STARWOOD PROPERTY TRUST, INC. - Quarter Report: 2015 June (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2015

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

Commission file number 001-34436

Starwood Property Trust, Inc.

(Exact name of registrant as specified in its charter)


Maryland		27-0247747
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

591 West Putnam Avenue
Greenwich, Connecticut		06830
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code:

(203) 422-8100

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ 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 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 ☐		Smaller reporting company ☐
(Do not check if a smaller reporting company)

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

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of July 30, 2015 was 238,580,962.

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Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including without limitation, statements concerning our operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are developed by combining currently available information with our beliefs and assumptions and are generally identified by the words “believe,” “expect,” “anticipate” and other similar expressions. Forward-looking statements do not guarantee future performance, which may be materially different from that expressed in, or implied by, any such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their 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 our Annual Report on Form 10-K for the year ended December 31, 2014, this Quarterly Report on Form 10-Q and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2015, 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;

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

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

national and local economic and business conditions;

general and local commercial and residential real estate property conditions;

changes in federal government policies;

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

increased competition from entities engaged in mortgage lending and securities investing activities;

changes in interest rates; and

the availability of and costs associated with sources of liquidity.

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

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TABLE OF CONTENTS


		Page
Part I	Financial Information
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Income	6
	Condensed Consolidated Statements of Equity	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	10
	Note 1 Business and Organization	10
	Note 2 Summary of Significant Accounting Policies	11
	Note 3 Acquisitions and Divestitures	17
	Note 4 Loans	19
	Note 5 Investment Securities	24
	Note 6 Properties	28
	Note 7 Investment in Unconsolidated Entities	29
	Note 8 Goodwill and Intangible Assets	30
	Note 9 Secured Financing Agreements	31
	Note 10 Convertible Senior Notes	34
	Note 11 Loan Securitization/Sale Activities	35
	Note 12 Derivatives and Hedging Activity	36
	Note 13 Offsetting Assets and Liabilities	38
	Note 14 Variable Interest Entities	39
	Note 15 Related-Party Transactions	40
	Note 16 Stockholders’ Equity	41
	Note 17 Earnings per Share	43
	Note 18 Accumulated Other Comprehensive Income	44
	Note 19 Fair Value	45
	Note 20 Income Taxes	50
	Note 21 Commitments and Contingencies	52
	Note 22 Segment Data	52
	Note 23 Subsequent Events	59
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	60
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	86
Item 4.	Controls and Procedures	88
Part II	Other Information
Item 1.	Legal Proceedings	89
Item 1A.	Risk Factors	89
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	89
Item 3.	Defaults Upon Senior Securities	89
Item 4.	Mine Safety Disclosures	89
Item 5.	Other Information	89
Item 6.	Exhibits	91

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited, amounts in thousands, except share data)


	As of		As of
	June 30, 2015		December 31, 2014
Assets:
Cash and cash equivalents	$	446,478	$	255,187
Restricted cash		26,791		48,704
Loans held-for-investment, net		5,915,396		5,779,238
Loans held-for-sale ($279,352 and $391,620 held at fair value)		367,408		391,620
Loans transferred as secured borrowings		135,940		129,427
Investment securities ($522,704 and $556,253 held at fair value)		877,238		998,248
Properties, net		397,016		39,854
Intangible assets ($128,109 and $132,303 held at fair value)		175,607		144,152
Investment in unconsolidated entities		204,255		193,983
Goodwill		140,437		140,437
Derivative assets		25,026		26,628
Accrued interest receivable		38,354		40,102
Other assets		116,198		95,652
Variable interest entity (“VIE”) assets, at fair value		92,719,092		107,816,065
Total Assets	$	101,585,236	$	116,099,297
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	141,087	$	144,516
Related-party payable		24,559		40,751
Dividends payable		115,575		108,189
Derivative liabilities		6,290		5,476
Secured financing agreements, net		3,579,503		3,137,789
Convertible senior notes, net		1,315,245		1,418,022
Secured borrowings on transferred loans		137,302		129,441
VIE liabilities, at fair value		92,046,550		107,232,201
Total Liabilities		97,366,111		112,216,385
Commitments and contingencies (Note 21)
Equity:
Starwood Property Trust, Inc. Stockholders’ Equity:
Preferred stock, $0.01 per share, 100,000,000 shares authorized, no shares issued and outstanding		—		—
Common stock, $0.01 per share, 500,000,000 shares authorized, 240,194,174 issued and 238,580,424 outstanding as of June 30, 2015 and 224,752,053 issued and 223,538,303 outstanding as of December 31, 2014		2,402		2,248
Additional paid-in capital		4,173,869		3,835,725
Treasury stock (1,613,750 shares and 1,213,750 shares)		(32,464)		(23,635)
Accumulated other comprehensive income		45,901		55,896
Retained earnings (accumulated deficit)		4,123		(9,378)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,193,831		3,860,856
Non-controlling interests in consolidated subsidiaries		25,294		22,056
Total Equity		4,219,125		3,882,912
Total Liabilities and Equity	$	101,585,236	$	116,099,297

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

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


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Revenues:
Interest income from loans	$	118,292	$	105,455	$	236,721	$	210,365
Interest income from investment securities		23,810		27,620		51,554		57,074
Servicing fees		30,154		32,681		58,411		66,892
Rental income		5,014		2,552		7,686		3,135
Other revenues		1,390		2,442		3,137		5,263
Total revenues		178,660		170,750		357,509		342,729
Costs and expenses:
Management fees		26,821		25,085		54,789		52,906
Interest expense		49,799		37,695		100,333		75,526
General and administrative		41,404		43,094		76,668		89,195
Acquisition and investment pursuit costs		4,867		771		6,053		1,165
Costs of rental operations		1,211		1,674		2,909		2,106
Depreciation and amortization		5,828		5,154		9,913		9,790
Loan loss allowance, net		2,661		(139)		2,978		358
Other expense		—		4,352		375		5,609
Total costs and expenses		132,591		117,686		254,018		236,655
Income before other income, income taxes and non-controlling interests		46,069		53,064		103,491		106,074
Other income:
Change in net assets related to consolidated VIEs		55,873		47,028		103,734		103,032
Change in fair value of servicing rights		(2,652)		(5,523)		(4,194)		(10,774)
Change in fair value of investment securities, net		1,446		4,959		947		13,320
Change in fair value of mortgage loans held-for-sale, net		10,831		11,608		31,962		32,501
Earnings from unconsolidated entities		8,951		9,563		15,041		9,627
Gain on sale of investments and other assets, net		209		10,078		17,407		11,633
(Loss) gain on derivative financial instruments, net		(19,530)		(9,790)		5,093		(17,656)
Foreign currency gain (loss), net		20,854		3,777		(9,453)		5,254
Total other-than-temporary impairment (“OTTI”)		—		(800)		—		(1,992)
Noncredit portion of OTTI recognized in other comprehensive income		—		3		—		982
Net impairment losses recognized in earnings		—		(797)		—		(1,010)
Loss on extinguishment of debt		(629)		—		(5,921)		—
Other income, net		10		692		55		710
Total other income		75,363		71,595		154,671		146,637
Income from continuing operations before income taxes		121,432		124,659		258,162		252,711
Income tax provision		(3,792)		(4,277)		(19,743)		(9,897)
Income from continuing operations		117,640		120,382		238,419		242,814
Loss from discontinued operations, net of tax (Note 3)		—		—		—		(1,551)
Net income		117,640		120,382		238,419		241,263
Net income attributable to non-controlling interests		(492)		(2,514)		(908)		(2,794)
Net income attributable to Starwood Property Trust, Inc.	$	117,148	$	117,868	$	237,511	$	238,469

Earnings per share data attributable to Starwood Property Trust, Inc.:
Basic:
Income from continuing operations	$	0.49	$	0.53	$	1.03	$	1.14
Loss from discontinued operations		—		—		—		(0.01)
Net income	$	0.49	$	0.53	$	1.03	$	1.13
Diluted:
Income from continuing operations	$	0.49	$	0.52	$	1.02	$	1.12
Loss from discontinued operations		—		—		—		(0.01)
Net income	$	0.49	$	0.52	$	1.02	$	1.11

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

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, amounts in thousands)


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Net income	$	117,640	$	120,382	$	238,419	$	241,263
Other comprehensive income (loss) (net change by component):
Cash flow hedges		123		(93)		(140)		29
Available-for-sale securities		(1,857)		(9,618)		(9,820)		(6,120)
Foreign currency remeasurement		8,273		4,558		(35)		5,604
Other comprehensive income (loss)		6,539		(5,153)		(9,995)		(487)
Comprehensive income		124,179		115,229		228,424		240,776
Less: Comprehensive income attributable to non-controlling interests		(492)		(2,514)		(908)		(2,794)
Comprehensive income attributable to Starwood Property Trust, Inc.	$	123,687	$	112,715	$	227,516	$	237,982

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

(Unaudited, amounts in thousands, except share data)


													Total
											Accumulated		Starwood
									(Accumulated		Other		Property
	Common stock			Additional					Deficit)		Comprehensive		Trust, Inc.		Non-
		Par		Paid-in		Treasury Stock			Retained		Income		Stockholders’		Controlling		Total
	Shares	Value		Capital		Shares	Amount		Earnings		(Loss)		Equity		Interests		Equity

Balance, January 1, 2015	224,752,053	$	2,248	$	3,835,725	1,213,750	$	(23,635)	$	(9,378)	$	55,896	$	3,860,856	$	22,056	$	3,882,912
Proceeds from public offering of common stock	13,800,000		138		326,004	—		—		—		—		326,142		—		326,142
Proceeds from DRIP Plan	6,404		—		154	—		—		—		—		154		—		154
Equity offering costs	—		—		(892)	—		—		—		—		(892)		—		(892)
Common stock repurchased	—		—		—	400,000		(8,829)		—		—		(8,829)		—		(8,829)
Equity component of 4.0% Convertible Senior Notes repurchase	—		—		(17,727)	—		—		—		—		(17,727)		—		(17,727)
Share-based compensation	1,112,157		11		17,871	—		—		—		—		17,882		—		17,882
Manager incentive fee paid in stock	523,560		5		12,734	—		—		—		—		12,739		—		12,739
Net income	—		—		—	—		—		237,511		—		237,511		908		238,419
Dividends declared, $0.96 per share	—		—		—	—		—		(224,010)		—		(224,010)		—		(224,010)
Other comprehensive loss, net	—		—		—	—		—		—		(9,995)		(9,995)		—		(9,995)
VIE non-controlling interests	—		—		—	—		—		—		—		—		1,045		1,045
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		2,077		2,077
Distributions to non-controlling interests	—		—		—	—		—		—		—		—		(792)		(792)
Balance, June 30, 2015	240,194,174	$	2,402	$	4,173,869	1,613,750	$	(32,464)	$	4,123	$	45,901	$	4,193,831	$	25,294	$	4,219,125

Balance, January 1, 2014	196,139,045	$	1,961	$	4,300,479	625,850	$	(10,642)	$	(84,719)	$	75,449	$	4,282,528	$	44,605	$	4,327,133
Proceeds from public offering of common stock	25,300,000		253		564,442	—		—		—		—		564,695		—		564,695
Proceeds from ATM Agreement	759,000		8		18,338	—		—		—		—		18,346		—		18,346
Proceeds from DRIP Plan	481		—		12	—		—		—		—		12		—		12
Equity offering costs	—		—		(1,636)	—		—		—		—		(1,636)		—		(1,636)
Share-based compensation	735,014		7		14,724	—		—		—		—		14,731		—		14,731
Manager incentive fee paid in stock	290,604		3		6,959	—		—		—		—		6,962		—		6,962
Net income	—		—		—	—		—		238,469		—		238,469		2,794		241,263
Dividends declared, $0.96 per share	—		—		—	—		—		(203,436)		—		(203,436)		—		(203,436)
Spin-off of Starwood Waypoint Residential Trust	—		—		(1,118,743)	—		—		—		—		(1,118,743)		(1,594)		(1,120,337)
Other comprehensive loss, net	—		—		—	—		—		—		(487)		(487)		—		(487)
VIE non-controlling interests	—		—		—	—		—		—		—		—		996		996
Distributions to non-controlling interests	—		—		—	—		—		—		—		—		(33,409)		(33,409)
Balance, June 30, 2014	223,224,144	$	2,232	$	3,784,575	625,850	$	(10,642)	$	(49,686)	$	74,962	$	3,801,441	$	13,392	$	3,814,833

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)


	For the Six Months Ended
	June 30,
	2015		2014
Cash Flows from Operating Activities:
Net income	$	238,419	$	241,263
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs		7,159		5,543
Amortization of convertible debt discount and deferred fees		10,503		6,209
Accretion of net discount on investment securities		(16,314)		(11,680)
Accretion of net deferred loan fees and discounts		(18,139)		(10,147)
Amortization of net premium (discount) from secured borrowings on transferred loans		4		(824)
Share-based compensation		17,882		14,731
Share-based component of incentive fees		12,739		6,962
Change in fair value of fair value option investment securities		(947)		(13,320)
Change in fair value of consolidated VIEs		3,663		(25,610)
Change in fair value of servicing rights		4,194		10,774
Change in fair value of loans held-for-sale		(31,962)		(32,501)
Change in fair value of derivatives		(8,782)		16,494
Foreign currency loss (gain), net		9,659		(5,464)
Gain on sale of investments and other assets		(17,407)		(12,575)
Other-than-temporary impairment		—		1,010
Loan loss allowance, net		2,978		358
Depreciation and amortization		9,079		10,550
Earnings from unconsolidated entities		(15,041)		(9,627)
Distributions of earnings from unconsolidated entities		14,752		6,016
Loss on extinguishment of debt		5,921		—
Originations of loans held-for-sale, net of principal collections		(889,413)		(582,033)
Proceeds from sale of loans held-for-sale		1,033,644		666,793
Changes in operating assets and liabilities:
Related-party payable, net		(16,192)		6,682
Accrued and capitalized interest receivable, less purchased interest		(32,185)		(18,840)
Other assets		(11,452)		(10,535)
Accounts payable, accrued expenses and other liabilities		(17,810)		(29,787)
Net cash provided by operating activities		294,952		230,442
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment		(1,256,784)		(1,277,636)
Proceeds from principal collections on loans		698,901		587,018
Proceeds from loans sold		378,576		202,514
Purchase of investment securities		(147,423)		(53,453)
Proceeds from sales of investment securities		5,098		50,219
Proceeds from principal collections on investment securities		247,774		19,114
Real estate business combinations, net of cash acquired		(95,891)		—
Proceeds from sale of properties		33,056		1,784
Purchase of other assets		—		(15,502)
Investment in unconsolidated entities		(32,065)		(21,973)
Distribution of capital from unconsolidated entities		22,127		30,544
Payments for purchase or termination of derivatives		(13,894)		(14,253)
Proceeds from termination of derivatives		24,782		2,092
Return of investment basis in purchased derivative asset		177		798
Decrease (increase) in restricted cash, net		16,090		(5,941)
Spin-off of Starwood Waypoint Residential Trust		—		(111,960)
Acquisition and improvement of single family homes		—		(61,901)
Proceeds from sale of non-performing loans		—		1,153
Net cash used in investing activities		(119,476)		(667,383)

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)


	For the Six Months Ended
	June 30,
	2015		2014
Cash Flows from Financing Activities:
Borrowings under financing agreements	$	2,464,018	$	1,807,229
Principal repayments on and repurchases of borrowings		(2,445,916)		(1,510,052)
Payment of deferred financing costs		(7,054)		(7,881)
Proceeds from common stock issuances		326,296		583,053
Payment of equity offering costs		(892)		(1,636)
Payment of dividends		(216,623)		(185,594)
Distributions to non-controlling interests		(792)		(33,409)
Purchase of treasury stock		(2,268)		—
Issuance of debt of consolidated VIEs		7,513		71,756
Repayment of debt of consolidated VIEs		(120,529)		(99,763)
Distributions of cash from consolidated VIEs		14,584		13,413
Net cash provided by financing activities		18,337		637,116
Net increase in cash and cash equivalents		193,813		200,175
Cash and cash equivalents, beginning of period		255,187		317,627
Effect of exchange rate changes on cash		(2,522)		825
Cash and cash equivalents, end of period	$	446,478	$	518,627
Supplemental disclosure of cash flow information:
Cash paid for interest	$	81,208	$	65,229
Income taxes paid		17,663		14,792
Supplemental disclosure of non-cash investing and financing activities:
Fair value of assets acquired	$	393,774	$	—
Fair value of liabilities assumed		297,883		—
Assets acquired from consolidated VIEs, net		31,309		—
Unsettled common stock repurchased		6,561		—
Dividends declared, but not yet paid		115,575		108,012
Consolidation of VIEs (VIE asset/liability additions)		5,657,627		23,991,532
Deconsolidation of VIEs (VIE asset/liability reductions)		(3,481,363)		6,038,375
Net assets distributed in spin-off of Starwood Waypoint Residential Trust		—		1,008,377
Unsettled trades and loans receivable		—		52,815

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of June 30, 2015

(Unaudited)

1. Business and Organization

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

commercial real estate mortgage loans, including preferred equity interests;

CMBS; and

other commercial real estate-related debt investments.

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.

During the three months ended June 30, 2015, we established a third business segment, real estate property (the “Property Segment”). We have three reportable business segments as of June 30, 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”).

Property Segment—engages primarily in acquiring and managing equity interests in stabilized commercial real estate 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.

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.

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

2. Summary of Significant Accounting Policies

Balance Sheet Presentation of 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 variable interest entities (“VIEs”). These are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.

Because 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.

Refer to the segment data in Note 22 for a presentation of the Investing and Servicing Segment without consolidation of these VIEs.

Basis of Accounting and Principles of Consolidation

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

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (the “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three and six months ended June 30, 2015 are not necessarily indicative of the operating results for the full year.

Refer to our Form 10-K for a description of our recurring accounting policies. We have included disclosure in this Note 2 regarding principles of consolidation and other accounting policies that (i) are required to be disclosed quarterly, (ii) we view as critical, or (iii) became significant since December 31, 2014 due to a corporate action or increase in the significance of the underlying business activity.

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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.

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 condensed consolidated statements of operations. The residual difference shown on our

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condensed 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 assets of our consolidated VIEs consist of loans and foreclosed loans which have been temporarily converted into real estate owned. These assets are presented in the aggregate because they are similar in nature and can only be used to settle the obligations of our consolidated VIEs. Because the VIE liabilities are more reliably measurable than the VIE assets, our current measurement methodology utilizes this value to determine the fair value of our VIE assets as a whole. Due to the inherent limitations and difficulties involved in valuing individual loans and real estate owned within this type of VIE structure, separately presenting the 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 is equal to the fair value of the liabilities. Further, it is important to understand that the VIE bondholders could not access these assets individually.

The liabilities of our consolidated VIEs represent obligations to the bondholders of the related CMBS trusts. There is no recourse to the general credit of the Company for the obligations of our consolidated VIEs.

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 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 notes have been reflected within additional paid-in capital in our condensed consolidated balance sheets. The resulting debt discount is being amortized over the period during which the convertible 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 condensed 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 condensed consolidated balance sheets.

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 condensed consolidated statements of operations for the six months ended June 30, 2014.

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 19 for further information regarding our fair value measurements.

Loans Receivable and Provision for Loan Losses

In our Lending Segment we purchase and originate commercial real estate debt and related instruments generally to be held as long-term investments at amortized cost. We are required to periodically evaluate each of these loans for possible impairment. Impairment is indicated when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is determined to be impaired, we write down the loan through a charge to the provision for loan losses. Actual losses, if any, could ultimately differ from these estimates.

We perform a quarterly review of our portfolio of loans. In connection with this review, we assess the performance of each loan and assign a risk rating based on several factors including risk of loss, loan-to-value ratio, or 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.

Intangible Lease Assets

In accordance with 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. In connection with the Ireland portfolio acquisition (refer to Note 3 for further discussion), 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

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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 condensed 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, both over the remaining noncancelable term of the respective leases on a straight-line basis.

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 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 amounts exceed the expected undiscounted future net cash flows, we adjust the carrying amount of the property to its estimated fair value.

Revenue Recognition

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 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.

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 condensed consolidated statements of operations when incurred. These costs reflect services performed by third parties and principally include due diligence and legal services.

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 restricted stock (“RSAs”) and restricted stock units (“RSUs”), (ii) contingently issuable shares to our Manager, and (iii) the “in-the-money” conversion options associated with our outstanding convertible notes (see further discussion in Note 17). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.

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 three and six months ended June 30, 2015 and 2014, the two-class method resulted in the most dilutive EPS calculation.

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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 condensed consolidated balance sheet as of December 31, 2014. Additionally, revenues of $2.6 million and $3.1 million previously reported in other revenue have been reclassified to rental income in our condensed consolidated statements of operations for the three and six months ended June 30, 2014, respectively. Expenses of $1.7 million and $2.1 million previously reported in other expense have been reclassified to costs of rental operations in our condensed consolidated statements of operations for the three and six months ended June 30, 2014, respectively.

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. Early application is permitted. 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 Accounting Standards Update (“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 July 9, 2015, the FASB decided to delay the effective date of this ASU 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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3. Acquisitions and Divestitures

Ireland Portfolio Acquisition

On May 8, 2015, we acquired all of the outstanding shares of Cedar Real Estate Investments PLC (“Cedar Investments”), an investment fund which owns a portfolio of eight fully occupied office properties and one fully occupied multi-family property all subject to net lease arrangements and located in Dublin, Ireland. Subsequent to this acquisition, in May 2015, Cedar Investments purchased three additional fully occupied office properties also located in Dublin, Ireland. The aggregate cash purchase price for all 12 properties (collectively, the “Ireland Portfolio”), which collectively comprise approximately 520,000 square feet, was $106.7 million. On the acquisition date, we executed a new secured financing facility to finance the Ireland Portfolio. Refer to Note 9 for further discussion of this facility.

