company to forecast its business and general economic environment in future
periods.
We recognize tax positions in the financial statements only when it is more likely than not that the position will
be sustained upon examination of the relevant taxing authority, based on the technical merits of the tax position. A tax
position is measured at the largest amount of benefit that will more likely than not be realized upon settlement. A
liability is established for the differences between positions taken in a tax return and amounts recognized in the financial
statements and no portion of the benefit is recognized in our consolidated statements of operations. We report interest
and penalties, if any, related to income tax matters as a component of income tax expense.
Discontinued Operations
On January 31, 2014, we completed the spin-off of our former SFR segment to our stockholders as discussed in
Note 3. In accordance with ASC 205, Presentation of Financial Statements, the results of the SFR segment are
presented within discontinued operations in our consolidated statements of operations for the years ended December 31,
2014 and 2013.
Earnings Per Share
We present both basic and diluted earnings per share (“EPS”) amounts in our financial statements. Basic EPS
excludes dilution and is computed by dividing income available to common stockholders by the weighted-average
number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that
could occur from (i) our share-based compensation, consisting of unvested RSUs and RSAs, (ii) shares contingently
issuable to our Manager, and (iii) the “in-the-money” conversion options associated with our outstanding convertible
senior notes (see further discussion in Note 18). Potential dilutive shares are excluded from the calculation if they have
an anti-dilutive effect in the period.
Nearly all of the Company’s unvested RSUs and RSAs contain rights to receive non-forfeitable dividends and
thus are participating securities. Due to the existence of these participating securities, the two-class method of
computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method,
undistributed earnings are reallocated between shares of common stock and participating securities. For the years ended
December 31, 2015, 2014 and 2013, the two-class method resulted in the most dilutive EPS calculation.
Concentration of Credit Risk
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash
investments, CMBS, RMBS, 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
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our investment portfolio by evaluating exposure to various counterparties, markets, underlying property types, contract
terms, tenant mix and other credit metrics.
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
Certain prior period amounts have been reclassified to conform to our current period presentation. In that
regard, we have reclassified $39.9 million of commercial real estate properties from other assets to properties, net on our
consolidated balance sheet as of December 31, 2014. Additionally, revenues of $9.8 million previously reported in other
revenues have been reclassified to rental income in our consolidated statement of operations for the year ended
December 31, 2014. Expenses of $5.9 million previously reported in other expense have been reclassified to costs of
rental operations in our consolidated statement of operations for the year ended December 31, 2014.
Recent Accounting Developments
On February 18, 2015, the Financial Accounting Standards Board (“FASB”) issued ASU 2015-02,
Consolidation (Topic 810) – Amendments to the Consolidation Analysis, which amends the criteria for determining
which entities are considered VIEs, amends the criteria for determining if a service provider possesses a variable interest
in a VIE and ends the deferral granted to investment companies for application of the VIE consolidation model. The
ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2015. We are in the
process of assessing what impact this ASU will have on the Company.
On April 7, 2015, the FASB issued ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30), which
requires entities to present debt issuance costs as a direct deduction from the carrying value of the related debt liability,
consistent with debt discounts, rather than as a separate deferred asset as the previous guidance required. The ASU is
effective for annual periods, and interim periods therein, beginning after December 15, 2015. 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. At
issuance, the ASU was effective for the first interim or annual period beginning after December 15, 2016. On August 12,
2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which
delayed the effective date of ASU 2014-09 by one year, resulting in the ASU becoming effective for the first interim or
annual period beginning after December 15, 2017. Early application, which was not permissible under the initial
effectiveness timeline, is now permissible though no earlier than as of the first interim or annual period beginning after
December 15, 2016. We do not expect the application of this ASU to materially impact the Company.
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On September 25, 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805) – Simplifying the
Accounting for Measurement-Period Adjustments, which requires that the acquirer in a business combination recognize
any measurement period adjustments in the period in which the adjustments are identified rather than retrospectively as
of the acquisition date, as current GAAP dictates. The ASU shall be applied prospectively and is effective for annual
periods, and interim periods therein, beginning after December 15, 2015. We intend to recognize any future
measurement period adjustments in the period identified in accordance with this ASU.
On January 5, 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) –
Recognition and Measurement of Financial Assets and Financial Liabilities, which impacts the accounting for equity
investments, financial liabilities under the fair value option, and disclosure requirements for financial instruments. The
ASU shall be applied prospectively and is effective for annual periods, and interim periods therein, beginning after
December 15, 2017. Early application is not permitted. We are in the process of assessing what impact this ASU will
have on the Company.
3. Acquisitions and Divestitures
Woodstar Portfolio Acquisition
During the three months ended December 31, 2015, we acquired 18 of the 32 affordable housing communities
which comprise our “Woodstar Portfolio.” The Woodstar Portfolio in its entirety is comprised of 8,948 units
concentrated primarily in the Tampa, Orlando and West Palm Beach metropolitan areas and are 98% occupied.
The 18 affordable housing communities acquired during 2015 comprise 5,238 units for an aggregate acquisition
price of $324.0 million. Financing of $257.6 million was utilized to fund these acquisitions which includes third party
debt of $248.6 million and assumed state sponsored financing of $9.0 million. Refer to Note 10 for further discussion of
these facilities.
For the period from their respective acquisition dates through December 31, 2015, we have recognized revenues
of $6.2 million and a net loss of $4.2 million related to the Woodstar Portfolio. Such net loss includes (i) one-time
acquisition-related costs, such as legal and due diligence costs, of approximately $3.2 million, and (ii) depreciation and
amortization expense of $4.5 million. No goodwill was recognized in connection with the Woodstar Portfolio
acquisition as the purchase price equaled the fair value of the net assets acquired.
Of the remaining 14 properties in the Woodstar Portfolio not acquired during 2015, 12 properties were acquired
prior to February 25, 2016, with the remaining two properties expected to close during the first quarter of 2016, subject
to customary closing conditions. As of February 25, 2016, the initial accounting for acquisitions occurring after
December 31, 2015 was not sufficiently complete to allow for inclusion of the ASC 805 disclosures herein. Refer to
Note 25 for further discussion.
Investing and Servicing Segment Property Portfolio
During the year ended December 31, 2015, our Investing and Servicing Segment acquired 14 U.S. commercial
real estate properties from CMBS trusts for $138.7 million (the “REO Portfolio”), two of which, totaling $13.6 million,
were acquired as non-performing loans and subsequently converted to properties through foreclosure. When these
properties are acquired from CMBS trusts that are consolidated as VIEs on our balance sheet, these acquisitions are
reflected as repayment of debt of consolidated VIEs in our consolidated statement of cash flows.
For the period from their respective acquisition dates through December 31, 2015, we have recognized revenues
of $4.9 million and a net loss of $1.6 million related to the REO Portfolio. Such net loss includes (i) one-time
acquisition-related costs, such as legal and due diligence costs, of approximately $1.6 million, and (ii) depreciation and
amortization expense of $2.1 million. No goodwill was recognized in connection with the REO Portfolio acquisitions as
the purchase price equaled the fair value of the net assets acquired.
108
Ireland Portfolio Acquisition
In May 2015, we acquired 11 net leased fully occupied office properties and one multi-family property all
located in Dublin, Ireland. In July 2015, we acquired one additional fully occupied net leased office property also
located in Dublin. Collectively, these 13 properties comprise our “Ireland Portfolio”.
The aggregate cash purchase price for the Ireland Portfolio, which collectively comprises approximately
600,000 square feet, was $217.7 million. In connection with the acquisition, we extinguished $283.0 million of debt
assumed, and obtained new financings totaling $328.6 million from the Ireland Portfolio Mortgage (as defined in Note
10). All properties within the Ireland Portfolio were acquired from entities controlled by the same third party investment
fund.
For the period from their respective acquisition dates through December 31, 2015, we have recognized revenues
of $19.2 million and net income of $2.4 million related to the Ireland Portfolio. Such net income includes (i) one-time
acquisition-related costs, such as legal and due diligence costs, of approximately $3.4 million, (ii) depreciation and
amortization expense of $10.6 million and (iii) net derivative gains of $5.1 million associated with our currency and debt
interest rate hedging activities. No goodwill was recognized in connection with the Ireland Portfolio acquisition as the
purchase price equaled the fair value of the net assets acquired.
LNR Acquisition
On April 19, 2013, we acquired the equity of LNR for $730.5 million. The resulting purchase price allocation
was finalized as of December 31, 2013 and resulted in goodwill recognized of $140.4 million.
Purchase Price Allocations of Acquisitions
We applied the provisions of ASC 805, Business Combinations, in accounting for our acquisitions of the
Woodstar Portfolio, the REO Portfolio, the Ireland Portfolio and LNR. In doing so, we have recorded all identifiable
assets acquired and liabilities assumed at fair value as of the respective acquisition dates. These amounts for the
Woodstar Portfolio, REO Portfolio and Ireland Portfolio are provisional and may be adjusted during the measurement
period, which expires no later than one year from the acquisition dates, if new information is obtained that, if known,
would have affected the amounts recognized as of the acquisition dates.
109
The following table summarizes the identified assets acquired and liabilities assumed at the respective
acquisition dates (amounts in thousands):
Woodstar
Portfolio
Portfolio
2015
REO
Ireland
Portfolio
2013
LNR
Assets acquired:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $
—
—
—
—
— $
—
—
—
—
339,040
11,337
—
—
—
652
351,029
128,218
19,381
—
—
—
4,973
152,572
— $ 143,771
24,413
8,015
256,502
314,471
—
276,989
63,297
3,103
1,315
60,484
1,152,360
10,829
—
—
—
445,369
59,529
—
—
—
2,508
518,235
Liabilities assumed:
Accounts payable, accrued expenses and other liabilities . . . . . . . . .
123,548
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
354
Secured financing agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
438,377
Total liabilities assumed. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
562,279
—
Non-controlling interests . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 324,017 $ 138,670 $ 217,673 $ 590,081
17,552
—
283,010
300,562
—
18,030
—
8,982
27,012
—
6,998
—
—
6,998
6,904
Goodwill represents the excess of the purchase price over the fair value of the underlying net tangible and
identifiable intangible assets acquired and liabilities assumed. This determination of goodwill is as follows (amounts in
thousands):
Woodstar
Portfolio
Purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 324,017
Fair value of net assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
324,017
— $
REO
Portfolio
Ireland
Portfolio
$ 138,670 (1) $ 217,673
138,670
217,673
—
$
LNR
$ 730,518
590,081
— $ 140,437
(1)
Includes $125.3 million purchased from consolidated CMBS trusts which is reflected as repayment of debt of
consolidated VIEs in our consolidated statement of cash flows.
Pro-Forma Operating Data (Unaudited)
The unaudited pro-forma revenues and net income attributable to the Company for the years ended December
31, 2015 and 2014, assuming the 18 properties acquired within the Woodstar Portfolio and all the properties within the
REO Portfolio and the Ireland Portfolio were acquired on January 1, 2014, are as follows (amounts in thousands, except
per share amounts):
(Unaudited)
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Net income attributable to STWD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share - Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income per share - Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014
2015
802,763 $ 801,536
472,170
457,891
2.17
1.95
2.13
1.94
For the year ended December 31,
110
Pro-forma net income was adjusted to include the following estimated incremental management fees the
combined entity would have incurred (amounts in thousands):
(Unaudited)
Management fee expense addition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
2014
3,990 $
6,975
For the year ended December 31,
SFR Spin-off
On January 31, 2014, we completed the spin-off of our former SFR segment to our stockholders. The real estate
investment trust, Starwood Waypoint Residential Trust (“SWAY”), was listed on the New York Stock Exchange
(“NYSE”) and traded under the ticker symbol “SWAY” following the spin-off until its merger with Colony American
Homes in January 2016. 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. The results of operations for the SFR segment are presented within discontinued operations in our consolidated
statements of operations for the years ended December 31, 2014 and 2013. 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 discontinued operations
prior to the spin-off (amounts in thousands):
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before other income and income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
For the year ended December 31,
2014
2013
2015
3,876 $ 16,200
— $
—
6,369
— (2,493) (33,481)
13,882
942
—
— (1,551) (19,599)
—
(195)
—
— $ (1,551) $ (19,794)
49,681 (1)
(1)
Costs and expenses for the year ended December 31, 2013 include interest expense of $6.5 million and
management fees of $5.2 million included within corporate overhead in our presentation of segment data in
Note 23.
4. Restricted Cash
A summary of our restricted cash as of December 31, 2015 and 2014 is as follows (amounts in thousands):
Cash collateral for derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Cash collateral for performance obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Funds held on behalf of borrowers and tenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other restricted cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
2015
16,497
—
3,786
2,786
23,069
2014
$ 34,397
4,431
9,486
390
$ 48,704
For the year ended December 31,
111
5. 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 December 31, 2015 and 2014 (amounts in thousands):
Carrying
Value
Face
Amount
December 31, 2015
First mortgages (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,723,852 $ 4,776,576
416,713
Subordinated mortgages (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mezzanine loans (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
850,024
6,043,313
Total loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . .
203,710
Loans held-for-sale, fair value option elected . . . . . . . . . . . . . . . . .
88,000
Loans transferred as secured borrowings . . . . . . . . . . . . . . . . . . . .
6,335,023
Total gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Loan loss allowance (loans held-for-investment) . . . . . . . . . . . . .
Total net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,263,517 $ 6,335,023
392,563
862,693
5,979,108
203,865
86,573
6,269,546
(6,029)
Weighted
Weighted Average Life
(“WAL”)
Average
(years)(3)
Coupon
2.7
3.4
2.5
6.0 %
8.5 %
9.9 %
4.9 %
6.1 %
9.8
2.4
December 31, 2014
First mortgages (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,538,961 $ 4,609,526
374,859
Subordinated mortgages (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
889,948
Mezzanine loans (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,874,333
Total loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . .
390,342
Loans held-for-sale, fair value option elected . . . . . . . . . . . . . . . .
Loans transferred as secured borrowings . . . . . . . . . . . . . . . . . . . .
129,570
6,394,245
Total gross loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Loan loss allowance (loans held-for-investment) . . . . . . . . . . . . .
Total net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,300,285 $ 6,394,245
345,091
901,217
5,785,269
391,620
129,427
6,306,316
(6,031)
6.2 %
8.1 %
10.4 %
4.5 %
5.4 %
3.5
3.9
2.6
8.3
2.5
(1)
(2)
(3)
First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a
whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. The application
of this methodology resulted in mezzanine loans with carrying values of $930.0 million and $704.2 million
being classified as first mortgages as of December 31, 2015 and 2014, respectively.
Subordinated mortgages include B-Notes and junior participation 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.
Represents the WAL of each respective group of loans as of the respective balance sheet date. The WAL of
each individual loan is calculated using amounts and timing of future principal payments, as projected at
origination.
112
As of December 31, 2015, approximately $5.1 billion, or 84.5%, of our loans held for-investment were variable
rate and paid interest principally at LIBOR plus a weighted-average spread of 6.0%. The following table summarizes our
investments in floating rate loans (amounts in thousands):
December 31, 2015
December 31, 2014
Carrying
Value
Index
$ 138,576
One-month LIBOR USD . . . . . . . . . . . . . . . . . . . . . . .
Three-month LIBOR GBP . . . . . . . . . . . . . . . . . . . . . .
440,222
LIBOR floor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.15 - 3.00 % (1) 4,237,947 0.15 - 3.00 % (1) 3,889,412
$ 4,468,210
Carrying
Value
$ 438,641
375,467
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.4295 %
0.5904 %
0.1713 %
0.5640 %
$ 5,052,055
Base Rate
Base Rate
(1) The weighted-average LIBOR floor was 0.31% and 0.35% as of December 31, 2015 and 2014, respectively.
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.
113
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
1
2
3
4
5
Characteristics
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—LTV does not exceed 65%. The loan has structural features that enhance the credit
profile.
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.
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%.
Sponsor capability and financial condition—Sponsor credit history includes missed payments, past due
payment, and maturity extensions. Management team is capable but thin.
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%.
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%.
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
114
As of December 31, 2015, the risk ratings for loans subject to our rating system, which 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):
Risk Rating
Category
1 . . . . . . . . . . . . . $
2 . . . . . . . . . . . . .
3 . . . . . . . . . . . . .
4 . . . . . . . . . . . . .
5 . . . . . . . . . . . . .
N/A . . . . . . . . . .
Balance Sheet Classification
Loans Held-For-Investment
Subordinated Mezzanine
Mortgages
Loans
Loans
Cost
Transferred
Recovery Loans Held- As Secured
Borrowings
Loans
For-Sale
% of
Total
Loans
Total
First
Mortgages
664 $
— $
— $
496,372
3,979,247
247,569
—
—
88,857
270,435
33,271
—
—
90,449
651,204
121,040
—
—
$ 4,723,852 $ 392,563 $ 862,693 $
— $
—
—
—
—
203,865
664
— $
675,678
—
4,987,459
—
401,880
—
—
—
203,865
—
— $ 203,865 $ 86,573 $ 6,269,546
— $
—
86,573
—
—
—
— %
10.8 %
79.6 %
6.4 %
— %
3.2 %
100.0 %
As of December 31, 2014, the risk ratings for loans subject to our rating system by class of loan were as follows
(amounts in thousands):
Risk Rating
Category
1 . . . . . . . . . . . . $
2 . . . . . . . . . . . .
3 . . . . . . . . . . . .
4 . . . . . . . . . . . .
5 . . . . . . . . . . . .
N/A . . . . . . . . .
Balance Sheet Classification
Loans Held-For-Investment
First
Mortgages
Subordinated Mezzanine
Mortgages
Loans
Cost
Recovery Loans Held- As Secured
Borrowings
Loans
For-Sale
% of
Total
Loans
Total
Loans
Transferred
— $
— $
822 $
822
523,572
5,092,243
248,793
45,974
394,912
$ 4,535,669 $ 345,091 $ 901,217 $ 3,292 $ 391,620 $ 129,427 $ 6,306,316
— $
—
129,427
—
—
—
— $
—
—
—
—
391,620
— $
—
—
—
—
3,292
258,822
4,120,562
109,489
45,974
—
116,168
196,476
32,447
—
—
148,582
645,778
106,857
—
—
— %
8.3 %
80.7 %
4.0 %
0.7 %
6.3 %
100.0 %
The Lending Segment held a $63.2 million mezzanine loan on a luxury condominium project located in New
York, of which $30.9 million was greater than 90 days past due as of December 31, 2015. In January 2016, the
mezzanine loan was amended resulting in (i) the borrower providing additional capital, (ii) increased fees charged to the
borrower and (iii) a 12-month extension of the maturity date. After completing our impairment evaluation process, we
concluded that no impairment charges were required on this loan or any other individual loans held-for-investment as of
December 31, 2015 or 2014, as we expect to collect all outstanding principal and interest. During the year ended
December 31, 2015, the Investing and Servicing Segment received full repayments of its basis in the two remaining
loans held-for-investment which were greater than 90 days past due and were acquired as part of the acquisition of LNR
in April 2013. None of our held-for-sale loans where we have elected the fair value option were 90 days or greater past
due.
115
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.” The
following table presents the activity in our allowance for loan losses (amounts in thousands):
For the year ended December 31,
2013
2014
2015
Allowance for loan losses at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2,061
3,984 $
6,031 $
Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,923
2,047
(2)
Charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
Recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
—
—
3,984
Allowance for loan losses at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
6,031 $
6,029 $
Recorded investment in loans related to the allowance for loan loss . . . . . . . . . . . . $ 401,880 $ 294,767 $ 265,640
The activity in our loan portfolio was as follows (amounts in thousands):
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions/originations/additional funding . . . . . . . . . . . . . . . . . . . . .
Capitalized interest (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Basis of loans sold (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan maturities/principal repayments . . . . . . . . . . . . . . . . . . . . . . . . . . .
Discount accretion/premium amortization . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unrealized foreign currency remeasurement loss . . . . . . . . . . . . . . . . . .
Change in loan loss allowance, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capitalized cost written off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to/from other asset classifications . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
2015
2013
For the year ended December 31,
2014
6,300,285 $ 4,750,804 $ 3,000,335
4,161,368
4,820,464
4,223,178
70,675
19,599
49,611
(1,762,778)
(2,171,300)
(2,732,501)
(770,313)
(1,244,445)
(1,647,852)
44,643
21,287
36,862
43,849
70,420
64,320
17,541
(47,392)
(51,278)
(1,923)
(2,047)
2
(1,517)
—
—
—
52,883
(174)
6,263,517 $ 6,300,285 $ 4,750,804
(1) Represents accrued interest income on loans whose terms do not require current payment of interest.
(2) See Note 12 for additional disclosure on these transactions.
116
6. Investment Securities
Investment securities were comprised of the following as of December 31, 2015 and 2014 (amounts in
thousands):
RMBS, available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Single-borrower CMBS, available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS, fair value option (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held-to-maturity (“HTM”) securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity security, fair value option . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtotal—Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIE eliminations (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
$
Carrying Value as of December 31,
2015
176,224
—
1,038,200
321,244
14,498
1,550,166
(825,219)
724,947
$
$
2014
207,053
100,349
753,553
441,995
15,120
1,518,070
(519,822)
998,248
(1)
Certain fair value option CMBS are eliminated in consolidation against VIE liabilities pursuant to ASC 810.
Purchases, sales and principal collections for all investment securities were as follows (amounts in thousands):
Available-for-sale
RMBS
CMBS
CMBS, fair
value option Securities Security
Equity
HTM
Total
Year Ended December 31, 2015
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal collections . . . . . . . . . . . . . . . . . . . . . .
Year Ended December 31, 2014
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal collections . . . . . . . . . . . . . . . . . . . . . .
— $
—
35,244
— $
68,134
53,126
— $ 14,653 $ 167,365 $
—
92,018
—
292,587
6,410
8,720
— $ 120,122 $ 69,300 $
—
1,121
32,032
3
—
45
— $ 182,018
6,410
—
428,569
—
— $ 189,422
100,166
—
54,295
—
Year Ended December 31, 2013
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 20,090 $
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal collections . . . . . . . . . . . . . . . . . . . . . .
