STARWOOD PROPERTY TRUST, INC. - Quarter Report: 2016 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, 2016

☐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) 422-7700

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 29, 2016 was 238,048,384.

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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, 2015, this Quarterly Report on Form 10-Q and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2016, including those set forth under the captions “Risk Factors” and “Business”

defaults by borrowers in paying debt service on outstanding indebtedness;

impairment in the value of real estate property securing our loans or in which we invest;

availability of mortgage origination and acquisition opportunities acceptable to us;

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

national and local economic and business conditions;

general and local commercial and residential real estate property conditions;

changes in federal government policies;

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

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

changes in interest rates; and

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

In light of these risks and uncertainties, there can be no assurances that the results referred to in the forward-looking statements contained in this 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	17
	Note 4 Loans	19
	Note 5 Investment Securities	23
	Note 6 Properties	28
	Note 7 Investment in Unconsolidated Entities	28
	Note 8 Goodwill and Intangible Assets	29
	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	39
	Note 14 Variable Interest Entities	39
	Note 15 Related-Party Transactions	41
	Note 16 Stockholders’ Equity	43
	Note 17 Earnings per Share	44
	Note 18 Accumulated Other Comprehensive Income	45
	Note 19 Fair Value	46
	Note 20 Income Taxes	51
	Note 21 Commitments and Contingencies	51
	Note 22 Segment Data	52
	Note 23 Subsequent Events	58
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	59
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	90
Item 3.	Defaults Upon Senior Securities	90
Item 4.	Mine Safety Disclosures	90
Item 5.	Other Information	90
Item 6.	Exhibits	92

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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, 2016		December 31, 2015
Assets:
Cash and cash equivalents	$	404,820	$	368,815
Restricted cash		41,131		23,069
Loans held-for-investment, net		5,693,452		5,973,079
Loans held-for-sale, at fair value		237,106		203,865
Loans transferred as secured borrowings		93,268		86,573
Investment securities ($378,461 and $403,703 held at fair value)		898,803		724,947
Properties, net		1,232,855		919,225
Intangible assets ($83,301 and $119,698 held at fair value)		177,053		201,570
Investment in unconsolidated entities		200,541		199,201
Goodwill		140,437		140,437
Derivative assets		42,692		45,091
Accrued interest receivable		30,036		34,314
Other assets		118,050		102,479
Variable interest entity (“VIE”) assets, at fair value		80,076,117		76,675,689
Total Assets	$	89,386,361	$	85,698,354
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	140,612	$	156,805
Related-party payable		20,318		40,955
Dividends payable		115,013		114,947
Derivative liabilities		17,870		5,196
Secured financing agreements, net		4,476,221		3,980,699
Convertible senior notes, net		1,334,424		1,323,795
Secured borrowings on transferred loans		94,668		88,000
VIE liabilities, at fair value		79,087,142		75,817,014
Total Liabilities		85,286,268		81,527,411
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, 242,653,861 issued and 238,046,976 outstanding as of June 30, 2016 and 241,044,775 issued and 237,490,779 outstanding as of December 31, 2015		2,427		2,410
Additional paid-in capital		4,220,887		4,192,844
Treasury stock (4,606,885 shares and 3,553,996 shares)		(92,104)		(72,381)
Accumulated other comprehensive income		32,627		29,729
Accumulated deficit		(103,373)		(12,286)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,060,464		4,140,316
Non-controlling interests in consolidated subsidiaries		39,629		30,627
Total Equity		4,100,093		4,170,943
Total Liabilities and Equity	$	89,386,361	$	85,698,354

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,
	2016		2015		2016		2015
Revenues:
Interest income from loans	$	122,557	$	118,292	$	240,089	$	236,721
Interest income from investment securities		15,301		23,810		34,704		51,554
Servicing fees		23,312		30,154		48,003		58,411
Rental income		37,843		5,014		70,520		7,686
Other revenues		979		1,390		2,169		3,137
Total revenues		199,992		178,660		395,485		357,509
Costs and expenses:
Management fees		23,767		26,821		48,730		54,789
Interest expense		57,635		49,799		114,155		100,333
General and administrative		35,409		41,404		68,207		76,668
Acquisition and investment pursuit costs		2,888		4,867		4,173		6,053
Costs of rental operations		15,852		1,211		28,507		2,909
Depreciation and amortization		19,073		5,828		37,833		9,913
Loan loss allowance, net		2,029		2,661		1,268		2,978
Other expense		—		—		100		375
Total costs and expenses		156,653		132,591		302,973		254,018
Income before other income (loss), income taxes and non-controlling interests		43,339		46,069		92,512		103,491
Other income (loss):
Change in net assets related to consolidated VIEs		50,707		55,873		46,540		103,734
Change in fair value of servicing rights		(12,191)		(2,652)		(18,930)		(4,194)
Change in fair value of investment securities, net		1,319		1,446		2,072		947
Change in fair value of mortgage loans held-for-sale, net		13,235		10,831		20,126		31,962
Earnings from unconsolidated entities		4,479		8,951		8,544		15,041
(Loss) gain on sale of investments and other assets, net		(90)		209		155		17,407
Gain (loss) on derivative financial instruments, net		20,253		(19,530)		(4,465)		5,093
Foreign currency (loss) gain, net		(16,988)		20,854		(17,366)		(9,453)
Total other-than-temporary impairment (“OTTI”)		—		—		(54)		—
Noncredit portion of OTTI recognized in other comprehensive income		—		—		54		—
Net impairment losses recognized in earnings		—		—		—		—
Loss on extinguishment of debt		—		(629)		—		(5,921)
Other income, net		8,714		10		10,729		55
Total other income (loss)		69,438		75,363		47,405		154,671
Income before income taxes		112,777		121,432		139,917		258,162
Income tax provision		(706)		(3,792)		(800)		(19,743)
Net income		112,071		117,640		139,117		238,419
Net income attributable to non-controlling interests		(598)		(492)		(987)		(908)
Net income attributable to Starwood Property Trust, Inc.	$	111,473	$	117,148	$	138,130	$	237,511