We applied the provisions of ASC 805, Business Combinations, in accounting for our acquisition of these properties. In doing so, we have provisionally recorded all identifiable assets acquired and liabilities assumed at fair value as of the acquisition date. These provisional amounts may be retrospectively adjusted during the measurement period, which expires no later than one year from the acquisition date, if new information is obtained that, if known, would have affected the amounts recognized as of the acquisition date.

The following table summarizes the provisional estimates of identified assets acquired and liabilities assumed at the respective acquisition dates (in thousands):


Assets acquired:
Cash and cash equivalents	$	10,829
Properties		339,429
Intangible assets		43,217
Other assets		11,128
Total assets acquired		404,603
Liabilities assumed:
Accounts payable, accrued expenses and other liabilities		14,873
Secured financing agreements		283,010
Total liabilities assumed		297,883
Net assets acquired/purchase price	$	106,720

Since the May 2015 acquisition dates through June 30, 2015, we have recognized revenues of $3.5 million and net loss of $2.7 million related to the Ireland Portfolio. Such net loss includes acquisition-related costs, such as legal and due diligence costs, of approximately $3.2 million during the three and six months ended June 30, 2015, which are included in acquisition and investment pursuit costs within our condensed consolidated statements of operations. No goodwill was recognized in connection with the Ireland Portfolio acquisition as the purchase price equaled the fair value of the net assets acquired.

The pro-forma revenues and net income attributable to STWD of the combined entity for the three and six months ended June 30, 2015 and 2014, assuming the Ireland Portfolio acquisition occurred on January 1, 2014, are as follows (in thousands, except per share amounts):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Revenues	$	181,977	$	177,384	$	367,460	$	355,997
Net income attributable to STWD		120,474		118,031		241,000		234,953
Net income per share - Basic		0.51		0.53		1.04		1.12
Net income per share - Diluted		0.51		0.52		1.04		1.10

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Pro-forma net income was adjusted to include the following estimated management fees the combined entity would have incurred (in thousands):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Management fee expense addition	$	402	$	805	$	1,207	$	1,610

Subsequent to June 30, 2015 on July 24, 2015, Cedar Investments acquired one additional fully occupied office property subject to net lease arrangements also located in Dublin, Ireland. As of August 4, 2015, the initial accounting for this acquisition was not sufficiently complete to allow for the inclusion of ASC 805, Business Combinations, disclosures herein. Refer to Note 23 for further discussion.

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”), is listed on the New York Stock Exchange (“NYSE”) and trades under the ticker symbol “SWAY.” Our stockholders received one common share of SWAY for every five shares of our common stock held at the close of business on January 24, 2014. As part of the spin-off, we contributed $100 million to the unlevered balance sheet of SWAY to fund its growth and operations. As of January 31, 2014, SWAY held net assets of $1.1 billion. The net assets of SWAY consisted of approximately 7,200 units of single-family homes and residential non-performing mortgage loans as of January 31, 2014. In connection with the spin-off, 40.1 million shares of SWAY were issued. The results of operations for the SFR segment are presented within discontinued operations in our condensed consolidated statement of operations for the six months ended June 30, 2014. 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 for the SFR segment prior to the spin-off (in thousands):


	For the Three Months Ended		For the Six Months Ended
	June 30, 2014		June 30, 2014
Total revenues	$	—	$	3,876
Total costs and expenses		—		6,369
Loss before other income and income taxes		—		(2,493)
Total other income		—		942
Loss before income taxes		—		(1,551)
Income tax provision		—		—
Net loss	$	—	$	(1,551)

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4. Loans

Our loans held-for-investment are accounted for at amortized cost and our loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option. The following tables summarize our investments in mortgages and loans by subordination class as of June 30, 2015 and December 31, 2014 (amounts in thousands):


							Weighted
					Weighted		Average Life
	Carrying		Face		Average		(“WAL”)
June 30, 2015	Value		Amount		Coupon		(years)(3)
First mortgages (1)	$	4,723,760	$	4,787,264	6.2	%	3.3
Subordinated mortgages (2)		291,300		318,460	7.9	%	3.6
Mezzanine loans (1)		909,345		897,184	10.1	%	3.2
Total loans held-for-investment		5,924,405		6,002,908
Loans held-for-sale (carrying value of $279,352 under fair value option)		367,408		374,718	3.9	%	8.4
Loans transferred as secured borrowings		135,940		137,302	6.0	%	2.4
Total gross loans		6,427,753		6,514,928
Loan loss allowance (loans held-for-investment)		(9,009)		—
Total net loans	$	6,418,744	$	6,514,928

December 31, 2014
First mortgages (1)	$	4,538,961	$	4,609,526	6.2	%	3.5
Subordinated mortgages (2)		345,091		374,859	8.1	%	3.9
Mezzanine loans (1)		901,217		889,948	10.4	%	2.6
Total loans held-for-investment		5,785,269		5,874,333
Loans held-for-sale, fair value option elected		391,620		390,342	4.5	%	8.3
Loans transferred as secured borrowings		129,427		129,570	5.4	%	2.5
Total gross loans		6,306,316		6,394,245
Loan loss allowance (loans held-for-investment)		(6,031)		—
Total net loans	$	6,300,285	$	6,394,245

(1)

During the three months ended June 30, 2015, we reclassified certain loans previously included in the mezzanine loan category to the first mortgage category. Previously, first mortgage loans which contained a related contiguous mezzanine loan component were classified by their respective components as first mortgages and mezzanine loans. These loans are now classified as first mortgage loans in their entirety because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. As of June 30, 2015 and December 31, 2014, the application of this methodology resulted in mezzanine loans with carrying values of $793.0 million and $704.2 million, respectively, being classified as first mortgages. Prior periods were reclassified to conform to this presentation.

(2)

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.

(3)

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.

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As of June 30, 2015, approximately $4.8 billion, or 81.6%, of our loans held-for-investment were variable rate and paid interest principally at LIBOR plus a weighted-average spread of 6.1%. The following table summarizes our investments in floating rate loans (amounts in thousands):


	June 30, 2015				December 31, 2014
			Carrying				Carrying
Index	Base Rate		Value		Base Rate		Value
One Month LIBOR USD	0.1865	%	$	458,077	0.1713	%	$	138,576
Three Month LIBOR GBP	0.5785	%		426,233	0.5640	%		440,222
LIBOR floor	0.15 - 3.00	% (1)		3,943,196	0.15 - 3.00	% (1)		3,889,412
Total			$	4,827,506			$	4,468,210

(1)

The weighted-average LIBOR Floor was 0.31% and 0.35% as of June 30, 2015 and December 31, 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.

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


Rating	Characteristics
1		Sponsor capability and financial condition—Sponsor is highly rated or investment grade or, if private, the equivalent thereof with significant management experience.
		Loan collateral and performance relative to underwriting—The collateral has surpassed underwritten expectations.
		Quality and stability of collateral cash flows—Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.
		Loan structure—Loan‑to‑collateral value ratio (“LTV”) does not exceed 65%. The loan has structural features that enhance the credit profile.

2		Sponsor capability and financial condition—Strong sponsorship with experienced management team and a responsibly leveraged portfolio.
		Loan collateral and performance relative to underwriting—Collateral performance equals or exceeds underwritten expectations and covenants and performance criteria are being met or exceeded.
		Quality and stability of collateral cash flows—Occupancy is stabilized with a diverse tenant mix.
		Loan structure—LTV does not exceed 70% and unique property risks are mitigated by structural features.

3		Sponsor capability and financial condition—Sponsor has historically met its credit obligations, routinely pays off loans at maturity, and has a capable management team.
		Loan collateral and performance relative to underwriting—Property performance is consistent with underwritten expectations.
		Quality and stability of collateral cash flows—Occupancy is stabilized, near stabilized, or is on track with underwriting.
		Loan structure—LTV does not exceed 80%.

4		Sponsor capability and financial condition—Sponsor credit history includes missed payments, past due payment, and maturity extensions. Management team is capable but thin.
		Loan collateral and performance relative to underwriting—Property performance lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers. A sale of the property may be necessary in order for the borrower to pay off the loan at maturity.
		Quality and stability of collateral cash flows—Occupancy is not stabilized and the property has a large amount of rollover.
		Loan structure—LTV is 80% to 90%.

5		Sponsor capability and financial condition—Credit history includes defaults, deeds‑in‑lieu, foreclosures, and/or bankruptcies.
		Loan collateral and performance relative to underwriting—Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Sale proceeds would not be sufficient to pay off the loan at maturity.
		Quality and stability of collateral cash flows—The property has material vacancy and significant rollover of remaining tenants.
		Loan structure—LTV exceeds 90%.

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As of June 30, 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):


	Balance Sheet Classification
	Loans Held-For-Investment										Loans
							Cost				Transferred				% of
Risk Rating	First		Subordinated		Mezzanine		Recovery		Loans Held-		As Secured				Total
Category	Mortgages		Mortgages		Loans		Loans		For-Sale		Borrowings		Total		Loans
1	$	750	$	—	$	—	$	—	$	—	$	—	$	750	—	%
2		339,902		109,922		61,436		—		—		—		511,260	8.0	%
3		4,034,158		148,549		734,215		—		—		135,940		5,052,862	78.6	%
4		300,759		32,829		113,694		—		—		—		447,282	7.0	%
5		45,992		—		—		—		—		—		45,992	0.7	%
N/A		—		—		—		2,199		367,408		—		369,607	5.7	%
	$	4,721,561	$	291,300	$	909,345	$	2,199	$	367,408	$	135,940	$	6,427,753	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):


	Balance Sheet Classification
	Loans Held-For-Investment										Loans
							Cost				Transferred				% of
Risk Rating	First		Subordinated		Mezzanine		Recovery		Loans Held-		As Secured				Total
Category	Mortgages		Mortgages		Loans		Loans		For-Sale		Borrowings		Total		Loans
1	$	822	$	—	$	—	$	—	$	—	$	—	$	822	—	%
2		258,822		116,168		148,582		—		—		—		523,572	8.3	%
3		4,120,562		196,476		645,778		—		—		129,427		5,092,243	80.7	%
4		109,489		32,447		106,857		—		—		—		248,793	4.0	%
5		45,974		—		—		—		—		—		45,974	0.7	%
N/A		—		—		—		3,292		391,620		—		394,912	6.3	%
	$	4,535,669	$	345,091	$	901,217	$	3,292	$	391,620	$	129,427	$	6,306,316	100.0	%

After completing our impairment evaluation process, we concluded that no impairment charges were required on any individual loans held-for-investment as of June 30, 2015 or December 31, 2014. As of June 30, 2015, the Lending Segment held a $58.9 million mezzanine loan on a luxury condominium project located in New York, of which $18.6 million is 90 to 120 days past due. As of June 30, 2015, the Investing and Servicing Segment held $2.2 million of loans held-for-investment which are greater than 90 days past due, all of which were acquired as part of the acquisition of LNR Property LLC (“LNR”) in April 2013. None of our held-for-sale loans where we have elected the fair value option were 90 days past due or greater or on nonaccrual status.

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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 Six Months Ended
	June 30,
	2015		2014
Allowance for loan losses at January 1	$	6,031	$	3,984
Provision for loan losses		2,978		358
Charge-offs		—		—
Recoveries		—		—
Allowance for loan losses at June 30	$	9,009	$	4,342
Recorded investment in loans related to the allowance for loan loss	$	493,274	$	289,470

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


	For the Six Months Ended
	June 30,
	2015		2014
Balance at January 1	$	6,300,285	$	4,750,804
Acquisitions/originations/additional funding		2,150,080		1,860,026
Capitalized interest(1)		33,509		19,022
Basis of loans sold(2)		(1,411,912)		(868,804)
Loan maturities/principal repayments		(695,750)		(633,425)
Discount accretion/premium amortization		18,139		10,147
Changes in fair value		31,962		32,501
Unrealized foreign currency remeasurement (loss) gain		(4,419)		16,462
Change in loan loss allowance, net		(2,978)		(358)
Transfer to/from other asset classifications		(172)		(3,242)
Balance at June 30	$	6,418,744	$	5,183,133

(1)

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

(2)

See Note 11 for additional disclosure on these transactions.

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5. Investment Securities

Investment securities were comprised of the following as of June 30, 2015 and December 31, 2014 (amounts in thousands):


	Carrying Value as of
	June 30, 2015		December 31, 2014
RMBS, available-for-sale	$	193,150	$	207,053
Single-borrower CMBS, available-for-sale		99,928		100,349
CMBS, fair value option (1)		829,687		753,553
Held-to-maturity (“HTM”) securities		354,534		441,995
Equity security, fair value option		15,402		15,120
Subtotal—Investment securities		1,492,701		1,518,070
VIE eliminations (1)		(615,463)		(519,822)
Total investment securities	$	877,238	$	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					CMBS, fair		HTM		Equity
	RMBS			CMBS		value option		Securities		Security		Total
Three Months Ended June 30, 2015
Purchases	$	—		$	—	$	250	$	79,926	$	—	$	80,176
Sales		—			—		385		—		—		385
Principal collections		7,127			—		—		228,910		—		236,037
Three Months Ended June 30, 2014
Purchases	$	—		$	—	$	43,563	$	—	$	—	$	43,563
Sales		53,236	(1)		—		13,548		—		—		66,784
Principal collections		10,466			421		—		—		—		10,887


	Available-for-sale					CMBS, fair		HTM		Equity
	RMBS			CMBS		value option		Securities		Security		Total
Six Months Ended June 30, 2015
Purchases	$	—		$	—	$	8,988	$	138,435	$	—	$	147,423
Sales		—			—		5,098		—		—		5,098
Principal collections		18,614			224		1		228,935		—		247,774
Six Months Ended June 30, 2014
Purchases		—			—		53,453		—		—		53,453
Sales		62,546	(1)		—		32,032		—		—		94,578
Principal collections		18,285			829		—		—		—		19,114

(1)

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

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

With the exception of six CMBS classified as HTM, the Company classified all of its RMBS and CMBS investments where the fair value option has not been elected as available-for-sale as of June 30, 2015 and December 31, 2014. These RMBS and CMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (“AOCI”).

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The tables below summarize various attributes of our investments in available-for-sale RMBS and single-borrower CMBS where the fair value option has not been elected as of June 30, 2015 and December 31, 2014 (amounts in thousands):


							Unrealized Gains or (Losses)
							Recognized in AOCI
	Purchase				Recorded				Gross		Gross		Net
	Amortized		Credit		Amortized		Non-Credit		Unrealized		Unrealized		Fair Value
	Cost		OTTI		Cost		OTTI		Gains		Losses		Adjustment		Fair Value
June 30, 2015
RMBS	$	158,594	$	(10,184)	$	148,410	$	(148)	$	44,888	$	—	$	44,740	$	193,150
Single-borrower CMBS		94,272		—		94,272		—		5,656		—		5,656		99,928
Total	$	252,866	$	(10,184)	$	242,682	$	(148)	$	50,544	$	—	$	50,396	$	293,078
December 31, 2014
RMBS	$	163,733	$	(10,197)	$	153,536	$	(197)	$	53,714	$	—	$	53,517	$	207,053
Single-borrower CMBS		93,685		—		93,685		—		6,664		—		6,664		100,349
Total	$	257,418	$	(10,197)	$	247,221	$	(197)	$	60,378	$	—	$	60,181	$	307,402


	Weighted Average		Weighted Average
	Coupon(1)		Rating (Standard & Poor’s)	WAL (Years)(2)
June 30, 2015
RMBS	1.2	%	B−	6.4
Single-borrower CMBS	11.6	%	B	0.2
December 31, 2014
RMBS	1.1	%	B−	5.8
Single-borrower CMBS	11.6	%	BB+	3.2

(1)

Calculated using the June 30, 2015 and December 31, 2014 one-month LIBOR rate of 0.187% and 0.171%, respectively, for floating rate securities.

(2)

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 June 30, 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 June 30, 2015, approximately $134.2 million, or 69.5%, of the RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 0.44%. As of December 31, 2014, approximately $140.1 million, or 67.7%, of the 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 June 30, 2015 and December 31, 2014, excluding CMBS where we have elected the fair value option (amounts in thousands):


	June 30, 2015				December 31, 2014
	RMBS		CMBS		RMBS		CMBS
Principal balance	$	251,203	$	94,272	$	270,783	$	93,685
Accretable yield		(74,184)		—		(85,495)		—
Non-accretable difference		(28,609)		—		(31,752)		—
Total discount		(102,793)		—		(117,247)		—
Amortized cost	$	148,410	$	94,272	$	153,536	$	93,685

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The principal balance of credit deteriorated RMBS was $211.9 million and $222.9 million as of June 30, 2015 and December 31, 2014, respectively. Accretable yield related to these securities totaled $62.1 million and $66.6 million as of June 30, 2015 and December 31, 2014, respectively.

The following table discloses the changes to accretable yield and non-accretable difference for our RMBS and single-borrower CMBS during the three and six months ended June 30, 2015, excluding CMBS where we have elected the fair value option (amounts in thousands):


					Non-Accretable
	Accretable Yield				Difference
Three Months Ended June 30, 2015	RMBS		CMBS		RMBS		CMBS
Balance as of April 1, 2015	$	82,242	$	—	$	25,018	$	—
Accretion of discount		(4,042)		—		—		—
Principal write-downs		—		—		(425)		—
Purchases		—		—		—		—
Sales		—		—		—		—
OTTI		—		—		—		—
Transfer to/from non-accretable difference		(4,016)		—		4,016		—
Balance as of June 30, 2015	$	74,184	$	—	$	28,609	$	—

Six Months Ended June 30, 2015
Balance as of January 1, 2015	$	85,495	$	—	$	31,752	$	—
Accretion of discount		(13,487)		—		—		—
Principal write-downs		—		—		(967)		—
Purchases		—		—		—		—
Sales		—		—		—		—
OTTI		—		—		—		—
Transfer to/from non-accretable difference		2,176		—		(2,176)		—
Balance as of June 30, 2015	$	74,184	$	—	$	28,609	$	—

Subject to certain limitations on durations, we have allocated an amount to invest in RMBS that cannot exceed 10% of our total assets excluding Investing and Servicing Segment VIEs. We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.4 million and $0.5 million for the three months ended June 30, 2015 and 2014, respectively, and $0.7 million and $1.1 million for the six months ended June 30, 2015 and 2014, respectively, which has been recorded as management fees in the accompanying condensed consolidated statements of operations.

The following table presents the gross unrealized losses and estimated fair value of the available-for-sale securities (i) where we have not elected the fair value option, (ii) that were in an unrealized loss position as of June 30, 2015 and December 31, 2014, and (iii) 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 less than		loss greater than		loss less than		loss greater than
	12 months		12 months		12 months		12 months
As of June 30, 2015
RMBS	$	—	$	697	$	—	$	(148)
Single-borrower CMBS		—		—		—		—
Total	$	—	$	697	$	—	$	(148)
As of December 31, 2014
RMBS	$	—	$	682	$	—	$	(197)
Single-borrower CMBS		—		—		—		—
Total	$	—	$	682	$	—	$	(197)

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As of June 30, 2015 and December 31, 2014, there was one security with unrealized losses reflected in the table above. After evaluating this security and recording an adjustment for credit-related other-than-temporary impairment in 2014, we concluded that the remaining unrealized losses reflected above were noncredit-related and would be recovered from the security’s estimated future cash flows. We considered a number of factors in reaching this conclusion, including that we did not intend to sell the security, it was not considered more likely than not that we would be forced to sell the security prior to recovering our amortized cost, and there were no material credit events that would have caused us to otherwise conclude that we would not recover our cost. Credit losses, which represent most of 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 June 30, 2015, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, before consolidation of securitization VIEs, were $829.7 million and $4.4 billion, respectively. These balances represent our economic interests in these assets. However, as a result of our consolidation of securitization VIEs, the vast majority of this fair value ($615.5 million at June 30, 2015) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option CMBS. During the three and six months ended June 30, 2015, we purchased $37.9 million and $98.2 million of CMBS, respectively, for which we elected the fair value option. Due to our consolidation of securitization VIEs, $37.7 million and $89.2 million, respectively, of these amounts are eliminated and reflected primarily as repayment of debt of consolidated VIEs in our condensed consolidated statement of cash flows.

As of June 30, 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 June 30, 2015 and December 31, 2014 (amounts in thousands):


	Weighted		Weighted
	Average		Average Rating	WAL
	Coupon		(Standard & Poor’s) (1)	(Years)(2)
June 30, 2015
CMBS, fair value option	3.6	%	CCC	7.8
December 31, 2014
CMBS, fair value option	3.9	%	CCC−	7.7

(1)

As of June 30, 2015 and December 31, 2014, excludes $36.8 million and $41.7 million, respectively, in fair value option CMBS that are not rated.

(2)

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.