30,964
59,957
1,889 $ 90,518 $ 367,346 $
413,323
10,460
12,372
—
—
—
— $ 479,843
463,428
70,417
6,769
—
RMBS and Single-borrower CMBS, Available-for-Sale
The Company classified all of its RMBS and any CMBS investments where the fair value option has not been
elected, or that are not HTM, as available-for-sale as of December 31, 2015 and 2014. These RMBS and CMBS are
reported at fair value in the balance sheet with changes in fair value recorded in AOCI.
117
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 December 31, 2015 and 2014 (amounts in
thousands):
Purchase
Amortized
Cost
Credit
OTTI
Recorded
Unrealized Gains or (Losses)
Recognized in AOCI
Gross
Gross
Net
Amortized Non-Credit Unrealized Unrealized Fair Value
Adjustment
Gains
OTTI
Losses
Cost
Fair Value
December 31, 2015
RMBS . . . . . . . . . . . . . . $ 149,102 $ (10,185) $ 138,917 $
Single-borrower CMBS
—
—
—
(340) $ 37,647 $
—
—
Total . . . . . . . . . . . . . $ 149,102 $ (10,185) $ 138,917 $
(340) $ 37,647 $
December 31, 2014
RMBS . . . . . . . . . . . . . . $ 163,733 $ (10,197) $ 153,536 $
Single-borrower CMBS
93,685
93,685
—
(197) $ 53,714 $
—
6,664
Total . . . . . . . . . . . . . $ 257,418 $ (10,197) $ 247,221 $
(197) $ 60,378 $
— $ 37,307 $ 176,224
—
—
— $ 37,307 $ 176,224
—
— $ 53,517 $ 207,053
6,664 100,349
—
— $ 60,181 $ 307,402
Weighted Average
Coupon (1)
Weighted Average
Rating
WAL
(Years) (2)
December 31, 2015
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Single-borrower CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2014
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Single-borrower CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1.3 %
— %
1.1 %
11.6 %
B−
—
B−
BB+
6.2
—
5.8
3.2
(1)
(2)
Calculated using the December 31, 2015 and 2014 one-month LIBOR rate of 0.430% and 0.171%, respectively,
for floating rate securities.
Represents the WAL of each respective group of securities as of the respective balance sheet date. The WAL of
each individual security is calculated using projected amounts and projected timing of future principal
payments.
As of December 31, 2015, there were no variable rate single-borrower CMBS. As of December 31, 2014, $0.2
million, or 0.2%, of the single-borrower CMBS were variable rate. As of December 31, 2015, $122.7 million, or 69.7%,
of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 0.43%. As of December 31,
2014, approximately $140.1 million, or 67.7%, of RMBS were variable rate and paid interest at LIBOR plus a weighted
average spread of 0.44%. 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 contains a reconciliation of aggregate principal balance to amortized cost for our RMBS
and single-borrower CMBS as of December 31, 2015 and 2014, excluding CMBS where we have elected the fair value
option (amounts in thousands):
Principal balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 233,976 $
Accretable yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-accretable difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortized cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,917 $
(68,345)
(26,714)
(95,059)
118
December 31, 2015
RMBS
CMBS
December 31, 2014
RMBS
CMBS
— $ 270,783 $ 93,685
—
(85,495)
—
—
(31,752)
—
—
—
(117,247)
— $ 153,536 $ 93,685
The principal balance of credit deteriorated RMBS was $199.0 million and $222.9 million as of December 31,
2015 and 2014, respectively. Accretable yield related to these securities totaled $57.7 million and $66.6 million as of
December 31, 2015 and 2014, respectively.
The following table discloses the changes to accretable yield and non-accretable difference for our RMBS
during the years ended December 31, 2015 and 2014 (amounts in thousands):
Non-Accretable
Balance as of January 1, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accretion of discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to/from non-accretable difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accretion of discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal write-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfer to/from non-accretable difference . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Accretable Yield Difference
70,196
—
(1,644)
—
(18,937)
—
(17,863)
31,752
—
(1,563)
—
—
—
(3,475)
26,714
101,046 $
(20,582)
—
—
(13,091)
259
17,863
85,495
(20,625)
—
—
—
—
3,475
68,345 $
Subject to certain limitations on durations, we have allocated an amount to invest in RMBS that cannot exceed
10% of our total assets excluding the Investing and Servicing VIEs. We have engaged a third party manager who
specializes in RMBS to execute the trading of RMBS, the cost of which was $0.9 million, $1.9 million and $2.4 million
for the years ended December 31, 2015, 2014 and 2013, respectively, which has been recorded as management fees in
the accompanying consolidated statements of operations.
The following table presents the gross unrealized losses and estimated fair value of any available-for-sale
securities that were in an unrealized loss position as of December 31, 2015 and 2014, and for which OTTIs (full or
partial) have not been recognized in earnings (amounts in thousands):
Estimated Fair Value
Unrealized Losses
Securities with a Securities with a Securities with a Securities with a
loss greater than
12 months
loss greater than
12 months
loss less than
12 months
loss less than
12 months
As of December 31, 2015
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Single-borrower CMBS . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
17,026 $
—
17,026 $
As of December 31, 2014
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Single-borrower CMBS . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
— $
—
— $
653 $
—
653 $
682 $
—
682 $
(180) $
—
(180) $
— $
—
— $
(160)
—
(160)
(197)
—
(197)
As of December 31, 2015 and 2014, there were five securities and one security, respectively, with unrealized
losses reflected in the table above. After evaluating these securities and recording adjustments for credit-related other-
than-temporary impairment, we concluded that the remaining unrealized losses reflected above were noncredit-related
and would be recovered from the securities’ estimated future cash flows. We considered a number of factors in reaching
this conclusion, including that we did not intend to sell the securities, it was not considered more likely than not that we
would be forced to sell the securities 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. Credit losses, which represent most of
119
the other-than-temporary impairments we record on securities, are 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. Significant judgment 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.
CMBS, Fair Value Option
As discussed in the “Fair Value Option” section of Note 2 herein, we elect the fair value option for the Investing
and Servicing Segment’s CMBS in an effort to eliminate accounting mismatches resulting from the current or potential
consolidation of securitization VIEs. As of December 31, 2015, the fair value and unpaid principal balance of CMBS
where we have elected the fair value option, before consolidation of securitization VIEs, were $1.0 billion and
$4.7 billion, respectively. The $1.0 billion fair value balance represents our economic interests in these assets. However,
as a result of our consolidation of securitization VIEs, the vast majority of this fair value ($825.2 million at
December 31, 2015) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option
CMBS. During the year ended December 31, 2015, we purchased $354.2 million of CMBS for which we elected the fair
value option. Due to our consolidation of securitization VIEs, $339.5 million of this amount is eliminated and reflected
primarily as repayment of debt of consolidated VIEs in our consolidated statement of cash flows.
As of December 31, 2015, none of our CMBS where we have elected the fair value option were variable rate.
The table below summarizes various attributes of our investment in fair value option CMBS as of December 31, 2015
and 2014 (amounts in thousands):
Weighted Average
Coupon
Weighted Average
Rating (1)
WAL
(Years) (2)
December 31, 2015
CMBS, fair value option . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2014
CMBS, fair value option . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3.9 %
3.9 %
CCC+
CCC−
7.4
7.7
(1)
(2)
As of December 31, 2015 and 2014, excludes $51.3 million and $41.7 million, respectively, in fair value option
CMBS that are not rated.
The WAL of each security is calculated based on the period of time over which we expect to receive principal
cash flows. Expected principal cash flows are based on contractual payments net of expected losses.
HTM Securities
The table below summarizes unrealized gains and losses of our investments in HTM securities as of
December 31, 2015 and 2014 (amounts in thousands):
Net Carrying Amount Gross Unrealized Gross Unrealized
Holding Gains
Holding Losses
(Amortized Cost)
Fair Value
December 31, 2015
Preferred interests . . . . . . . . . . . . . . . . . . . . . . . . . . . $
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
December 31, 2014
Preferred interests . . . . . . . . . . . . . . . . . . . . . . . . . . . $
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
19,386 $
301,858
321,244 $
307,465 $
134,530
441,995 $
— $
257
257 $
(595) $ 18,791
296,464
(5,651)
(6,246) $ 315,255
— $
—
— $
(1,366) $ 306,099
134,530
(1,366) $ 440,629
—
120
The table below summarizes the maturities of our HTM preferred equity interests in limited liability companies
that own commercial real estate and our HTM CMBS as of December 31, 2015 (amounts in thousands):
Preferred
Interests
CMBS
Total
Less than one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
One to three years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Three to five years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
— $ 134,264 $ 134,264
— 167,594 167,594
—
—
19,386
19,386
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,386 $ 301,858 $ 321,244
—
—
Equity Security, Fair Value Option
During 2012, we acquired 9,140,000 ordinary shares from a related-party 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. We have elected to report the investment using the fair value option 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 lags in reporting resulting from differences in the respective regulatory requirements. The fair value of
the investment remeasured in USD was $14.5 million and $15.1 million as of December 31, 2015 and 2014. As of
December 31, 2015, our shares represent an approximate 3% interest in SEREF.
7. Properties
Our properties include the Woodstar Portfolio, REO Portfolio and Ireland Portfolio as discussed in Note 3. The
below table summarizes our properties held as of December 31, 2015 and December 31, 2014 (dollar amounts in
thousands):
Property Segment
Depreciable Life
2015
2014
December 31,
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 – 7 years
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 – 40 years
Furniture & fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 – 5 years
—
$ 236,545 $
11,044
516,117
11,980
—
—
—
—
Investing and Servicing Segment
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 – 40 years
Building improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 – 10 years
Furniture & fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 – 5 years
Tenant improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 – 5 years
—
Properties, cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: accumulated depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
39,103
110,815
1,709
680
67
928,060
(8,835)
8,225
30,637
—
1,635
—
40,497
(643)
$ 919,225 $ 39,854
In March 2015, the Investing and Servicing Segment sold an operating property that we had previously acquired
from a CMBS trust. The sale resulted in a $17.8 million gain, which is included in gain on sale of investments and other
assets in our consolidated statement of operations for the year ended December 31, 2015.
121
8. Investment in Unconsolidated Entities
The below table summarizes our investments in unconsolidated entities as of December 31, 2015 and 2014
(dollar amounts in thousands):
Participation /
Ownership % (1)
Carrying value as of December 31,
2015
2014
Equity method:
Retail Fund (see Note 16) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investor entity which owns equity in an online real estate auction
33%
$
122,454
$
129,475
company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity interests in commercial real estate (2). . . . . . . . . . . . . . . . . . . .
Bridge loan venture (3) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Various . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50%
16% - 43%
N/A
25% - 50%
23,972
28,230
—
6,376
181,032
21,534
—
8,417
16,933
176,359
Cost method:
Investment funds which own equity in a loan servicer and other real
estate assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Various . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4% - 6%
0% - 3%
9,225
8,944
18,169
199,201
9,225
8,399
17,624
193,983
$
$
(1)
(2)
None of these investments are publicly traded and therefore quoted market prices are not available.
During the year ended December 31, 2015, we acquired $28.0 million of equity interests in limited liability
companies that own 10 office and student housing properties throughout the U.S.
(3)
During the year ended December 31, 2015, we sold our interest in the bridge loan venture at par.
There were no differences between the carrying value of our investment in unconsolidated entities and the
underlying equity in the net assets of the investees as of December 31, 2015.
122
9. Goodwill and Intangibles
Goodwill
Goodwill at December 31, 2015 and 2014 represents the excess of consideration transferred over the fair value
of net assets of LNR acquired on April 19, 2013. The goodwill recognized is attributable to value embedded in LNR’s
existing platform, which includes an international network of commercial real estate asset managers, work-out
specialists, underwriters and administrative support professionals as well as proprietary historical performance data on
commercial real estate assets. The tax deductible component of our goodwill as of April 19, 2013 was $149.9 million and
is deductible over 15 years. As discussed in Note 2, goodwill is tested for impairment at least annually. Based on our
qualitative assessment during the fourth quarter of 2015, we determined that it is not more likely than not that the fair
value of the Investing and Servicing Segment reporting unit to which the goodwill is attributed is less than its carrying
value including goodwill. Therefore, we concluded goodwill was not impaired.
Intangible Assets
Servicing Rights Intangibles
In connection with the LNR acquisition, we identified domestic and European servicing rights that existed at the
purchase date, based upon the expected future cash flows of the associated servicing contracts. All of our servicing fees
are specified by these Pooling and Servicing Agreements. At December 31, 2015 and 2014, the balance of the domestic
servicing intangible was net of $11.8 million and $46.1 million, respectively, that was eliminated in consolidation
pursuant to ASC 810 against VIE assets in connection with our consolidation of securitization VIEs. Before
VIE consolidation, as of December 31, 2015 and 2014, the domestic servicing intangible had a balance of $131.5 million
and $178.4 million, respectively, which represents our economic interest in this asset.
Lease Intangibles
In connection with our acquisitions of commercial real estate, we recognized in-place lease intangible assets and
favorable lease intangible assets associated with certain noncancelable operating leases of the acquired properties. The
weighted-average amortization periods for the in-place lease intangible assets and the favorable lease intangible assets
for the Ireland Portfolio at acquisition were 10.0 years and 11.2 years, respectively. The weighted-average amortization
period for the in-place lease intangible assets for the Woodstar Portfolio at acquisition was 0.5 years.
The following table summarizes our intangible assets, which are comprised of servicing rights intangibles and
lease intangibles, as of December 31, 2015 and 2014 (amounts in thousands):
As of December 31, 2015
As of December 31, 2014
Gross Carrying Accumulated Net Carrying Gross Carrying Accumulated Net Carrying
Value
Amortization
Value
Value
Amortization
Value
Domestic servicing rights, at fair
value . . . . . . . . . . . . . . . . . . . . . . . . $
European servicing rights (1) . . . . .
In-place lease intangible assets . . . .
Favorable lease intangible assets . .
Total net intangible assets . . . . . $
— $ 119,698 $
119,698 $
(28,967)
31,593
(8,898)
74,983
(942)
14,103
240,377 $ (38,807) $ 201,570 $
2,626
66,085
13,161
132,303 $
33,392
—
—
— $ 132,303
11,849
—
—
165,695 $ (21,543) $ 144,152
(21,543)
—
—
(1)
The fair value as of December 31, 2015 and 2014 was $5.3 million and $12.7 million, respectively.
123
The following table summarizes the activity within intangible assets for the year ended December 31, 2015
(amounts in thousands):
Domestic European In-place Lease Favorable Lease
Servicing
Servicing
Intangible
Assets
Intangible
Assets
Rights
Rights
Total
Balance as of January 1, 2015 . . . . . . . . . . . . . . . . . . $ 132,303 $ 11,849 $
Acquisition of Ireland Portfolio . . . . . . . . . . . . . . . . .
Acquisition of Woodstar Portfolio . . . . . . . . . . . . . . .
Acquisition of REO Portfolio (1) . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value due to changes in inputs and
assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2015 . . . . . . . . . . . . . . . $ 119,698 $ 2,626 $
—
—
—
(8,893)
(330)
—
—
—
—
—
(12,605)
—
— $
47,999
11,337
16,610
(9,027)
(834)
— $ 144,152
59,529
11,337
19,381
(18,880)
(1,344)
11,530
—
2,771
(960)
(180)
—
66,085 $
—
(12,605)
13,161 $ 201,570
(1)
Includes loans acquired from CMBS trusts that were subsequently foreclosed on.
The following table summarizes the activity within intangible assets for the year ended December 31, 2014
(amounts in thousands):
Domestic European In-place Lease Favorable Lease
Servicing
Servicing
Intangible
Assets
Intangible
Assets
Total
Rights
Rights
Balance as of January 1, 2014 . . . . . . . . . . . . . . . . . . $ 150,149 $ 27,024 $
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign exchange loss . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in fair value due to changes in inputs and
assumptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OTTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2014 . . . . . . . . . . . . . . . $ 132,303 $ 11,849 $
(16,787)
—
(1,059)
(13,648)
(731)
—
(796)
—
—
—
— $
—
—
—
—
—
— $
— $ 177,173
—
(13,648)
—
(731)
—
(16,787)
—
(796)
—
(1,059)
— $ 144,152
The following table sets forth the estimated aggregate amortization of our European servicing rights, in-place
lease intangible assets and favorable lease intangible assets for the next five years and thereafter (amounts in thousands):
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
22,125
10,243
8,775
7,488
5,917
27,324
81,872
Lease Liabilities
In connection with our acquisition of certain properties within our Ireland Portfolio, we recognized aggregate
unfavorable lease liabilities of $3.4 million with weighted average lives of 3.1 years at acquisition.
In connection with our acquisition of LNR in 2013, we recognized an unfavorable lease liability of
$15.3 million related to an assumed operating lease for our offices in Miami Beach, Florida, which expires in 2021. This
liability is being amortized over the remaining six years of the underlying lease term at a rate of approximately
$1.9 million per year. The liability balance was $10.2 million and $12.1 million as of December 31, 2015 and 2014,
respectively.
124
10. Secured Financing Agreements
The following table is a summary of our secured financing agreements in place as of December 31, 2015 and
2014 (in thousands):
Current
Extended
Maturity Maturity(a)
(b)
(b)
Pricing
Lender 1 Repo 1 . . . . .
LIBOR + 1.85% to 5.25%
Lender 2 Repo 1 . . . . . Oct 2017 Oct 2020 LIBOR + 1.75% to 2.75%
Lender 3 Repo 1 . . . . . May 2017 May 2019 LIBOR + 2.50% to 2.85%
Lender 4 Repo 1 . . . . . Oct 2016 Oct 2017
Lender 4 Repo 2 . . . . . Dec 2018 Dec 2020
Lender 6 Repo 1 . . . . . Aug 2018
Lender 7 Secured
LIBOR + 2.00%
LIBOR + 2.50%
LIBOR + 2.50% to 3.00%
N/A
Jul 2019
N/A
N/A
Financing . . . . . . . . . . Jul 2018
Conduit Repo 1 . . . . . . Sep 2016
Conduit Repo 2 . . . . . . Nov 2016
Conduit Repo 3 . . . . . . Feb 2018 Feb 2019
CMBS Repo 1 . . . . . . .
CMBS Repo 2 . . . . . . . Dec 2016
CMBS Repo 3 . . . . . . .
CMBS Repo 4 . . . . . . .
RMBS Repo 1 . . . . . . .
Investing and Servicing
(f)
N/A
(g)
N/A
N/A
(g)
(h)
(i)
(f)
LIBOR + 2.75%
LIBOR + 1.95% to 3.35%
LIBOR + 2.10%
LIBOR + 2.10%
LIBOR + 1.90%
LIBOR + 2.35% to 2.70%
LIBOR + 1.40% to 1.85%
N/A
LIBOR + 1.90%
Pledged Asset Maximum
Carrying Value Facility Size
2015
Carrying value at December 31,
$
(d)
1,427,281 $ 1,600,000
500,000
131,997
309,498
1,000,000 (c)
500,000
326,292
185,917
394,945
—
708,071
$ 975,735 $
233,705
131,997
309,498
—
491,263
157,716
107,580
—
88,266
—
159,111
341,422
—
180,192
650,000 (e)
150,000
150,000
150,000
—
120,850
243,434
—
125,000
38,055
80,741
—
66,041
—
120,850
243,434
—
2,000
2014
875,111
240,188
124,250
327,117
—
296,967
189,871
94,727
113,636
—
—
39,024
—
58,079
101,886
Segment Property
Mortgages . . . . . . . . .
June 2018
to Dec 2025
Ireland Portfolio
Woodstar Portfolio
Mortgages . . . . . . . . .
Mortgage . . . . . . . . . . May 2020
Nov 2025
to Jan 2026
Mar 2026
to Dec 2043
Term Loan . . . . . . . . . Apr 2020
FHLB Advances . . . . . Nov 2016
Government Financing
Woodstar Portfolio
N/A
N/A
N/A
N/A
N/A
N/A
Various
153,356
90,055
82,964
14,000
EURIBOR + 1.69%
506,500
319,322
319,322
3.72% to 3.81%
327,967
248,630
248,630
3.00%
LIBOR + 2.75%
LIBOR + 0.37%
99,007
3,254,640
10,832
8,982
658,270
9,250
8,429,095 $ 6,965,288
8,982
656,568 (j)
9,250
$ 4,019,035 $
(d)
$
—
—
—
662,933 (j)
—
3,137,789
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
Subject to certain conditions as defined in the respective facility agreement.
Maturity date for borrowings collateralized by loans of January 2017 before extension options and January 2019
assuming initial extension options. Borrowings collateralized by loans existing at maturity may remain
outstanding until such loan collateral matures, subject to certain specified conditions and not to exceed January
2023.
The initial maximum facility size of $600.0 million may be increased to $1.0 billion at our option, subject to
certain conditions.
Subject to borrower’s option to choose alternative benchmark based rates pursuant to the terms of the credit
agreement. The term loan is also subject to a 75 basis point floor.
The initial maximum facility size of $450.0 million may be increased to $650.0 million at our option, subject to
certain conditions.
Facility carries a rolling 11 month term which may reset monthly with the lender’s consent. This facility carries
no maximum facility size. Amount herein reflects the zero outstanding balance as of December 31, 2015.
Facility carries a rolling 12 month term which may reset monthly with the lender’s consent. Current maturity is
December 2016. This facility carries no maximum facility size. Amount herein reflects the outstanding balance
as of December 31, 2015.
Facility was terminated at our option in March 2015.
The date that is 180 days after the buyer delivers notice to seller, subject to a maximum date of March 2017.
Term loan outstanding balance is net of $1.7 million and $2.1 million of unamortized discount as of
December 31, 2015 and 2014, respectively.
In the normal course of business, the Company is in discussions with its lenders to extend or amend any
financing facilities which contain near term expirations.
125
In February 2015, we executed a $150.0 million repurchase facility (“Conduit Repo 3”) for our Investing and
Servicing Segment’s conduit platform. The facility carries a three year initial term with a one year extension option and
an annual interest rate of LIBOR +2.10%.
In March 2015, we executed a repurchase facility (“CMBS Repo 3”) with a new lender to finance certain
CMBS holdings, including CMBS holdings previously financed under the CMBS Repo 4 facility which was terminated
at our option in March 2015. There is no maximum facility size specified under the facility as the lender will evaluate all
eligible collateral on an individual basis. The facility carries a rolling 12 month term which may reset monthly with the
lender’s consent and an annual interest rate of LIBOR +1.40% to LIBOR +1.85% depending on the CMBS collateral.
In April 2015, we amended the Lender 4 Repo 1 facility to reduce pricing. In July 2015, we exercised a one-
year extension option on the Lender 4 Repo 1 facility, extending the maturity from October 2015 to October 2016.
In May 2015, we executed a €294.0 million mortgage facility (“Ireland Portfolio Mortgage”) to finance the
acquisition of the Ireland Portfolio. The facility carries a five year term, an annual interest rate of EURIBOR + 1.69%
and was fully funded as of December 31, 2015. Refer to Note 3 for further discussion of this acquisition. During the
year ended December 31, 2015, we incurred deferred financing costs of $5.7 million associated with this facility.
In July 2015, we exercised a one-year extension option on the Lender 6 Repo 1 facility, extending the maturity
from August 2017 to August 2018.
In July 2015, we amended the Lender 7 Secured Financing facility to (i) permanently upsize available
borrowings from $250.0 million to $450.0 million; (ii) extend the maturity date to July 2019 assuming exercise of a one-
year extension option; and (iii) reduce pricing. The maximum facility size of $450.0 million may be increased to $650.0
million at our option, subject to certain conditions.
In August 2015, we amended the Lender 1 Repo 1 facility to upsize available borrowings from $1.25 billion to
$1.6 billion.
In September 2015, we were admitted as a member of the Federal Home Loan Bank (“FHLB”) of Des Moines
through a captive insurance subsidiary. On January 20, 2016, the FHLB system amended its membership rules to
exclude captive insurers from membership. Therefore, effective January 20, 2016, we may no longer receive FHLB
advances and are obligated to repay our $9.3 million of outstanding FHLB advances within one year from the effective
date of the amendment.
In October 2015, we amended the Lender 2 Repo 1 facility to upsize available borrowings from $325.0 million
to $500.0 million and extend the maturity from October 2018 to October 2020, assuming exercise of available extension
options.
In October 2015, we exercised a one-year extension option on the Conduit Repo 2 facility extending the
maturity from November 2015 to November 2016.
In November 2015, we executed a repurchase facility (“CMBS Repo 1”) to finance certain CMBS holdings.
There is no maximum facility size specified under the facility as the lender will evaluate all eligible collateral on an
individual basis. The facility carries a rolling 11 month term which may reset monthly with the lender’s consent and an
annual interest rate of LIBOR + 1.90%.
In December 2015, we executed a $600.0 million repurchase facility (“Lender 4 Repo 2”) that carries a three
year initial term with two one-year extension options and an annual interest rate of LIBOR +2.50%. Subject to certain
conditions defined in the facility agreement, the maximum facility size may be increased to $1.0 billion at our option.
126
During the year ended December 31, 2015, we executed seven mortgage facilities with aggregate borrowings of
$69.0 million to finance commercial real estate acquired by our Investing and Servicing Segment. As of December 31,
2015, these facilities carry a remaining weighted average term of 6.9 years. Four of the facilities carry floating annual
interest rates ranging from LIBOR + 1.80% to 2.50% while three of the facilities carry fixed annual interest rates ranging
from 4.52% to 4.91%.
During the quarter ended December 31, 2015, we executed 18 mortgage facilities (“Woodstar Portfolio
Mortgages”), all with a new lender to finance each of the 18 properties acquired in our Woodstar Portfolio. These
facilities have 10 year terms and carry fixed annual interest rates ranging from 3.72% to 3.81%.
During the quarter ended December 31, 2015, we assumed five state sponsored mortgage facilities (“Woodstar
Portfolio Government Financing”) associated with certain properties acquired in our Woodstar Portfolio with aggregate
outstanding balances of $9.0 million as of the acquisition dates. The Woodstar Portfolio Government Financing was
originated by the Florida Housing Finance Corporation, a state sponsored finance company, and carries fixed 3.0%
interest rates with initial maturities ranging from March 2026 to December 2043.
Our secured financing agreements contain certain financial tests and covenants. Should we breach certain of
these covenants it may restrict our ability to pay dividends in the future. As of December 31, 2015, we were in
compliance with all such covenants.
The following table sets forth our five-year principal repayments schedule for secured financings assuming no
defaults and excluding loans transferred as secured borrowings. 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 each period 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) the credit facilities that are expected to have
amounts outstanding at their current maturity dates are extended where extension options are available to us (amounts in
thousands):
Repurchase Other Secured
Agreements
Financing
Total
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 790,577 $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
581,395
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
536,547
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
545,599
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
121,553
79,593
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,655,264
54,351 $ 844,928
7,058
588,453
24,752
561,299
7,257
552,856
961,198 (1) 1,082,751
390,451
310,858
$ 1,365,474 $ 4,020,738
(1) Principal paydown of the term loan through 2020 excludes $1.7 million of unamortized discount.
Secured financing maturities for 2016 primarily relate to $243.4 million on the CMBS Repo 3 facility,
$225.5 million on the Lender 6 Repo 1 facility and $120.8 million on the CMBS Repo 2 facility.
As of December 31, 2015 and 2014, we had approximately $38.3 million and $26.5 million, respectively, of
deferred financing costs from secured financing agreements, net of amortization, which is included in other assets on our
consolidated balance sheets. For the years ended December 31, 2015, 2014 and 2013, approximately $14.2 million,
$11.3 million and $9.9 million, respectively, of amortization was included in interest expense on our consolidated
statements of operations.
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As of December 31, 2015 and 2014, the outstanding balance of our repurchase agreements related to the
following asset collateral classes (amounts in thousands):
Class of Collateral
Loans held-for-investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loans held-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31, 2015 December 31, 2014
1,863,633
208,363
198,989
2,270,985
2,142,198 $
146,782
366,284
2,655,264 $
$
We seek to mitigate risks associated with our repurchase agreements by managing risk related to the credit
quality of our assets, interest rates, liquidity, prepayment speeds and market value. The margin call provisions under the
majority of our repurchase facilities, consisting of 61% of these agreements, do not permit valuation adjustments based
on capital markets activity. Instead, margin calls on these facilities are limited to collateral-specific credit marks. To
monitor credit risk associated with the performance and value of our loans and investments, our asset management team
regularly reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the
collateral and enforcing our rights as necessary. For repurchase agreements containing margin call provisions for
general capital markets activity, approximately 23% of these pertain to our loans held-for-sale, for which we manage
credit risk through the purchase of credit index instruments. We further seek to manage risks associated with our
repurchase agreements by matching the maturities and interest rate characteristics of our loans with the related
repurchase agreements.
11. Convertible Senior Notes
On October 8, 2014, we issued $431.3 million of 3.75% Convertible Senior Notes due 2017 (the “2017 Notes”).
On February 15, 2013, we issued $600.0 million of 4.55% Convertible Senior Notes due 2018 (the “2018 Notes”). On
July 3, 2013, we issued $460.0 million of 4.00% Convertible Senior Notes due 2019 (the “2019 Notes”). We recognized
interest expense of $58.0 million, $49.4 million and $33.0 million during the years ended December 31, 2015, 2014 and
2013, respectively, from our unsecured convertible senior notes (collectively, the “Convertible Notes”). The following
summarizes our Convertible Notes outstanding as of December 31, 2015 (amounts in thousands, except rates):
2017 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 431,250
2018 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 599,981
2019 Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 341,363
3.75 %
4.55 %
4.00 %
Principal
Amount
Coupon Effective Conversion Maturity
Rate
Rate(1)
Rate(2)
Date
Remaining
Period of
Amortization
5.87 % 41.7397 10/15/2017 1.8 years
6.10 % 46.1565
3/1/2018 2.2 years
5.37 % 48.9439 1/15/2019 3.0 years
Total principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,372,594 $ 1,491,228
(73,206)
Net unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying amount of debt components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,325,243 $ 1,418,022
(47,351)
Carrying amount of conversion option equity components recorded in additional paid-
in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
46,343 $
64,070
As of December 31,
2014
2015
(1)
(2)
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.
The conversion rate represents the number of shares of common stock issuable per $1,000 principal amount of
Convertible Notes converted, as adjusted in accordance with the indentures governing the Convertible Notes
(including the applicable supplemental indentures) as a result of the spin-off of the SFR segment and cash
dividend payments.
128
The if-converted value of the 2019 Notes exceeded their principal amount by $2.2 million at December 31,
2015 since the closing market price of the Company’s common stock of $20.56 per share exceeded the implicit
conversion price of $20.43 per share. The if-converted value of the 2017 Notes and 2018 Notes were less than their
principal amounts by $61.2 million and $30.7 million at December 31, 2015, respectively, since the closing market price
of the Company’s common stock of $20.56 per share was less than the implicit conversion prices of $23.96 and $21.67,
respectively. The Company has asserted its intent and ability to settle the principal amount of the Convertible Notes in
cash. As a result, conversion of this principal amount, totaling 62.3 million shares, was not included in the computation
of diluted EPS. However, the conversion spread value for the 2019 Notes, representing 0.1 million shares, was included
in the computation of diluted EPS as the notes were “in-the-money”. No dilution related to the 2017 Notes and 2018
Notes was included in the computation of diluted EPS for the year ended December 31, 2015 as these notes were not “in-
the-money”. See further discussion in Note 18.
Under the repurchase program approved by our board of directors (refer to Note 17), we repurchased $118.6
million aggregate principal amount of our 2019 Notes during the year ended December 31, 2015 for $136.3 million plus
transaction expenses of $0.1 million. The repurchase price was allocated between the fair value of the liability
component and the fair value of the equity component of the convertible security. The portion of the repurchase price
attributable to the equity component totaled $17.7 million and was recognized as a reduction of additional paid-in capital
during the year ended December 31, 2015. The remaining repurchase price was attributable to the liability component.
The difference between this amount and the net carrying amount of the liability and debt issuance costs was reflected as
a loss on extinguishment of debt in our consolidated statement of operations. For the year ended December 31, 2015, the
loss on extinguishment of debt totaled $5.9 million, consisting principally of the write-off of unamortized debt discount.
As of December 31, 2015 and 2014, we had approximately $1.4 million and $2.3 million, respectively, of
deferred financing costs from our Convertible Notes, net of amortization, which is included in other assets on our
consolidated balance sheet.
Conditions for Conversion
Prior to April 15, 2017 for the 2017 Notes, September 1, 2017 for the 2018 Notes and July 15, 2018 for the
2019 Notes, the Convertible Notes will be convertible only upon satisfaction of one or more of the following conditions:
(1) the closing market price of the Company’s common stock is at least 110%, in the case of the 2017 Notes, or 130%, in
the case of the 2018 Notes and the 2019 Notes, of the conversion price of the respective Convertible Notes for at least 20
out of 30 trading days prior to the end of the preceding fiscal quarter, (2) the trading price of the Convertible Notes is
less than 98% of the product of (i) the conversion rate and (ii) the closing price of the Company’s common stock during
any five consecutive trading day period, (3) the Company issues certain equity instruments at less than the 10-day
average closing market price of its common stock or the per-share value of certain distributions exceeds the market price
of the Company’s common stock by more than 10% or (4) other specified corporate events (significant consolidation,
sale, merger, share exchange, fundamental change, etc.) occur.
On or after April 15, 2017, in the case of the 2017 Notes, September 1, 2017, in the case of the 2018 Notes, and
July 15, 2018, in the case of the 2019 Notes, holders may convert each of their Convertible 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.
Impact of Spin-off on Convertible Senior Notes
As described in Note 3, on January 31, 2014, the Company distributed all of its interest in the SFR segment to
the Company’s stockholders of record as of January 24, 2014. As the per-share value of the distribution was expected to
exceed 10% of the last reported market price of the Company’s common stock on the trading day prior to the
announcement for such distribution, holders of the Convertible Notes were eligible to surrender their Convertible Notes
for conversion at any time during the period beginning November 26, 2013 (the 45th trading day immediately prior to
the scheduled ex-dividend date for the distribution) and ending on the close of the business day immediately preceding
February 3, 2014, the ex-dividend date for such distribution. During this period, the Company received notices of
129
conversion totaling $19 thousand and $3 thousand in principal for the 2018 Notes and 2019 Notes, respectively. The
cash settlement of these conversions occurred in April 2014.
Due to the distribution, the quarterly dividend threshold amounts for the Convertible Notes were adjusted to
$0.3548 and $0.3710 (from $0.44 and $0.46) per share of common stock, in the case of the 2018 Notes and 2019 Notes,
respectively, effective February 3, 2014.
12. Loan Securitization/Sale Activities
As described below, we regularly sell loans and notes under various strategies. We evaluate such sales as to
whether they meet the criteria for treatment as a sale—legal isolation, ability of transferee to pledge or exchange the
transferred assets without constraint, and transfer of control.
Within the Investing and Servicing Segment, we originate commercial mortgage loans with the intent to sell
these mortgage loans to VIEs for the purposes of securitization. These VIEs then issue CMBS that are collateralized in
part by these assets, as well as other assets transferred to the VIE. In certain instances, we retain a subordinated interest
in the VIE and serve as special servicer for the VIE. The following summarizes the fair value and par value of loans sold
from our conduit platform, as well as the amount of sale proceeds used in part to repay the outstanding balance of the
repurchase agreements associated with these loans for the years ended December 31, 2015, 2014 and 2013 (amounts in
thousands):
For the Year Ended December 31,
2014
2013
2015
Fair value of loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,100,216 $ 1,670,522 $ 1,326,602
1,263,914
Par value of loans sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
947,351
Repayment of repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,603,807
1,196,778
2,034,773
1,548,111
Within the Lending Segment, we originate or acquire loans and then subsequently sell a portion, which can be
in various forms including first mortgages, A-Notes, senior participations and mezzanine loans. Typically, our
motivation for entering into these transactions is to effectively create leverage on the subordinated position that we will
retain and hold for investment. In certain instances, we continue to service the loan following its sale. The following
table summarizes our loans sold and loans transferred as secured borrowings by the Lending Segment net of expenses
(amounts in thousands):
Loan Transfers Accounted
for as Sales
Loan Transfers
Accounted for as Secured
Borrowings
For the Year Ended December 31,
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 645,425 $ 637,124 $
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
501,988
435,818
510,539
435,933
Face Amount Proceeds
Face Amount Proceeds
$ 38,925
—
95,000
38,925
—
95,000
During the years ended December 31, 2015 and 2014, the Lending Segment recognized gains on sales of loans
of $4.8 million and $1.2 million within gain on sale of investments and other assets in our consolidated statements of
operations. During the year ended December 31, 2013, the Lending Segment recognized losses on sales of loans of $1.1
million also recognized within gain on sale of investments and other assets in our consolidated statements of operations.
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13. Derivatives and Hedging Activity
Risk Management Objective of Using Derivatives
We are exposed to certain risks 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.
Designated Hedges
Our objective in using interest rate derivatives is 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 into seven outstanding interest rate swaps that
have been designated as cash flow hedges of the interest rate risk associated with forecasted interest payments. As of
December 31, 2015, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest
rate risk totaled $76.8 million. Under these agreements, we will pay fixed monthly coupons at fixed rates ranging from
0.56% to 1.52% of the notional amount to the counterparty and receive floating rate LIBOR. Our interest rate swaps
designated as cash flow hedges of interest rate risk have maturities ranging from March 2016 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 AOCI 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 years ended December 31, 2015, 2014 and 2013, we did not recognize any hedge ineffectiveness in earnings.
Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are
made on the associated variable-rate debt. Over the next 12 months, we estimate that an additional $0.2 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 65 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
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 gain (loss) on
derivative financial instruments in the consolidated statements of operations.
We have entered into a series of forward contracts whereby we agreed to sell an amount of foreign currency for
an agreed upon amount of USD at various dates through June 2020. These forward contracts were executed to
economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to foreign
denominated loan investments and properties.
131
The following table summarizes our non-designated foreign exchange (“Fx”) forwards, interest rate swaps,
interest rate caps and credit index instruments as of December 31, 2015 (notional amounts in thousands):
Type of Derivative
Fx contracts – Sell Euros ("EUR") (1) . . . . . . . . . . . . . . .
Fx contracts – Sell Pounds Sterling ("GBP") . . . . . . . . .
Fx contracts – Sell Swedish Krona ("SEK") . . . . . . . . . .
Fx contracts – Sell Norwegian Krone ("NOK") . . . . . . .
Fx contracts – Sell Danish Krone ("DKK") . . . . . . . . . . .
Interest rate swaps – Paying fixed rates . . . . . . . . . . . . . .
Interest rate swaps – Receiving fixed rates . . . . . . . . . . .
Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit index instruments . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregate
Number
Notional Notional
of Contracts Amount Currency
Maturity
346,666 EUR February 2016 – June 2020
217,756 GBP January 2016 – March 2018
7,032
SEK
878 NOK
6,251 DKK
December 2016
December 2016
December 2016
325,048 USD July 2016 – December 2025
8,000 USD
294,000 EUR
34,635 USD
40,000 USD
July 2017
May 2020
June 2018 – October 2020
January 2047
83
64
1
1
1
31
1
2
4
11
199
(1)
Includes 54 Fx contracts executed to hedge our Euro currency exposure created by our acquisition of the Ireland
Portfolio. As of December 31, 2015, these contracts have an aggregate notional amount of €253.3 million and
varying maturities through June 2020.
The table below presents the fair value of our derivative financial instruments as well as their classification on
the consolidated balance sheets as of December 31, 2015 and 2014 (amounts in thousands):
Fair Value of Derivatives
in an Asset Position (1)
as of December 31,
2014
2015
Fair Value of Derivatives
in a Liability Position (2)
as of December 31,
2014
2015
Derivatives designated as hedging instruments:
Interest rate swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Total derivatives designated as hedging instruments . . . . . . . . . . . . . . . . .
Derivatives not designated as hedging instruments:
5,216
Interest rate swaps and caps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2,360
15
Foreign exchange contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,137
10
Credit index instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1,537
Total derivatives not designated as hedging instruments . . . . . . . . . . . . . 45,034
5,241
Total derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 45,091 $ 26,628 $ 5,196 $ 5,476
1,128
24,388
974
26,490
4,970
104
—
5,074
122 $
122
138 $
138
57 $
57
235
235
(1)
(2)
Classified as derivative assets in our consolidated balance sheets.
Classified as derivative liabilities in our consolidated balance sheets.
132
The tables below present the effect of our derivative financial instruments on the consolidated statements of
operations and of comprehensive income for the years ended December 31, 2015, 2014 and 2013 (amounts in
thousands):
Derivatives Designated as Hedging Instruments
For the Year Ended December 31,
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Gain (Loss)
Recognized
in OCI
Gain (Loss)
Reclassified
from AOCI
into Income
Gain (Loss)
Recognized
in Income
Location of Gain (Loss)
(effective portion) (effective portion) (ineffective portion) Recognized in Income
(709) $
(865) $
334 $
(741) $
(1,372) $
(1,633) $
— Interest expense
— Interest expense
— Interest expense
Derivatives Not Designated
2013
as Hedging Instruments
3,549
Interest rate swaps and caps . . . Gain (loss) on derivative financial instruments $ (22,675) $ (15,662) $
(13,160)
37,207
Foreign exchange contracts . . . Gain (loss) on derivative financial instruments
(1,559)
(1,094)
Credit index instruments . . . . . Gain (loss) on derivative financial instruments
20,451 $ (11,170)
Location of Gain (Loss)
Recognized in Income
44,089
184
$ 21,598 $
2015
Amount of Gain (Loss)
Recognized in Income for the
Year Ended December 31,
2014
14. Offsetting Assets and Liabilities
The following tables present the potential effects of netting arrangements on our financial position for financial
assets and liabilities within the scope of ASC 210-20, Balance Sheet—Offsetting, which for us are derivative assets and
liabilities as well as repurchase agreement liabilities (amounts in thousands):
(i)
Gross Amounts
Recognized
(ii)
(iii) = (i) - (ii)
Gross Amounts Net Amounts
Presented in
Offset in the
Statement of
the Statement of
Financial Position Financial Position
Financial
Instruments
Collateral
Received /
Pledged
(v) = (iii) - (iv)
Net Amount
(iv)
Gross Amounts Not
Offset in the Statement
of Financial Position
Cash
As of December 31, 2015
Derivative assets . . . . . . . . . . $
Derivative liabilities . . . . . . . $
Repurchase agreements . . . .
45,091 $
5,196 $
2,655,264
$ 2,660,460 $
As of December 31, 2014
Derivative assets . . . . . . . . . . $
Derivative liabilities . . . . . . . $
Repurchase agreements . . . .
26,628 $
5,476 $
2,270,985
$ 2,276,461 $
— $
— $
—
— $
— $
— $
—
— $
45,091 $
5,196 $
243 $
— $
243 $ 4,953 $
2,655,264
2,655,264
2,660,460 $ 2,655,507 $ 4,953 $
—
26,628 $
5,476 $
— $
2,016 $
2,016 $ 3,460 $
2,270,985
2,270,985
2,276,461 $ 2,273,001 $ 3,460 $
—
44,848
—
—
—
24,612
—
—
—
133
15. Variable Interest Entities
Investment Securities
As discussed in Note 2, we evaluate all of our investments and other interests in entities for consolidation,
including our investments in CMBS and our retained interests in securitization transactions we initiated, all of which are
generally considered to be variable interests in VIEs.
The VIEs consolidated in accordance with ASC 810 are structured as pass through entities that receive principal
and interest on the underlying collateral and distribute those payments to the certificate holders. The assets and other
instruments held by these securitization entities are restricted and can only be used to fulfill the obligations of the entity.
Additionally, the obligations of the securitization entities do not have any recourse to the general credit of any other
consolidated entities, nor to us as the primary beneficiary. The VIE 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.
VIEs in which we are the Primary Beneficiary
The inclusion of the assets and liabilities of VIEs in which we are deemed the primary beneficiary has no
economic effect on us. Our exposure to the obligations of VIEs is generally limited to our investment in these entities.