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HTM Securities

The table below summarizes unrealized gains and losses of our investments in HTM securities as of June 30, 2015 and December 31, 2014 (amounts in thousands):


	Net Carrying Amount		Gross Unrealized		Gross Unrealized
	(Amortized Cost)		Holding Gains		Holding Losses		Fair Value
June 30, 2015
Preferred interests	$	81,497	$	181	$	(677)	$	81,001
CMBS		273,037		—		(227)		272,810
Total	$	354,534	$	181	$	(904)	$	353,811
December 31, 2014
Preferred interests	$	307,465	$	—	$	(1,366)	$	306,099
CMBS		134,530		—		—		134,530
Total	$	441,995	$	—	$	(1,366)	$	440,629

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 June 30, 2015 (amounts in thousands):


	Preferred
	Interests		CMBS		Total
Less than one year	$	—	$	—	$	—
One to three years		—		273,037		273,037
Three to five years		62,357		—		62,357
Thereafter		19,140		—		19,140
Total	$	81,497	$	273,037	$	354,534

Equity Security, Fair Value Option

During 2012, we acquired 9,140,000 ordinary shares from a related-party (approximately a 4% interest) 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 $15.4 million and $15.1 million as of June 30, 2015 and December 31, 2014, respectively.

6. Properties

During the three months ended June 30, 2015, our Property Segment acquired a portfolio of 11 office properties and one multi-family residential property all located in Dublin, Ireland. Refer to Note 3 for further discussion. Also during the three months ended June 30, 2015, our Investing and Servicing Segment acquired two multi-family properties and one retail property from CMBS trusts for $33.4 million. These properties were acquired from CMBS trusts that are consolidated as VIEs on our balance sheet. As a result, the acquisitions are reflected as repayment of debt of consolidated VIEs in our condensed consolidated statement of cash flows.

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The below table summarizes our properties held as of June 30, 2015 and December 31, 2014 (dollar amounts in thousands):


	Depreciable Life	June 30, 2015		December 31, 2014
Property Segment
Land	—	$	125,319	$	—
Buildings	30 years		214,836		—
Investing and Servicing Segment
Land	—		11,592		8,225
Buildings	30 years		46,042		30,637
Furniture & fixtures	10 years		680		1,635
Properties, cost			398,469		40,497
Less: accumulated depreciation			(1,453)		(643)
Properties, net		$	397,016	$	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 $17.1 million gain, which is included in gain on sale of investments and other assets in our condensed consolidated statement of operations for the six months ended June 30, 2015.

7. Investment in Unconsolidated Entities

The below table summarizes our investments in unconsolidated entities as of June 30, 2015 and December 31, 2014 (dollar amounts in thousands):


						Carrying value over (under)
	Participation /	Carrying value as of				equity in net assets as of
	Ownership %(1)	June 30, 2015		December 31, 2014		June 30, 2015(2)
Equity method:
Retail Fund	33%	$	120,927	$	129,475	$	—
Investor entity which owns equity in two real estate services providers	50%		22,609		21,534		—
Equity interests in commercial real estate (3)	16% - 43%		28,107		—		—
Bridge loan venture	various		5,587		8,417		33
Various	25% - 50%		6,626		16,933		—
			183,856		176,359	$	33
Cost method:
Investment funds which own equity in a loan servicer and other real estate assets	4% - 6%		9,225		9,225
Various	2% - 10%		11,174		8,399
			20,399		17,624
		$	204,255	$	193,983

(1)

None of these investments are publicly traded and therefore quoted market prices are not available.

(2)

Differences between the carrying value of our investment and the underlying equity in net assets of the investee are accounted for as if the investee were a consolidated entity in accordance with ASC 323, Investments—Equity Method and Joint Ventures.

(3)

During the six months ended June 30, 2015, we acquired $28.0 million of equity interests in limited liability companies that own ten office and student housing properties throughout the U.S.

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8. Goodwill and Intangible Assets

Goodwill

Goodwill at June 30, 2015 and December 31, 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.

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 June 30, 2015 and December 31, 2014, the balance of the domestic servicing intangible was net of $37.0 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 June 30, 2015 and December 31, 2014 the domestic servicing intangible had a balance of $165.1 million and $178.4 million, respectively, which represents our economic interest in this asset.

Lease Intangibles

In connection with the Ireland Portfolio acquisition, 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 were 6.8 years and 3.8 years, respectively, as of June 30, 2015.

The following table summarizes our intangible assets, which are comprised of servicing rights intangibles and lease intangibles, as of June 30, 2015 and December 31, 2014 (in thousands):


	As of June 30, 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	$	128,109	$	—	$	128,109	$	132,303	$	—	$	132,303
European servicing rights (1)		33,681		(28,682)		4,999		33,392		(21,543)		11,849
In-place lease intangible assets		37,250		(691)		36,559		—		—		—
Favorable lease intangible assets		6,051		(111)		5,940		—		—		—
Total net intangible assets	$	205,091	$	(29,484)	$	175,607	$	165,695	$	(21,543)	$	144,152

(1)

The fair value as of June 30, 2015 and December 31, 2014 was $8.8 million and $12.7 million, respectively.

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The following table summarizes the activity within intangible assets for the six months ended June 30, 2015 (in thousands):


	Domestic		European		In-place Lease		Favorable Lease
	Servicing		Servicing		Intangible		Intangible
	Rights		Rights		Assets		Assets		Total
Balance as of January 1, 2015	$	132,303	$	11,849	$	—	$	—	$	144,152
Acquisition of Ireland Portfolio		—		—		37,179		6,038		43,217
Amortization		—		(6,747)		(691)		(111)		(7,549)
Foreign exchange (loss) gain		—		(103)		71		13		(19)
Changes in fair value due to changes in inputs and assumptions		(4,194)		—		—		—		(4,194)
Balance as of June 30, 2015	$	128,109	$	4,999	$	36,559	$	5,940	$	175,607

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 (in thousands):


2015 (remainder of)	$	5,059
2016		8,771
2017		6,748
2018		6,319
2019		6,204
Thereafter		14,397
Total	$	47,498

9. Secured Financing Agreements

The following table is a summary of our secured financing agreements in place as of June 30, 2015 and December 31, 2014 (dollars in thousands):


					Pledged
					Asset		Maximum		Carrying Value at
	Current	Extended			Carrying		Facility		June 30,			December 31,
	Maturity	Maturity(a)	Pricing		Value		Size		2015			2014
Lender 1 Repo 1	(b)	(b)	LIBOR + 1.85% to 5.25%		$	1,571,235	$	1,250,000	$	1,085,871		$	875,111
Lender 1 Repo 2	(c)	N/A	LIBOR + 1.90%			193,150		125,000		65,948			101,886
Lender 2 Repo 1	Oct 2015	Oct 2018	LIBOR + 1.75% to 2.75%			398,363		325,000		294,869			240,188
Lender 3 Repo 1	May 2017	May 2019	LIBOR + 2.85%			176,866		122,470		122,470			124,250
Conduit Repo 1	Sep 2015	Sep 2016	LIBOR + 1.90%			32,283		150,000		24,712			94,727
Conduit Repo 2	Nov 2015	Nov 2016	LIBOR + 2.10%			102,288		150,000		77,868			113,636
Conduit Repo 3	Feb 2018	Feb 2019	LIBOR + 2.10%			30,289		150,000		23,100			—
Lender 4 Repo 1	Oct 2015	Oct 2017	LIBOR + 2.00%			420,581		329,952		329,952			327,117
Lender 5 Repo 1	(d)	N/A	N/A			—		—		—			58,079
Lender 6 Repo 1	Aug 2017	Aug 2018	LIBOR + 2.75% to 3.00%			557,574		500,000		376,500			296,967
Lender 6 Mortgage	May 2020	N/A	EURIBOR + 2.00%			381,744		327,722		245,609			—
Lender 7 Repo 1	Dec 2016	N/A	LIBOR + 2.60% to 2.70%			50,365		39,024		39,024			39,024
Investing and Servicing Segment Property Mortgages	June 2018 to Nov 2024	June 2020 to Nov 2024	Various			43,748		38,975		31,835			14,000
Lender 9 Repo 1	(e)	(e)	LIBOR + 1.40% to 1.85%			283,347		195,994		195,994			—
Borrowing Base	Sep 2015	Sep 2017	LIBOR + 3.25%	(f)		783,508		250,000		6,000			189,871
Term Loan	Apr 2020	N/A	LIBOR + 2.75%	(f)		2,695,747		661,655		659,751	(g)		662,933	(g)
					$	7,721,088	$	4,615,792	$	3,579,503		$	3,137,789

(a)

Subject to certain conditions as defined in the respective facility agreement.

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(b)

Maturity date for borrowings collateralized by loans of January 2017 before extension options and January 2019 assuming initial extension options.

(c)

The date that is 180 days after the buyer delivers notice to seller, subject to a maximum date of March 2017.

(d)

Facility was terminated at our option in March 2015.

(e)

Facility carries a rolling twelve month term which may reset monthly with the lender’s consent. Current maturity is June 2016. Facility carries no maximum borrowing capacity. Amount herein reflects the outstanding balance as of June 30, 2015.

(f)

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.

(g)

Term loan outstanding balance is net of $1.9 million and $2.1 million of unamortized discount as of June 30, 2015 and December 31, 2014.

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.

In February 2015, we executed a $150.0 million repurchase facility (“Conduit Repo 3”) with an existing lender 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 (“Lender 9 Repo 1”) with a new lender to finance certain CMBS holdings, including CMBS holdings previously financed under the Lender 5 Repo 1 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 twelve 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 May 2015, we executed a €294.0 million mortgage facility (“Lender 6 Mortgage”) to finance the acquisition of the Ireland Portfolio. The facility carries a five year term and an annual interest rate of EURIBOR + 2.00%. As of June 30, 2015, only €220.5 million of this facility had been drawn down. The remaining balance was funded upon acquisition of the remaining asset in the Ireland portfolio in July 2015. Refer to Note 23 for further discussion of this acquisition. During the three months ended June 30, 2015, we incurred deferred financing costs of $5.3 million associated with this facility.

During the three months ended June 30, 2015, we executed two mortgage facilities with aggregate borrowings of $17.8 million to finance commercial real estate acquired by our Investing and Servicing Segment. These facilities carry a weighted average term of 4.2 years and weighted average interest rate of LIBOR + 2.41%.

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 June 30, 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

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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
2015 (remainder of)	$	161,263	$	9,384		$	170,647
2016		184,387		6,769			191,156
2017		994,320		6,769			1,001,089
2018		547,724		19,054			566,778
2019		748,614		6,769			755,383
Thereafter		—		896,354	(1)		896,354
Total	$	2,636,308	$	945,099		$	3,581,407

(1)

Principal paydown of the Term Loan through 2020 excludes $1.9 million of discount amortization.

Secured financing maturities for 2015 primarily relate to $125.7 million on the Conduit Repo facilities and $19.7 million on the Lender 1 Repo 1 facility.

As of June 30, 2015 and December 31, 2014, we had approximately $26.6 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 condensed consolidated balance sheets. For the three and six months ended June 30, 2015, approximately $3.5 million and $7.0 million, respectively, of amortization was included in interest expense on our condensed consolidated statements of operations. For the three and six months ended June 30, 2014, approximately $2.6 million and $5.3 million, respectively, of amortization was included in interest expense on our condensed consolidated statements of operations.

As of June 30, 2015 and December 31, 2014, the outstanding balance of our repurchase agreements related to the following asset collateral classes (amounts in thousands):


Class of Collateral	June 30, 2015		December 31, 2014
Loans held-for-investment	$	2,209,662	$	1,863,633
Loans held-for-sale		125,680		208,363
Investment securities		300,966		198,989
	$	2,636,308	$	2,270,985

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 76% 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 half 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.

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10. 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”). The following summarizes the unsecured convertible senior notes (collectively, the “Convertible Notes”) outstanding as of June 30, 2015 (amounts in thousands, except rates):


									Remaining
	Principal		Coupon		Effective		Conversion	Maturity	Period of
	Amount		Rate		Rate(1)		Rate(2)	Date	Amortization
2017 Notes	$	431,250	3.75	%	5.87	%	41.7397	10/15/2017	2.3	years
2018 Notes	$	599,981	4.55	%	6.10	%	45.6167	3/1/2018	2.7	years
2019 Notes	$	341,363	4.00	%	5.37	%	48.4451	1/15/2019	3.5	years


	As of		As of
	June 30, 2015		December 31, 2014
Total principal	$	1,372,594	$	1,491,228
Net unamortized discount		(57,349)		(73,206)
Carrying amount of debt components	$	1,315,245	$	1,418,022
Carrying amount of conversion option equity components recorded in additional paid-in capital	$	46,343	$	64,070

(1)

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

(2)

The 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 applicable indentures as a result of the spin-off of the SFR segment and cash dividend payments. The if-converted value of the 2019 Notes exceeded their principal amount by $15.4 million at June 30, 2015 since the closing market price of the Company’s common stock of $21.57 per share exceeded the implicit conversion price of $20.64 per share. The if-converted values of the 2017 Notes and 2018 Notes were less than their principal amounts by $43.0 million and $9.6 million, respectively, since the closing market price of the Company’s common stock of $21.57 per share was less than the implicit conversion prices of $23.96 and $21.92, 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 61.3 million shares, was not included in the computation of diluted earnings per share (“EPS”). However, the conversion spread value for the 2019 Notes, representing 0.6 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 three and six months ended June 30, 2015 as these notes were not “in-the-money”. See further discussion at Note 17.

Under the repurchase program approved by our board of directors (refer to Note 16), we repurchased $14.5 million and $118.6 million aggregate principal amount of our 2019 Notes during the three and six months ended June 30, 2015, respectively, for $16.5 million and $136.3 million plus transaction expenses of $0.1 million, respectively. 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 six months ended June 30, 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 condensed consolidated statement of operations. For the three and six months ended June 30, 2015, the loss on extinguishment of debt totaled $0.6 million and $5.9 million, respectively, consisting principally of the write-off of unamortized debt discount.

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As of June 30, 2015 and December 31, 2014, we had approximately $1.8 million and $2.3 million, respectively, of deferred financing costs from our Convertible Senior Notes, net of amortization, which is included in other assets on our condensed consolidated balance sheets.

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% for the 2017 Notes or 130% for the 2018 Notes and 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 for the 2017 Notes, September 1, 2017 for the 2018 Notes and July 15, 2018 for the 2019 Notes, holders may convert each of their notes at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.

11. 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. During the three and six months ended June 30, 2015, we sold $533.4 million and $998.0 million, respectively, par value of loans held-for-sale from our conduit platform for their fair values of $551.6 million and $1.0 billion, respectively. The sale proceeds were used in part to repay $400.1 million and $744.5 million, respectively, of the outstanding balance of the repurchase agreements associated with these loans. During the three and six months ended June 30, 2014, we sold $348.0 million and $637.4 million, respectively, par value of loans held-for-sale from our conduit platform for their fair values of $364.3 million and $666.8 million, respectively. The sale proceeds were used in part to repay $261.0 million and $478.1 million, respectively, of the outstanding balance of the repurchase agreements associated with these loans.

Within the Lending Segment (refer to Note 22), 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

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sale. The following table summarizes our loans sold and loans transferred as secured borrowings by the Lending Segment net of expenses (in thousands):


					Loan Transfers
	Loan Transfers Accounted				Accounted for as Secured
	for as Sales				Borrowings
	Face Amount		Proceeds		Face Amount		Proceeds
For the Three Months Ended June 30,
2015	$	295,961	$	293,455	$	38,925	$	38,925
2014		56,975		56,124		—		—
For the Six Months Ended June 30,
2015	$	381,461	$	378,576	$	38,925	$	38,925
2014		204,859		202,524		—		—

12. 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. Refer to Note 12 to the consolidated financial statements included in our Form 10-K for further discussion of our risk management objectives and policies.

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 eight outstanding interest rate swaps that have been designated as cash flow hedges of the interest rate risk associated with forecasted interest payments. As of June 30, 2015, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest rate risk totaled $90.4 million. Under these agreements, we will pay fixed monthly coupons at fixed rates ranging from 0.56% to 2.23% 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 November 2015 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 three and six months ended June 30, 2015 and 2014 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 twelve months, we estimate that an additional $0.5 million will be reclassified as an increase to interest expense. We are hedging our exposure to the variability in future cash flows for forecasted transactions over a maximum period of 71 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 our condensed consolidated statements of operations.

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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 investments.

As of June 30, 2015, we had 68 foreign exchange forward derivatives to sell Euros (“EUR”) with total notional amounts of €287.5 million, 64 foreign exchange forward derivatives to sell pounds sterling (“GBP”) with total notional amounts of £301.5 million, two foreign exchange forward derivatives to sell Swedish Krona (“SEK”) with total notional amounts of SEK 19.7 million, one foreign exchange forward derivative to buy SEK with a notional amount of SEK 4.1 million, one foreign exchange forward derivative to sell Norwegian Krone (“NOK”) with a notional amount of NOK 1.3 million and one foreign exchange forward to sell Danish Krone (“DKK”) with a notional amount of DKK 3.2 million that were not designated as hedges in qualifying hedging relationships. Also as of June 30, 2015, there were 59 interest rate swaps where the Company is paying fixed rates, with maturities ranging from 1 to 10 years and total notional amounts of $396.4 million, two interest rate swaps where the Company is receiving fixed rates with maturities ranging from one to two years and total notional amounts of $9.0 million, one interest rate cap with a term of five years and a total notional amount of €220.5 million and 11 credit index instruments with a total notional amount of $40.0 million.

Included in the above discussion of our non-designated derivative holdings as of June 30, 2015 are 40 foreign exchange contracts executed to hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio. As of June 30, 2015, these contracts have an aggregate notional of $216.4 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 condensed consolidated balance sheets as of June 30, 2015 and December 31, 2014 (amounts in thousands):


	Fair Value of Derivatives in an				Fair Value of Derivatives in a
	Asset Position(1) As of				Liability Position(2) As of
	June 30, 2015		December 31, 2014		June 30, 2015		December 31, 2014
Derivatives designated as hedging instruments:
Interest rate swaps	$	38	$	138	$	276	$	235
Total derivatives designated as hedging instruments		38		138		276		235
Derivatives not designated as hedging instruments:
Interest rate swaps and caps		4,075		1,128		2,494		5,216
Foreign exchange contracts		19,854		24,388		3,520		15
Credit index instruments		1,059		974		—		10
Total derivatives not designated as hedging instruments		24,988		26,490		6,014		5,241
Total derivatives	$	25,026	$	26,628	$	6,290	$	5,476

(1)

Classified as derivative assets in our condensed consolidated balance sheets.

(2)

Classified as derivative liabilities in our condensed consolidated balance sheets.

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The tables below present the effect of our derivative financial instruments on the condensed consolidated statements of operations and of comprehensive income for the three and six months ended June 30, 2015 and 2014 (amounts in thousands):


			Gain (Loss)
	Gain (Loss)		Reclassified		Gain (Loss)
Derivatives Designated as	Recognized		from AOCI		Recognized
Hedging Instruments	in OCI		into Income		in Income		Location of Gain (Loss)
For the Three Months Ended June 30,	(effective portion)		(effective portion)		(ineffective portion)		Recognized in Income
2015	$	(71)	$	(194)	$	—	Interest expense
2014	$	(457)	$	(364)	$	—	Interest expense

For the Six Months Ended June 30,
2015	$	(538)	$	(398)	$	—	Interest expense
2014	$	(708)	$	(737)	$	—	Interest expense


		Amount of Gain (Loss)				Amount of Gain (Loss)
		Recognized in Income for the				Recognized in Income for the
Derivatives Not Designated	Location of Gain (Loss)	Three Months Ended June 30,				Six Months Ended June 30,
as Hedging Instruments	Recognized in Income	2015		2014		2015		2014
Interest rate swaps and caps	Gain (loss) on derivative financial instruments	$	7,958	$	(2,314)	$	(4,964)	$	(6,511)
Foreign exchange contracts	Gain (loss) on derivative financial instruments		(27,799)		(6,965)		10,172		(10,012)
Credit index instruments	Gain (loss) on derivative financial instruments		311		(511)		(115)		(1,133)
		$	(19,530)	$	(9,790)	$	5,093	$	(17,656)

13. 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):


							(iv)
							Gross Amounts Not
							Offset in the Statement
			(ii)		(iii) = (i) - (ii)		of Financial Position
			Gross Amounts		Net Amounts				Cash
	(i)		Offset in the		Presented in				Collateral
	Gross Amounts		Statement of		the Statement of		Financial		Received /		(v) = (iii) - (iv)
	Recognized		Financial Position		Financial Position		Instruments		Pledged		Net Amount
As of June 30, 2015
Derivative assets	$	25,026	$	—	$	25,026	$	4,264	$	—	$	20,762
Derivative liabilities	$	6,290	$	—	$	6,290	$	4,264	$	2,026	$	—
Repurchase agreements		2,636,308		—		2,636,308		2,636,308		—		—
	$	2,642,598	$	—	$	2,642,598	$	2,640,572	$	2,026	$	—
As of December 31, 2014
Derivative assets	$	26,628	$	—	$	26,628	$	2,016	$	—	$	24,612
Derivative liabilities	$	5,476	$	—	$	5,476	$	2,016	$	3,460	$	—
Repurchase agreements		2,270,985		—		2,270,985		2,270,985		—		—
	$	2,276,461	$	—	$	2,276,461	$	2,273,001	$	3,460	$	—

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14. 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 June 30, 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 June 30, 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 June 30, 2015, our maximum risk of loss related to VIEs in which we were not the primary beneficiary was $214.2 million on a fair value basis.

As of June 30, 2015, the securitization VIEs which we do not consolidate had debt obligations to beneficial interest holders with unpaid principal balances of $40.8 billion. The corresponding assets are comprised primarily of

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commercial mortgage loans with unpaid principal balances corresponding to the amounts of the outstanding debt obligations.

15. 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. Refer to Note 15 to the consolidated financial statements included in our Form 10-K for further discussion of this agreement.

Base Management Fee. For the three months ended June 30, 2015 and 2014, we recognized base management fees of $14.9 million and $13.6 million, respectively, within management fees in our condensed consolidated statements of operations. For the six months ended June 30, 2015 and 2014, we recognized base management fees of $28.8 million and $26.8 million, respectively. As of June 30, 2015 and December 31, 2014, there were $14.9 million and $13.9 million, respectively, of unpaid base management fees within related-party payable in our condensed consolidated balance sheets.

Incentive Fee. For both the three months ended June 30, 2015 and 2014, we recognized incentive fees of $4.1 million within management fees in our condensed consolidated statements of operations. For the six months ended June 30, 2015 and 2014, we recognized incentive fees of $10.8 million and $11.3 million, respectively. As of June 30, 2015 and December 31, 2014, $4.2 million and $18.9 million, respectively, of unpaid incentive fees were included within related-party payable in our condensed consolidated balance sheets.

Expense Reimbursement. For the three months ended June 30, 2015 and 2014, we recognized expense reimbursements for executive compensation and other reimbursable expenses of $1.5 million and $2.0 million, respectively, within general and administrative expenses in our condensed consolidated statements of operations. For the six months ended June 30, 2015 and 2014, we recognized expense reimbursements for executive compensation and other reimbursable expenses of $2.9 million and $3.9 million, respectively. As of June 30, 2015 and December 31, 2014, approximately $2.0 million and $3.4 million, respectively, of unpaid reimbursable executive compensation and other expenses were included within related-party payable in our condensed consolidated balance sheets.

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 $7.4 million and $6.8 million within management fees in our condensed consolidated statements of operations for the three months ended June 30, 2015 and 2014, respectively. For the six months ended June 30, 2015 and 2014, we recognized $14.3 million and $13.6 million, respectively, related to these awards. Refer to Note 16 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.

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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 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. We now hold a participation interest in the junior mezzanine loan of £18 million, which bears 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 is secured primarily by the ownership interest in entities that own a portfolio of three luxury hotels located in London, England.

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 is within our name and is thus reflected within our restricted cash balance. We have recognized a corresponding payable to Fund IX of $3.4 million and $4.4 million within related-party payable in our condensed consolidated balance sheets as of June 30, 2015 and December 31, 2014, respectively.

Refer to Note 15 to the consolidated financial statements included in our Form 10-K for further discussion of related-party agreements.

16. Stockholders’ Equity

During the six months ended June 30, 2015, our board of directors declared the following dividends:


Declare Date	Record Date	Ex-Dividend Date	Payment Date	Amount		Frequency
5/5/15	6/30/15	6/26/15	7/15/15	$	0.48	Quarterly
2/25/15	3/31/15	3/27/15	4/15/15	$	0.48	Quarterly

On April 20, 2015, we issued 12.0 million shares of common stock for gross proceeds of $283.6 million. In connection with the offering, the underwriters had a 30-day option to purchase an additional 1.8 million shares of common stock, which they exercised in full, resulting in additional gross proceeds of $42.5 million.

During the six months ended June 30, 2015, there were no shares issued under our At-The-Market Equity Offering Sales Agreement (the “ATM Agreement”). During the six months ended June 30, 2015, shares issued under the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) were not material.

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. In December 2014, our board of directors amended the repurchase program to include the repurchase of our outstanding Convertible Notes. In June 2015, our board of directors amended the repurchase program to increase the authorized purchase amount to $450 million and provide for a one-year extension through June 2016. During the three and six months ended June 30, 2015, we repurchased $14.5 million and $118.6 million aggregate principal amount of our 2019 Notes for $16.5 million and $136.3 million, respectively (refer to Note 10). Also during the three months ended June 30, 2015, we repurchased 400,000 shares of common stock for $8.8 million under the repurchase program. No common stock was repurchased during the three months ended March 31, 2015. As of June 30, 2015, we have $291.7 million of remaining capacity to repurchase common stock or Convertible Notes under the repurchase program.

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Equity Incentive Plans

The Company currently maintains the Manager Equity Plan, the Starwood Property Trust, Inc. Equity Plan (the “Equity Plan”), and the Starwood Property Trust, Inc. Non-Executive Director Stock Plan (“Non-Executive Director Stock Plan”). Refer to Note 16 to the consolidated financial statements included in our Form 10-K for further information regarding these plans.

The table below summarizes our share awards granted under the Manager Equity Plan that were not fully vested as of June 30, 2015 (dollar amounts in thousands):


Grant Date	Type	Amount Granted	Grant Date Fair Value		Vesting Period
May 2015	RSU	675,000	$	16,511	3 years
January 2014 (1)	RSU	489,281		14,776	3 years
January 2014	RSU	2,000,000		55,420	3 years
October 2012	RSU	875,000		19,854	3 years

(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 times 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 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 three months ended June 30, 2015, we granted 379,167 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 ratably over a three-year period. Expenses related to the vesting of these awards is reflected in general and administrative expenses in our condensed consolidated statements of operations.

As of June 30, 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.

Schedule of Non-Vested Shares and Share Equivalents


					Weighted
					Average
	Non-Executive				Grant Date
	Director		Manager		Fair Value
	Stock Plan	Equity Plan	Equity Plan	Total	(per share)
Balance as of January 1, 2015	17,105	109,708	1,854,585	1,981,398	$	27.30
Granted	—	502,659	675,000	1,177,659		24.43
Vested	—	(27,348)	(628,806)	(656,154)		26.54
Forfeited	—	(19,308)	—	(19,308)		23.95
Balance as of June 30, 2015	17,105	565,711	1,900,779	2,483,595		26.17

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17. 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 computations of basic EPS and diluted EPS (in thousands, except per share amounts):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Basic Earnings
Continuing Operations:
Income from continuing operations attributable to STWD common shareholders	$	117,148	$	117,868	$	237,511	$	240,020
Less: Income attributable to unvested shares		(1,207)		(1,367)		(2,183)		(3,100)
Basic — Income from continuing operations	$	115,941	$	116,501	$	235,328	$	236,920

Discontinued Operations:
Loss from discontinued operations	$	—	$	—	$	—	$	(1,551)
Basic — Net income attributable to STWD common shareholders after allocation to participating securities	$	115,941	$	116,501	$	235,328	$	235,369

Diluted Earnings
Continuing Operations:
Basic — Income from continuing operations attributable to STWD common shareholders	$	117,148	$	117,868	$	237,511	$	240,020
Less: Income attributable to unvested shares		(1,207)		(1,367)		(2,183)		(3,100)
Add: Undistributed earnings to unvested shares		15		128		126		480
Less: Undistributed earnings reallocated to unvested shares		(15)		(126)		(126)		(471)
Diluted — Income from continuing operations	$	115,941	$	116,503	$	235,328	$	236,929

Discontinued Operations:
Basic — Loss from discontinued operations	$	—	$	—	$	—	$	(1,551)
Diluted — Net income attributable to STWD common shareholders after allocation to participating securities	$	115,941	$	116,503	$	235,328	$	235,378

Number of Shares:
Basic — Average shares outstanding		235,087		218,751		229,346		207,203
Effect of dilutive securities — Convertible Notes		649		4,056		644		3,906
Effect of dilutive securities — Contingently Issuable Shares		95		85		95		85
Diluted — Average shares outstanding		235,831		222,892		230,085		211,194

Earnings Per Share Attributable to STWD Common Stockholders:
Basic:
Income from continuing operations	$	0.49	$	0.53	$	1.03	$	1.14
Loss from discontinued operations		—		—		—		(0.01)
Net income	$	0.49	$	0.53	$	1.03	$	1.13

Diluted:
Income from continuing operations	$	0.49	$	0.52	$	1.02	$	1.12
Loss from discontinued operations		—		—		—		(0.01)
Net income	$	0.49	$	0.52	$	1.02	$	1.11

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Earnings per share for the six months ended June 30, 2015 and 2014 may not equal the sum of each quarter’s earnings per share due to rounding and other computational factors.

As of June 30, 2015 and 2014, unvested restricted shares of 2.5 million and 2.6 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 June 30, 2015, there were 61.9 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 61.3 million shares at June 30, 2015, was not included in the computation of diluted EPS. However, as discussed in Note 10, the conversion options associated with the 2019 Notes are “in-the-money” as the if-converted value of the Convertible Notes exceeded the principal amount by $15.4 million at June 30, 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 0.6 million shares for the three and six months ended June 30, 2015. The conversion options associated with the 2017 Notes and 2018 Notes are “out-of-the-money” because the if-converted values of those notes were less than their principal amounts by $43.0 million and $9.6 million, respectively, at June 30, 2015. Therefore, there was no dilutive effect to EPS for the 2017 Notes and 2018 Notes.

18. Accumulated Other Comprehensive Income

The changes in AOCI by component are as follows (in thousands):


			Cumulative
			Unrealized Gain
	Effective Portion of		(Loss) on		Foreign
	Cumulative Loss on		Available-for-		Currency
	Cash Flow Hedges		Sale Securities		Translation		Total
Three Months Ended June 30, 2015
Balance at March 31, 2015	$	(360)	$	52,227	$	(12,505)	$	39,362
OCI before reclassifications		(71)		(1,857)		8,273		6,345
Amounts reclassified from AOCI		194		—		—		194
Net period OCI		123		(1,857)		8,273		6,539
Balance at June 30, 2015	$	(237)	$	50,370	$	(4,232)	$	45,901
Three Months Ended June 30, 2014
Balance at March 31, 2014	$	(482)	$	70,064	$	10,533	$	80,115
OCI before reclassifications		(457)		2,285		4,558		6,386
Amounts reclassified from AOCI		364		(11,903)		—		(11,539)
Net period OCI		(93)		(9,618)		4,558		(5,153)
Balance at June 30, 2014	$	(575)	$	60,446	$	15,091	$	74,962
Six Months Ended June 30, 2015
Balance at January 1, 2015	$	(97)	$	60,190	$	(4,197)	$	55,896
OCI before reclassifications		(538)		(4,424)		(35)		(4,997)
Amounts reclassified from AOCI		398		(5,396)		—		(4,998)
Net period OCI		(140)		(9,820)		(35)		(9,995)
Balance at June 30, 2015	$	(237)	$	50,370	$	(4,232)	$	45,901
Six Months Ended June 30, 2014
Balance at January 1, 2014	$	(604)	$	66,566	$	9,487	$	75,449
OCI before reclassifications		(708)		5,566		5,604		10,462
Amounts reclassified from AOCI		737		(11,686)		—		(10,949)
Net period OCI		29		(6,120)		5,604		(487)
Balance at June 30, 2014	$	(575)	$	60,446	$	15,091	$	74,962

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The reclassifications out of AOCI impacted the condensed consolidated statements of operations for the three and six months ended June 30, 2015 and 2014 as follows (in thousands):


	Amounts Reclassified from				Amounts Reclassified from
	AOCI during the Three Months				AOCI during the Six Months				Affected Line Item
	Ended June 30,				Ended June 30,				in the Statements
Details about AOCI Components	2015		2014		2015		2014		of Operations
Losses on cash flow hedges:
Interest rate contracts	$	(194)	$	(364)	$	(398)	$	(737)	Interest expense
Unrealized gains (losses) on available for sale securities:
Interest realized upon collection		—		—		5,396		—	Interest income from investment securities
Net realized gain on sale of investments		—		11,903		—		11,899	Gain on sale of investments and other assets, net
OTTI		—		—		—		(213)	OTTI
Total		—		11,903		5,396		11,686
Total reclassifications for the period	$	(194)	$	11,539	$	4,998	$	10,949

19. 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. Refer to Note 20 to the consolidated financial statements included in our Form 10-K for further discussion of our valuation process.

We determine the fair value of our assets and liabilities measured at fair value on a recurring and nonrecurring basis in accordance with the methodology described in our Form 10-K.

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The following tables present our financial assets and liabilities carried at fair value on a recurring basis in the condensed consolidated balance sheets by their level in the fair value hierarchy as of June 30, 2015 and December 31, 2014 (amounts in thousands):


	June 30, 2015
	Total		Level I		Level II		Level III
Financial Assets:
Loans held-for-sale, fair value option	$	279,352	$	—	$	—	$	279,352
RMBS		193,150		—		—		193,150
CMBS		314,152		—		—		314,152
Equity security		15,402		15,402		—		—
Domestic servicing rights		128,109		—		—		128,109
Derivative assets		25,026		—		25,026		—
VIE assets		92,719,092		—		—		92,719,092
Total	$	93,674,283	$	15,402	$	25,026	$	93,633,855
Financial Liabilities:
Derivative liabilities	$	6,290	$	—	$	6,290	$	—
VIE liabilities		92,046,550		—		89,935,539		2,111,011
Total	$	92,052,840	$	—	$	89,941,829	$	2,111,011


	December 31, 2014
	Total		Level I		Level II		Level III
Financial Assets:
Loans held-for-sale, fair value option	$	391,620	$	—	$	—	$	391,620
RMBS		207,053		—		—		207,053
CMBS		334,080		—		—		334,080
Equity security		15,120		15,120		—		—
Domestic servicing rights		132,303		—		—		132,303
Derivative assets		26,628		—		26,628		—
VIE assets		107,816,065		—		—		107,816,065
Total	$	108,922,869	$	15,120	$	26,628	$	108,881,121
Financial Liabilities:
Derivative liabilities	$	5,476	$	—	$	5,476	$	—
VIE liabilities		107,232,201		—		102,339,081		4,893,120
Total	$	107,237,677	$	—	$	102,344,557	$	4,893,120

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The changes in financial assets and liabilities classified as Level III were as follows for the three and six months ended June 30, 2015 and 2014 (amounts in thousands):


							Domestic
	Loans						Servicing				VIE
Three Months Ended June 30, 2015	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
April 1, 2015 balance	$	343,770	$	197,385	$	308,195	$	130,761	$	103,363,978	$	(2,145,458)	$	102,198,631
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		10,831		—		936		(2,652)		(8,425,383)		490,913		(7,925,355)
OTTI		—		—		—		—		—		—		—
Net accretion		—		4,042		—		—		—		—		4,042
Included in OCI		—		(1,150)		5,019		—		—		—		3,869
Purchases / Originations		476,699		—		250		—		—		—		476,949
Sales		(551,634)		—		(385)		—		—		—		(552,019)
Issuances		—		—		—		—		—		(750)		(750)
Cash repayments / receipts		(314)		(7,127)		—		—		—		27,051		19,610
Transfers into Level III		—		—		—		—		—		(623,538)		(623,538)
Transfers out of Level III		—		—		—		—		—		174,376		174,376
Consolidations of VIEs		—		—		—		—		1,244,019		(34,133)		1,209,886
Deconsolidations of VIEs		—		—		137		—		(3,463,522)		528		(3,462,857)
June 30, 2015 balance	$	279,352	$	193,150	$	314,152	$	128,109	$	92,719,092	$	(2,111,011)	$	91,522,844
Amount of total (losses) gains included in earnings attributable to assets still held at June 30, 2015	$	(2,382)	$	4,042	$	1,097	$	(2,652)	$	(8,425,383)	$	490,913	$	(7,934,365)


							Domestic
	Loans						Servicing				VIE
Three Months Ended June 30, 2014	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
April 1, 2014 balance	$	74,117	$	291,217	$	240,665	$	144,898	$	118,451,518	$	(3,482,922)	$	115,719,493
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		11,546		10,130		4,393		(5,523)		(3,332,084)		(1,664)		(3,313,202)
Net accretion		—		3,323		—		—		—		—		3,323
Included in OCI		—		(9,363)		2,740		—		—		—		(6,623)
Purchases / Originations		320,566		—		42,740		—		—		—		363,306
Sales		(251,612)		(53,236)		(13,457)		—		—		—		(318,305)
Issuances		—		—		—		—		—		(25,995)		(25,995)
Cash repayments / receipts		(205)		(10,466)		(421)		—		—		50,984		39,892
Transfers into Level III		—		—		5,480		—		—		(1,983,525)		(1,978,045)
Transfers out of Level III		—		—		—		(1,057)		—		293,115		292,058
Consolidations of VIEs		—		—		—		—		3,720,885		(68,772)		3,652,113
Deconsolidations of VIEs		—		—		221		—		(4,749,161)		32,654		(4,716,286)
June 30, 2014 balance	$	154,412	$	231,605	$	282,361	$	138,318	$	114,091,158	$	(5,186,125)	$	109,711,729
Amount of total gains (losses) included in earnings attributable to assets still held at June 30, 2014	$	688	$	2,804	$	4,513	$	(5,523)	$	(3,332,084)	$	(1,664)	$	(3,331,266)

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							Domestic
	Loans						Servicing				VIE
Six Months Ended June 30, 2015	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
January 1, 2015 balance	$	391,620	$	207,053	$	334,080	$	132,303	$	107,816,065	$	(4,893,120)	$	103,988,001
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		31,962		—		776		(4,194)		(17,273,237)		2,951,583		(14,293,110)
OTTI		—		—		—		—		—		—		—
Net accretion		—		13,487		—		—		—		—		13,487
Included in OCI		—		(8,776)		(198)		—		—		—		(8,974)
Purchases / Originations		889,919		—		8,988		—		—		—		898,907
Sales		(1,033,644)		—		(5,098)		—		—		—		(1,038,742)
Issuances		—		—		—		—		—		(7,513)		(7,513)
Cash repayments / receipts		(505)		(18,614)		(223)		—		—		74,988		55,646
Transfers into Level III		—		—		—		—		—		(816,018)		(816,018)
Transfers out of Level III		—		—		—		—		—		723,746		723,746
Consolidations of VIEs		—		—		(24,310)		—		5,657,627		(145,205)		5,488,112
Deconsolidations of VIEs		—		—		137		—		(3,481,363)		528		(3,480,698)
June 30, 2015 balance	$	279,352	$	193,150	$	314,152	$	128,109	$	92,719,092	$	(2,111,011)	$	91,522,844
Amount of total (losses) gains included in earnings attributable to assets still held at June 30, 2015	$	(2,382)	$	7,994	$	981	$	(4,194)	$	(17,273,237)	$	2,951,583	$	(14,319,255)


							Domestic
	Loans						Servicing				VIE
Six Months Ended June 30, 2014	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
January 1, 2014 balance	$	206,672	$	296,236	$	208,006	$	150,149	$	103,151,624	$	(1,597,984)	$	102,414,703
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		32,439		11,141		9,600		(10,774)		(7,013,623)		99,837		(6,871,380)
OTTI		—		(213)		—		—		—		—		(213)
Net accretion		—		9,887		—		—		—		—		9,887
Included in OCI		—		(4,615)		2,207		—		—		—		(2,408)
Purchases / Originations		582,391		—		46,571		—		—		—		628,962
Sales		(554,073)		(62,546)		(29,301)		—		—		—		(645,920)
Issuances		—		—		—		—		—		(71,756)		(71,756)
Cash repayments / receipts		(297)		(18,285)		(829)		—		—		86,349		66,938
Transfers into Level III		—		—		52,780		—		—		(2,555,137)		(2,502,357)
Transfers out of Level III		(112,720)		—		(179)		(1,057)		—		712,856		598,900
Consolidations of VIEs		—		—		(6,715)		—		23,991,532		(1,892,944)		22,091,873
Deconsolidations of VIEs		—		—		221		—		(6,038,375)		32,654		(6,005,500)
June 30, 2014 balance	$	154,412	$	231,605	$	282,361	$	138,318	$	114,091,158	$	(5,186,125)	$	109,711,729
Amount of total gains (losses) included in earnings attributable to assets still held at June 30, 2014	$	688	$	7,971	$	9,018	$	(10,774)	$	(7,013,623)	$	99,837	$	(6,906,883)

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.

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The following table presents the fair values (all Level III) of our financial instruments not carried at fair value on the consolidated balance sheets (amounts in thousands):


	June 30, 2015				December 31, 2014
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets not carried at fair value:
Loans held-for-investment, loans held-for-sale and loans transferred as secured borrowings	$	6,139,392	$	6,259,610	$	5,908,665	$	6,034,838
Securities, held-to-maturity		354,534		353,811		441,995		440,629
European servicing rights		4,999		8,804		11,849		12,741
Financial liabilities not carried at fair value:
Secured financing agreements and secured borrowings on transferred loans	$	3,716,805	$	3,711,026	$	3,267,230		3,251,035
Convertible senior notes		1,315,245		1,354,957		1,418,022		1,444,975

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):


	Carrying Value at		Valuation	Unobservable	Range as of (1)
	June 30, 2015		Technique	Input	June 30, 2015	December 31, 2014
Loans held-for-sale, fair value option	$	279,352	Discounted cash flow	Yield (b)	4.4% - 5.2%	4.2% - 4.9%
				Duration (c)	10.0 years	5.0 - 10.0 years
RMBS		193,150	Discounted cash flow	Constant prepayment rate (a)	2.5% - 14.9%	1.2% - 15.9%
				Constant default rate (b)	1.0% - 8.7%	1.1% - 8.9%
				Loss severity (b)	11% - 80% (e)	15% - 80% (e)
				Delinquency rate (c)	2% - 29%	2% - 43%
				Servicer advances (a)	30% - 92%	14% - 75%
				Annual coupon deterioration (b)	0% - 0.5%	0% - 0.6%
				Putback amount per projected total collateral loss (d)	0% - 11%	0% - 11%
CMBS		314,152	Discounted cash flow	Yield (b)	0% - 207.8%	0% - 421.4%
				Duration (c)	0 - 13.5 years	0 - 11.8 years
Domestic servicing rights		128,109	Discounted cash flow	Debt yield (a)	8.25%	8.25%
				Discount rate (b)	15%	15%
				Control migration (b)	0% - 80%	0% - 80%
VIE assets		92,719,092	Discounted cash flow	Yield (b)	0% - 889.4%	0% - 925.0%
				Duration (c)	0 - 19.1 years	0 - 21.0 years
VIE liabilities		2,111,011	Discounted cash flow	Yield (b)	0% - 889.4%	0% - 925.0%
				Duration (c)	0 - 19.1 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.