We are not obligated to provide, nor have we provided, any financial support for any of these consolidated structures.
VIEs in which we are not the Primary Beneficiary
In certain instances, we hold a variable interest in a VIE in the form of CMBS, but either (i) we are not
appointed, or do not serve as, special servicer or (ii) an unrelated third party has the rights to unilaterally remove us as
special servicer. In these instances, we do not have the power to direct activities that most significantly impact the VIE’s
economic performance. In other cases, the variable interest we hold does not obligate us to absorb losses or provide us
with the right to receive benefits from the VIE which could potentially be significant. For these structures, we are not
deemed to be the primary beneficiary of the VIE, and we do not consolidate these VIEs.
As of December 31, 2015, one of our CDO structures was in default, which pursuant to the underlying
indentures, changes the rights of the variable interest holders. Upon default of a CDO, the trustee or senior note holders
are allowed to exercise certain rights, including liquidation of the collateral, which at that time, is the activity which
would most significantly impact the CDO’s economic performance. Further, when the CDO is in default, the collateral
administrator no longer has the option to purchase securities from the CDO. In cases where the CDO is in default and we
do not have the ability to exercise rights which would most significantly impact the CDO’s economic performance, we
do not consolidate the VIE. As of December 31, 2015, this CDO structure was not consolidated. During the three months
ended March 31, 2014, one of our CDOs, which was previously in default as of December 31, 2013, ceased to be in
default. This event triggered the initial consolidation of the CDO and its underlying assets during the three months
ended March 31, 2014.
As noted above, we are not obligated to provide, nor have we provided, any financial support for any of our
securitization VIEs, whether or not we are deemed to be the primary beneficiary. As such, the risk associated with our
involvement in these VIEs is limited to the carrying value of our investment in the entity. As of December 31, 2015, our
maximum risk of loss related to VIEs in which we were not the primary beneficiary was $213.0 million on a fair value
basis.
As of December 31, 2015, the securitization VIEs which we do not consolidate had debt obligations to
beneficial interest holders with unpaid principal balances of $40.6 billion. The corresponding assets are comprised
primarily of commercial mortgage loans with unpaid principal balances corresponding to the amounts of the outstanding
debt obligations.
134
16. Related-Party Transactions
Management Agreement
We are party to a management agreement (the “Management Agreement”) with our Manager. Under the
Management Agreement, our Manager, subject to the oversight of our board of directors, is required to manage our day
to day activities, for which our Manager receives a base management fee and is eligible for an incentive fee and stock
awards. Our Manager’s personnel perform certain due diligence, legal, management and other services that outside
professionals or consultants would otherwise perform. As such, in accordance with the terms of our Management
Agreement, our Manager is paid or reimbursed for the documented costs of performing such tasks, provided that such
costs and reimbursements are in amounts no greater than those which would be payable to outside professionals or
consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis.
Base Management Fee. The base management fee is 1.5% of our stockholders’ equity per annum and
calculated and payable quarterly in arrears in cash. For purposes of calculating the management fee, our stockholders’
equity means: (a) the sum of (1) the net proceeds from all issuances of our equity securities since inception (allocated on
a pro rata daily basis for such issuances during the fiscal quarter of any such issuance), plus (2) our retained earnings at
the end of the most recently completed calendar quarter (without taking into account any non-cash equity compensation
expense incurred in current or prior periods), less (b) any amount that we pay to repurchase our common stock since
inception. It also excludes (1) any unrealized gains and losses and other non-cash items that have impacted stockholders’
equity as reported in our financial statements prepared in accordance with GAAP, and (2) one-time events pursuant to
changes in GAAP, and certain non-cash items not otherwise described above, in each case after discussions between our
Manager and our independent directors and approval by a majority of our independent directors. As a result, our
stockholders’ equity, for purposes of calculating the management fee, could be greater or less than the amount of
stockholders’ equity shown in our consolidated financial statements.
For the years ended December 31, 2015, 2014 and 2013, approximately $59.2 million, $54.5 million and
$51.5 million, respectively, was incurred for base management fees. As of December 31, 2015 and 2014, there were
$15.2 million and $13.9 million, respectively, of unpaid base management fees included in the related-party payable in
our consolidated balance sheets.
Incentive Fee. Our Manager is entitled to be paid the incentive fee described below with respect to each
calendar quarter if (1) our Core Earnings (as defined below) for the previous 12-month period exceeds an 8% threshold,
and (2) our Core Earnings for the 12 most recently completed calendar quarters is greater than zero.
On December 4, 2014, our board of directors authorized an amendment to our Management Agreement to
adjust the calculation of the incentive fee for the spin-off of SWAY (the “Amendment”). The Amendment provides that
on and after January 31, 2014, the date of the SWAY spin-off, the computation of the weighted average issue price per
share of the common stock shall be decreased to give effect to the book value per share on January 31, 2014 of the assets
of SWAY, and the computation of the average number of shares of common stock outstanding shall be decreased by the
weighted-average number of shares of SWAY distributed in the spin-off. The Amendment results in an increase to the
incentive fee of $18.0 million for the year ended December 31, 2014, which is recognized within management fee
expense in our consolidated statement of operations.
After giving effect to the Amendment, the incentive fee is calculated as follows: an amount, not less than zero,
equal to the difference between (1) the product of (x) 20% and (y) the difference between (i) our Core Earnings for the
previous 12-month period, and (ii) the product of (A) the weighted average of the issue price per share of our common
stock of all of our public offerings as decreased for the spin-off of SWAY multiplied by the weighted average number of
all shares of common stock outstanding (including any RSUs, any RSAs and other shares of common stock underlying
awards granted under our equity incentive plans) in such previous 12-month period as decreased for the spin-off of
SWAY, and (B) 8%, and (2) the sum of any incentive fee paid to our Manager with respect to the first three calendar
quarters of such previous 12-month period. One half of each quarterly installment of the incentive fee is payable in
shares of our common stock so long as the ownership of such additional number of shares by our Manager would not
violate the 9.8% stock ownership limit set forth in our charter, after giving effect to any waiver from such limit that our
board of directors may grant in the future. The remainder of the incentive fee is payable in cash. The number of shares to
be issued to our Manager is equal to the dollar amount of the portion of the quarterly installment of the incentive fee
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payable in shares divided by the average of the closing prices of our common stock on the NYSE for the five trading
days prior to the date on which such quarterly installment is paid.
Core Earnings is a non-GAAP financial measure. We calculate Core Earnings as GAAP net income (loss)
excluding non-cash equity compensation expense, the incentive fee, depreciation and amortization of real estate and
associated intangibles, losses on extinguishment of debt, acquisition costs associated with successful acquisitions and
any unrealized gains, losses or other non-cash items recorded in net income for the period, regardless of whether such
items are included in OCI, or in net income. The amount is adjusted to exclude one-time events pursuant to changes in
GAAP and certain other non-cash adjustments as determined by our Manager and approved by a majority of our
independent directors.
For the years ended December 31, 2015, 2014 and 2013, approximately $37.7 million, $34.4 million and
$11.6 million, respectively, was incurred for incentive fees. As of December 31, 2015 and 2014, approximately
$21.8 million and $18.9 million, respectively, of unpaid incentive fees were included in related-party payable in our
consolidated balance sheets.
Expense Reimbursement. We are required to reimburse our Manager for operating expenses incurred by our
Manager on our behalf. In addition, pursuant to the terms of the Management Agreement, we are required to reimburse
our Manager for the cost of legal, tax, consulting, auditing and other similar services rendered for us by our Manager’s
personnel provided that such costs are no greater than those that would be payable if the services were provided by an
independent third party. The expense reimbursement is not subject to any dollar limitations but is subject to review by
our independent directors. For the years ended December 31, 2015, 2014 and 2013, approximately $7.0 million,
$8.1 million and $8.8 million was incurred, respectively, for executive compensation and other reimbursable expenses.
As of December 31, 2015 and 2014, approximately $3.6 million and $3.4 million, respectively, of unpaid reimbursable
executive compensation and other expenses were included in related-party payable in our consolidated balance sheets.
Termination Fee. We can terminate the Management Agreement without cause, as defined in the Management
Agreement, with an affirmative two-thirds vote by our independent directors and 180 days written notice to our
Manager. Upon termination without cause, our Manager is due a termination fee equal to three times the sum of the
average annual base management fee and incentive fee earned by our Manager over the preceding eight calendar
quarters. No termination fee is payable if our Manager is terminated for cause, as defined in the Management
Agreement, which can be done at any time with 30 days written notice from our board of directors.
Manager Equity Plan
In May 2015, we granted 675,000 RSUs to our Manager under the Starwood Property Trust, Inc. Manager
Equity Plan (“Manager Equity Plan”). In January 2014, we granted 2,489,281 RSUs to our Manager under the Manager
Equity Plan. In connection with these grants and prior similar grants, we recognized share-based compensation expense
of $26.6 million, $26.5 million and $15.7 million within management fees in our consolidated statements of operations
for the years ended December 31, 2015, 2014 and 2013, respectively. Refer to Note 17 herein for further discussion of
these grants.
Investments in Loans and Securities
In March 2015, we purchased a subordinate single-borrower CMBS from a third party for $58.6 million which
is secured by 85 U.S. hotel properties. The borrower is an affiliate of Starwood Distressed Opportunity Fund IX (“Fund
IX”), an affiliate of our Manager.
In March 2015, we sold our entire interest, consisting of a $35 million participation, in a subordinate loan (the
“Mammoth Loan”) at par to Mammoth Mezz Holdings, LLC, an affiliate of our Manager. We purchased the Mammoth
Loan in April 2011 from an independent third party and a syndicate of financial institutions and other entities acting as
subordinate lenders to Mammoth Mountain Ski Area, LLC (“Mammoth”). Mammoth is a single purpose, bankruptcy
remote entity that is owned and controlled by Starwood Global Opportunity Fund VII-A, L.P., Starwood Global
Opportunity Fund VII-B, L.P., Starwood U.S. Opportunity Fund VII-D, L.P. and Starwood U.S. Opportunity Fund
VII-D-2, L.P. (collectively, the “Sponsors”). Each of the Sponsors is indirectly wholly-owned by Starwood Capital
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Group Global I, LLC and an affiliate of our Chief Executive Officer.
In January 2015, a junior mezzanine loan, which we co-originated with SEREF and an unaffiliated third party in
2012, was restructured to reduce both our and SEREF’s participation interests and margin. Following the restructuring,
we held a participation interest in the junior mezzanine loan of £18 million, which paid interest at three-month LIBOR
plus 8.81%. Prior to the restructure, our participation interest was £30.0 million and carried an interest rate of three-
month LIBOR plus 11.65%. The junior mezzanine loan paid off in full in October 2015.
In December 2014, we co-originated a £200 million first mortgage for the acquisition of a 17-story office tower
located in London with SEREF and other private funds, all affiliates of our Manager. We originated £138.3 million of
the loan, SEREF provided £45.0 million and the private funds provided £16.7 million.
In July 2014, we announced the co-origination of a £101.75 million first mortgage loan for the development of a
46-story residential tower and 18-story housing development containing a total of 366 private residential and affordable
housing units located in London. We originated £86.75 million of the loan, and private funds managed by an affiliate of
our Manager provided £15.0 million.
In July 2014, we co-originated a €99.0 million mortgage loan for the refinancing and refurbishment of a 239
key, full service hotel located in Amsterdam, Netherlands with SEREF and other private funds, both affiliates of our
Manager. We originated €58.0 million of the loan, SEREF provided €25.0 million and the private funds provided €16.0
million.
In December 2013, we acquired a subordinate CMBS investment in a securitization issued by an affiliate of our
Manager. The security was acquired for $84.1 million and is secured by five regional malls in Ohio, California and
Washington.
In November 2013, we co-originated a GBP-denominated first mortgage loan with SEREF, which is secured by
Centre Point, an iconic tower located in Central London, England. We funded £15 million of the initial £55 million
funding and committed to future funding of £165 million. The A-Note bears interest at 8.55% fixed and the B-Note bears
interest at three-month LIBOR plus 7.0%, unless the fixed rate option is elected. The loan was amended in December
2014, increasing the total commitment to £265.0 million and our future funding commitment to £195.0 million. The loan
matures in December 2017.
In October 2013, we co-originated a GBP-denominated $467.2 million first mortgage loan with SEREF that is
secured by the Heron Tower in London, England (the "Heron Tower Loan"). The facility was advanced in October 2013
in a single utilization, with SEREF taking $29.2 million of the total advance. The most senior tranche funded by us,
which is of $340.6 million, carries a return of LIBOR plus 3.90% and the other tranche funded by us, which is of $97.3
million, carries a fixed rate of 5.61% per annum. The Heron Tower Loan matures in October 2018.
In September 2013, we co-originated a EUR-denominated first mortgage loan with Starfin Lux S.a.r.l.
(“Starfin”), an affiliate of our Manager. The loan had an initial funding of approximately $102.3 million ($53.8 million
for us and $48.5 million for Starfin), and future funding commitments totaling $24.6 million, of which we committed to
fund $12.9 million and Starfin is committed to fund $11.7 million. The loan bears interest at three-month EURIBOR plus
7.0% and is secured by a portfolio of approximately 20 retail properties located throughout Finland. The loan matures in
October 2016.
In August 2013, we co-originated GBP-denominated first mortgage and mezzanine loans with Starfin. The
loans are collateralized by a development of a 109 unit retirement community and a 30 key nursing home in Battersea
Park, London, England. We and Starfin committed $11.3 million and $22.5 million, respectively, in aggregate for the
two loans. The first mortgage loan bears interest at 5.02% and the mezzanine loan bears interest at 15.12%, and the loans
each have three-year terms.
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In April 2013, we purchased two B-Notes for $146.7 million from entities substantially all of whose equity was
owned by an affiliate of our Manager. The B-Notes are secured by two Class A office buildings located in Austin, Texas.
On May 17, 2013, we sold senior participation interests in the B-Notes to a third party, generating $95.0 million in
aggregate proceeds. We retained the subordinated interests. In October 2015, we sold one of the subordinated interests in
the B-Notes to a third party, generating $29.2 million in aggregate proceeds.
In December 2012, we acquired 9,140,000 ordinary shares in 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, which equated
to approximately 4% ownership of SEREF. As of December 31, 2015, our shares represent an approximate 3% interest
in SEREF. Refer to Note 6 for additional details.
In October 2012, we co-originated $475.0 million in financing for the acquisition and redevelopment of a
10-story retail building located at 701 Seventh Avenue in the Times Square area of Manhattan through a joint venture
with Fund IX, an affiliate of our Manager. In January 2014, we refinanced the initial financing with an $815.0 million
first mortgage and mezzanine financing to facilitate the further development of the property. Fund IX did not participate
in the refinancing. As such, the joint venture distributed $31.6 million to Fund IX for the liquidation of Fund IX’s
interest in the joint venture.
Investment in Unconsolidated Entities
In October 2014, we committed $150 million for a 33% equity interest in four regional shopping malls (the
“Retail Fund”), of which $132.0 million was funded as of December 31, 2014. During the year ended December 31,
2015, we received capital distributions of $17.1 million, which reduced our carrying value to $122.5 million as of
December 31, 2015. The Retail Fund was established for the purpose of acquiring and operating four leading regional
shopping malls located in Florida, Michigan, North Carolina and Virginia. All leasing services and asset management
functions for the properties are conducted by an affiliate of our Manager which specializes in redeveloping, managing
and repositioning retail real estate assets. In addition, another affiliate of our Manager serves as general partner of the
Retail Fund. In consideration for its services, the general partner will earn incentive distributions that are payable once
we, along with the other limited partners, receive 100% of our capital and a preferred return of 8%. During the years
ended December 31, 2015 and 2014, we recognized $10.1 million and $2.2 million of income from the Retail Fund,
respectively.
In April 2013, in connection with our acquisition of LNR, we acquired 50% of a joint venture. An affiliate of
ours, Fund IX, owns the remaining 50% of the venture.
Other Related-Party Arrangements
In connection with the LNR acquisition, we were required to cash collateralize certain obligations of LNR,
including letters of credit and performance obligations. Fund IX funded $6.2 million of this obligation, but the account
was in our name and was thus reflected within our restricted cash balance. As of December 31, 2014, we recognized a
corresponding payable to Fund IX of $4.4 million within related-party payable in our consolidated balance sheet. Our
obligation was released in September 2015.
Our Investing and Servicing Segment acquires properties from CMBS trusts, some of which are consolidated as
VIEs on our balance sheet. Acquisitions from consolidated VIEs are reflected as repayment of debt of consolidated
VIEs in our consolidated statement of cash flows. During the year ended December 31, 2015, we acquired $138.7
million of properties, $13.6 million of which were acquired as non-performing loans and subsequently converted to
properties through foreclosure, from both consolidated and unconsolidated CMBS trusts. During the year ended
December 31, 2014, we acquired $35.0 million of properties from a consolidated CMBS trust. There were no properties
acquired from CMBS trusts during the year ended December 31, 2013. Refer to Note 3 for further discussion of these
acquisitions.
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17. Stockholders’ Equity
The Company’s authorized capital stock consists of 100,000,000 shares of preferred stock, $0.01 par value per
share, and 500,000,000 shares of common stock, $0.01 par value per share.
We issued common stock in public offerings as follows during the years ended December 31, 2015, 2014 and
2013:
Pricing date
4/20/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4/11/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
9/9/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4/8/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares issued Price
(in thousands) per share
Proceeds
(in thousands)
13,800 $ 23.63 $ 326,142
564,695
25,300
691,150
28,750
822,367
30,475
22.32
24.04
26.99
In May 2014, we established the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock
Purchase Plan (the “DRIP Plan”), which provides stockholders with a means of purchasing additional shares of our
common stock by reinvesting the cash dividends paid on our common stock and by making additional optional cash
purchases. Shares of our common stock purchased under the DRIP Plan will either be issued directly by the Company or
purchased in the open market by the plan administrator. The Company may issue up to 11 million shares of common
stock under the DRIP Plan. During the years ended December 31, 2015 and 2014, shares issued under the DRIP Plan
were not material.
In May 2014, we entered into an amended and restated At-The-Market Equity Offering Sales Agreement (the
“ATM Agreement”) with Merrill Lynch, Pierce, Fenner & Smith Incorporated to sell shares of the Company’s common
stock of up to $500.0 million from time to time, through an “at the market” equity offering program. Sales of shares
under the ATM Agreement are made by means of ordinary brokers’ transactions on the NYSE or otherwise at market
prices prevailing at the time of sale or at negotiated prices. During the year ended December 31, 2015, there were no
shares issued under the ATM Agreement. During the year ended December 31, 2014, we issued 1.5 million shares under
the ATM Agreement for gross proceeds of $36.2 million.
In September 2014, our board of directors authorized and announced the repurchase of up to $250 million of
our outstanding common stock over a period of one year. Subsequent amendments to the repurchase program approved
by our board of directors in December 2014 and June 2015 resulted in the program being (i) amended to increase
maximum repurchases to $450.0 million, (ii) expanded to allow for the repurchase of our outstanding Convertible Notes
under the program and (iii) extended through June 2016. Purchases made pursuant to the program are made in either the
open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other
legal requirements. The timing, manner, price and amount of any repurchases are discretionary and are subject to
economic and market conditions, stock price, applicable legal requirements and other factors. The program may be
suspended or discontinued at any time. During the year ended December 31, 2015, we repurchased $118.6 million
aggregate principal amount of our 2019 Notes for $136.3 million (refer to Note 11). Also during the year ended
December 31, 2015, we repurchased 2,340,246 shares of common stock for $48.7 million under the repurchase program.
During the year ended December 31, 2014, we repurchased 587,900 shares of common stock for $13.0 million and no
Convertible Notes under the repurchase program. As of December 31, 2015, we had $251.8 million of remaining
capacity to repurchase common stock and/or Convertible Notes under the repurchase program.
In January 2016, our board of directors authorized a $50.0 million increase and an extension of our share
repurchase program through January 2017, increasing the maximum amount of shares and Convertible Notes available
for repurchase under the program to $500.0 million. Refer to Note 25 for further discussion.
Underwriting and offering costs for the years ended December 31, 2015, 2014 and 2013 were $0.9 million, $1.5
million and $1.4 million, respectively, and are reflected as a reduction of additional paid in capital in the consolidated
statements of equity.
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Our board of directors declared the following dividends in 2015, 2014 and 2013:
Declaration Date
11/5/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8/4/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5/5/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2/25/15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11/5/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8/6/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5/6/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2/24/14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
11/7/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10/31/13 (non-cash SWAY shares) . . . . . . . . . . . .
8/6/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5/8/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2/27/13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Record Date Ex-Dividend Date Payment Date Amount
12/31/15
9/30/15
6/30/15
3/31/15
12/31/14
9/30/14
6/30/14
3/31/14
12/31/13
1/24/14
9/30/13
6/28/13
3/28/13
12/29/15
9/28/15
6/26/15
3/27/15
12/29/14
9/26/14
6/26/14
3/27/14
12/27/13
2/3/14
9/26/13
6/26/13
3/26/13
1/15/16 $
10/15/15
7/15/15
4/15/15
1/15/15
10/15/14
7/15/14
4/15/14
1/15/14
1/31/14
10/15/13
7/15/13
4/15/13
Frequency
0.48 Quarterly
0.48 Quarterly
0.48 Quarterly
0.48 Quarterly
0.48 Quarterly
0.48 Quarterly
0.48 Quarterly
0.48 Quarterly
0.46 Quarterly
5.77
Special
0.46 Quarterly
0.46 Quarterly
0.44 Quarterly
Equity Incentive Plans
The Company currently maintains the Manager Equity Plan, which provides for the grant of stock options, stock
appreciation rights, RSAs, RSUs and other equity-based awards, including dividend equivalents, to our Manager. The
Company also maintains the Starwood Property Trust, Inc. Equity Plan (the “Equity Plan”), which provides for the same
types of equity-based awards to individuals who provide services to the Company, including employees of our Manager.