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(e)

82% and 85% of the portfolio falls within a range of 45%-80% as of June 30, 2015 and December 31, 2014, respectively.

20. 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 June 30, 2015 and December 31, 2014, approximately $857.9 million and $1.0 billion, respectively, of the Investing and Servicing Segment’s assets were owned by TRS entities, including $60.0 million and $88.6 million in cash, respectively. 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 three and six months ended June 30, 2015 and 2014 (in thousands):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2015		2014		2015		2014
Current
Federal	$	4,245	$	5,484	$	15,751	$	10,624
Foreign		1,242		1,782		2,278		3,231
State		670		929		2,625		1,799
Total current		6,157		8,195		20,654		15,654
Deferred
Federal		(1,344)		(2,344)		615		(3,048)
Foreign		(834)		(1,192)		(1,623)		(2,198)
State		(187)		(382)		97		(511)
Total deferred		(2,365)		(3,918)		(911)		(5,757)
Total income tax provision	$	3,792	$	4,277	$	19,743	$	9,897

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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 June 30, 2015 and December 31, 2014, our U.S. tax jurisdiction was in a net deferred tax asset position, while our European tax 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):


	June 30, 2015		December 31, 2014
U.S.
Deferred tax asset, net
Reserves and accruals	$	13,054	$	13,818
Domestic intangible assets		9,661		9,617
Investment securities and loans		(2,408)		(2,327)
Investment in unconsolidated entities		702		883
Deferred income		435		427
Net operating and capital loss carryforwards		5,371		2,498
Valuation allowance		(5,371)		(2,498)
Other U.S. temporary differences		777		515
		22,221		22,933
Europe
Deferred tax liability, net
European servicing rights		(1,120)		(2,681)
Net operating and capital loss carryforwards		8,214		8,702
Valuation allowance		(8,214)		(8,702)
Other European temporary differences		(204)		(337)
		(1,324)		(3,018)
Net deferred tax assets	$	20,897	$	19,915

Unrecognized tax benefits were not material as of and during the three and six months ended June 30, 2015.

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 three and six months ended June 30, 2015 and 2014 (dollar amounts in thousands):


	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2015				2014				2015				2014
Federal statutory tax rate	$	42,501	35.0	%	$	43,631	35.0	%	$	90,357	35.0	%	$	87,906	35.0	%
REIT and other non-taxable income		(40,510)	(33.3)	%		(38,989)	(31.3)	%		(75,482)	(29.2)	%		(79,372)	(31.7)	%
State income taxes		179	0.1	%		753	0.6	%		2,180	0.8	%		1,203	0.5	%
Federal benefit of state tax deduction		(63)	(0.1)	%		(263)	(0.2)	%		(763)	(0.3)	%		(421)	(0.2)	%
Valuation allowance		1,618	1.3	%		(1,100)	(0.9)	%		2,873	1.1	%		412	0.2	%
Other		67	0.1	%		245	0.2	%		578	0.2	%		169	0.1	%
Effective tax rate	$	3,792	3.1	%	$	4,277	3.4	%	$	19,743	7.6	%	$	9,897	3.9	%

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21. Commitments and Contingencies

As of June 30, 2015, we had future funding commitments on 57 loans totaling $2.0 billion, of which we expect to fund $1.7 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 may 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.

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 condensed consolidated financial statements.

22. Segment 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. During the three months ended March 31, 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 during the three months ended March 31, 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. During the three months ended June 30, 2015, 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 four regional shopping malls (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.

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The table below presents our results of operations for the three months ended June 30, 2015 by business segment (amounts in thousands):


			Investing								Investing
	Lending		and Servicing		Property						and Servicing
	Segment		Segment		Segment		Corporate		Subtotal		VIEs		Total
Revenues:
Interest income from loans	$	113,928	$	4,364	$	—	$	—	$	118,292	$	—	$	118,292
Interest income from investment securities		17,050		47,272		—		—		64,322		(40,512)		23,810
Servicing fees		98		54,349		—		—		54,447		(24,293)		30,154
Rental income		—		1,478		3,536		—		5,014		—		5,014
Other revenues		334		1,301		—		—		1,635		(245)		1,390
Total revenues		131,410		108,764		3,536		—		243,710		(65,050)		178,660
Costs and expenses:
Management fees		367		18		—		26,385		26,770		51		26,821
Interest expense		20,197		2,751		877		25,974		49,799		—		49,799
General and administrative		6,083		32,626		174		2,343		41,226		178		41,404
Acquisition and investment pursuit costs		224		505		4,262		(124)		4,867		—		4,867
Costs of rental operations		—		878		333		—		1,211		—		1,211
Depreciation and amortization		—		4,213		1,615		—		5,828		—		5,828
Loan loss allowance, net		2,661		—		—		—		2,661		—		2,661
Total costs and expenses		29,532		40,991		7,261		54,578		132,362		229		132,591
Income (loss) before other income, income taxes and non-controlling interests		101,878		67,773		(3,725)		(54,578)		111,348		(65,279)		46,069
Other income:
Change in net assets related to consolidated VIEs		—		—		—		—		—		55,873		55,873
Change in fair value of servicing rights		—		(8,381)		—		—		(8,381)		5,729		(2,652)
Change in fair value of investment securities, net		510		(3,191)		—		—		(2,681)		4,127		1,446
Change in fair value of mortgage loans held-for-sale, net		—		10,831		—		—		10,831		—		10,831
Earnings from unconsolidated entities		1,361		5,328		2,554		—		9,243		(292)		8,951
Gain on sale of investments and other assets, net		209		—		—		—		209		—		209
(Loss) gain on derivative financial instruments, net		(23,954)		4,274		150		—		(19,530)		—		(19,530)
Foreign currency gain (loss), net		21,181		(120)		(207)		—		20,854		—		20,854
Loss on extinguishment of debt		—		—		—		(629)		(629)		—		(629)
Other income, net		—		10		—		—		10		—		10
Total other (loss) income		(693)		8,751		2,497		(629)		9,926		65,437		75,363
Income (loss) before income taxes		101,185		76,524		(1,228)		(55,207)		121,274		158		121,432
Income tax provision		—		(3,792)		—		—		(3,792)		—		(3,792)
Net income (loss)		101,185		72,732		(1,228)		(55,207)		117,482		158		117,640
Net income attributable to non-controlling interests		(334)		—		—		—		(334)		(158)		(492)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	100,851	$	72,732	$	(1,228)	$	(55,207)	$	117,148	$	—	$	117,148

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The table below presents our results of operations for the three months ended June 30, 2014 by business segment (amounts in thousands):


			Investing						Investing
	Lending		and Servicing						and Servicing
	Segment		Segment		Corporate		Subtotal		VIEs		Total
Revenues:
Interest income from loans	$	102,892	$	2,563	$	—	$	105,455	$	—	$	105,455
Interest income from investment securities		15,178		30,081		—		45,259		(17,639)		27,620
Servicing fees		153		57,834		—		57,987		(25,306)		32,681
Rental income		—		2,552		—		2,552		—		2,552
Other revenues		108		2,684		—		2,792		(350)		2,442
Total revenues		118,331		95,714		—		214,045		(43,295)		170,750
Costs and expenses:
Management fees		556		18		24,471		25,045		40		25,085
Interest expense		15,619		976		21,100		37,695		—		37,695
General and administrative		5,467		34,977		2,469		42,913		181		43,094
Acquisition and investment pursuit costs		508		248		15		771		—		771
Costs of rental operations		—		1,674		—		1,674		—		1,674
Depreciation and amortization		—		5,154		—		5,154		—		5,154
Loan loss allowance, net		(139)		—		—		(139)		—		(139)
Other expense		66		4,286		—		4,352		—		4,352
Total costs and expenses		22,077		47,333		48,055		117,465		221		117,686
Income (loss) before other income, income taxes and non-controlling interests		96,254		48,381		(48,055)		96,580		(43,516)		53,064
Other income:
Change in net assets related to consolidated VIEs		—		—		—		—		47,028		47,028
Change in fair value of servicing rights		—		(12,804)		—		(12,804)		7,281		(5,523)
Change in fair value of investment securities, net		861		16,294		—		17,155		(12,196)		4,959
Change in fair value of mortgage loans held-for-sale, net		—		11,608		—		11,608		—		11,608
Earnings from unconsolidated entities		3,432		5,219		—		8,651		912		9,563
Gain on sale of investments, net		10,078		—		—		10,078		—		10,078
Loss on derivative financial instruments, net		(7,610)		(2,180)		—		(9,790)		—		(9,790)
Foreign currency gain (loss), net		4,082		(305)		—		3,777		—		3,777
OTTI		—		(797)		—		(797)		—		(797)
Other income, net		35		657		—		692		—		692
Total other income		10,878		17,692		—		28,570		43,025		71,595
Income (loss) before income taxes		107,132		66,073		(48,055)		125,150		(491)		124,659
Income tax provision		(443)		(3,834)		—		(4,277)		—		(4,277)
Net income (loss)		106,689		62,239		(48,055)		120,873		(491)		120,382
Net income attributable to non-controlling interests		(3,005)		—		—		(3,005)		491		(2,514)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	103,684	$	62,239	$	(48,055)	$	117,868	$	—	$	117,868

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The table below presents our results of operations for the six months ended June 30, 2015 by business segment (amounts in thousands):


			Investing								Investing
	Lending		and Servicing		Property						and Servicing
	Segment		Segment		Segment		Corporate		Subtotal		VIEs		Total
Revenues:
Interest income from loans	$	227,400	$	9,321	$	—	$	—	$	236,721	$	—	$	236,721
Interest income from investment securities		39,346		71,968		—		—		111,314		(59,760)		51,554
Servicing fees		182		105,297		—		—		105,479		(47,068)		58,411
Rental income		—		4,150		3,536		—		7,686		—		7,686
Other revenues		413		3,231		—		—		3,644		(507)		3,137
Total revenues		267,341		193,967		3,536		—		464,844		(107,335)		357,509
Costs and expenses:
Management fees		755		36		—		53,897		54,688		101		54,789
Interest expense		41,720		4,870		877		52,866		100,333		—		100,333
General and administrative		10,941		61,815		176		3,372		76,304		364		76,668
Acquisition and investment pursuit costs		997		718		4,262		76		6,053		—		6,053
Costs of rental operations		—		2,576		333		—		2,909		—		2,909
Depreciation and amortization		—		8,298		1,615		—		9,913		—		9,913
Loan loss allowance, net		2,978		—		—		—		2,978		—		2,978
Other expense		—		375		—		—		375		—		375
Total costs and expenses		57,391		78,688		7,263		110,211		253,553		465		254,018
Income (loss) before other income, income taxes and non-controlling interests		209,950		115,279		(3,727)		(110,211)		211,291		(107,800)		103,491
Other income:
Change in net assets related to consolidated VIEs		—		—		—		—		—		103,734		103,734
Change in fair value of servicing rights		—		(13,256)		—		—		(13,256)		9,062		(4,194)
Change in fair value of investment securities, net		171		5,122		—		—		5,293		(4,346)		947
Change in fair value of mortgage loans held-for-sale, net		—		31,962		—		—		31,962		—		31,962
Earnings from unconsolidated entities		2,216		8,052		5,195		—		15,463		(422)		15,041
Gain on sale of investments and other assets, net		307		17,100		—		—		17,407		—		17,407
Gain (loss) on derivative financial instruments, net		8,909		(3,733)		(83)		—		5,093		—		5,093
Foreign currency loss, net		(8,155)		(1,291)		(7)		—		(9,453)		—		(9,453)
Loss on extinguishment of debt		—		—		—		(5,921)		(5,921)		—		(5,921)
Other income, net		—		41		—		14		55		—		55
Total other income (loss)		3,448		43,997		5,105		(5,907)		46,643		108,028		154,671
Income (loss) before income taxes		213,398		159,276		1,378		(116,118)		257,934		228		258,162
Income tax benefit (provision)		30		(19,773)		—		—		(19,743)		—		(19,743)
Net income (loss)		213,428		139,503		1,378		(116,118)		238,191		228		238,419
Net income attributable to non-controlling interests		(680)		—		—		—		(680)		(228)		(908)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	212,748	$	139,503	$	1,378	$	(116,118)	$	237,511	$	—	$	237,511

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The table below presents our results of operations for the six months ended June 30, 2014 by business segment (amounts in thousands):


			Investing				Single				Investing
	Lending		and Servicing				Family				and Servicing
	Segment		Segment		Corporate		Residential		Subtotal		VIEs		Total
Revenues:
Interest income from loans	$	204,979	$	5,386	$	—	$	—	$	210,365	$	—	$	210,365
Interest income from investment securities		33,467		53,089		—		—		86,556		(29,482)		57,074
Servicing fees		190		114,019		—		—		114,209		(47,317)		66,892
Rental income		—		3,135		—		—		3,135		—		3,135
Other revenues		188		5,698		—		—		5,886		(623)		5,263
Total revenues		238,824		181,327		—		—		420,151		(77,422)		342,729
Costs and expenses:
Management fees		1,183		36		51,609		—		52,828		78		52,906
Interest expense		31,445		1,927		42,154		—		75,526		—		75,526
General and administrative		10,612		74,326		3,890		—		88,828		367		89,195
Acquisition and investment pursuit costs		720		430		15		—		1,165		—		1,165
Costs of rental operations		—		2,106		—		—		2,106		—		2,106
Depreciation and amortization		—		9,790		—		—		9,790		—		9,790
Loan loss allowance, net		358		—		—		—		358		—		358
Other expense		52		5,557		—		—		5,609		—		5,609
Total costs and expenses		44,370		94,172		97,668		—		236,210		445		236,655
Income (loss) before other income, income taxes and non-controlling interests		194,454		87,155		(97,668)		—		183,941		(77,867)		106,074
Other income:
Change in net assets related to consolidated VIEs		—		—		—		—		—		103,032		103,032
Change in fair value of servicing rights		—		(24,979)		—		—		(24,979)		14,205		(10,774)
Change in fair value of investment securities, net		705		53,246		—		—		53,951		(40,631)		13,320
Change in fair value of mortgage loans held-for-sale, net		—		32,501		—		—		32,501		—		32,501
Earnings from unconsolidated entities		4,972		3,836		—		—		8,808		819		9,627
Gain on sale of investments, net		11,633		—		—		—		11,633		—		11,633
Loss on derivative financial instruments, net		(10,398)		(7,258)		—		—		(17,656)		—		(17,656)
Foreign currency gain (loss), net		5,643		(389)		—		—		5,254		—		5,254
OTTI		(213)		(797)		—		—		(1,010)		—		(1,010)
Other income, net		53		657		—		—		710		—		710
Total other income		12,395		56,817		—		—		69,212		77,425		146,637
Income (loss) from continuing operations before income taxes		206,849		143,972		(97,668)		—		253,153		(442)		252,711
Income tax provision		(526)		(9,371)		—		—		(9,897)		—		(9,897)
Income (loss) from continuing operations		206,323		134,601		(97,668)		—		243,256		(442)		242,814
Loss from discontinued operations, net of tax		—		—		—		(1,551)		(1,551)		—		(1,551)
Net income (loss)		206,323		134,601		(97,668)		(1,551)		241,705		(442)		241,263
Net income attributable to non-controlling interests		(3,236)		—		—		—		(3,236)		442		(2,794)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	203,087	$	134,601	$	(97,668)	$	(1,551)	$	238,469	$	—	$	238,469

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The table below presents our condensed consolidated balance sheet as of June 30, 2015 by business segment (amounts in thousands):


			Investing								Investing
	Lending		and Servicing		Property						and Servicing
	Segment		Segment		Segment		Corporate		Subtotal		VIEs		Total
Assets:
Cash and cash equivalents	$	158,795	$	47,694	$	1,161	$	238,072	$	445,722	$	756	$	446,478
Restricted cash		10,969		15,822		—		—		26,791		—		26,791
Loans held-for-investment, net		5,913,197		2,199		—		—		5,915,396		—		5,915,396
Loans held-for-sale		88,056		279,352		—		—		367,408		—		367,408
Loans transferred as secured borrowings		135,940		—		—		—		135,940		—		135,940
Investment securities		663,014		829,687		—		—		1,492,701		(615,463)		877,238
Properties, net		—		57,771		339,245		—		397,016		—		397,016
Intangible assets		—		170,100		42,499		—		212,599		(36,992)		175,607
Investment in unconsolidated entities		35,283		55,189		120,927		—		211,399		(7,144)		204,255
Goodwill		—		140,437		—		—		140,437		—		140,437
Derivative assets		16,572		4,485		3,969		—		25,026		—		25,026
Accrued interest receivable		38,078		276		—		—		38,354		—		38,354
Other assets		20,084		65,478		19,459		12,918		117,939		(1,741)		116,198
VIE assets, at fair value		—		—		—		—		—		92,719,092		92,719,092
Total Assets	$	7,079,988	$	1,668,490	$	527,260	$	250,990	$	9,526,728	$	92,058,508	$	101,585,236
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	16,293	$	80,485	$	15,261	$	28,493	$	140,532	$	555	$	141,087
Related-party payable		—		3,484		—		21,075		24,559		—		24,559
Dividends payable		—		—		—		115,575		115,575		—		115,575
Derivative liabilities		5,734		556		—		—		6,290		—		6,290
Secured financing agreements, net		2,379,372		294,771		245,609		659,751		3,579,503		—		3,579,503
Convertible senior notes, net		—		—		—		1,315,245		1,315,245		—		1,315,245
Secured borrowings on transferred loans		137,302		—		—		—		137,302		—		137,302
VIE liabilities, at fair value		—		—		—		—		—		92,046,550		92,046,550
Total Liabilities		2,538,701		379,296		260,870		2,140,139		5,319,006		92,047,105		97,366,111
Equity:
Starwood Property Trust, Inc. Stockholders’ Equity:
Common stock		—		—		—		2,402		2,402		—		2,402
Additional paid-in capital		2,918,478		1,174,898		262,513		(182,020)		4,173,869		—		4,173,869
Treasury stock		—		—		—		(32,464)		(32,464)		—		(32,464)
Accumulated other comprehensive income (loss)		46,668		(1,090)		323		—		45,901		—		45,901
Retained earnings (accumulated deficit)		1,564,327		113,309		3,554		(1,677,067)		4,123		—		4,123
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,529,473		1,287,117		266,390		(1,889,149)		4,193,831		—		4,193,831
Non-controlling interests in consolidated subsidiaries		11,814		2,077		—		—		13,891		11,403		25,294
Total Equity		4,541,287		1,289,194		266,390		(1,889,149)		4,207,722		11,403		4,219,125
Total Liabilities and Equity	$	7,079,988	$	1,668,490	$	527,260	$	250,990	$	9,526,728	$	92,058,508	$	101,585,236

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The table below presents our condensed consolidated balance sheet as of December 31, 2014 by business segment (amounts in thousands):


			Investing								Investing
	Lending		and Servicing		Property						and Servicing
	Segment		Segment		Segment		Corporate		Subtotal		VIEs		Total
Assets:
Cash and cash equivalents	$	125,132	$	85,252	$	—	$	44,017	$	254,401	$	786	$	255,187
Restricted cash		34,941		13,763		—		—		48,704		—		48,704
Loans held-for-investment, net		5,771,307		7,931		—		—		5,779,238		—		5,779,238
Loans held-for-sale		—		391,620		—		—		391,620		—		391,620
Loans transferred as secured borrowings		129,427		—		—		—		129,427		—		129,427
Investment securities		764,517		753,553		—		—		1,518,070		(519,822)		998,248
Properties, net		—		39,854		—		—		39,854		—		39,854
Intangible assets		—		190,207		—		—		190,207		(46,055)		144,152
Investment in unconsolidated entities		22,537		48,693		129,475		—		200,705		(6,722)		193,983
Goodwill		—		140,437		—		—		140,437		—		140,437
Derivative assets		23,579		3,049		—		—		26,628		—		26,628
Accrued interest receivable		39,188		914		—		—		40,102		—		40,102
Other assets		21,329		61,048		—		14,739		97,116		(1,464)		95,652
VIE assets, at fair value		—		—		—		—		—		107,816,065		107,816,065
Total Assets	$	6,931,957	$	1,736,321	$	129,475	$	58,756	$	8,856,509	$	107,242,788	$	116,099,297
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	23,015	$	97,424	$	—	$	23,620	$	144,059	$	457	$	144,516
Related-party payable		—		4,405		—		36,346		40,751		—		40,751
Dividends payable		—		—		—		108,189		108,189		—		108,189
Derivative liabilities		3,662		1,814		—		—		5,476		—		5,476
Secured financing agreements, net		2,252,493		222,363		—		662,933		3,137,789		—		3,137,789
Convertible senior notes, net		—		—		—		1,418,022		1,418,022		—		1,418,022
Secured borrowings on transferred loans		129,441		—		—		—		129,441		—		129,441
VIE liabilities, at fair value		—		—		—		—		—		107,232,201		107,232,201
Total Liabilities		2,408,611		326,006		—		2,249,110		4,983,727		107,232,658		112,216,385
Equity:
Starwood Property Trust, Inc. Stockholders’ Equity:
Common stock		—		—		—		2,248		2,248		—		2,248
Additional paid-in capital		3,126,845		1,413,608		127,299		(832,027)		3,835,725		—		3,835,725
Treasury stock		—		—		—		(23,635)		(23,635)		—		(23,635)
Accumulated other comprehensive income		55,781		115		—		—		55,896		—		55,896
Retained earnings (accumulated deficit)		1,328,794		(3,408)		2,176		(1,336,940)		(9,378)		—		(9,378)
Total Starwood Property 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		11,926		—		—		—		11,926		10,130		22,056
Total Equity		4,523,346		1,410,315		129,475		(2,190,354)		3,872,782		10,130		3,882,912
Total Liabilities and Equity	$	6,931,957	$	1,736,321	$	129,475	$	58,756	$	8,856,509	$	107,242,788	$	116,099,297

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23. Subsequent Events

Our significant events subsequent to June 30, 2015 were as follows:

Ireland Property Acquisition

On July 24, 2015, we acquired a fully occupied office property subject to a net lease arrangement located in Dublin, Ireland. The gross purchase price for this additional property, which comprises approximately 103,000 square feet, was €111.0 million.

Secured Financing Agreements

In July 2015, we exercised a one-year extension option on the Conduit Repo 1 facility extending the maturity from September 2015 to September 2016.

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 Borrowing Base 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.

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 August 2015, we amended the Lender 1 Repo 1 facility to upsize available borrowings from $1.25 billion to $1.6 billion.

Dividend Declaration

On August 4, 2015, our board of directors declared a dividend of $0.48 per share for the third quarter of 2015, which is payable on October 15, 2015 to common stockholders of record as of September 30, 2015.

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Item 2.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 should be read in conjunction with the information included elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (the “Form 10-K”). 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. See “Special Note Regarding Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q.

Overview

commercial real estate mortgage loans, including preferred equity interests;

CMBS; and

other commercial real estate-related debt investments.

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.

Property Segment— engages primarily in acquiring and managing equity interests in stabilized commercial real estate properties that are held for investment.

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Refer to Note 1 of our condensed consolidated financial statements included herein for further discussion of our business and organization.

Developments during the Second Quarter of 2015

Acquired Cedar Real Estate Investments PLC (“Cedar Investments”), an investment fund which owned a portfolio of eight office properties and one multi-family residential property all located in Dublin, Ireland. Subsequent to this acquisition, Cedar Investments purchased three additional office properties also located in Dublin, Ireland. The aggregate purchase price for all twelve properties (the “Ireland Portfolio”), which collectively comprise approximately 520,000 square feet, was $106.7 million. We executed a €294.0 million, five year mortgage facility which carries an annual interest rate of EURIBOR + 2.00% to finance the acquisition, of which €220.5 million was drawn down during the quarter.

The Lending Segment originated or acquired the following loans during the quarter:

$257.9 million first mortgage for the development of a 194-acre coastal residential community in Orange County, California, of which the Company funded $76.3 million during the second quarter.

$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 the Company funded $170.0 million during the second quarter.

$83.5 million first mortgage and mezzanine loan for the refinancing and development of a 77-acre retail center located in Albuquerque, New Mexico, of which the Company funded $33.7 million during the second quarter.

$82.8 million first mortgage and mezzanine loan for the refinancing of a 270-unit luxury condominium tower located in Philadelphia, Pennsylvania, which the Company fully funded during the second quarter.

Funded $131.9 million of previously originated loan commitments during the second quarter.

Received proceeds of $373.5 million and $228.9 million from maturities and principal repayments on loans and held-to-maturity investment securities, respectively, during the second quarter.

Sold $293.2 million of loans and loan commitments during the second quarter.

Named special servicer on one new issue CMBS deal with a total unpaid principal balance of $1.1 billion.

Purchased $37.9 million of CMBS, including $17.5 million in new issue B-pieces.

Originated new conduit loans of $476.7 million.

Received proceeds of $551.6 million from sales of conduit loans.

Sold 13.8 million shares of common stock for gross proceeds of $326.1 million.

Repurchased 400,000 shares of common stock at a total cost of $8.8 million.

Repurchased $14.5 million par value of our 2019 Notes for $16.5 million, recognizing a loss on extinguishment of debt of $0.6 million.

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Developments during the First Quarter of 2015

Entered into agreements to acquire the Ireland Portfolio.

The Lending Segment originated or acquired the following loans during the quarter:

$111.6 million first mortgage and mezzanine loan for the acquisition of a 129-acre office park in Boca Raton, Florida, of which the Company funded $85.0 million during the first quarter.

$105.6 million mezzanine loan secured by a 6,530-room, 24-property U.S. hotel portfolio.

$73.3 million first mortgage and mezzanine loan for the acquisition of a 367-room full service hotel in New Orleans, Louisiana, of which the Company funded $64.6 million during the first quarter.

$61.6 million first mortgage and mezzanine loan for the acquisition of a 499-room full service hotel in Indianapolis, Indiana, of which the Company funded $55.0 million during the first quarter.

$58.9 million first mortgage and mezzanine loan for the acquisition of an 11-building office portfolio in Sonoma County, California, of which the Company funded $55.7 million during the first quarter.

Funded $130.4 million of previously originated loan commitments during the first quarter.

Sold $85.5 million of loans and loan commitments during the first quarter.

Sold a commercial real estate asset from our Investing and Servicing Segment for a gain of $17.1 million.

Named special servicer on three new issue CMBS deals with total unpaid principal balances of $3.0 billion.

Purchased $60.3 million of CMBS, including $47.5 million in new issue B-pieces.

Originated new conduit loans of $413.2 million.

Received proceeds of $482.0 million from sales of conduit loans.

Executed a $150.0 million repurchase facility with an existing lender to fund the origination of commercial mortgage loans for future securitization through the 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%.

Executed a repurchase facility with a new lender 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 twelve 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.

Repurchased $104.1 million par value of our 2019 Notes for $119.9 million, recognizing a loss on extinguishment of debt of $5.3 million.

Subsequent Events

Refer to Note 23 of our condensed consolidated financial statements included herein for disclosure regarding significant transactions that occurred subsequent to June 30, 2015.

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Results of Operations

The discussion below is based on accounting principles generally accepted in the United States of America (“GAAP”) and therefore reflects the elimination of certain key financial statement line items related to the consolidation of variable interest entities (“VIEs”), particularly within revenues and other income, as discussed in Note 2 to the condensed consolidated financial statements included herein. For a discussion of our results of operations excluding the impact of Accounting Standards Codification (“ASC”) Topic 810 as it relates to the consolidation of VIEs, refer to the Non-GAAP Financial Measures section herein.

The following table compares our summarized results of operations for the three and six months ended June 30, 2015 and 2014 by business segment (amounts in thousands):


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2015		2014		$ Change		2015		2014		$ Change
Revenues:
Lending Segment	$	131,410	$	118,331	$	13,079	$	267,341	$	238,824	$	28,517
Investing and Servicing Segment		108,764		95,714		13,050		193,967		181,327		12,640
Property Segment		3,536		—		3,536		3,536		—		3,536
Investing and Servicing VIEs		(65,050)		(43,295)		(21,755)		(107,335)		(77,422)		(29,913)
		178,660		170,750		7,910		357,509		342,729		14,780
Costs and expenses (1):
Lending Segment		29,532		22,077		7,455		57,391		44,370		13,021
Investing and Servicing Segment		40,991		47,333		(6,342)		78,688		94,172		(15,484)
Property Segment		7,261		—		7,261		7,263		—		7,263
Corporate		54,578		48,055		6,523		110,211		97,668		12,543
Investing and Servicing VIEs		229		221		8		465		445		20
		132,591		117,686		14,905		254,018		236,655		17,363
Other income (expense):
Lending Segment		(693)		10,878		(11,571)		3,448		12,395		(8,947)
Investing and Servicing Segment		8,751		17,692		(8,941)		43,997		56,817		(12,820)
Property Segment		2,497		—		2,497		5,105		—		5,105
Corporate		(629)		—		(629)		(5,907)		—		(5,907)
Investing and Servicing VIEs		65,437		43,025		22,412		108,028		77,425		30,603
		75,363		71,595		3,768		154,671		146,637		8,034
Income (loss) from continuing operations before income taxes:
Lending Segment		101,185		107,132		(5,947)		213,398		206,849		6,549
Investing and Servicing Segment		76,524		66,073		10,451		159,276		143,972		15,304
Property Segment		(1,228)		—		(1,228)		1,378		—		1,378
Corporate		(55,207)		(48,055)		(7,152)		(116,118)		(97,668)		(18,450)
Investing and Servicing VIEs		158		(491)		649		228		(442)		670
		121,432		124,659		(3,227)		258,162		252,711		5,451
Income tax provision		(3,792)		(4,277)		485		(19,743)		(9,897)		(9,846)
Loss from discontinued operations, net of tax		—		—		—		—		(1,551)		1,551
Net income attributable to non-controlling interests		(492)		(2,514)		2,022		(908)		(2,794)		1,886
Net income attributable to Starwood Property Trust, Inc.	$	117,148	$	117,868	$	(720)	$	237,511	$	238,469	$	(958)

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GAAP financial measures. Refer to Note 22 of our condensed consolidated financial statements included herein for further information.

Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014

Lending Segment

Revenues

For the three months ended June 30, 2015, revenues of our Lending Segment increased $13.1 million to $131.4 million, compared to $118.3 million for the three months ended June 30, 2014. This increase was primarily due to (i) an $11.0 million increase in interest income from loans, which reflects a $1.1 billion net increase in loan investments of our Lending Segment between June 30, 2014 and 2015, mainly resulting from new loan originations exceeding maturities, and (ii) a $1.9 million increase in interest income from investment securities principally due to an increase in CMBS investments.

Costs and Expenses

For the three months ended June 30, 2015, costs and expenses of our Lending Segment increased $7.4 million to $29.5 million, compared to $22.1 million for the three months ended June 30, 2014. The increase was primarily due to a $4.6 million increase in interest expense associated with the various secured financing facilities used to fund the growth of our investment portfolio and a $2.8 million increase in our general loan loss allowance compared to a small reversal in the 2014 second quarter. The outstanding balance under the secured financing facilities increased $574.3 million between June 30, 2014 and 2015.

Net Interest Income (amounts in thousands)


	For the Three Months Ended
	June 30,
	2015		2014		Change
Interest income from loans	$	113,928	$	102,892	$	11,036
Interest income from investment securities		17,050		15,178		1,872
Interest expense		(20,197)		(15,619)		(4,578)
Net interest income	$	110,781	$	102,451	$	8,330

For the three months ended June 30, 2015, net interest income of our Lending Segment increased $8.3 million to $110.8 million from $102.5 million for the three months ended June 30, 2014. The increase primarily reflects a $1.0 billion net increase in investments of our Lending Segment between June 30, 2014 and 2015 which was financed in part by unallocated corporate-level debt.

The weighted average unlevered yield on the Lending Segment’s loans and investment securities was 7.9% as of June 30, 2015 compared to 8.3% as of June 30, 2014. The slight decrease is primarily due to a gradual tightening of interest rate spreads due to increased lender competition in the credit markets over the last twelve months.

During the three months ended June 30, 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 3.1% and 3.6%, respectively. This decrease in borrowing rates primarily reflects lower interest rate spreads on both our new and amended debt facilities over the last twelve months.

Other Income

For the three months ended June 30, 2015, other income (expense) of our Lending Segment decreased $11.6 million to $(0.7) million, from $10.9 million for the three months ended June 30, 2014. The decrease was primarily due to a $9.9 million decrease in gain on sale of investments due to higher sales activity, particularly of RMBS, in the second quarter of 2014 and a $2.1 million decrease in equity in earnings of unconsolidated entities. A $17.1 million increase in

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foreign currency gain due to a weakening of the U.S. dollar against the pound sterling was mostly offset by a $16.3 million increased loss on derivatives. The increased loss on derivatives reflects a $20.7 million increase in loss on foreign currency hedges partially offset by a $4.4 million favorable change in gain (loss) on interest rate derivatives. The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and CMBS investments.

Investing and Servicing Segment and VIEs

Revenues

For the three months ended June 30, 2015, revenues of our Investing and Servicing Segment decreased $8.7 million to $43.7 million after consolidated VIE eliminations of $65.0 million, compared to $52.4 million after consolidated VIE eliminations of $43.3 million for the three months ended June 30, 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 in the second quarter of 2015 was due to decreases of $5.7 million in interest income from CMBS investments, $2.5 million in servicing fees and $2.3 million in rental and other revenues, all partially offset by an increase of $1.8 million in interest income from loans. The $5.7 million decrease in CMBS interest income was due to a $22.9 million increase in VIE eliminations related to the CMBS trusts we consolidate. Excluding the effect of these eliminations, CMBS interest income increased by $17.2 million.

Costs and Expenses

For the three months ended June 30, 2015, costs and expenses of our Investing and Servicing Segment decreased $6.3 million to $41.2 million, compared to $47.6 million for the three months ended June 30, 2014. The VIE eliminations were nominal for both periods. The decrease in costs and expenses was primarily due to accruals for contingencies and legal fees incurred in the second quarter of 2014 which did not recur in the second quarter of 2015 and a $1.7 million decrease in depreciation and costs of rental operations related to a commercial real estate asset we sold for a gain in the first quarter of 2015, all partially offset by a $1.8 million increase in interest expense related to higher balances under our conduit loan and CMBS financing facilities.

Other Income

For the three months ended June 30, 2015, other income of our Investing and Servicing Segment increased $13.5 million to $74.2 million including additive net VIE eliminations of $65.4 million, from $60.7 million including additive net VIE eliminations of $43.0 million for the three months ended June 30, 2014. The increase in other income in the second quarter of 2015 compared to the second quarter of 2014 was primarily due to an $8.8 million increase in net assets related to consolidated VIEs and a $6.5 million favorable swing in gain (loss) on derivatives which are used to hedge interest rate risk and credit risk principally on the Investing and Servicing Segment’s conduit loans held-for-sale, both partially offset by a decrease of $3.2 million in the change in fair value of investment securities. The change in fair value of our CMBS reflects a $0.9 million increase in the three months ended June 30, 2015 compared to a $4.1 million increase in the three months ended June 30, 2014. Before VIE eliminations, there were (decreases) increases in fair value of these securities of $(3.2) million and $16.3 million in the three months ended June 30, 2015 and 2014, respectively. 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.

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 three months ended June 30, 2015, as well as the overall effective tax rate, is slightly lower than for the three months ended June 30, 2014 primarily due to a decrease in our income from an investment in an unconsolidated entity held within a TRS.

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Property Segment

During the three months ended June 30, 2014, there was no activity in the Property Segment. Therefore a comparison of results of this segment for the three months ended June 30, 2014 to the three months ended June 30, 2015 is not meaningful.

Revenues

For the three months ended June 30, 2015, revenues of our Property Segment consisted of $3.5 million of rental income for the partial period subsequent to our May 2015 acquisition of the Ireland Portfolio.

Costs and Expenses

For the three months ended June 30, 2015, costs and expenses of our Property Segment of $7.3 million consisted of $4.3 million of acquisition and investment pursuit costs, of which $3.2 million related to the acquisition of the Ireland Portfolio, and $3.0 million of other rental related costs, including $1.6 million of depreciation and amortization and $0.9 million of interest expense on the secured financing for the Ireland Portfolio.

Other Income

For the three months ended June 30, 2015, other income of our Property Segment of $2.5 million consisted primarily of equity in earnings from our investment in four regional shopping malls (the “Retail Fund”) which we acquired in the fourth quarter of 2014.

Corporate

For the three months ended June 30, 2015, corporate expenses increased $6.5 million to $54.6 million, compared to $48.1 million for the three months ended June 30, 2014. The increase was primarily due to a $4.9 million increase in interest expense related to our October 2014 issuance of Convertible Notes due 2017 and a $1.9 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 manager stock compensation expense resulting from awards granted during the second quarter of 2015. Corporate other expense of $0.6 million for the three months ended June 30, 2015 represents a loss on the repurchase of $14.5 million principal amount of our Convertible Notes due 2019.

Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2014

Lending Segment

Revenues

For the six months ended June 30, 2015, revenues of our Lending Segment increased $28.5 million to $267.3 million, compared to $238.8 million for the six months ended June 30, 2014. This increase was primarily due to (i) a $22.4 million increase in interest income from loans, which reflects a $1.1 billion net increase in loan investments of our Lending Segment between June 30, 2014 and 2015, mainly resulting from new loan originations exceeding maturities, and (ii) a $5.9 million increase in interest income from investment securities, reflecting higher accretion of discount on RMBS as well as increased income from CMBS and preferred equity interests in real estate ventures.

Costs and Expenses

For the six months ended June 30, 2015, costs and expenses of our Lending Segment increased $13.0 million to $57.4 million, compared to $44.4 million for the six months ended June 30, 2014. The increase was primarily due to a $10.3 million increase in interest expense associated with the various secured financing facilities used to fund the growth

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of our investment portfolio and a $2.6 million increase in our general loan loss allowance. The outstanding balance under the secured financing facilities increased $574.3 million between June 30, 2014 and 2015.

Net Interest Income (amounts in thousands)


	For the Six Months Ended
	June 30,
	2015		2014		Change
Interest income from loans	$	227,400	$	204,979	$	22,421
Interest income from investment securities		39,346		33,467		5,879
Interest expense		(41,720)		(31,445)		(10,275)
Net interest income	$	225,026	$	207,001	$	18,025

For the six months ended June 30, 2015, net interest income of our lending segment increased $18.0 million to $225.0 million from $207.0 million for the six months ended June 30, 2014. The increase primarily reflects a $1.0 billion net increase in investments of our Lending Segment between June 30, 2014 and 2015 which was financed in part by unallocated corporate-level debt.

Refer to the discussion of the Lending Segment’s results of operations for the three months ended June 30, 2015 for a discussion of our weighted average unlevered yields on the Lending Segment’s loans and investment securities and the Lending Segment’s weighted average secured borrowing rates.

Other Income

For the six months ended June 30, 2015, other income of our Lending Segment decreased $8.9 million to $3.4 million, from $12.4 million for the six months ended June 30, 2014. The decrease was primarily due to a $13.8 million unfavorable swing in foreign currency gain (loss), an $11.3 million decrease in gain on sale of investments due to higher sales activity, particularly of RMBS, in the second half of 2014 and a $2.8 million decrease in equity in earnings of unconsolidated entities. These decreases were partially offset by a $19.3 million favorable swing in gain (loss) on derivatives, mostly related to foreign currency hedges. The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and CMBS investments.

Investing and Servicing Segment and VIEs

Revenues

For the six months ended June 30, 2015, revenues of our Investing and Servicing Segment decreased $17.3 million to $86.6 million after consolidated VIE eliminations of $107.3 million, compared to $103.9 million after consolidated VIE eliminations of $77.4 million for the six months ended June 30, 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 in the second half of 2015 was due to decreases of $11.4 million in interest income from CMBS investments, $8.5 million in servicing fees and $1.3 million in rental and other revenues, all partially offset by an increase of $3.9 million in interest income from loans. The $11.4 million decrease in CMBS interest income was due to a $30.3 million increase in VIE eliminations related to the CMBS trusts we consolidate. Excluding the effect of these eliminations, CMBS interest income increased by $18.9 million.

Costs and Expenses

For the six months ended June 30, 2015, costs and expenses of our Investing and Servicing Segment decreased $15.4 million to $79.2 million, compared to $94.6 million for the six months ended June 30, 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, (ii) accruals for contingencies and legal fees incurred in the first half of 2014 which did not recur in the first half of 2015 and (iii) a $1.0 million net decrease in depreciation and costs of rental operations related to a

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commercial real estate asset we sold for a gain in the first quarter of 2015, all partially offset by a $2.9 million increase in interest expense related to higher balances under our conduit loan and CMBS financing facilities.

Other Income

For the six months ended June 30, 2015, other income of our Investing and Servicing Segment increased $17.8 million to $152.0 million including additive net VIE eliminations of $108.0 million, from $134.2 million including additive net VIE eliminations of $77.4 million for the six months ended June 30, 2014. The increase in other income in the first half of 2015 compared to the first half of 2014 was primarily due to (i) a $17.1 million gain on sale of a commercial real estate asset, (ii) a $6.6 million lesser reduction 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, (iii) a $3.5 million lower loss from derivatives which are used to hedge interest rate risk and credit risk principally on the Investing and Servicing Segment’s conduit loans held-for-sale and (iv) a $3.0 million increase in earnings from unconsolidated entities, all partially offset by a decrease of $11.8 million in the change in fair value of investment securities. The change in fair value of our CMBS reflects a $0.8 million increase in the six months ended June 30, 2015 compared to a $12.6 million increase in the six months ended June 30, 2014. Before VIE eliminations, there were increases in fair value of these securities of $5.1 million and $53.2 million in the six months ended June 30, 2015 and 2014, respectively.

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 six months ended June 30, 2015, as well as the overall effective tax rate, is higher than for the six months ended June 30, 2014 primarily due to the taxable gain on sale of a commercial real estate asset and other increases in our TRS income.