The maximum number of shares that may be made subject to awards granted under either the Manager Equity Plan or the
Equity Plan, determined on a combined basis, was initially 3,112,500 shares. On March 26, 2013, the Company
amended, subject to stockholder approval which was obtained on May 2, 2013, the Manager Equity Plan and the Equity
Plan to (i) increase the number of shares available under such plans for awards granted on or after January 1, 2013 by
6,000,000 shares of common stock, (ii) clarify the prohibitions on the repricing of stock options and stock appreciation
rights, and (iii) remove the restriction that no more than an aggregate of 50,000 shares may be subject to awards granted
to the Company’s chief financial officer and/or compliance officer. Additionally, we have reserved 100,000 shares of
common stock for issuance under the Starwood Property Trust, Inc. Non-Executive Director Stock Plan (“Non-Executive
Director Stock Plan”) which provides for the issuance of restricted stock, RSUs and other equity-based awards to
non-executive directors. To date, we have only granted RSAs and RSUs under the three equity incentive plans. The
holders of awards of RSAs or RSUs are entitled to receive dividends or “distribution equivalents,” which generally will
be payable at such time dividends are paid on our outstanding shares of common stock.
The table below summarizes our share awards granted or vested under the Manager Equity Plan during the
years ended December 31, 2015, 2014 and 2013 (dollar amounts in thousands):
Grant Date
May 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU
January 2014 (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU
January 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU
October 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSU
May 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . RSA
675,000 $
489,281
2,000,000
875,000
30,000
16,511
14,776
55,420
19,854
602
3 years
3 years
3 years
3 years
9 months
Type Amount Granted Grant Date Fair Value Vesting Period
(1)
As part of the spin-off of our SFR segment, all holders of the Company’s common stock and vested restricted
common stock received one SWAY common share for every five shares of the Company’s common stock. At
the time of the spin-off, the Manager held certain unvested RSUs that were not entitled to SWAY shares.
Under the legal documentation governing the outstanding RSUs, the Manager was entitled to receive additional
RSUs in an amount equal to the number of such outstanding RSUs multiplied by the amount received in the
spin-off by a holder of a share of the Company’s common stock (i.e., the price per share of a SWAY common
share divided by five) divided by the fair market value of a share of the Company’s common stock on the date
of the spin-off. In order to prevent dilution of the rights of our equity plan participants resulting from this
make-whole issuance, the Equity Plan and Manager Equity Plan provide for, and, on August 12, 2014, our
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board of directors authorized, an increase of 489,281 shares to the maximum number of shares available for
issuance under the Equity Plan and Manager Equity Plan.
During the year ended December 31, 2015, we granted 576,408 RSAs under the Equity Plan to a select group of
eligible participants which includes our employees and employees of our Manager who perform services for us. The
awards were granted based on the market price of the Company’s common stock on the respective grant date and vest
over a three-year period. Expenses related to the vesting of these awards is reflected in general and administrative
expenses in our consolidated statements of operations.
As of December 31, 2015, there were 2.7 million shares available for future grants under the Manager Equity
Plan, the Equity Plan and the Non-Executive Director Stock Plan.
The following shares of common stock were issued, without restriction, to our Manager as part of the incentive
compensation due under the Management Agreement:
Timing of Issuance
November 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
August 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
August 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
May 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
November 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
March 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares of Common
Stock Issued
126,154
95,696
136,261
387,299
92,865
86,328
152,316
138,288
89,269
13,188
$
Price
per share
20.22
21.82
24.17
24.39
22.97
23.49
23.99
23.92
26.72
27.83
The following table summarizes our share-based compensation expenses during the years ended December 31,
2015, 2014 and 2013 (in thousands):
Management fees:
For the year ended December 31,
2013
2014
2015
Manager incentive fee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,859 $ 17,258 $ 5,764
15,688
Manager Equity Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
21,452
26,498
43,756
26,625
45,484
General and administrative:
Non-Executive Director Stock Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
217
437
654
—
Income tax effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total share-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,005 $ 45,880 $ 22,106
294
1,830
2,124
—
360
5,161
5,521
—
141
Schedule of Non-Vested Shares and Share Equivalents
Balance as of December 31, 2014 . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2015 . . . .
Non-Executive
Director
Stock Plan
Total
Manager
Equity Plan
Equity Plan
109,708
1,854,585
1,981,398 $
1,268,396
675,000
576,408
(52,249) (1,226,735) (1,296,089)
(85,489)
(85,489)
1,868,216
548,378
—
1,302,850
17,105
16,988
(17,105)
—
16,988
Weighted Average
Grant Date Fair Value
(per share)
27.30
24.20
26.58
24.27
25.84
The weighted average grant date fair value per share of grants during the years ended December 31, 2015, 2014
and 2013 was $24.20, $27.91 and $26.87, respectively.
Vesting Schedule
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-Executive
Director Stock Plan
16,988
—
—
16,988
Equity Plan
273,429
234,998
39,951
548,378
Total
Manager
Equity Plan
1,021,600 1,312,017
459,998
96,201
1,302,850 1,868,216
225,000
56,250
As of December 31, 2015, there was approximately $36.0 million of total unrecognized compensation costs
related to unvested share-based compensation arrangements which are expected to be recognized over a weighted
average period of 1.7 years. The total fair value of shares vested during the year ended December 31, 2015 was
$28.3 million as of the respective vesting dates.
142
18. Earnings per Share
The following table provides a reconciliation of net income from continuing operations and the number of
shares of common stock used in the computation of basic EPS and diluted EPS (amounts in thousands, except per share
amounts):
For the Year Ended December 31,
2013
2014
2015
Basic Earnings
Continuing Operations:
Income from continuing operations attributable to STWD common shareholders $ 450,697 $ 496,572 $ 324,824
(1,579)
Less: Income attributable to participating shares . . . . . . . . . . . . . . . . . . . . . . . . . .
Basic — Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 447,263 $ 490,993 $ 323,245
(5,579)
(3,434)
Discontinued Operations:
Loss from discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Basic — Net income attributable to STWD common shareholders after
— $
(1,551) $ (19,794)
allocation to participating shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 447,263 $ 489,442 $ 303,451
Diluted Earnings
Continuing Operations:
Basic — Income from continuing operations attributable to STWD common
shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 450,697 $ 496,572 $ 324,824
(1,579)
Less: Income attributable to participating shares . . . . . . . . . . . . . . . . . . . . . . . . . .
—
Add: Undistributed earnings to participating shares . . . . . . . . . . . . . . . . . . . . . . . .
—
Less: Undistributed earnings reallocated to participating shares . . . . . . . . . . . . . .
Diluted — Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . $ 447,263 $ 491,009 $ 323,245
(5,579)
918
(902)
(3,434)
—
—
Discontinued Operations:
Basic — Loss from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Diluted — Net income attributable to STWD common shareholders after
— $
(1,551) $ (19,794)
allocation to participating shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 447,263 $ 489,458 $ 303,451
Number of Shares:
Basic — Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities — Convertible Notes . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities — Contingently issuable shares . . . . . . . . . . . . . . . . .
Effect of dilutive securities — Unvested non-participating shares . . . . . . . . . . . .
Diluted — Average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
233,419
97
524
102
234,142
214,945 166,356
—
139
—
218,781 166,495
3,432
404
—
Earnings Per Share Attributable to STWD Common Stockholders:
Basic:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loss from discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.92 $
—
1.92 $
2.29 $
(0.01)
2.28 $
1.94
(0.12)
1.82
Diluted:
Income from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Loss from discontinued operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
1.91 $
—
1.91 $
2.25 $
(0.01)
2.24 $
1.94
(0.12)
1.82
143
As of December 31, 2015, 2014 and 2013, participating shares of 1.5 million, 2.0 million and 0.5 million,
respectively, were excluded from the computation of diluted shares as their effect was already considered under the more
dilutive two-class method used above.
Also as of December 31, 2015, there were 62.4 million potential shares of common stock contingently issuable
upon the conversion of the Convertible Notes. The Company has asserted its intent and ability to settle the principal
amount of the Convertible Notes in cash. As a result, this principal amount, representing 62.3 million shares at December
31, 2015, was not included in the computation of diluted EPS. However, as discussed in Note 11, the conversion options
associated with the 2019 Notes are “in-the-money” as the if-converted values of the 2019 Notes exceeded their principal
amounts by $2.2 million at December 31, 2015. The dilutive effect to EPS is determined by dividing this “conversion
spread value” by the average share price. The “conversion spread value” is the value that would be delivered to investors
in shares based on the terms of the Convertible Notes, upon an assumed conversion. In calculating the dilutive effect of
these shares, the treasury stock method was used and resulted in a dilution of 0.1 million shares for the year ended
December 31, 2015. The conversion option associated with the 2017 Notes and 2018 Notes are “out-of-the-money”
because the if-converted value of the 2017 Notes and 2018 Notes was less than their principal amount by $61.2 million
and $30.7 million, respectively, at December 31, 2015, therefore, there was no dilutive effect to EPS for the 2017 Notes
and 2018 Notes.
19. Accumulated Other Comprehensive Income
The changes in AOCI by component are as follows (in thousands):
Cumulative
Unrealized Gain
(Loss) on
Effective Portion of
Cumulative Loss on Available-for-
Sale Securities
Cash Flow Hedges
Foreign
Currency
Translation
Total
Balance at January 1, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
OCI before reclassifications . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCI . . . . . . . . . . . . . . . . . . . .
Net period OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OCI before reclassifications . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCI . . . . . . . . . . . . . . . . . . . .
Net period OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
OCI before reclassifications . . . . . . . . . . . . . . . . . . . . . . . .
Amounts reclassified from AOCI . . . . . . . . . . . . . . . . . . . .
Net period OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
(2,571) $
334
1,633
1,967
(604)
(865)
1,372
507
(97)
(709)
741
32
(65) $
— $ 79,675
82,246 $
20,544
9,487
10,723
(24,770)
—
(26,403)
(4,226)
9,487
(15,680)
75,449
9,487
66,566
(10,866)
(13,684)
3,683
(8,687)
—
(10,059)
(19,553)
(13,684)
(6,376)
55,896
(4,197)
60,190
(27,481)
(9,285)
(17,487)
1,314
5,969
(5,396)
(22,883)
(26,167)
(3,316)
37,307 $ (7,513) $ 29,729
144
The reclassifications out of AOCI impacted the consolidated statements of operations for the years ended
December 31, 2015, 2014 and 2013 as follows:
Details about AOCI Components
Losses on cash flow hedges:
Amounts Reclassified from
AOCI during the Year
Ended December 31,
2014
2015
2013
Affected Line Item
in the Statements
of Operations
Interest rate contracts . . . . . . . . $
(741) $ (1,372) $ (1,633)
Interest expense
Unrealized gains (losses) on
available-for-sale securities:
Interest realized upon collection
Net realized gain on sale of
investments . . . . . . . . . . . . . . .
OTTI . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation:
Foreign currency loss from
5,396
—
—
—
—
5,396
10,148
(89)
10,059
27,417
(1,014) OTTI
26,403
Interest income from investment securities
Gain on sale of investments and other
assets, net
CMBS redemption . . . . . . . . . .
Total reclassifications for the period $
(5,969)
(1,314) $
—
8,687
— Foreign currency loss, net
$ 24,770
20. Fair Value
GAAP establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring
financial assets and liabilities at fair value. GAAP establishes market-based or observable inputs as the preferred source
of values, followed by valuation models using management assumptions in the absence of market inputs. The three
levels of the hierarchy are described below:
Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the
measurement date.
Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly
observable for the asset or liability through correlation with market data at the measurement date and for the
duration of the instrument’s anticipated life.
Level III—Inputs reflect management’s best estimate of what market participants would use in pricing
the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation
technique and the risk inherent in the inputs to the model.
Valuation Process
We have valuation control processes in place to validate the fair value of the Company’s financial assets and
liabilities measured at fair value including those derived from pricing models. These control processes are designed to
assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that
observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is
appropriate and consistently applied and the assumptions are reasonable.
Pricing Verification—We use recently executed transactions, other observable market data such as exchange
data, broker/dealer quotes, third party pricing vendors and aggregation services for validating the fair values generated
using valuation models. Pricing data provided by approved external sources is evaluated using a number of approaches;
for example, by corroborating the external sources’ prices to executed trades, analyzing the methodology and
145
assumptions used by the external source to generate a price and/or by evaluating how active the third party pricing
source (or originating sources used by the third party pricing source) is in the market.
Unobservable Inputs—Where inputs are not observable, we review the appropriateness of the proposed
valuation methodology to ensure it is consistent with how a market participant would arrive at the unobservable input.
The valuation methodologies utilized in the absence of observable inputs may include extrapolation techniques and the
use of comparable observable inputs.
Any changes to the valuation methodology will be reviewed by our management to ensure the changes are
appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or
reflective of future fair values. Furthermore, while we anticipate that our valuation methods are appropriate and
consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value
could result in a different estimate of fair value at the reporting date.
Fair Value on a Recurring Basis
We determine the fair value of our financial assets and liabilities measured at fair value on a recurring basis as follows:
Loans held-for-sale
We measure the fair value of our mortgage loans held-for-sale within the Investing and Servicing Segment’s
conduit platform using a discounted cash flow analysis unless observable market data (i.e., securitized pricing) is
available. A discounted cash flow analysis requires management to make estimates regarding future interest rates and
credit spreads. The most significant of these inputs relates to credit spreads and is unobservable. Thus, we have
determined that the fair values of mortgage loans valued using a discounted cash flow analysis should be classified in
Level III of the fair value hierarchy, while mortgage loans valued using securitized pricing should be classified in Level
II of the fair value hierarchy. Mortgage loans classified in Level III are transferred to Level II if securitized pricing
becomes available.
RMBS
RMBS are valued utilizing observable and unobservable market inputs. The observable market inputs include
recent transactions, broker quotes and vendor prices (“market data”). However, given the implied price dispersion
amongst the market data, the fair value determination for RMBS has also utilized significant unobservable inputs in
discounted cash flow models including prepayments, default and severity estimates based on the recent performance of
the collateral, the underlying collateral characteristics, industry trends, as well as expectations of macroeconomic events
(e.g., housing price curves, interest rate curves, etc.). At each measurement date, we consider both the observable and
unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable
inputs these securities have been classified within Level III.
CMBS
CMBS are valued utilizing both observable and unobservable market inputs. These factors include projected
future cash flows, ratings, subordination levels, vintage, remaining lives, credit issues, recent trades of similar securities
and the spreads used in the prior valuation. We obtain current market spread information where available and use this
information in evaluating and validating the market price of all CMBS. Depending upon the significance of the fair value
inputs used in determining these fair values, these securities are classified in either Level II or Level III of the fair value
146
hierarchy. CMBS may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs
used to price the CMBS become or cease to be observable.
Equity security
The equity security is publicly registered and traded in the United States and its market price is listed on the
London Stock Exchange. The security has been classified within Level I.
Domestic servicing rights
The fair value of this intangible is determined using discounted cash flow modeling techniques which require
management to make estimates regarding future net servicing cash flows, including forecasted loan defeasance, control
migration, delinquency and anticipated maturity defaults which are calculated assuming a debt yield at which default
occurs. Since the most significant of these inputs are unobservable, we have determined that the fair values of this
intangible in its entirety should be classified in Level III of the fair value hierarchy.
Derivatives
The valuation of derivative contracts are determined using widely accepted valuation techniques including
discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms
of the derivatives, including the period to maturity, and uses observable market based inputs, including interest rate
curves, spot and market forward points and implied volatilities. The fair values of interest rate swaps are determined
using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected
variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves)
derived from observable market interest rate curves.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the
respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our
derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable
credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level II of
the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level III inputs, such as
estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of
December 31, 2015 and 2014, we have assessed the significance of the impact of the credit valuation adjustments on the
overall valuation of our derivative positions and have determined that the credit valuation adjustments are not as
significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in
their entirety are classified in Level II of the fair value hierarchy.
The valuation of over the counter (“OTC”) derivatives are determined using discounted cash flows based on
Overnight Index Swap (“OIS”) rates. Fully collateralized trades are discounted using OIS with no additional economic
adjustments to arrive at fair value. Uncollateralized or partially collateralized trades are also discounted at OIS, but
include appropriate economic adjustments for funding costs (i.e., a LIBOR OIS basis adjustment to approximate
uncollateralized cost of funds) and credit risk.
For credit index instruments, fair value is determined based on changes in the relevant indices from the date of
initiation of the instrument to the reporting date, as these changes determine the amount of any future cash settlement
between us and the counterparty. These indices are considered Level II inputs as they are directly observable. We have
assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our credit index
instruments and have determined that any credit valuation adjustment would not be significant to the overall valuation as
147
the counterparty to these contracts is a highly rated global financial institution. As a result, we have determined that
credit index instruments are classified in Level II of the fair value hierarchy.
Liabilities of consolidated VIEs
We utilize several inputs and factors in determining the fair value of VIE liabilities, including future cash flows,
market transaction information, ratings, subordination levels, and current market spread and pricing information where
available. Quoted market prices are used when this debt trades as an asset. Depending upon the significance of the fair
value inputs used in determining these fair values, these liabilities are classified in either Level II or Level III of the fair
value hierarchy. VIE liabilities may shift between Level II and Level III of the fair value hierarchy if the significant fair
value inputs used to price the VIE liabilities become or cease to be observable.
Assets of consolidated VIEs
The VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active
management of the underlying assets. In determining the fair value of the assets of the VIE, we maximize the use of
observable inputs over unobservable inputs. We also acknowledge that our principal market for selling CMBS assets is
the securitization market where the market participant is considered to be a CMBS trust or a CDO. This methodology
results in the fair value of the assets of a static CMBS trust being equal to the fair value of its liabilities. The individual
assets of a VIE are inherently incapable of precise measurement given their illiquid nature and the limitations on
available information related to these assets. Because our methodology for valuing these assets does not value the
individual assets of a VIE, but rather uses the value of the VIE liabilities as an indicator of the fair value of VIE assets as
a whole, we have determined that our valuations of VIE assets in their entirety should be classified in Level III of the fair
value hierarchy.
Fair Value Only Disclosed
We determine the fair value of our financial instruments and assets where fair value is disclosed as follows:
Loans held-for-investment and loans transferred as secured borrowings
We estimate the fair values of our loans not carried at fair value on a recurring basis by discounting their
expected cash flows at a rate we estimate would be demanded by the market participants that are most likely to buy our
loans. The expected cash flows used are generally the same as those used to calculate our level yield income in the
financial statements. Since these inputs are unobservable, we have determined that the fair value of these loans in their
entirety would be classified in Level III of the fair value hierarchy.
HTM securities
We estimate the fair value of our mandatorily redeemable preferred equity interests in commercial real estate
companies using the same methodology described for our loans held-for-investment. We estimate the fair value of our
HTM CMBS using the same methodology described for our CMBS carried at fair value on a recurring basis.
European servicing rights
The fair value of this intangible was determined using discounted cash flow modeling techniques which require
management to make estimates regarding future net servicing cash flows. Since the most significant of these inputs are
unobservable, we have determined that the fair values of these intangibles in their entirety should be classified in
Level III of the fair value hierarchy.
148
Secured financing agreements and secured borrowings on transferred loans
The fair value of the secured financing agreements and secured borrowings on transferred loans are determined
by discounting the contractual cash flows at the interest rate we estimate such arrangements would bear if executed in the
current market. We have determined that our valuation of secured financing agreements and secured borrowings on
transferred loans should be classified in Level III of the fair value hierarchy.
Convertible Notes
The fair value of the debt component of our Convertible Notes is estimated by discounting the contractual cash
flows at the interest rate we estimate such notes would bear if sold in the current market without the embedded
conversion option which, in accordance with ASC 470, is reflected as a component of equity. We have determined that
our valuation of our Convertible Notes should be classified in Level III of the fair value hierarchy.
Fair Value Disclosures
The following tables present our financial assets and liabilities carried at fair value on a recurring basis in the
consolidated balance sheets by their level in the fair value hierarchy as of December 31, 2015 and 2014 (amounts in
thousands):
Total
December 31, 2015
Level I
Level II
Level III
Financial Assets:
Loans held-for-sale, fair value option . . . . . . . . . . . . . . . $
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic servicing rights . . . . . . . . . . . . . . . . . . . . . . . .
Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIE assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities:
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
VIE liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
203,865 $
176,224
212,981
14,498
119,698
45,091
76,675,689
— $
—
—
14,498
—
—
$ 77,448,046 $ 14,498 $
— $
—
—
—
—
45,091
—
203,865
176,224
212,981
—
119,698
—
76,675,689
45,091 $ 77,388,457
5,196 $
75,817,014
$ 75,822,210 $
5,196 $
— $
—
73,264,566
— $ 73,269,762 $
—
2,552,448
2,552,448
Total
Level I
Level II
Level III
December 31, 2014
Financial Assets:
Loans held-for-sale, fair value option . . . . . . . . . . . . . . . $
RMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CMBS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equity security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic servicing rights . . . . . . . . . . . . . . . . . . . . . . . .
Derivative assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
VIE assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Liabilities:
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
VIE liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
391,620 $
207,053
334,080
15,120
132,303
26,628
107,816,065
— $
—
—
15,120
—
—
—
$ 108,922,869 $ 15,120 $
— $
—
—
—
—
26,628
—
391,620
207,053
334,080
—
132,303
—
107,816,065
26,628 $ 108,881,121
5,476 $
107,232,201
$ 107,237,677 $
5,476 $
— $
—
— $ 102,344,557 $
102,339,081
—
4,893,120
4,893,120
149
The changes in financial assets and liabilities classified as Level III are as follows for the years ended
December 31, 2015 and 2014 (amounts in thousands):
January 1, 2014 balance . . . . . . . . . . . . . $
Total realized and unrealized gains (losses):
206,672 $ 296,236 $ 208,006 $ 150,149 $ 103,151,624 $ (1,597,984) $ 102,414,703
Loans
Held-for-sale RMBS
CMBS
Domestic
Servicing
Rights
VIE Assets
VIE
Liabilities
Total
Included in earnings:
Change in fair value / gain on sale . .
OTTI . . . . . . . . . . . . . . . . . . . . . . . .
Net accretion . . . . . . . . . . . . . . . . . .
Included in OCI . . . . . . . . . . . . . . . . .
Purchases / Originations . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuances . . . . . . . . . . . . . . . . . . . . . . . . .