Property Segment

Refer to the discussion of the Property Segment’s results of operations for the three months ended June 30, 2015, as the Ireland Portfolio acquisition occurred during that period. The results of operations for the Property Segment prior to the Ireland Portfolio acquisition relate solely to our equity method investment in the Retail Fund, which was acquired during the fourth quarter of 2014.

Corporate

For the six months ended June 30, 2015, corporate expenses increased $12.5 million to $110.2 million, compared to $97.7 million for the six months ended June 30, 2014. The increase was primarily due to a $10.7 million increase in interest expense related to our October 2014 issuance of Convertible Notes due 2017 and a $2.3 million increase in management fees. The increase in management fees reflects the impacts of (1) higher levels of invested capital which resulted in an increased base management fee and (2) higher manager stock compensation expense resulting from awards granted during the 2015 second quarter. Corporate other expense of $5.9 million for the six months ended June 30, 2015 represents a loss on the repurchase of $118.6 million principal amount of our Convertible Notes due 2019.

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Non-GAAP Financial Measures

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 due under our management agreement, depreciation and amortization of real estate, 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. 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.

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 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 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 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 participating securities 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, our GAAP EPS methodology was adjusted to include (instead of exclude) participating securities. Further, conversion of the convertible 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. We have adjusted prior periods to conform to the above definition. 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 (in thousands):


	For the Three Months Ended		For the Six Months Ended
	June 30,		June 30,
	2015	2014	2015	2014
Diluted weighted average shares - GAAP	235,831	222,892	230,085	211,194
Add: Participating securities	2,295	2,875	2,155	2,876
Less: Conversion spread value	(649)	(4,056)	(644)	(3,906)
Diluted weighted average shares - Core	237,477	221,711	231,596	210,164

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 this type of situation during the first quarter of 2015 when we incurred a loss on extinguishment of debt associated with our convertible notes. The definition of Core Earnings did not contemplate the treatment of a loss on extinguishment of debt, so we modified the definition during the first quarter of 2015 to incorporate this type of transaction.

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For the three and six months ended June 30, 2015, we repurchased $14.5 million and $118.6 million, respectively, of our 2019 Notes for total consideration of $16.5 million and $136.3 million, respectively. The resulting GAAP loss for the three and six months ended June 30, 2015 of $0.6 million and $5.9 million, respectively, 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 three and six months ended June 30, 2015 totaled $2.1 million, of which $0.5 million reflects a write-off of the unamortized conversion discount, and $17.7 million, of which $3.8 million reflects a write-off of the unamortized conversion discount, respectively. For the three and six months ended June 30, 2015, the $0.5 million and $3.8 million write-offs, respectively, are already included in the GAAP loss of $0.6 million and $5.9 million, respectively, and as such, are already reflected in Core Earnings.

For the remaining $1.6 million and $13.9 million reduction to equity for the three and six months ended June 30, 2015, respectively, 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 (i) the entire issuance of the 2019 Notes has been extinguished; or (2) the $20.4 million has been fully amortized. As a result, for the three and six months ended June 30, 2015, we reflected the $1.6 million and $13.9 million, respectively, 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.

The following table summarizes our quarterly Core Earnings per weighted average diluted share for the six months ended June 30, 2015 and 2014:


	Core Earnings For the Three-Month Periods Ended
	March 31		June 30
2015	$	0.55	$	0.53
2014		0.61		0.52

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Three Months Ended June 30, 2015 Compared to the Three Months Ended June 30, 2014

The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended June 30, 2015, by business segment (amounts in thousands):


			Investing
	Lending		and Servicing		Property
	Segment		Segment		Segment		Corporate		Total
Revenues	$	131,410	$	108,764	$	3,536	$	—	$	243,710
Costs and expenses		(29,532)		(40,991)		(7,261)		(54,578)		(132,362)
Other (loss) income		(693)		8,751		2,497		(629)		9,926
Income (loss) before income taxes		101,185		76,524		(1,228)		(55,207)		121,274
Income tax provision		—		(3,792)		—		—		(3,792)
Income attributable to non-controlling interests		(334)		—		—		—		(334)
Net income (loss) attributable to Starwood Property Trust, Inc.		100,851		72,732		(1,228)		(55,207)		117,148
Add / (Deduct):
Non-cash equity compensation expense		1,135		2,291		—		7,484		10,910
Management incentive fee		—		—		—		4,088		4,088
Depreciation and amortization		—		414		1,537		—		1,951
Loan loss allowance, net		2,661		—		—		—		2,661
Interest income adjustment for securities		(301)		(7,232)		—		—		(7,533)
Other non-cash items		—		—		—		—		—
Reversal of unrealized (gains) / losses on:
Loans held-for-sale		—		(10,831)		—		—		(10,831)
Securities		(510)		3,191		—		—		2,681
Derivatives		23,160		(5,067)		(150)		—		17,943
Foreign currency		(21,182)		120		207		—		(20,855)
Earnings from unconsolidated entities		—		(5,328)		—		—		(5,328)
Recognition of realized gains / (losses) on:
Loans held-for-sale		—		18,188		—		—		18,188
Securities		—		(11,492)		—		—		(11,492)
Derivatives		8,578		(62)		—		—		8,516
Foreign currency		(6,282)		(120)		(7)		—		(6,409)
Earnings from unconsolidated entities		—		4,274		—		—		4,274
Core Earnings (Loss)	$	108,110	$	61,078	$	359	$	(43,635)	$	125,912
Core Earnings (Loss) per Weighted Average Diluted Share	$	0.46	$	0.25	$	—	$	(0.18)	$	0.53

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The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended June 30, 2014, by business segment (amounts in thousands):


			Investing
	Lending		and Servicing
	Segment		Segment		Corporate		Total
Revenues	$	118,331	$	95,714	$	—	$	214,045
Costs and expenses (1)		(22,077)		(47,333)		(48,055)		(117,465)
Other income		10,878		17,692		—		28,570
Income (loss) before income taxes		107,132		66,073		(48,055)		125,150
Income tax provision		(443)		(3,834)		—		(4,277)
Income attributable to non-controlling interests		(3,005)		—		—		(3,005)
Net income (loss) attributable to Starwood Property Trust, Inc.		103,684		62,239		(48,055)		117,868
Add / (Deduct):
Non-cash equity compensation expense		416		233		6,875		7,524
Management incentive fee		—		—		4,047		4,047
Depreciation and amortization		—		788		—		788
Loan loss allowance, net		(139)		—		—		(139)
Interest income adjustment for securities		(948)		396		—		(552)
Other non-cash items		—		250		—		250
Reversal of unrealized (gains) / losses on:
Loans held-for-sale		—		(11,608)		—		(11,608)
Securities		(10,991)		(16,293)		—		(27,284)
Derivatives		7,622		1,762		—		9,384
Foreign currency		(4,083)		—		—		(4,083)
Earnings from unconsolidated entities		—		(522)		—		(522)
Recognition of realized gains / (losses) on:
Loans held for sale		—		11,096		—		11,096
Securities		10,301		(284)		—		10,017
Derivatives		(10,244)		(400)		—		(10,644)
Foreign currency		9,100		—		—		9,100
Earnings from unconsolidated entities		—		—		—		—
Core Earnings (Loss)	$	104,718	$	47,657	$	(37,133)	$	115,242
Core Earnings (Loss) per Weighted Average Diluted Share (2)	$	0.47	$	0.22	$	(0.17)	$	0.52

(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 22 of our condensed consolidated financial statements included herein for further information.

(2)

We have conformed our calculation of weighted average diluted shares to our current methodology of excluding the conversion spread value of our convertible notes.

Lending Segment

The Lending Segment’s Core Earnings increased by $3.4 million, from $104.7 million during the second quarter of 2014 to $108.1 million in the second quarter of 2015. After making adjustments for the calculation of Core Earnings, revenues were $131.1 million, costs and expenses were $25.7 million and other income was $3.0 million.

Core revenues, consisting principally of interest income on loans, increased by $13.7 million in the second quarter of 2015 due to growth of $1.1 billion in our loan portfolio since June 30, 2014 and, to a lesser extent, increased interest income on investment securities.

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Core costs and expenses increased by $3.9 million in the second quarter of 2015 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 $574.3 million since June 30, 2014.

Core other income decreased by $9.5 million, principally due to a decrease in gain on sale of investments due to higher sales activity, particularly of RMBS, in the second quarter of 2014.

Investing and Servicing Segment

The Investing and Servicing Segment’s Core Earnings increased by $13.4 million, from $47.7 million during the second quarter of 2014 to $61.1 million in the second quarter of 2015. After making adjustments for the calculation of Core Earnings, revenues were $101.5 million, costs and expenses were $38.2 million, other income was $1.6 million and income taxes were $3.8 million.

Core revenues increased by $5.4 million in the second quarter of 2015 due to increases of $9.6 million in interest income from our CMBS portfolio and $1.8 million in interest income on our conduit loans partially offset by a decrease of $3.5 million in servicing fees and $2.5 million in rental and other revenues.

Core costs and expenses decreased by $7.8 million in the second quarter of 2015, primarily due to accruals for contingencies and legal fees incurred in the second quarter of 2014, which did not recur in the second quarter of 2015, and lower incentive compensation, all partially offset by an increase of $1.8 million in interest expense on our conduit loan and CMBS financing facilities.

Core other income increased by $0.2 million in the second quarter of 2015, reflecting higher gains on sales of conduit loans into securitizations partially offset by lower gains on CMBS sales.

Income taxes, which principally relate to the operating results of our servicing and conduit businesses which are held in TRSs, decreased nominally.

Property Segment

During the three months ended June 30, 2014, there was no activity in the Property Segment. Therefore a comparison of results of this segment for the three months ended June 30, 2015 to the three months ended June 30, 2014 is not meaningful.

The Property Segment contributed Core Earnings of $0.4 million during the second quarter of 2015. After making adjustments for the calculation of Core Earnings, revenues were $3.5 million, costs and expenses were $5.6 million and other income was $2.5 million.

Core revenues consisted of $3.5 million of rental income from the Ireland Portfolio following its acquisition in May 2015.

Core costs and expenses of $5.6 million consisted of (i) acquisition and investment pursuit costs of $4.3 million, of which $3.2 million related to the Ireland Portfolio, (ii) $0.9 million of interest expense on secured financing for the Ireland Portfolio and (iii) $0.4 million of other rental related costs.

Core other income of $2.5 million consisted primarily of equity in earnings of the Retail Fund.

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Corporate

Core corporate costs and expenses increased by $6.5 million, from $37.1 million in the second quarter of 2014 to $43.6 million in the second quarter of 2015. This increase was primarily due to a $4.9 million increase in interest expense primarily related to our October 2014 issuance of Convertible Notes due 2017 and a $1.3 million increase in base management fees.

Six Months Ended June 30, 2015 Compared to the Six Months Ended June 30, 2014

The following table presents our summarized results of operations and reconciliation to Core Earnings for the six months ended June 30, 2015, by business segment (amounts in thousands):


			Investing
	Lending		and Servicing		Property
	Segment		Segment		Segment		Corporate		Total
Revenues	$	267,341	$	193,967	$	3,536	$	—	$	464,844
Costs and expenses		(57,391)		(78,688)		(7,263)		(110,211)		(253,553)
Other income (loss)		3,448		43,997		5,105		(5,907)		46,643
Income (loss) before income taxes		213,398		159,276		1,378		(116,118)		257,934
Income tax benefit (provision)		30		(19,773)		—		—		(19,743)
Income attributable to non-controlling interests		(680)		—		—		—		(680)
Net income (loss) attributable to Starwood Property Trust, Inc.		212,748		139,503		1,378		(116,118)		237,511
Add / (Deduct):
Non-cash equity compensation expense		1,312		2,554		—		14,535		18,401
Management incentive fee		—		—		—		10,767		10,767
Depreciation and amortization		—		856		1,537		—		2,393
Loan loss allowance, net		2,978		—		—		—		2,978
Interest income adjustment for securities		(364)		(3,445)		—		—		(3,809)
Other non-cash items		—		(775)		—		—		(775)
Reversal of unrealized (gains) / losses on:
Loans held-for-sale		—		(31,962)		—		—		(31,962)
Securities		(171)		(5,122)		—		—		(5,293)
Derivatives		(10,507)		1,642		83		—		(8,782)
Foreign currency		8,154		1,291		7		—		9,452
Earnings from unconsolidated entities		—		(8,052)		—		—		(8,052)
Recognition of realized gains / (losses) on:
Loans held-for-sale		—		35,623		—		—		35,623
Securities		—		(10,121)		—		—		(10,121)
Derivatives		11,506		(4,495)		—		—		7,011
Foreign currency		(10,239)		(1,565)		(7)		—		(11,811)
Earnings from unconsolidated entities		—		6,063		—		—		6,063
Core Earnings (Loss)	$	215,417	$	121,995	$	2,998	$	(90,816)	$	249,594
Core Earnings (Loss) per Weighted Average Diluted Share	$	0.94	$	0.52	$	0.01	$	(0.39)	$	1.08

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The following table presents our summarized results of operations and reconciliation to Core Earnings for the six months ended June 30, 2014, by business segment (amounts in thousands):


			Investing
	Lending		and Servicing				Single Family
	Segment		Segment		Corporate		Residential		Total
Revenues	$	238,824	$	181,327	$	—	$	—	$	420,151
Costs and expenses (1)		(44,370)		(94,172)		(97,668)		—		(236,210)
Other income		12,395		56,817		—		—		69,212
Income (loss) from continuing operations before income taxes		206,849		143,972		(97,668)		—		253,153
Income tax provision		(526)		(9,371)		—		—		(9,897)
Loss from discontinued operations, net of tax		—		—		—		(1,551)		(1,551)
Income attributable to non-controlling interests		(3,236)		—		—		—		(3,236)
Net income (loss) attributable to Starwood Property Trust, Inc.		203,087		134,601		(97,668)		(1,551)		238,469
Add / (Deduct):
Non-cash equity compensation expense		593		442		13,696		—		14,731
Management incentive fee		—		—		11,223		—		11,223
Change in Control Plan		—		1,279		—		—		1,279
Depreciation and amortization		—		1,070		—		1,540		2,610
Loan loss allowance, net		358		—		—		—		358
Interest income adjustment for securities		(1,350)		5,854		—		—		4,504
Other non-cash items		—		250		—		—		250
Reversal of unrealized (gains) / losses on:
Loans held for sale		—		(32,501)		—		—		(32,501)
Securities		(10,835)		(53,245)		—		—		(64,080)
Derivatives		10,410		6,082		—		—		16,492
Foreign currency		(5,644)		—		—		—		(5,644)
Earnings from unconsolidated entities		—		(593)		—		—		(593)
Recognition of realized gains / (losses) on:
Loans held for sale		—		29,385		—		—		29,385
Securities		9,782		14,131		—		—		23,913
Derivatives		(10,590)		(2,757)		—		—		(13,347)
Foreign currency		9,716		—		—		—		9,716
Earnings from unconsolidated entities		—		—		—		—		—
Core Earnings (Loss)	$	205,527	$	103,998	$	(72,749)	$	(11)	$	236,765
Core Earnings (Loss) per Weighted Average Diluted Share (2)	$	0.98	$	0.50	$	(0.35)	$	—	$	1.13

(1)

(2)

We have conformed our calculation of weighted average diluted shares to our current methodology of excluding the conversion spread value of our convertible notes.

Lending Segment

The Lending Segment’s Core Earnings increased by $9.9 million, from $205.5 million during the six months ended June 30, 2014 to $215.4 million during the six months ended June 30, 2015. After making adjustments for the calculation of Core Earnings, revenues were $267.0 million, costs and expenses were $53.1 million and other income was $2.2 million.

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Core revenues, consisting principally of interest income on loans, increased by $29.5 million in the first half of 2015 due to growth of $1.1 billion in our loan portfolio since June 30, 2014 and, to a lesser extent, increased interest income on investment securities.

Core costs and expenses increased by $9.7 million 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 $574.3 million since June 30, 2014.

Core other income decreased by $13.0 million, principally due to a decrease in gain on sale of investments due to higher sales activity, particularly of RMBS, in the second half of 2014.

Investing and Servicing Segment

The Investing and Servicing Segment’s Core Earnings increased by $18.0 million, from $104.0 million during the six months ended June 30, 2014 to $122.0 million during the six months ended June 30, 2015. After making adjustments for the calculation of Core Earnings, revenues were $190.5 million, costs and expenses were $75.5 million, other income was $26.8 million and income taxes were $19.8 million.

Core revenues increased by $3.3 million primarily due to increases of $9.6 million in interest income from our CMBS portfolio and $3.9 million in interest income on our conduit loans partially offset by a decrease of $8.7 million in servicing fees and $1.5 million in rental and other revenues.

Core costs and expenses decreased by $15.7 million, primarily due to accruals for contingencies and legal fees incurred in the second quarter of 2014, which did not recur in the second quarter of 2015, and lower incentive compensation, all partially offset by an increase of $2.9 million in interest expense on our conduit loan and CMBS financing facilities.

Core other income increased by $9.4 million, primarily due to a gain on the sale of a commercial real estate asset and increased gains on sales of conduit loans into securitizations, both partially offset by lower gains on CMBS sales.

Income taxes, which principally relate to the operating results of our servicing and conduit businesses which are held in TRSs, increased $10.4 million due to a taxable gain on the sale of a commercial real estate asset as well as other increases in our TRS income.

Property Segment

The Property Segment contributed Core Earnings of $3.0 million for the six months ended June 30, 2015. Refer to the discussion of the Property Segment’s core results for the three months ended June 30, 2015, as the Ireland Portfolio acquisition occurred during that period. The results of operations for the Property Segment prior to the Ireland Portfolio acquisition relate solely to our equity method investment in the Retail Fund, which contributed $5.2 million to Core Earnings for the six months ended June 30, 2015.

Corporate

Core corporate costs and expenses increased by $18.1 million, from $72.7 million during the six months ended June 30, 2014 to $90.8 million during the six months ended June 30, 2015. This increase was primarily due to a $10.7 million increase in interest expense primarily related to our October 2014 issuance of Convertible Notes due 2017, a $5.9 million loss on extinguishment of a portion of our Convertible Notes due 2019 and a $2.0 million increase in base management fees.

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Single Family Residential Segment

As discussed in Note 3 to our condensed consolidated financial statements included herein, our former single family residential (“SFR”) segment was spun off to our stockholders on January 31, 2014.

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 strategy for managing liquidity and capital resources has not changed since December 31, 2014, other than as set forth below. Refer to our Form 10-K for a description of these strategies.

Cash and Cash Equivalents

As of June 30, 2015, we had cash and cash equivalents of $446.5 million.

Cash Flows for the Six Months Ended June 30, 2015 (amounts in thousands)


			VIE		Excluding Investing
	GAAP		Adjustments		and Servicing VIEs
Net cash provided by operating activities	$	294,952	$	30	$	294,982
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment		(1,256,784)		—		(1,256,784)
Proceeds from principal collections and sale of loans		1,077,477		—		1,077,477
Purchase of investment securities		(147,423)		(89,220)		(236,643)
Proceeds from sales and collections of investment securities		252,872		22,097		274,969
Real estate business combinations, net of cash acquired		(95,891)		(31,309)		(127,200)
Proceeds from sale of properties		33,056		—		33,056
Net cash flows from other investments and assets		1,127		—		1,127
Decrease in restricted cash, net		16,090		—		16,090
Net cash used in investing activities		(119,476)		(98,432)		(217,908)
Cash Flows from Financing Activities:
Borrowings under financing agreements		2,464,018		—		2,464,018
Principal repayments on and repurchases of borrowings		(2,445,916)		—		(2,445,916)
Payment of deferred financing costs		(7,054)		—		(7,054)
Proceeds from common stock issuances, net of offering costs		325,404		—		325,404
Payment of dividends		(216,623)		—		(216,623)
Distributions to non-controlling interests		(792)		—		(792)
Purchase of treasury stock		(2,268)		—		(2,268)
Issuance of debt of consolidated VIEs		7,513		(7,513)		—
Repayment of debt of consolidated VIEs		(120,529)		120,529		—
Distributions of cash from consolidated VIEs		14,584		(14,584)		—
Net cash provided by financing activities		18,337		98,432		116,769
Net increase in cash and cash equivalents		193,813		30		193,843
Cash and cash equivalents, beginning of period		255,187		(786)		254,401
Effect of exchange rate changes on cash		(2,522)		—		(2,522)
Cash and cash equivalents, end of period	$	446,478	$	(756)	$	445,722

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The discussion below is on a non-GAAP basis, after removing adjustments principally resulting from the consolidation of Investing and Servicing Segment’s VIEs under ASC 810. These adjustments principally relate to (i) purchase of CMBS related to 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 to our condensed consolidated financial statements included herein for further discussion.

Cash and cash equivalents increased by $193.8 million during the six months ended June 30, 2015, reflecting net cash provided by operating activities of $295.0 million and net cash provided by financing activities of $116.7 million partially offset by net cash used in investing activities of $217.9 million.

Net cash provided by operating activities of $295.0 million for the six months ended June 30, 2015 related primarily to cash interest income of $329.6 million from our loan origination and conduit programs, plus cash interest income on investment securities of $96.0 million. Servicing fees provided cash of $105.5 million, rental income provided cash of $4.8 million and other revenues provided $15.0 million. Offsetting these revenues were cash interest expense of $81.2 million, general and administrative expenses of $58.1 million, a net change in operating assets and liabilities of $49.0 million, management fees of $43.8 million, income tax payments of $17.7 million and acquisition and investment pursuit costs of $6.1 million.