Cash repayments / receipts . . . . . . . . . . . .
Transfers into Level III . . . . . . . . . . . . . . .
Transfers out of Level III . . . . . . . . . . . . .
Consolidations of VIEs . . . . . . . . . . . . . . .
Deconsolidations of VIEs . . . . . . . . . . . . .
December 31, 2014 balance . . . . . . . . . .
Total realized and unrealized gains (losses):
Included in earnings:
70,420
—
—
—
1,785,769
(1,670,522)
—
(719)
—
—
—
—
391,620
11,677
(259)
20,600
59
—
(68,134)
—
(53,126)
—
—
—
—
207,053
11,712
—
—
(12,876)
113,240
(29,301)
—
(16,788)
—
—
—
—
—
—
—
—
(1,058)
—
—
334,080 132,303
(1,124)
54,220
(180)
(10,474)
857
(15,306,563)
—
—
—
—
—
—
—
—
—
29,363,132
(9,392,128)
107,816,065
(762,590)
—
—
—
—
—
(89,354)
118,165
(3,428,958)
2,827,109
(2,004,330)
44,822
(4,893,120)
(15,992,132)
(259)
20,600
(12,817)
1,899,009
(1,767,957)
(89,354)
63,196
(3,374,738)
2,825,871
27,348,328
(9,346,449)
103,988,001
Change in fair value / gain on sale . .
OTTI . . . . . . . . . . . . . . . . . . . . . . . .
Net accretion . . . . . . . . . . . . . . . . . .
Included in OCI . . . . . . . . . . . . . . . . .
Purchases / Originations . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuances . . . . . . . . . . . . . . . . . . . . . . . . .
Cash repayments / receipts . . . . . . . . . . . .
Transfers into Level III . . . . . . . . . . . . . . .
Transfers out of Level III . . . . . . . . . . . . .
Consolidations of VIEs . . . . . . . . . . . . . . .
Deconsolidations of VIEs . . . . . . . . . . . . .
December 31, 2015 balance . . . . . . . . . . $
Amount of total gains (losses) included in
earnings attributable to assets still held at:
December 31, 2014 . . . . . . . . . . . . . . . . . . $
December 31, 2015 . . . . . . . . . . . . . . . . . .
64,320
—
—
—
1,848,879
(2,100,216)
—
(738)
—
—
—
—
(31,336,587)
—
20,625
(18,573)
1,863,532
(2,106,626)
(9,132)
168,096
(2,920,033)
1,290,497
11,663,104
(7,766,895)
203,865 $ 176,224 $ 212,981 $ 119,698 $ 76,675,689 $ (2,552,448) $ 74,836,009
3,980,376
—
—
—
—
—
(9,132)
304,816
(2,920,033)
1,290,497
(363,008)
57,156
(35,365,585)
—
—
—
—
—
—
—
—
—
12,050,421
(7,825,212)
(3,093)
—
—
(2,363)
14,653
(6,410)
—
(100,738)
—
—
(24,309)
1,161
(12,605)
—
—
—
—
—
—
—
—
—
—
—
—
—
20,625
(16,210)
—
—
—
(35,244)
—
—
—
—
1,278 $ 18,376 $
155
15,131
9,747 $ (16,788) $ (15,306,563) $
3,134
(35,365,585)
(12,605)
(762,590) $ (16,056,540)
(31,379,394)
3,980,376
Amounts were transferred from Level II to Level III due to a decrease in the observable relevant market activity
and amounts were transferred from Level III to Level II due to an increase in the observable relevant market activity.
The following table presents the fair values, all of which are classified in Level III of the fair value hierarchy, of
our financial instruments not carried at fair value on the consolidated balance sheets (amounts in thousands):
Financial assets not carried at fair value:
Loans held-for-investment and loans transferred as
December 31, 2015
December 31, 2014
Carrying
Value
Fair
Value
Carrying
Value
Fair
Value
secured borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,059,652 $ 6,125,881 $ 5,908,665 $ 6,034,838
440,629
12,741
HTM securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
European servicing rights . . . . . . . . . . . . . . . . . . . . . . . . .
441,995
11,849
321,244
2,626
315,255
5,302
Financial liabilities not carried at fair value:
Secured financing agreements and secured borrowings
on transferred loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,107,035 $ 4,092,264 $ 3,267,230
1,418,022
Convertible senior notes . . . . . . . . . . . . . . . . . . . . . . . . . .
1,331,979
1,325,243
3,251,035
1,444,975
150
The following is quantitative information about significant unobservable inputs in our Level III measurements
for those assets and liabilities measured at fair value on a recurring basis (dollar amounts in thousands):
Loans held-for-sale, fair value option $
Carrying Value at
December 31, 2015
Valuation
Technique
203,865 Discounted cash flow Yield (b)
Unobservable
Input
RMBS . . . . . . . . . . . . . . . . . . . . . .
176,224 Discounted cash flow Constant prepayment rate (a)
Duration (c)
Constant default rate (b)
Loss severity (b)
Delinquency rate (c)
Servicer advances (a)
Annual coupon deterioration
Range as of December 31, (1)
2015
4.8% - 5.3%
2014
4.2% - 4.9%
5.0 - 10.0
years
5.0 - 10.0 years
2.6% - 17.8% 1.2% - 15.9%
1.0% - 8.9%
1.1% - 8.9%
10% - 79% (e) 15% - 80% (e)
2% - 29%
30% - 94%
2% - 43%
14% - 75%
(b)
0% - 0.5%
0% - 0.6%
Putback amount per projected
total collateral loss (d)
CMBS . . . . . . . . . . . . . . . . . . . . . .
212,981 Discounted cash flow Yield (b)
Domestic servicing rights . . . . . . . .
119,698 Discounted cash flow Debt yield (a)
Duration (c)
Discount rate (b)
Control migration (b)
VIE assets . . . . . . . . . . . . . . . . . . .
76,675,689 Discounted cash flow Yield (b)
VIE liabilities . . . . . . . . . . . . . . . . .
2,552,448 Discounted cash flow Yield (b)
Duration (c)
Duration (c)
0% - 11%
0% - 11%
0% - 435.8% 0% - 421.4%
0 - 18.5 years 0 - 11.8 years
8.25%
15%
0% - 80%
8.25%
15%
0% - 80%
0% - 920.2% 0% - 925.0%
0 - 17.5 years 0 - 21.0 years
0% - 920.2% 0% - 925.0%
0 - 17.5 years 0 - 21.0 years
(1)
The ranges of significant unobservable inputs are represented in percentages and years.
Sensitivity of the Fair Value to Changes in the Unobservable Inputs
(a) Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower)
fair value measurement.
(b) Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher)
fair value measurement.
(c) Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or
higher (lower or higher) fair value measurement depending on the structural features of the security in question.
(d) Any delay in the putback recovery date leads to a decrease in fair value for the majority of securities in our RMBS
portfolio.
(e) 76% and 85% of the portfolio falls within a range of 45% - 80% as of December 31, 2015 and 2014, respectively.
151
21. Income Taxes
Certain of our subsidiaries have elected to be treated as 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.
Our 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. The majority of our TRSs are held within the Investing and Servicing Segment. As of December 31, 2015
and 2014, approximately $858.5 million and $1.0 billion, respectively, of the Investing and Servicing Segment’s assets,
including $185.6 million and $88.6 million in cash, respectively, 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.
Our income tax provision consisted of the following for the years ended December 31, 2015, 2014 and 2013 (in
thousands):
Current
For the year ended December 31,
2013
2014
2015
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 15,095 $ 28,677 $ 27,850
1,484
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4,768
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
34,102
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
5,432
4,946
39,055
6,000
2,532
23,627
Deferred
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(6,915)
(1,829)
(1,305)
(10,049)
Total income tax provision (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 17,206 $ 24,096 $ 24,053
(9,975)
(3,400)
(1,584)
(14,959)
(3,799)
(1,973)
(649)
(6,421)
(1)
Includes provision of zero and $0.2 million reflected in discontinued operations for the years ended December
31, 2014 and 2013, respectively.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of the
assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Deferred tax assets
and liabilities are presented net by tax jurisdiction and are reported in other assets and other liabilities, respectively. At
December 31, 2015 and 2014, our U.S. tax jurisdiction was in a net deferred tax asset position, while our European tax
152
jurisdiction was in a net deferred tax liability position. The following table presents each of these tax jurisdictions and
the tax effects of temporary differences on their respective net deferred tax assets and liabilities (in thousands):
U.S.
Deferred tax asset, net
Reserves and accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Domestic intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities and loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in unconsolidated entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating and capital loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other U.S. temporary differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
Europe
Deferred tax liability, net
European servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating and capital loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other European temporary differences . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
December 31,
2015
2014
11,659
17,734
(2,416)
(362)
423
2,967
(2,967)
343
27,381
(583)
7,606
(7,606)
(346)
(929)
26,452
$
$
13,818
9,617
(2,327)
883
427
2,498
(2,498)
515
22,933
(2,681)
8,702
(8,702)
(337)
(3,018)
19,915
Unrecognized tax benefits were not material as of and during the years ended December 31, 2015 and 2014.
The Company’s tax returns are no longer subject to audit for years ended prior to January 1, 2012. The Company had
pre-tax income from foreign operations of $22.0 million and $13.5 million during the years ended December 31, 2015
and 2014, respectively, and a pre-tax loss of $2.5 million during the year ended December 31, 2013.
The following table is a reconciliation of our federal income tax determined using our statutory federal tax rate
to our reported income tax provision for the years ended December 31, 2015, 2014 and 2013 (dollar amounts in
thousands):
Federal statutory tax rate . . . . . . . . . . . . . . $
REIT and other non-taxable income . . . . .
State income taxes . . . . . . . . . . . . . . . . . . .
Federal benefit of state tax deduction . . . .
Valuation allowance . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . .
$
For the year ended December 31,
2014
35.0 % $ 183,622
2013
2015
164,286
(148,514) (31.6)%
0.4 %
(0.1)%
0.1 %
(0.1)%
3.7 % $
1,800
(630)
445
(181)
17,206
(160,745) (30.7) % (93,892)
3,769
0.6 %
(1,319)
(0.2) %
(1,928)
0.3 %
(0.4) %
389
4.6 % $ 24,053
35.0 % $ 117,034 35.0 %
(28.1)%
1.1 %
(0.4)%
(0.6)%
0.2 %
7.2 %
3,149
(1,102)
1,315
(2,143)
24,096
153
The changes in the valuation allowance associated with our deferred tax assets are as follows for the years
ended December 31, 2015 and 2014 (amounts in thousands):
January 1 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
Additions to income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision to return adjustments to deferred tax amounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency adjustments reflected in OCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
December 31 balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2015
11,200 $
445
23
(770)
(325)
2014
11,750
1,315
(822)
(1,086)
43
10,573 $ 11,200
22. Commitments and Contingencies
As of December 31, 2015, we had future funding commitments on 54 loans totaling $1.5 billion, of which we
expect to fund $1.3 billion. These future funding commitments primarily relate to construction projects, capital
improvements, tenant improvements and leasing commissions. Generally, funding commitments are subject to certain
conditions that must be met, such as customary construction draw certifications, minimum debt service coverage ratios
or executions of new leases before advances are made to the borrower.
In the ordinary course of business, we provide various forms of guarantees. In limited instances, specifically
involving construction loans, the Company has guaranteed the future funding obligations of certain third party lenders in
the event that such third parties fail to fund their proportionate share of the obligation in a timely manner. We are
currently unaware of any circumstances which would require us to make payments under any of these guarantees.
Future minimum rental payments and sublease income related to our existing corporate leases and subleases for
each of the next five years and thereafter are as follows (in thousands):
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,314 $
Minimum
Rents
7,093 $
6,797
6,697
6,389
5,691
2,647
Sublease
Income
1,447
1,481
1,375
789
612
483
6,187
Management is not aware of any other contractual obligations, legal proceedings, or any other contingent
obligations incurred in the normal course of business that would have a material adverse effect on our consolidated
financial statements.
23. Segment and Geographic Data
In its operation of the business, management, including our chief operating decision maker, who is our Chief
Executive Officer, reviews certain financial information, including segmented internal profit and loss statements
prepared on a basis prior to the impact of consolidating VIEs under ASC 810. The segment information within this note
is reported on that basis. Effective January 1, 2015, we established a separate presentation for corporate overhead, which
includes our corporate debt facilities and the associated expenses, management fee expenses and general and
administrative expenses not directly allocable to our segments. Also effective January 1, 2015, we transferred a
performing loan with a balance of $25.0 million as of December 31, 2014 from our Investing and Servicing Segment to
our Lending Segment. Effective upon our Ireland Portfolio acquisition discussed in Note 3, we established a third
business segment, the Property Segment, and transferred our existing equity method investment in the Retail Fund from
our Lending Segment to our Property Segment. As of December 31, 2014, the carrying value of the Retail Fund was
$129.5 million. We have retrospectively reclassified prior periods to conform to these changes in presentation.
154
The table below presents our results of operations for the year ended December 31, 2015 by business segment
(amounts in thousands):
Investing
Lending and Servicing Property
Segment
Segment
Segment
Corporate Subtotal
Investing
and Servicing
VIEs
Total
Revenues:
Interest income from loans . . . . . . . . . . . . $ 460,365 $
68,059
Interest income from investment securities
428
Servicing fees . . . . . . . . . . . . . . . . . . . . . .
Rental income . . . . . . . . . . . . . . . . . . . . . .
—
597
Other revenues . . . . . . . . . . . . . . . . . . . . .
529,449
Total revenues . . . . . . . . . . . . . . . . . . .
Costs and expenses:
Management fees . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . .
Acquisition and investment pursuit costs . .
Costs of rental operations . . . . . . . . . . . . . .
Depreciation and amortization . . . . . . . . . .
Loan loss allowance, net . . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . . .
901
81,676
21,685
2,065
—
—
(2)
6
106,331
Income (loss) before other income, income
17,566 $
156,365
215,770
11,177
10,928
411,806
72
10,386
123,746
2,375
6,121
13,972
—
383
157,055
— $
—
—
25,445
—
25,445
— $ 477,931 $
—
—
—
—
—
224,424
216,198
36,622
11,525
966,700
— $ 477,931
93,665
117,068
36,622
10,591
735,877
(130,759)
(99,130)
—
(934)
(230,823)
—
5,584
1,205
8,951
5,421
15,038
—
—
36,199
123,532
104,904
7,275
38
—
—
—
—
235,749
124,505
202,550
153,911
13,429
11,542
29,010
(2)
389
535,334
228
—
717
—
—
—
—
—
945
124,733
202,550
154,628
13,429
11,542
29,010
(2)
389
536,279
taxes and non-controlling interests . . . . . .
423,118
254,751
(10,754)
(235,749)
431,366
(231,768)
199,598
Other income:
Change in net assets related to consolidated
VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of servicing rights . . . . . .
Change in fair value of investment securities, net
Change in fair value of mortgage loans held-for-
sale, net . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from unconsolidated entities . . . . . . .
Gain on sale of investments and other assets, net
Gain (loss) on derivative financial instruments,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency (loss) gain, net . . . . . . . . . . .
Loss on extinguishment of debt . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . . .
Total other income (loss) . . . . . . . . . . .
Income (loss) before income taxes . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to non-controlling
interests . . . . . . . . . . . . . . . . . . . . . . . . .
Net income (loss) attributable to Starwood
—
—
209
—
4,045
4,839
30,764
(36,956)
—
—
2,901
426,019
(242)
425,777
—
(46,831)
(9,952)
64,320
13,042
17,825
(14,226)
(296)
—
161
24,043
278,794
(16,964)
261,830
—
—
—
—
10,090
—
5,060
31
—
1,530
16,711
5,957
—
5,957
—
—
—
—
—
—
—
(46,831)
(9,743)
64,320
27,177
22,664
—
—
(5,921)
17
(5,904)
(241,653)
—
(241,653)
21,598
(37,221)
(5,921)
1,708
37,751
469,117
(17,206)
451,911
185,490
34,226
12,827
185,490
(12,605)
3,084
—
(503)
—
64,320
26,674
22,664
—
—
—
—
232,040
272
—
272
21,598
(37,221)
(5,921)
1,708
269,791
469,389
(17,206)
452,183
(1,389)
175
—
—
(1,214)
(272)
(1,486)
Property Trust, Inc. . . . . . . . . . . . . . . . $ 424,388 $
262,005 $ 5,957 $ (241,653) $ 450,697 $
— $ 450,697
155
The table below presents our results of operations for the year ended December 31, 2014 by business segment
(amounts in thousands):
Lending
Segment
Investing
and Servicing Property
Single
Family
Segment
Segment Corporate Residential Subtotal
Investing
and Servicing
VIEs
Total
Revenues:
Interest income from loans . . $ 420,683 $
Interest income from
investment securities . . . . .
Servicing fees . . . . . . . . . . . .
Rental income . . . . . . . . . . . .
Other revenues . . . . . . . . . . .
Total revenues . . . . . . . . .
68,348
330
—
406
489,767
13,979 $
— $
— $
— $ 434,662 $
— $ 434,662
109,819
227,145
9,831
11,619
372,393
72
4,781
141,500
1,206
5,938
16,627
—
7,167
177,291
—
—
—
—
—
—
—
—
—
—
—
—
—
115,411
90,410
5,887
—
—
—
—
—
—
452
—
—
—
—
212,160
—
—
—
—
—
—
—
—
—
—
—
—
—
—
178,167
227,475
9,831
12,025
862,160
117,562
161,104
168,938
3,681
5,938
16,627
2,047
7,219
483,116
(66,151)
(91,910)
—
(1,224)
(159,285)
112,016
135,565
9,831
10,801
702,875
170
—
723
117,732
161,104
169,661
—
—
—
—
—
893
3,681
5,938
16,627
2,047
7,219
484,009
2,079
65,913
21,551
2,023
—
—
2,047
52
93,665
396,102
195,102
—
(212,160)
—
379,044
(160,178)
218,866
—
—
—
(53,065)
—
—
—
—
7,484
12,886
13,610
—
2,176
—
30,713
(29,139)
(259)
(327)
22,180
(10,262)
(803)
(797)
4,159
120,985
—
—
—
—
2,176
—
—
—
—
—
—
—
—
—
—
—
—
—
212,506
212,506
—
(53,065)
36,278
(16,787)
—
98,545
(83,468)
15,077
—
70,420
—
70,420
—
—
—
—
—
—
—
23,270
12,886
(3,338)
—
19,932
12,886
20,451
(29,942)
(1,056)
3,832
145,341
—
—
—
—
161,978
20,451
(29,942)
(1,056)
3,832
307,319
418,282
(1,476)
316,087
(22,620)
2,176
—
(212,160)
—
—
—
524,385
(24,096)
1,800
—
526,185
(24,096)
416,806
293,467
2,176
(212,160)
—
500,289
1,800
502,089
—
416,806
—
293,467
—
2,176
—
(212,160)
(1,551)
(1,551)
(1,551)
498,738
—
1,800
(1,551)
500,538
(3,717)
—
—
—
—
(3,717)
(1,800)
(5,517)
Costs and expenses:
Management fees . . . . . . . . .
Interest expense . . . . . . . . . .
General and administrative . .
Acquisition and investment
pursuit costs . . . . . . . . . . . .
Costs of rental operations . . . .
Depreciation and amortization
Loan loss allowance, net . . . .
Other expense . . . . . . . . . . . .
Total costs and expenses .
Income (loss) before other
income, income taxes and non-
controlling interests . . . . . . . .
Other income:
Change in net assets related to
consolidated VIEs . . . . . . . . . .
Change in fair value of servicing
rights . . . . . . . . . . . . . . . . . . . .
Change in fair value of investment
Earnings from unconsolidated
entities . . . . . . . . . . . . . . . . . . .
Gain on sale of investments, net .
Gain (loss) on derivative financial
instruments, net . . . . . . . . . . . .
Foreign currency loss, net . . . . . .
OTTI . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . .
Total other income . . . . . .
Income (loss) from continuing
operations before income taxes
Income tax provision . . . . . . . . .
Income (loss) from continuing
operations . . . . . . . . . . . . . . . .
Loss from discontinued operations,
net of tax . . . . . . . . . . . . . . . . .
Net income (loss) . . . . . . . . . . . .
Net income attributable to non-
controlling interests . . . . . .
Net income (loss) attributable
securities, net . . . . . . . . . . . . . .
822
97,723
Change in fair value of mortgage
loans held-for-sale, net . . . . . . .
—
70,420
to Starwood Property
Trust, Inc. . . . . . . . . . . . . . $ 413,089 $
293,467 $ 2,176 $ (212,160) $
(1,551) $ 495,021 $
— $ 495,021
156
The table below presents our results of operations for the year ended December 31, 2013 by business segment
(amounts in thousands):
Single
Lending and Servicing Family
Investing
Segment
Segment
Residential Corporate
Subtotal
Investing
and Servicing
VIEs
Total
Revenues:
Interest income from loans . . . . . . . . . . . $ 335,078 $
Interest income from investment securities
Servicing fees . . . . . . . . . . . . . . . . . . . . .
Rental income . . . . . . . . . . . . . . . . . . . . .
Other revenues . . . . . . . . . . . . . . . . . . . .
Total revenues . . . . . . . . . . . . . . . . . .
57,802
—
6
592
393,478
Costs and expenses:
Management fees . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . .
Business combination costs . . . . . . . . . . .
Acquisition and investment pursuit costs .
Depreciation and amortization . . . . . . . . .
Loan loss allowance, net . . . . . . . . . . . . .
Other expense . . . . . . . . . . . . . . . . . . . . .
Total costs and expenses . . . . . . . . . .
2,993
65,007
11,125
—
2,819
—
1,923
150
84,017
Income (loss) before other income, income
9,562 $
54,020
179,015
—
6,111
248,708
51
3,117
132,713
—
829
9,701
—
1,148
147,559
— $
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— $ 344,640 $
—
—
—
—
—
111,822
179,015
6
6,703
642,186
— $ 344,640
74,312
124,726
6
5,811
549,495
(37,510)
(54,289)
—
(892)
(92,691)
73,650
43,679
5,658
17,958
—
—
—
—
140,945
76,694
111,803
149,496
17,958
3,648
9,701
1,923
1,298
372,521
122
—
523
—
—
—
—
—
645
76,816
111,803
150,019
17,958
3,648
9,701
1,923
1,298
373,166
taxes and non-controlling interests . . . . .
309,461
101,149
—
(140,945)
269,665
(93,336)
176,329
—
—
—
(15,868)
116,377
9,024
116,377
(6,844)
—
22,509
(31,393)
(8,884)
Other income:
Change in net assets related to consolidated
VIEs . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in fair value of servicing rights . . . . .
Change in fair value of investment securities,
—
—
—
(15,868)
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(148)
22,657
Change in fair value of mortgage loans held-
for-sale, net . . . . . . . . . . . . . . . . . . . . . . . .
Earnings from unconsolidated entities . . . . . .
Gain on sale of investments, net . . . . . . . . . .
(Loss) gain on derivative financial instruments,
net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency gain (loss), net . . . . . . . . . .
OTTI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income, net . . . . . . . . . . . . . . . . . . . . .
Total other income . . . . . . . . . . . . . . .
Income (loss) from continuing operations
before income taxes . . . . . . . . . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . .
Income (loss) from continuing operations .
Loss from discontinued operations, net of tax
Net income (loss) . . . . . . . . . . . . . . . . . . . . .
Net income attributable to non-controlling
—
4,776
25,063
(13,259)
10,478
(1,014)
15
25,911
335,372
1,722
337,094
—
337,094
43,849
4,502
—
2,089
(95)
—
1,037
58,171
159,320
(25,580)
133,740
—
133,740
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
43,849
9,278
25,063
(11,170)
10,383
(1,014)
1,052
84,082
—
—
—
(8,106)
(8,106)
(140,945)
—
(140,945)
(11,688)
(152,633)
353,747
(23,858)
329,889
(19,794)
310,095
—
(437)
—
43,849
8,841
25,063
—
—
—
—
93,571
(11,170)
10,383
(1,014)
1,052
177,653
235
—
235
—
235
353,982
(23,858)
330,124
(19,794)
310,330
interests . . . . . . . . . . . . . . . . . . . . . . . .
(5,065)
—
—
—
(5,065)
(235)
(5,300)
Net income (loss) attributable to
Starwood Property Trust, Inc. . . . . . . $ 332,029 $
133,740 $
(8,106) $ (152,633) $ 305,030 $
— $ 305,030
157
The table below presents our consolidated balance sheet as of December 31, 2015 by business segment
(amounts in thousands):
Lending
Segment
Investing
and Servicing
Segment
Property
Segment
Corporate
Subtotal
VIEs
Total
Investing
and Servicing
Assets:
Cash and cash equivalents . . . . . . . $
Restricted cash . . . . . . . . . . . . . . .
Loans held-for-investment, net . . .
Loans held-for-sale . . . . . . . . . . . .
Loans transferred as secured
83,836 $
9,775
5,973,079
—
62,649 $
8,826
—
203,865
2,944 $
4,468
—
—
218,408 $ 367,837 $
—
—
—
23,069
5,973,079
203,865
978 $
—
—
—
368,815
23,069
5,973,079
203,865
borrowings . . . . . . . . . . . . . . . . .
Investment securities . . . . . . . . . . .
Properties, net . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . .
Investment in unconsolidated
entities . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . .
Derivative assets . . . . . . . . . . . . . .
Accrued interest receivable . . . . . .
Other assets . . . . . . . . . . . . . . . . .
VIE assets, at fair value . . . . . . . . .
86,573
511,966
—
—
—
1,038,200
150,497
152,278
30,827
—
33,412
34,028
27,883
—
53,145
140,437
2,087
286
72,936
—
—
—
768,728
61,121
122,454
—
9,592
—
31,853
—
Total Assets . . . . . . . . . . . . . . . . . . . . . $ 6,791,379 $ 1,885,206 $ 1,001,160 $
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses
—
—
—
—
86,573
1,550,166
919,225
213,399
—
(825,219)
—
(11,829)
86,573
724,947
919,225
201,570
—
—
—
—
11,648
—
199,201
140,437
45,091
34,314
142,263
76,675,689
230,056 $ 9,907,801 $ 75,830,337 $ 85,738,138
(7,225)
—
—
—
(2,057)
76,675,689
206,426
140,437
45,091
34,314
144,320
—
18,822 $
—
—
5,190
2,361,842
—
90,399 $
423
—
6
423,691
—
25,427 $
—
—
—
576,934
—
21,468 $ 156,116 $
40,532
114,947
—
656,568
1,325,243
40,955
114,947
5,196
4,019,035
1,325,243
689 $
—
—
—
—
—
156,805
40,955
114,947
5,196
4,019,035
1,325,243
88,000
—
2,473,854
—
—
514,519
—
—
602,361
—
—
2,158,758
88,000
—
5,749,492
—
75,817,014
75,817,703
88,000
75,817,014
81,567,195
and other liabilities . . . . . . . . . . . $
Related-party payable . . . . . . . . . .
Dividends payable . . . . . . . . . . . .
Derivative liabilities . . . . . . . . . . .
Secured financing agreements, net .
Convertible senior notes, net . . . . .
Secured borrowings on transferred
loans . . . . . . . . . . . . . . . . . . . . .
VIE liabilities, at fair value . . . . . .
Total Liabilities . . . . . . . . . . . . . . .
Equity:
Starwood Property Trust, Inc.
Stockholders’ Equity:
Common stock . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . .
Accumulated other comprehensive
—
—
—
—
—
2,410
4,192,844
(72,381)
29,729
(12,286)
—
2,477,987
—
—
1,146,926
—
—
394,465
—
2,410
173,466
(72,381)
2,410
4,192,844
(72,381)
income (loss) . . . . . . . . . . . . . . . .
37,242
(3,714)
(3,799)
—
29,729
Retained earnings (accumulated
deficit) . . . . . . . . . . . . . . . . . . . . .
Total Starwood Property Trust, Inc.
1,790,705
221,073
8,133
(2,032,197)
(12,286)
Stockholders’ Equity . . . . . . . . . .
4,305,934
1,364,285
398,799
(1,928,702)
4,140,316
—
4,140,316
Non-controlling interests in
consolidated subsidiaries . . . . . . . .
Total Equity . . . . . . . . . . . . . . . . . .
Total Liabilities and Equity . . . . . . $ 6,791,379 $ 1,885,206 $ 1,001,160 $
6,402
1,370,687
11,591
4,317,525
—
398,799
—
(1,928,702)
30,627
4,170,943
230,056 $ 9,907,801 $ 75,830,337 $ 85,738,138
17,993
4,158,309
12,634
12,634
158
The table below presents our consolidated balance sheet as of December 31, 2014 by business segment
(amounts in thousands):
Investing
Lending
Segment
and Servicing Property
Segment
Segment
Corporate
Subtotal
Investing
and Servicing
VIEs
Total
Assets:
Cash and cash equivalents . . . . . $
Restricted cash . . . . . . . . . . . . .
Loans held-for-investment, net .
Loans held-for-sale . . . . . . . . . .
Loans transferred as secured
125,132 $
34,941
5,771,307
—
85,252 $
13,763
7,931
391,620
—
753,553
39,854
190,207
borrowings . . . . . . . . . . . . . . .
Investment securities . . . . . . . . .
Properties, net . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . .
Investment in
unconsolidated entities . . . . . .
Goodwill . . . . . . . . . . . . . . . . .
Derivative assets . . . . . . . . . . . .
Accrued interest receivable . . . .
Other assets . . . . . . . . . . . . . . .
VIE assets, at fair value . . . . . . .
129,427
764,517
—
—
22,537
—
23,579
39,188
21,329
—
— $
—
—
—
—
—
—
—
44,017 $ 254,401 $
—
48,704
— 5,779,238
391,620
—
—
129,427
— 1,518,070
39,854
—
190,207
—
786 $
—
—
—
255,187
48,704
5,779,238
391,620
—
(519,822)
—
(46,055)
129,427
998,248
39,854
144,152
48,693
140,437
3,049
914
61,048
—
129,475
—
—
—
—
—
—
—
—
—
—
200,705
140,437
26,628
40,102
97,116
—
(6,722)
193,983
—
140,437
—
26,628
—
40,102
(1,464)
95,652
107,816,065
107,816,065
$ 8,856,509 $ 107,242,788 $ 116,099,297
14,739
Total Assets . . . . . . . . . . . . . . . . . . . $ 6,931,957 $ 1,736,321 $ 129,475 $
Liabilities and Equity
58,756
Liabilities:
Accounts payable, accrued
expenses and other liabilities . . $
Related-party payable . . . . . . . .
Dividends payable . . . . . . . . . .
Derivative liabilities . . . . . . . . .
Secured financing
agreements, net . . . . . . . . . . . .
Convertible senior notes, net . . .
Secured borrowings on
transferred loans . . . . . . . . . . .
VIE liabilities, at fair value . . . .
Total Liabilities . . . . . . . . . . . . .
Equity:
Starwood Property Trust, Inc.
Stockholders’ Equity:
Common stock . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . .
Treasury stock . . . . . . . . . . . . . . .
Accumulated other
23,015 $
—
—
3,662
97,424 $
4,405
—
1,814
— $
—
—
—
23,620 $ 144,059 $
36,346
108,189
40,751
108,189
5,476
—
457 $
—
—
—
144,516
40,751
108,189
5,476
2,252,493
—
222,363
—
129,441
—
2,408,611
—
—
326,006
—
—
—
—
—
—
—
129,441
—
4,983,727
2,249,110
662,933
1,418,022
3,137,789
1,418,022
—
—
3,137,789
1,418,022
—
107,232,201
107,232,658
129,441
107,232,201
112,216,385
—
—
—
—
—
2,248
3,835,725
(23,635)
55,896
(9,378)
—
3,126,845
—
—
1,413,608
—
—
127,299
—
2,248
(832,027)
(23,635)
2,248
3,835,725
(23,635)
comprehensive income . . . . . . .
55,781
115
—
—
55,896
Retained earnings (accumulated
deficit) . . . . . . . . . . . . . . . . . . .
Total Starwood Property
1,328,794
(3,408)
2,176
(1,336,940)
(9,378)
Trust, Inc. Stockholders’ Equity
4,511,420
1,410,315
129,475
(2,190,354)
3,860,856
—
3,860,856
Non-controlling interests in
consolidated subsidiaries . . . . . .
Total Equity . . . . . . . . . . . . . . . .
Total Liabilities and Equity . . . . $ 6,931,957 $ 1,736,321 $ 129,475 $
—
1,410,315
11,926
4,523,346
—
129,475
—
(2,190,354)
58,756
22,056
11,926
3,872,782
3,882,912
$ 8,856,509 $ 107,242,788 $ 116,099,297
10,130
10,130
Revenues generated from foreign sources were $134.7 million, $111.5 million and $64.8 million for the years
ended December 31, 2015, 2014 and 2013, respectively. The majority of our revenues generated from foreign sources
are derived from Ireland and the United Kingdom. Refer to Schedule III for a detailed listing of the properties held by
the Company, including their respective geographic locations.
159
24. Quarterly Financial Data (Unaudited)
The following table summarizes our quarterly financial data which, in the opinion of management, reflects all
adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of our results of
operations (amounts in thousands, except per share data):
March 31
June 30
September 30 December 31
For the Three-Month Periods Ended
2015:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 178,849 $ 178,660 $ 192,145 $ 186,223
96,648
Income from continuing operations . . . . . . . . . . . . . . . . . . .
96,648
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
96,451
Net income attributable to Starwood Property Trust, Inc. .
Basic earnings per share:
117,116
117,116
116,735
117,640
117,640
117,148
120,779
120,779
120,363
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
0.53
0.53
0.52
0.52
0.49
0.49
0.49
0.49
0.49
0.49
0.49
0.49
0.40
0.40
0.40
0.40
2014:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income attributable to Starwood Property Trust, Inc. .
Basic earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Diluted earnings per share:
Continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
171,979
122,432
120,881
120,601
170,750
120,382
120,382
117,868
181,368
167,390
167,390
165,044
178,778
91,885
91,885
91,508
0.62
0.61
0.61
0.60
0.53
0.53
0.52
0.52
0.73
0.73
0.73
0.73
0.41
0.41
0.40
0.40
Annual EPS may not equal the sum of each quarter’s EPS due to rounding and other computational factors.
160
25. Subsequent Events
Our significant events subsequent to December 31, 2015 were as follows:
Woodstar Portfolio Acquisitions
Since December 31, 2015, we have acquired 12 properties in the Woodstar Portfolio, comprised of 3,082 units,
which were previously under contract for an aggregate gross acquisition price of $202.8 million. We assumed sponsored
debt of $126.7 million at acquisition.
Amendment to Share Repurchase Program and Subsequent Repurchases
In January 2016, our board of directors authorized a $50.0 million increase and an extension of our share
repurchase program through January 2017, increasing the maximum amount of shares and Convertible Notes available
for repurchase under the program to $500.0 million. Subsequent to December 31, 2015 and through February 19, 2016,
we repurchased 1.1 million shares for $19.7 million and no Convertible Notes, bringing the remaining capacity under the
repurchase program to $282.1 million as of February 19, 2016.
Dividend Declaration
On February 25, 2016, our board of directors declared a dividend of $0.48 per share for the first quarter of 2016,
which is payable on April 15, 2016 to common stockholders of record as of March 31, 2016.
161
Starwood Property Trust, Inc. and Subsidiaries
Schedule III—Real Estate and Accumulated Depreciation
December 31, 2015
(Dollars in thousands)
Property Type /
Geographic Location
Individually Significant
Properties
Initial Cost
to Company
Costs
Capitalized
Depreciable Subsequent to
Gross Amounts Carried at
December 31, 2015
Depreciable
Accumulated Acquisition
Encumbrances Land
Property Acquisition(1) Land
Property Total
Depreciation(3)
Date
Office—Dublin, Ireland—1 . . . . $
Office—Dublin, Ireland—2 . . . .
Office—Dublin, Ireland—3 . . . .
Office—Dublin, Ireland—4 . . . .
Aggregated Properties
Office—Ireland (8 properties) . . .
Multi-family—U.S., South East (24
78,331 $ 35,476 $
23,144
49,559
21,901
44,398
14,993
33,922
69,301 $
46,844
39,149
31,495
— $ 35,476 $
23,144
—
21,901
—
14,993
—
69,301 $ 104,777
69,988
46,844
61,050
39,149
46,488
31,495
$
102,059
53,931
83,255
—
53,931
83,255 137,186
properties) . . . . . . . . . . . . . . .
275,981
82,613
282,947
1,410
82,613
284,357 366,970
Jul-15
(1,012)
(1,012) May-15
(845) May-15
(680) May-15
(1,798) May-15
Sep-14 to
Dec-15
(2,047)
Multi-family—U.S., South West (1
property) . . . . . . . . . . . . . . . .
Multi-family—Ireland (1 property)
Retail—U.S., North East (3
properties) . . . . . . . . . . . . . . .
Retail—U.S., West (2 properties) .
Retail—U.S., South East (3
properties) . . . . . . . . . . . . . . .
Retail—U.S., Midwest (1 property)
Retail—U.S., South West (3
properties) . . . . . . . . . . . . . . .
Industrial—U.S., Midwest (1
property) . . . . . . . . . . . . . . . .
Self-storage—U.S., North East (1
property) . . . . . . . . . . . . . . . .
$
Notes to Schedule III:
—
11,053
665
8,247
2,356
8,766
—
—
665
8,247
2,356
8,766
3,021
17,013
(105)
Sep-14
(189) May-15
23,057
—
7,457
1,339
24,804
2,910
286
—
7,457
1,339
25,090
2,910
32,547
4,249
4,838
12,300
7,617
5,238
12,304
5,692
—
—
7,617
5,238
12,304
5,692
19,921
10,930
24,400
10,108
26,615
188
10,108
26,803
36,911
(173)
(5)
May-15 to
Nov-15
Dec-15
Aug-15 to
(85)
Dec-15
(39) Nov-15
Oct-14 to
Sep-15
(691)
—
717
2,557
35
717
2,592
3,309
(145)
Apr-14
—
11,498
2,202
659,898 $ 275,648 $ 650,493 $
—
2,202
11,498
13,700
1,919 $ 275,648 $ 652,412 $ 928,060 (2) $
(9)
(8,835)
Dec-15
(1)
(2)
(3)
No costs subsequent to acquisition are capitalized to land.
The aggregate cost for federal income tax purposes is $1.0 billion.
Depreciation is computed based upon estimated useful lives as described in Note 7 of our Consolidated Financial Statements.
The following schedule presents our real estate activity during the years ended December 31, 2015, 2014 and
2013 (in thousands):
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40,497 $ 754,981 $ 99,328
Additions during the year:
Acquisitions (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisitions through foreclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on conversion of loans to real estate . . . . . . . . . . . . . . . . . . . . . . . . . . .
Improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total additions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
900,247
12,548
—
2,056
914,851
96,901
7,897
—
1,872
106,670
539,610
18,867
8,624
102,490
669,591
2015
2014
2013
Deductions during the year:
Spin-off of SWAY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Costs of real estate sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deductions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
—
(18,421)
(8,867)
—
(27,288)
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 928,060 $
(819,239)
(1,915)
—
—
(821,154)
—
12,842
—
1,096
13,938
40,497 $ 754,981
(1)
Refer to Note 16 of our Consolidated Financial Statements for a discussion of property acquisitions from related
162
parties.
The following schedule presents activity within accumulated depreciation during the years ended December 31,
2015, 2014 and 2013 (in thousands):
Beginning balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
643 $
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Spin-off of SWAY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Disposition/write-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign currency translation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Ending balance, December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$
8,802
—
(539)
(71)
8,835
$
2015
2014
2013
5,767 $ 213
5,554
2,183
—
(7,221)
—
(86)
—
—
$ 5,767
643
163
Starwood Property Trust, Inc. and Subsidiaries
Schedule IV—Mortgage Loans on Real Estate
December 31, 2015
(Dollars in thousands)
Description/ Location
Prior
Carrying
Face
Liens(1) Amount Amount
Interest Rate(2)
Payment
Terms(3) Maturity Date(4)
Individually Significant First Mortgages:
Hospitality, Various, USA-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Hospitality, Various, USA-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mixed Use, New York, NY-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mixed Use, New York, NY-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mixed Use, New York, NY-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mixed Use, New York, NY-4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, London, England-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, London, England-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, New York, NY-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, New York, NY-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office, New York, NY-3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Aggregated First Mortgages:
Hospitality, International, Floating (1 mortgage) . . . . . . . . . . . . . . . . .
Hospitality, North East, Floating (6 mortgages) . . . . . . . . . . . . . . . . . .
Hospitality, South East, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . . .
Hospitality, South East, Floating (10 mortgages) . . . . . . . . . . . . . . . . .
Hospitality, South West, Floating (4 mortgages) . . . . . . . . . . . . . . . . . .
Hospitality, West, Floating (14 mortgages) . . . . . . . . . . . . . . . . . . . . .
Industrial, South East, Fixed (7 mortgages) . . . . . . . . . . . . . . . . . . . . .
Industrial, West, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . . . . .
Mixed Use, North East, Floating (3 mortgages) . . . . . . . . . . . . . . . . . .
Mixed Use, South West, Floating (2 mortgages) . . . . . . . . . . . . . . . . . .
Mixed Use, West, Floating (4 mortgages) . . . . . . . . . . . . . . . . . . . . . .
Multi-family, International, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . .
Multi-family, International, Floating (1 mortgage) . . . . . . . . . . . . . . . .
Multi-family, International, Floating (1 mortgage) . . . . . . . . . . . . . . . .
Multi-family, North East, Floating (12 mortgages) . . . . . . . . . . . . . . . .
Multi-family, West, Floating (21 mortgages) . . . . . . . . . . . . . . . . . . . .
Office, International, Fixed (2 mortgages) . . . . . . . . . . . . . . . . . . . . . .
Office, International, Floating (1 mortgage) . . . . . . . . . . . . . . . . . . . . .
Office, Mid Atlantic, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . .
Office, Mid Atlantic, Floating (4 mortgages) . . . . . . . . . . . . . . . . . . . .
Office, Midwest, Floating (5 mortgages) . . . . . . . . . . . . . . . . . . . . . . .
Office, North East, Fixed (2 mortgages) . . . . . . . . . . . . . . . . . . . . . . . .
Office, North East, Floating (10 mortgages) . . . . . . . . . . . . . . . . . . . . .
Office, South East, Floating (4 mortgages) . . . . . . . . . . . . . . . . . . . . . .
Office, South West, Floating (4 mortgages) . . . . . . . . . . . . . . . . . . . . .
Office, West, Floating (14 mortgages) . . . . . . . . . . . . . . . . . . . . . . . . .
Other, International, Fixed (2 mortgages) . . . . . . . . . . . . . . . . . . . . . . .
Other, South East, Fixed (3 mortgages) . . . . . . . . . . . . . . . . . . . . . . . .
Other, South East, Floating (4 mortgages) . . . . . . . . . . . . . . . . . . . . . .
Other, Various, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential, West, Floating (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . .
Retail, International, Floating (1 mortgage) . . . . . . . . . . . . . . . . . . . . .
Retail, Mid Atlantic, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . .
Retail, Midwest, Fixed (4 mortgages). . . . . . . . . . . . . . . . . . . . . . . . . .
Retail, Midwest, Floating (6 mortgages) . . . . . . . . . . . . . . . . . . . . . . . .
Retail, North East, Fixed (3 mortgages) . . . . . . . . . . . . . . . . . . . . . . . .
Retail, North East, Floating (8 mortgages) . . . . . . . . . . . . . . . . . . . . . .
Retail, South East, Fixed (4 mortgages) . . . . . . . . . . . . . . . . . . . . . . . .
Retail, South West, Fixed (3 mortgages) . . . . . . . . . . . . . . . . . . . . . . .
Retail, South West, Floating (4 mortgages) . . . . . . . . . . . . . . . . . . . . .
Retail, Various, Floating (2 mortgages) . . . . . . . . . . . . . . . . . . . . . . . .