Net cash used in investing activities of $217.9 million for the six months ended June 30, 2015 related primarily to the origination and acquisition of new loans held-for-investment of $1.3 billion, the purchase of investment securities of $236.6 million and the purchase of real estate property of $127.2 million, partially offset by proceeds received from principal repayments and sales of loans of $1.1 billion and investment securities of $275.0 million.

Net cash provided by financing activities of $116.7 million for the six months ended June 30, 2015 related primarily to proceeds from the issuance of common stock of $325.4 million, net borrowings after repayments and repurchases of our secured debt and convertible notes of $18.1 million, partially offset by dividend distributions of $216.6 million, payment of deferred financing costs of $7.1 million and share repurchases of $2.3 million.

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Our Investment Portfolio

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 June 30, 2015 and December 31, 2014 (amounts in thousands):


										Unlevered
	Face		Carrying		Asset Specific		Net			Return on
	Amount		Value		Financing		Investment		Vintage	Asset
June 30, 2015
First mortgages (1)	$	4,784,004	$	4,721,561	$	2,171,744	$	2,549,817	1989-2015	7.0	%
Subordinated mortgages		318,460		291,300		2,000		289,300	1998-2013	11.3	%
Mezzanine loans (1)		897,184		909,345		—		909,345	2006-2015	10.9	%
Loans held-for-sale		92,984		88,056		41,917		46,139	2004-2015
Loans transferred as secured borrowings		137,302		135,940		137,302		(1,362)	N/A
Loan loss allowance		—		(9,009)		—		(9,009)	N/A
RMBS—AFS (2)		251,203		193,150		65,948		127,202	2003-2007	11.5	%
CMBS—AFS (2)		94,272		99,928		—		99,928	2012	12.3	%
HTM securities (3)		354,365		354,534		97,763		256,771	2013-2015	7.1	%
Equity security		14,361		15,402		—		15,402	N/A
Investments in unconsolidated entities		N/A		35,283		—		35,283	N/A
	$	6,944,135	$	6,835,490	$	2,516,674	$	4,318,816

December 31, 2014
First mortgages (1)	$	4,599,841	$	4,531,030	$	1,861,633	$	2,669,397	1989-2014	6.9	%
Subordinated mortgages		374,859		345,091		2,000		343,091	1998-2014	11.0	%
Mezzanine loans (1)		889,948		901,217		—		901,217	2006-2014	11.4	%
Loans transferred as secured borrowings		129,570		129,427		129,441		(14)	N/A
Loan loss allowance		—		(6,031)		—		(6,031)	N/A
RMBS—AFS (2)		270,783		207,053		101,886		105,167	2003-2007	12.3	%
CMBS—AFS (2)		93,686		100,349		—		100,349	2012-2013	12.1	%
HTM securities (3)		440,253		441,995		97,103		344,892	2013-2014	8.6	%
Equity security		14,237		15,120		—		15,120	N/A
Investments in unconsolidated entities (4)		N/A		22,537		—		22,537	N/A
	$	6,813,177	$	6,687,788	$	2,192,063	$	4,495,725

(1)

During the three months ended June 30, 2015, we reclassified certain loans previously included in the mezzanine loan category to the first mortgage category. Previously, first mortgage loans which contained a related contiguous mezzanine loan component were classified by their respective components as first mortgages and mezzanine loans. These loans are now classified as first mortgage loans in their entirety because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. As of June 30, 2015 and December 31, 2015, the application of this methodology resulted in mezzanine loans with carrying values of $793.0 million and $704.2 million, respectively, being classified as first mortgages. Prior periods were reclassified to conform to this presentation.

(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 $129,475 investment in the Retail Fund to our newly established Property Segment.

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As of June 30, 2015 and December 31, 2014, our Lending Segment’s investment portfolio, excluding RMBS and other investments, had the following characteristics based on carrying values:


Collateral Property Type	June 30, 2015		December 31, 2014
Office	40.3	%	42.1	%
Hospitality	27.1	%	24.7	%
Multi-family	12.8	%	13.1	%
Mixed Use	9.0	%	8.8	%
Retail	6.4	%	8.3	%
Residential	2.4	%	1.1	%
Industrial	2.0	%	1.9	%
	100.0	%	100.0	%


Geographic Location	June 30, 2015		December 31, 2014
West	28.6	%	25.6	%
North East	26.7	%	26.8	%
International	14.2	%	14.2	%
South East	12.9	%	12.4	%
Midwest	6.2	%	8.5	%
Mid Atlantic	5.8	%	6.4	%
South West	5.6	%	6.1	%
	100.0	%	100.0	%

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 June 30, 2015 and December 31, 2014 (amounts in thousands):


						Asset
	Face		Carrying			Specific		Net
	Amount		Value			Financing		Investment
June 30, 2015
CMBS, fair value option	$	4,410,018	$	829,687	(1)	$	137,256	$	692,431
Intangible assets - servicing rights		N/A		170,100	(2)		—		170,100
Loans held-for-sale, fair value option		281,734		279,352			125,680		153,672
Loans held-for-investment		3,260		2,199			—		2,199
Investment in unconsolidated entities		N/A		55,189			—		55,189
Properties, net		N/A		57,771			31,835		25,936
	$	4,695,012	$	1,394,298		$	294,771	$	1,099,527
December 31, 2014
CMBS, fair value option	$	4,281,364	$	753,553	(1)	$	—	$	753,553
Intangible assets - servicing rights		N/A		190,207	(2)		—		190,207
Loans held-for-sale, fair value option		390,342		391,620			208,363		183,257
Loans held-for-investment		9,685		7,931			—		7,931
Investment in unconsolidated entities		N/A		48,693			—		48,693
Properties, net		N/A		39,854			14,000		25,854
	$	4,681,391	$	1,431,858		$	222,363	$	1,209,495

(1)

Includes $615.5 million and $519.8 million of CMBS reflected in “VIE liabilities” in accordance with ASC 810 as of June 30, 2015 and December 31, 2014, respectively.

(2)

Includes $37.0 million and $46.1 million of servicing rights intangibles reflected in “VIE assets” in accordance with ASC 810 as of June 30, 2015 and December 31, 2014, respectively.

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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, held within our Property Segment as of June 30, 2015 and December 31, 2014 (amounts in thousands):


	June 30, 2015		December 31, 2014
Properties, net	$	339,245	$	—
Intangible assets - lease intangibles		42,499		—
Investment in unconsolidated entities		120,927		129,475
	$	502,671	$	129,475

The following table sets forth our net investment and other information regarding the Property Segment’s properties and intangible lease assets as of June 30, 2015 (dollar amounts in thousands):


	Net		Asset						Weighted
	Carrying		Specific		Net		Occupancy		Average
	Value		Financing		Investment		Rate		Lease Term
Office	$	364,234	$	236,073	$	128,161	99.8	%	6.8 years
Multi-family residential		17,510		9,536		7,974	100.0	%	0.4 years
	$	381,744	$	245,609	$	136,135

New Credit Facilities and Amendments

Refer to Note 9 of our condensed consolidated financial statements herein for a detailed discussion of new credit facilities and amendments to existing credit facilities executed since December 31, 2014.

Borrowings under Various Secured Financing Arrangements

The following table is a summary of our secured financing facilities as of June 30, 2015 (dollar amounts in thousands):


				Pledged							Approved
				Asset		Maximum					but		Unallocated
	Current	Extended		Carrying		Facility		Outstanding			Undrawn		Financing
	Maturity	Maturity(a)	Pricing	Value		Size		Balance			Capacity(b)		Amount(c)
Lender 1 Repo 1	(d)	(d)	LIBOR + 1.85% to 5.25%	$	1,571,235	$	1,250,000	$	1,085,871		$	83,086	$	81,043
Lender 1 Repo 2	(e)	N/A	LIBOR + 1.90%		193,150		125,000		65,948			45,725		13,327
Lender 2 Repo 1	Oct 2015	Oct 2018	LIBOR + 1.75% to 2.75%		398,363		325,000		294,869			—		30,131
Lender 3 Repo 1	May 2017	May 2019	LIBOR + 2.85%		176,866		122,470		122,470			—		—
Conduit Repo 1	Sep 2015	Sep 2016	LIBOR + 1.90%		32,283		150,000		24,712			—		125,288
Conduit Repo 2	Nov 2015	Nov 2016	LIBOR + 2.10%		102,288		150,000		77,868			—		72,132
Conduit Repo 3	Feb 2018	Feb 2019	LIBOR + 2.10%		30,289		150,000		23,100			—		126,900
Lender 4 Repo 1	Oct 2015	Oct 2017	LIBOR + 2.00%		420,581		329,952		329,952			—		—
Lender 6 Repo 1	Aug 2017	Aug 2018	LIBOR + 2.75% to 3.00%		557,574		500,000		376,500			—		123,500
Lender 6 Mortgage	May 2020	N/A	EURIBOR + 2.00%		381,744		327,722		245,609			—		82,113
Lender 7 Repo 1	Dec 2016	N/A	LIBOR + 2.60% to 2.70%		50,365		39,024		39,024			—		—
Investing and Servicing Segment Property Mortgages	June 2018 to Nov 2024	June 2020 to Nov 2024	Various		43,748		38,975		31,835			—		7,140
Lender 9 Repo 1	(f)	(f)	LIBOR + 1.40% to 1.85%		283,347		195,994		195,994			—		—
Borrowing Base	Sep 2015	Sep 2017	LIBOR + 3.25%(g)		783,508		250,000		6,000			—		244,000
Term Loan	Apr 2020	N/A	LIBOR + 2.75%(g)		2,695,747		661,655		659,751	(h)		—		—
				$	7,721,088	$	4,615,792	$	3,579,503		$	128,811	$	905,574

(a)

Subject to certain conditions as defined in the respective facility agreement.

(b)

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.

(c)

Unallocated financing amount represents the maximum facility size less the total draw capacity that has been approved by the lender.

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(d)

Maturity date for borrowings collateralized by loans of January 2017 before extension options and January 2019 assuming initial extension options.

(e)

The date that is 180 days after the buyer delivers notice to seller, subject to a maximum date of March 2017.

(f)

Facility carries a rolling twelve month term which may reset monthly with the lender’s consent. Current maturity is June 2016.

(g)

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.

(h)

Term loan outstanding balance is net of $1.9 million of unamortized discount.

As of June 30, 2015, Wells Fargo Bank, N.A. (“Lender 1”) is our largest creditor through two repurchase facilities.

Refer to Note 9 of our condensed consolidated financial statements included herein for further disclosure regarding the terms of our financing arrangements.

Borrowings under Convertible Senior Notes

The following table is a summary of our unsecured convertible senior notes outstanding as of June 30, 2015 (amounts in thousands, except rates):


									Remaining
	Principal		Coupon		Effective		Conversion	Maturity	Period of
	Amount		Rate		Rate		Rate	Date	Amortization
2017 Notes	$	431,250	3.75	%	5.87	%	41.7397	10/15/2017	2.3	years
2018 Notes	$	599,981	4.55	%	6.10	%	45.6167	3/1/2018	2.7	years
2019 Notes	$	341,363	4.00	%	5.37	%	48.4451	1/15/2019	3.5	years

During both the three and six months ended June 30, 2015, the weighted average effective borrowing rate on our convertible notes was 5.7%. During both the three and six months ended June 30, 2014, the weighted average effective borrowing rate on our convertible notes was 5.6%. 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 10 of our condensed consolidated financial statements included herein for further disclosure regarding the terms of our convertible senior notes.

Variance between Average and Quarter-End Credit Facility Borrowings Outstanding

The following table compares 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):


			Weighted-Average				Explanations
	Quarter-End		Balance During				for Significant
Quarter Ended	Balance		Quarter		Variance		Variances
December 31, 2014	$	3,137,789	$	2,745,631	$	392,158	(a)
March 31, 2015		3,711,834		3,455,082		256,752	(b)
June 30, 2015		3,579,503		3,509,209		70,294	(c)

(a)

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 Borrowing Base 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 Borrowing Base facility in November 2014.

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(b)

Variance primarily due to the following: (i) $131.7 million drawn on the Lender 9 Repo 1 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.

(c)

Variance primarily due to the following: (i) $245.6 million drawn on the Lender 6 Mortgage in May 2015; partially offset by (ii) $82.0 million repaid on the Borrowing Base facility in May 2015.

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 June 30, 2015 (amounts in thousands):


	Scheduled Principal		Scheduled/Projected		Projected/Required		Scheduled Principal
	Repayments on Loans		Principal Repayments		Repayments of		Inflows Net of
	and Preferred Interests		on RMBS and CMBS		Financing		Financing Outflows
Third Quarter 2015	$	386,398	$	111,203	$	(153,737)	$	343,864
Fourth Quarter 2015		27,745		30,227		(16,910)		41,062
First Quarter 2016		117,618		24,833		(5,738)		136,713
Second Quarter 2016		14,845		30,539		(5,737)		39,647
Total	$	546,606	$	196,802	$	(182,122)	$	561,286

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 June 30, 2015, we had 100,000,000 shares of preferred stock available for issuance and 261,419,576 shares of common stock available for issuance.

Refer to Note 16 of our condensed consolidated financial statements included herein for a discussion of our issuances of equity securities during the six months ended June 30, 2015.

Other Potential Sources of Financing

In the future, we may 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.

Repurchases of Equity Securities and Convertible 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. In December 2014, our board of directors amended the repurchase program to allow for the repurchase of our outstanding convertible senior notes. In June 2015, our board of directors amended the repurchase program to increase the authorized purchase amount to $450 million and provide for a one year extension through June 2016. Purchases made pursuant to the program will be 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 three and six months ended June 30, 2015, we repurchased $14.5 million and $118.6 million aggregate principal of our 2019 Notes, respectively, for $16.5 million and $136.3 million plus related transaction expenses of $0.1 million, respectively. During the three months ended June 30, 2015, we also

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repurchased $8.8 million in common stock under the repurchase program. No common stock was repurchased during the three months ended March 31, 2015. As of June 30, 2015, we have $291.7 million of remaining capacity to repurchase common stock or convertible notes under the repurchase program.

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 14 of our condensed consolidated financial statements included herein 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 our Form 10-K for a detailed dividend history.

The Company’s board of directors declared the following dividend during the six months ended June 30, 2015:


Declare Date	Record Date	Payment Date	Amount		Frequency
5/5/15	6/30/15	7/15/15	$	0.48	Quarterly
2/25/15	3/31/15	4/15/15	$	0.48	Quarterly

Leverage Policies

Our strategies with regards to use of leverage have not changed significantly since December 31, 2014. Refer to our Form 10-K for a description of our strategies regarding use of leverage.

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Contractual Obligations and Commitments

Contractual obligations as of June 30, 2015 are as follows (amounts in thousands):


			Less than						More than
	Total		1 year		1 to 3 years		3 to 5 years		5 years
Secured financings(a)	$	3,581,407	$	182,122	$	1,237,150	$	2,162,135	$	—
Convertible senior notes		1,372,594		—		1,031,231		341,363		—
Secured borrowings on transferred loans(b)		195,000		—		95,000		100,000		—
Loan funding commitments(c)		1,690,428		968,261		722,167		—		—
Future lease commitments		34,004		6,365		11,847		10,823		4,969
Total	$	6,873,433	$	1,156,748	$	3,097,395	$	2,614,321	$	4,969

(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 $303.9 million of loan funding commitments 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 certain instances, particularly with loans involving multiple construction lenders, the Company has guaranteed the future funding obligations of 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.

Critical Accounting Estimates

Refer to the section of our Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” for a full discussion of our critical accounting estimates. Our critical accounting estimates have not materially changed since December 31, 2014 with the exception of the following:

Acquisition of Properties

When we acquire properties, we allocate the purchase price to its tangible and intangible components. Our process for determining the allocation to these components requires various estimates and assumptions, including: (1) market rental rates; (2) period of time to fully lease the property; (3) rental incentives; (4) property operating expenses; (5) other leasing costs and (6) if-vacant land value. A change in any of the above key assumptions could materially change not only the presentation of acquired properties in our consolidated financial statements but also our reported results of operations.

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Item 3. 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. Our strategies for managing risk and our exposure to such risks have not changed materially since December 31, 2014. Refer to our Form 10-K Item 7A for further discussion.

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 Investing and Servicing Segment loans held-for-sale through the purchase of credit index instruments. The following table presents our credit index instruments as of June 30, 2015 and December 31, 2014 (dollar amounts in thousands):


	Face Value of		Aggregate Notional Value of		Number of
	Loans Held-for-Sale		Credit Index Instruments		Credit Index Instruments
June 30, 2015	$	281,734	$	40,000	11
December 31, 2014	$	390,342	$	45,000	12

Refer to Note 5 of our condensed 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

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presents financial instruments where we have utilized interest rate derivatives to hedge interest rate risk and the related interest rate derivatives as of June 30, 2015 and December 31, 2014 (dollar amounts in thousands):


			Aggregate Notional
	Face Value of		Value of Interest		Number of Interest
	Hedged Instruments		Rate Derivatives		Rate Derivatives
Instrument hedged as of June 30, 2015
Loans held-for-investment	$	9,000	$	9,000	2
Loans held-for-sale		281,734		233,300	55
RMBS, available-for-sale		251,203		74,000	3
Secured financing agreements		435,520		425,259	10
	$	977,457	$	741,559	70
Instrument hedged as of December 31, 2014
Loans held-for-investment	$	9,000	$	9,000	2
Loans held-for-sale		390,342		338,500	54
RMBS, available-for-sale		270,783		74,000	3
Secured financing agreements		220,729		218,165	8
	$	890,854	$	639,665	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 (in thousands, except per share amounts):


	Variable-rate
	investments and		3.0%		2.0%		1.0%		1.0%
Income (Expense) Subject to Interest Rate Sensitivity	indebtedness		Increase		Increase		Increase		Decrease (1)
Investment income from variable-rate investments	$	5,209,407	$	169,887	$	110,919	$	52,067	$	(8,654)
Interest expense from variable-rate debt		(3,567,407)		(103,934)		(68,260)		(32,585)		6,485
Net investment income from variable rate instruments	$	1,642,000	$	65,953	$	42,659	$	19,482	$	(2,169)
Impact per diluted average shares outstanding			$	0.28	$	0.18	$	0.08	$	(0.01)

(1)

Assumes LIBOR does not go below 0%.

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. 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.

During the three months ended June 30, 2015, we entered into 40 foreign exchange contracts to hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio. As of June 30, 2015, these contracts have an aggregate notional of $216.4 million and varying maturities through June 2020.

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The following table represents our 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 June 30, 2015 pound sterling (“GBP”) closing rate of 1.5712, Euro (“EUR”) closing rate of 1.1147, Swedish Krona (“SEK”) closing rate of 0.1206, Norwegian Krone (“NOK”) closing rate of 0.1273, Danish Krone (“DKK”) closing rate of 0.1493):




Carrying Value of		Local	Number of Foreign	Aggregate Notional Value
Investment		Currency	Exchange Contracts	of Hedges Applied		Expiration Range of Contracts
$	115,849	GBP	6	$	135,176	July 2016
	23,486	GBP	7		29,478	January 2017
	10,748	GBP	12		11,041	July 2015 – March 2016
	99,928	GBP	2		105,231	September 2015 – March 2016
	24,163	GBP	7		28,170	July 2015 – January 2018
	6,635	EUR, DKK, NOK, SEK	6		11,564	December 2015
	93,460	GBP	8		110,352	July 2015 – April 2017
	27,402	GBP	7		32,553	August 2015 – February 2017
	3,563	GBP	3		4,602	June 2016 – March 2018
	140,796	EUR	40		216,415	September 2015 – June 2020
	15,402	GBP	12		17,125	July 2015 – January 2018
	46,112	EUR	14		46,163	July 2015 – October 2016
	44,264	EUR	13		49,902	February 2016 – October 2016
$	651,808		137	$	797,772

Item 4. 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 Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including the 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 the 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.

Changes in 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 June 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

Currently, no material legal proceedings are pending or, to our knowledge, threatened or contemplated against us, that could have a material adverse effect on our business, financial position or results of operations.

Item 1A. Risk Factors.

There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

Issuer Purchases of Equity Securities

The following table provides information regarding our purchases of common stock during the three months ended June 30, 2015:


				Number of shares	Value of shares available
		Average		purchased as part of	for purchase
	Total number of	repurchase		publicly announced	under the program
Period	shares purchased	price per share		program (1)	(in thousands)
June 2015	400,000	$	22.07	400,000	$	291,734

(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. In December 2014, our board of directors amended the repurchase program to include the repurchase of our outstanding convertible senior notes. In June 2015, our board of directors amended the repurchase program to increase the authorized purchase amount to $450 million and provide for a one-year extension through June 2016.

Item 3. Defaults Upon Senior Securities.

None.

Item 4. Mine Safety Disclosures.

Not applicable.

Item 5. Other Information.

None.

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SIGNATURES

Pursuant to the requirements 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.


	STARWOOD PROPERTY TRUST, INC.

Date: August 4, 2015	By:	/s/ BARRY S. STERNLICHT
		Barry S. Sternlicht Chief Executive Officer Principal Executive Officer

Date: August 4, 2015	By:	/s/ RINA PANIRY
		Rina Paniry Chief Financial Officer, Treasurer, Chief Accounting Officer and Principal Financial Officer

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Item 6. Exhibits.

(a)Index to Exhibits

INDEX TO EXHIBITS

Exhibit No.		Description
10.1		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)

31.1		Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2		Certification pursuant to Section 302(a) 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