Retail, West, Fixed (6 mortgages) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing and Servicing Segment Loans Held-for-Sale, Various, Fixed .
Aggregated Subordinated and Mezzanine Loans:
Hospitality, Midwest, Floating (2 mortgages) . . . . . . . . . . . . . . . . . . . .
Hospitality, North East, Floating (5 mortgages) . . . . . . . . . . . . . . . . . .
Hospitality, South East, Floating (2 mortgages) . . . . . . . . . . . . . . . . . .
Hospitality, Various, Floating (4 mortgages) . . . . . . . . . . . . . . . . . . . .
Hospitality, West, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . . . .
Hospitality, West, Floating (2 mortgages) . . . . . . . . . . . . . . . . . . . . . .
Industrial, South East, Fixed (8 mortgages) . . . . . . . . . . . . . . . . . . . . .
Mixed Use, North East, Floating (2 mortgages) . . . . . . . . . . . . . . . . . .
Mixed Use, West, Floating (2 mortgages) . . . . . . . . . . . . . . . . . . . . . .
Multi-family, Mid Atlantic, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . .
Multi-family, Mid Atlantic, Floating (2 mortgages) . . . . . . . . . . . . . . .
163,282
41,223
117,951
32,388
40,840
51,573
87,759
307,186
139,475
160,101
48,608
54,175
72,798
68,015
406,940
131,536
374,083
31,312
463
141,908
87,537
52,810
21,936
37,546
47,448
61,335
215,199
117,950
68,281
48,014
156,494
33,679
75,254
324,147
146,963
50,817
189,539
10,341
126,165
36,042
41,894
99,775
39,238
650
2,021
81,403
7,287
64,744
9,242
2,404
33,865
12,432
10,651
203,865
15,670
44,569
14,615
151,681
6,142
11,985
63,425
155,273
38,950
2,976
9,828
L+2.40%
L+9.90%
L+8.00%
L+8.00%
L+8.00%
5.90%
5.61%
3GBP+3.90%
L+10.90%
L+3.50%
L+3.50%
3EU+7.00%
L+2.75% to 9.75%
9.00%
L+2.65% to 13.00%
L+2.25% to 9.75%
L+2.25% to 10.25%
7.80% to 9.83%
9.75%
L+3.50% to 10.19%
L+2.50% to 10.00%
L+1.00% to 7.50%
8.55%
3GBP+7.00%
GBP+7.65%
L+6.34%
L+1.00% to 9.25%
5.60%
3GBP+4.50%
5.25%
L+2.25% to 11.25%
L+2.25% to 10.58%
6.35% to 11.00%
L+2.00% to 10.67%
L+2.25% to 13.00%
L+5.50%
L+2.25% to 9.75%
5.02% to 15.12%
5.00% to 12.00%
L+8.50%
10.00%
L+5.25%
3EU+8.00%
7.07%
7.07% to 10.25%
L+2.25% to 10.75%
5.74% to 10.00%
L+2.25% to 8.05%
5.93% to 10.00%
6.03% to 7.99%
L+2.25% to 15.25%
L+2.25% to 9.25%
5.82% to 7.26%
4.61% to 5.32%
L+8.11%
L+5.10% to 11.17%
L+3.49% to 8.83%
L+7.50% to 11.13%
12.66%
L+7.75%
8.18%
L+10.00% to 12.00%
L+9.31%
10.50%
L+8.35%
$
$
— $ 164,902
—
41,225
— 118,750
32,700
—
42,687
—
53,000
—
—
88,428
— 309,498
— 140,000
— 161,085
48,914
—
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
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N/A
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N/A
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N/A
N/A
164
I/O
I/O
I/O
I/O
I/O
I/O
I/O
I/O
I/O
I/O
I/O
N/A
N/A
N/A
N/A
N/A
N/A
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N/A
12/9/2018
12/9/2018
1/31/2019
1/31/2019
1/31/2019
1/31/2019
10/1/2018
10/1/2018
4/9/2018
4/9/2018
4/9/2018
2016
2017-2018
2016
2016-2019
2020
2018-2019
2016-2024
2017
2018-2019
2019
2017-2018
2017
2017
2017
2018
2016-2020
2016
2016
2017
2016-2019
2017-2019
2017-2019
2018-2019
2018-2019
2017
2016-2019
2016
2017-2024
2018
2025
2018
2016
2019
2017-2019
2018
2016-2019
2017
2016-2019
2018
2018
2016
2017-2023
2020-2025
2018
2018
2018
2017-2018
2016
2018
2024
2017-2020
2018
2024
2019
Description/ Location
Multi-family, Midwest, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . . .
Multi-family, North East, Floating (2 mortgages) . . . . . . . . . . . . . . . . .
Multi-family, South East, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . .
Multi-family, South West, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . .
Multi-family, West, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . . .
Multi-family, West, Floating (1 mortgage) . . . . . . . . . . . . . . . . . . . . . .
Office, Midwest, Floating (6 mortgages) . . . . . . . . . . . . . . . . . . . . . . .
Office, North East, Fixed (5 mortgages) . . . . . . . . . . . . . . . . . . . . . . . .
Office, North East, Floating (3 mortgages) . . . . . . . . . . . . . . . . . . . . . .
Office, South East, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . . .
Office, South West, Fixed (2 mortgages) . . . . . . . . . . . . . . . . . . . . . . .
Office, West, Floating (6 mortgages) . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, Midwest, Floating (2 mortgages) . . . . . . . . . . . . . . . . . . . . . . . .
Other, South East, Fixed (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . . . .
Other, West, Floating (2 mortgages) . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential, South East, Floating (1 mortgage) . . . . . . . . . . . . . . . . . . .
Residential, West, Floating (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . .
Retail, Midwest, Fixed (3 mortgages). . . . . . . . . . . . . . . . . . . . . . . . . .
Retail, South West, Floating (1 mortgage) . . . . . . . . . . . . . . . . . . . . . .
Retail, Various, Floating (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . . . .
Retail, West, Floating (1 mortgage) . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan Loss Allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid Loan Costs, Net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Schedule IV:
Prior
Carrying
Face
Liens(1) Amount Amount
1,786
85,578
2,878
4,179
3,684
99,569
57,566
56,226
62,487
7,770
56,706
93,902
25,698
4,582
57,822
8,574
34,566
92,073
7,417
3,787
8,290
(6,029)
(9,292)
N/A
N/A
N/A
N/A
N/A
N/A
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N/A
N/A
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—
—
N/A
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N/A
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N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
—
—
$ 6,263,517 (5)
Interest Rate(2)
7.62%
L+9.08% to 15.00%
5.47%
8.51%
7.83%
L+10.13%
L+8.25% to 9.00%
6.79% to 8.72%
L+8.00% to 10.25%
8.25%
5.92% to 6.13%
L+7.34% to 8.85%
L+10.67%
12.02%
L+6.10% to 10.08%
L+9.46%
L+7.89%
6.97% to 7.16%
L+8.85%
L+8.85%
L+8.85%
Payment
Terms(3) Maturity Date(4)
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
2016
2016-2018
2020
2016
2016
2019
2017-2019
2016-2023
2017-2018
2020
2017
2017-2019
2016
2021
2018
2019
2019
2017-2024
2017
2017
2017
(1)
(2)
(3)
(4)
(5)
Represents third-party priority liens. Third party portions of pari-passu participations are not considered prior liens. Additionally, excludes the outstanding debt on
third party joint ventures of underlying borrowers.
L = one month LIBOR rate, GBP=one month GBP LIBOR rate, 3GBP= three month GBP LIBOR rate, 3EU = three month Euro LIBOR rate.
I/O = interest only until final maturity.
Based on management’s judgment of extension options being exercised.
The aggregate cost for federal income tax purposes is $6.2 billion.
For the activity within our loan portfolio during the years ended December 31, 2015, 2014 and 2013, refer to the loan activity
table in Note 5 of our Consolidated Financial Statements.
Refer to Note 16 of our Consolidated Financial Statements for a discussion of loan activity with related parties.
165
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures.—We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and that such information is accumulated and communicated to our management, including our
Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosures.
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
the end of the period covered by this report.
Management Report on Internal Control Over Financial Reporting. Our management is responsible for
establishing and maintaining adequate internal control over financial reporting. Our internal control over financial
reporting is a process designed under the supervision of our principal executive and principal financial officers to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial
statements for external reporting purposes in accordance with accounting principles generally accepted in the United
States of America.
As of December 31, 2015, our management conducted an assessment of the effectiveness of our internal control
over financial reporting based on the framework established in Internal Control—Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission in 2013. Based on this assessment, our
management has concluded that our internal control over financial reporting as of December 31, 2015 is effective.
Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of
records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of assets; provide reasonable
assurances that transactions are recorded as necessary to permit preparation of financial statements in accordance with
accounting principles generally accepted in the United States of America, and that receipts and expenditures are being
made only in accordance with authorizations of our management and directors; and provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a
material effect on our financial statements.
The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by
Deloitte & Touche LLP, an independent registered public accounting firm, as stated in their report included in this
Form 10-K, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting
as of December 31, 2015.
Changes to Internal Control Over Financial Reporting. No change in internal control over financial reporting
(as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended December 31, 2015 that has
materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None noted.
166
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
Information required by this Item with respect to members of our board of directors and with respect to our
Audit Committee will be contained in the Proxy Statement for the 2016 Annual Meeting of Shareholders (“2016 Proxy
Statement”) under the captions “Election of Directors” and “Board and Committee Meetings—Audit Committee” and in
the chart disclosing Audit Committee membership and is incorporated herein by this reference. Information required by
this Item with respect to our executive officers will be contained in the 2016 Proxy Statement under the caption
“Executive Officers,” and is incorporated herein by this reference. Information required by this Item with respect to
compliance with Section 16(a) of the Securities Exchange Act of 1934 will be contained in the 2016 Proxy Statement
under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934,” and is incorporated herein
by this reference.
Code of Ethics
We have adopted a Code of Business Conduct and Ethics for all directors, officers and employees of the
Company which is available on our website at http://ir.starwoodpropertytrust.com/govdocs. In addition, stockholders
may request a free copy of the Code of Business Conduct and Ethics from:
Starwood Property Trust, Inc.
Attention: Investor Relations
591 West Putnam Avenue
Greenwich, CT 06830
(202) 422-7700
We have also adopted a Code of Ethics for our Principal Executive Officer and Senior Financial Officers setting
forth a code of ethics applicable to our Principal Executive Officer, Principal Financial Officer and Principal Accounting
Officer, which is available on our website at http://ir.starwoodpropertytrust.com/govdocs. Stockholders may request a
free copy of the Code of Ethics for Principal Executive Officer and Senior Financial Officers from the address and phone
number set forth above.
Corporate Governance Guidelines
We have also adopted Corporate Governance Guidelines, which are available on our website at
http://ir.starwoodpropertytrust.com/govdocs. Stockholders may request a free copy of the Corporate Governance
Guidelines from the address and phone number set forth above.
Item 11. Executive Compensation.
Information required by this Item will be contained in the 2016 Proxy Statement under the captions “Executive
Compensation” and “Compensation of Directors” and is incorporated herein by this reference, provided that the
Compensation Committee Report shall not be deemed to be “filed” with this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Information required by this Item will be contained in the 2016 Proxy Statement under the captions “Security
Ownership of Certain Beneficial Owners, Directors and Management” and “Equity Compensation Plan Information” and
is incorporated herein by this reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
Information required by this Item will be contained in the 2016 Proxy Statement under the captions “Certain
Relationships and Related Transactions” and “Corporate Governance—Determination of Director Independence” and is
incorporated herein by this reference.
167
Item 14. Principal Accountant Fees and Services.
Information required by this Item will be contained in the 2016 Proxy Statement under the captions
“Independent Registered Public Accounting Firm” and “Pre-Approval Policies for Services of Independent Registered
Public Accounting Firm” and is incorporated herein by reference.
168
PART IV
Item 15. Exhibits and Financial Statement Schedules.
(a) Documents filed as part of this report:
(1) Financial Statements:
See Item 8—“Financial Statements and Supplementary Data”, filed herewith, for a list of
financial statements.
(2) Financial Statement Schedules:
Included within Item 8:
Schedule III—Real Estate and Accumulated Depreciation
Schedule IV—Mortgage Loans on Real Estate
(3) Exhibits:
Exhibit No.
Description
2.1 Unit Purchase Agreement, dated January 23, 2013, by and among Starwood Property Trust, Inc., LNR
Property LLC, Aozora Investments LLC, CBR I LLC, iStar Marlin LLC, Opps VIIb LProp, L.P. and
VNO LNR Holdco LLC (Incorporated by reference to Exhibit 2.1 of the Company’s Current Report on
Form 8-K filed January 24, 2013)
2.2 Separation and Distribution Agreement, dated January 16, 2014, by and between Starwood Property
Trust, Inc. and Starwood Waypoint Residential Trust (Incorporated by reference to Exhibit 2.1 of the
Company’s Current Report on Form 8-K filed January 21, 2014)
3.1 Articles of Amendment and Restatement of Starwood Property Trust, Inc. (Incorporated by reference to
Exhibit 3.1 of the Company’s Quarterly Report on Form 10-Q filed November 16, 2009)
3.2 Amended and Restated Bylaws of Starwood Property Trust, Inc. (Incorporated by reference to
Exhibit 3.1 of the Company’s Current Report on Form 8-K filed March 17, 2014)
4.1 Form of Indenture for Senior Debt Securities between the Company and The Bank of New York Mellon,
as trustee (Incorporated by reference to Exhibit 4.4 of the Company’s Registration Statement on
Form S-3 filed February 11, 2013)
4.2 First Supplemental Indenture, dated as of February 15, 2013, between the Company and The Bank of
New York Mellon, as trustee (Incorporated by reference to Exhibit 4.2 of the Company’s Current Report
on Form 8-K filed February 15, 2013)
4.3 Form of 4.55% Convertible Senior Notes due 2018 (Incorporated by reference to Exhibit 4.3 of the
Company’s Current Report on Form 8-K filed February 15, 2013)
4.4 Second Supplemental Indenture, dated as of July 3, 2013, between the Company and The Bank of New
York Mellon, as trustee (Incorporated by reference to Exhibit 4.2 of the Company’s Current Report on
Form 8-K filed July 3, 2013)
169
Exhibit No.
Description
4.5
4.6
4.7
Form of 4.00% Convertible Senior Notes due 2019 (Incorporated by reference to Exhibit 4.3 of the
Company’s Current Report on Form 8-K filed July 3, 2013)
Third Supplemental Indenture, dated as of October 8, 2014, between the Company and The Bank of New
York Mellon, as trustee (Incorporated by reference to Exhibit 4.2 of the Company’s Current Report on
Form 8-K filed October 8, 2014)
Form of 3.75% Convertible Senior Notes due 2017 (Incorporated by reference to Exhibit 4.3 of the
Company’s Current Report on Form 8-K filed October 8, 2014)
10.1
Registration Rights Agreement, dated August 17, 2009, among Starwood Property Trust, Inc., SPT
Investment, LLC and SPT Management, LLC (Incorporated by reference to Exhibit 10.2 of the
Company’s Quarterly Report on Form 10-Q filed November 16, 2009)
10.2 Management Agreement, dated August 17, 2009, among SPT Management, LLC and Starwood Property
Trust, Inc. (Incorporated by reference to Exhibit 10.3 of the Company’s Quarterly Report on Form 10-Q
filed November 16, 2009)
10.3 Amendment No. 1, dated May 7, 2012, to Management Agreement, dated August 17, 2009, as amended,
between Starwood Property Trust, Inc. and SPT Management, LLC (Incorporated by reference to
Exhibit 10.1 of the Company’s Current Report on Form 8-K filed May 8, 2012)
10.4 Amendment No. 2, dated December 4, 2014, to Management Agreement, dated August 17, 2009, as
amended, between Starwood Property Trust, Inc. and SPT Management, LLC (Incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed December 5, 2014)
10.5 Co-Investment and Allocation Agreement, dated August 17, 2009, among Starwood Property Trust, Inc.,
SPT Management, LLC and Starwood Capital Group Global, L.P. (Incorporated by reference to
Exhibit 10.4 of the Company’s Quarterly Report on Form 10-Q filed November 16, 2009)
10.6 Amendment No. 1, dated as of June 19, 2015, to the Co-Investment and Allocation Agreement, dated as
of August 17, 2009, by and among Starwood Property Trust, Inc., SPT Management, LLC and Starwood
Capital Group Global, L.P. (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed June 25, 2015)
10.7
Starwood Property Trust, Inc. Non-Executive Director Stock Plan (Incorporated by reference to
Exhibit 10.5 of the Company’s Quarterly Report on Form 10-Q filed November 16, 2009)
10.8
Form of Restricted Stock Award Agreement for Independent Directors (Incorporated by reference to
Exhibit 10.6 of the Company’s Quarterly Report on Form 10-Q filed November 16, 2009)
10.9
Starwood Property Trust, Inc. Manager Equity Plan (Incorporated by reference to Exhibit 10.7 of the
Company’s Quarterly Report on Form 10-Q filed November 16, 2009)
10.10
First Amendment to the Starwood Property Trust, Inc. Manager Equity Plan (Incorporated by reference
to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed May 6, 2013)
10.11 Restricted Stock Unit Award Agreement, dated August 17, 2009, between Starwood Property Trust, Inc.
and SPT Management, LLC (Incorporated by reference to Exhibit 10.8 of the Company’s Quarterly
Report on Form 10-Q filed November 16, 2009)
10.12
Starwood Property Trust, Inc. Equity Plan (Incorporated by reference to Exhibit 10.9 of the Company’s
Quarterly Report on Form 10-Q filed November 16, 2009)
170
Exhibit No.
10.13
First Amendment to the Starwood Property Trust, Inc. Equity Plan (Incorporated by reference to
Exhibit 10.2 of the Company’s Current Report on Form 8-K filed May 6, 2013)
Description
10.14 Master Repurchase and Securities Contract, dated March 31, 2010, between Starwood Property
Mortgage Sub-1, L.L.C. and Wells Fargo Bank, National Association (Incorporated by reference to
Exhibit 10.2 of the Company’s Quarterly Report on Form 10-Q filed May 10, 2010)
10.15 Master Repurchase and Securities Contract, dated August 6, 2010, between Starwood Property Mortgage
Sub-2, L.L.C. and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.1 of
the Company’s Current Report on Form 8-K filed August 12, 2010)
10.16 Amendment No. 2, dated November 3, 2011, to Amended and Restated Master Repurchase and
Securities Contract, Amended and Restated Guarantee and Security Agreement and Amended and
Restated Fee and Pricing Letter between and among Starwood Property Mortgage Sub-2, L.L.C.,
Starwood Property Mortgage Sub-2A, L.L.C., Starwood Property Trust, Inc. and Wells Fargo Bank,
National Association (Incorporated by reference to Exhibit 10.17 of the Company’s Annual Report on
Form 10-K filed February 29, 2012)
10.17
Second Amended and Restated Master Repurchase and Securities Contract, dated January 27, 2014,
between and among Starwood Property Mortgage Sub 2, L.L.C., Starwood Property Mortgage Sub-2-A,
L.L.C. and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.20 of the
Company’s Annual Report on Form 10-K filed February 26, 2014)
10.18 Third Amended and Restated Master Repurchase and Securities Contract, dated October 23, 2014,
between and among Starwood Property Mortgage Sub 2, L.L.C., Starwood Property Mortgage Sub-2-A,
L.L.C. and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.19 of the
Company’s Annual Report on Form 10-K filed February 25, 2015)
10.19 Fourth Amended and Restated Master Repurchase and Securities Contract, dated August 3, 2015,
between and among Starwood Property Mortgage Sub 2, L.L.C., Starwood Property Mortgage Sub-2-A,
L.L.C. and Wells Fargo Bank, National Association (Incorporated by reference to Exhibit 10.1 of the
Company’s Quarterly Report on Form 10-Q filed November 5, 2015)
10.20 Master Repurchase Agreement, dated December 2, 2010, between Starwood Property Mortgage Sub-3,
L.L.C. and Goldman Sachs Mortgage Company (Incorporated by reference to Exhibit 10.1 of the
Company’s Current Report on Form 8-K filed December 6, 2010)
10.21 Credit Agreement, dated December 3, 2010, among SPT Real Estate Sub II, LLC, Starwood Property
Trust, Inc. and certain subsidiaries of Starwood Property Trust, Inc., as guarantors, and Bank of America,
N.A., as administrative agent (Incorporated by reference to Exhibit 10.1 of the Company’s Quarterly
Report on Form 10-Q filed August 6, 2014)
10.22 Uncommitted Master Repurchase Agreement, dated as of December 10, 2015, by and among Starwood
Property Mortgage Sub-14, L.L.C., Starwood Property Mortgage Sub-14-A, L.L.C. and JPMorgan Chase
Bank, National Association (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report
on Form 8-K filed December 16, 2015)
10.23 Form of Indemnification Agreement for Directors and Officers
21.1 Subsidiaries of the Registrant
23.1 Consent of Independent Registered Public Accounting Firm
171
Exhibit No.
Description
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
172
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: February 25, 2016
Starwood Property Trust, Inc.
By:
/s/ BARRY S. STERNLICHT
Barry S. Sternlicht
Chief Executive Officer and Chairman of the Board of
Directors
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 25, 2016
Date: February 25, 2016
Date: February 25, 2016
Date: February 25, 2016
Date: February 25, 2016
Date: February 25, 2016
Date: February 25, 2016
/s/ BARRY S. STERNLICHT
Barry S. Sternlicht
Chief Executive Officer and Chairman of the Board of
Directors (Principal Executive Officer)
/s/ RINA PANIRY
Rina Paniry
Chief Financial Officer, Treasurer, Chief Accounting
Officer and Principal Financial Officer
/s/ JEFFREY G. DISHNER
Jeffrey G. Dishner
Director
/s/ RICHARD D. BRONSON
Richard D. Bronson
Director
/s/ CAMILLE J. DOUGLAS
Camille J. Douglas
Director
/s/ STRAUSS ZELNICK
Strauss Zelnick
Director
/s/ SOLOMON J. KUMIN
Solomon J. Kumin
Director
By:
By:
By:
By:
By:
By:
By:
173
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