Earnings per share data attributable to Starwood Property Trust, Inc.:
Basic	$	0.47	$	0.49	$	0.58	$	1.03
Diluted	$	0.47	$	0.49	$	0.58	$	1.02

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,
	2016		2015		2016		2015
Net income	$	112,071	$	117,640	$	139,117	$	238,419
Other comprehensive (loss) income (net change by component):
Cash flow hedges		(48)		123		(321)		(140)
Available-for-sale securities		5,951		(1,857)		2,551		(9,820)
Foreign currency remeasurement		(6,733)		8,273		668		(35)
Other comprehensive (loss) gain		(830)		6,539		2,898		(9,995)
Comprehensive income		111,241		124,179		142,015		228,424
Less: Comprehensive income attributable to non-controlling interests		(598)		(492)		(987)		(908)
Comprehensive income attributable to Starwood Property Trust, Inc.	$	110,643	$	123,687	$	141,028	$	227,516

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

Balance, January 1, 2016	241,044,775	$	2,410	$	4,192,844	3,553,996	$	(72,381)	$	(12,286)	$	29,729	$	4,140,316	$	30,627	$	4,170,943
Proceeds from DRIP Plan	9,163		—		177	—		—		—		—		177		—		177
Common stock repurchased	—		—		—	1,052,889		(19,723)		—		—		(19,723)		—		(19,723)
Share-based compensation	876,674		9		14,651	—		—		—		—		14,660		—		14,660
Manager incentive fee paid in stock	723,249		8		13,215	—		—		—		—		13,223		—		13,223
Net income	—		—		—	—		—		138,130		—		138,130		987		139,117
Dividends declared, $0.96 per share	—		—		—	—		—		(229,217)		—		(229,217)		—		(229,217)
Other comprehensive income, net	—		—		—	—		—		—		2,898		2,898		—		2,898
VIE non-controlling interests	—		—		—	—		—		—		—		—		(52)		(52)
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		10,417		10,417
Distributions to non-controlling interests	—		—		—	—		—		—		—		—		(2,350)		(2,350)
Balance, June 30, 2016	242,653,861	$	2,427	$	4,220,887	4,606,885	$	(92,104)	$	(103,373)	$	32,627	$	4,060,464	$	39,629	$	4,100,093

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

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,
	2016		2015
Cash Flows from Operating Activities:
Net income	$	139,117	$	238,419
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of deferred financing costs, premiums and discounts on secured financing agreements		8,212		7,159
Amortization of convertible debt discount and deferred costs		10,628		10,503
Accretion of net discount on investment securities		(7,349)		(16,314)
Accretion of net deferred loan fees and discounts		(23,362)		(18,139)
Amortization of net discount from secured borrowings on transferred loans		—		4
Share-based compensation		14,660		17,882
Share-based component of incentive fees		13,223		12,739
Change in fair value of fair value option investment securities		(2,072)		(947)
Change in fair value of consolidated VIEs		45,899		3,663
Change in fair value of servicing rights		18,930		4,194
Change in fair value of loans held-for-sale		(20,126)		(31,962)
Change in fair value of derivatives		2,332		(8,782)
Foreign currency loss, net		17,169		9,659
Gain on sale of investments and other assets		(155)		(17,407)
Loan loss allowance, net		1,268		2,978
Depreciation and amortization		34,664		9,079
Earnings from unconsolidated entities		(8,544)		(15,041)
Distributions of earnings from unconsolidated entities		9,817		14,752
Bargain purchase gain		(8,406)		—
Loss on extinguishment of debt		—		5,921
Originations of loans held-for-sale, net of principal collections		(488,448)		(889,413)
Proceeds from sale of loans held-for-sale		475,333		1,033,644
Changes in operating assets and liabilities:
Related-party payable, net		(20,749)		(16,192)
Accrued and capitalized interest receivable, less purchased interest		(41,151)		(32,185)
Other assets		6,715		(11,452)
Accounts payable, accrued expenses and other liabilities		(29,055)		(17,810)
Net cash provided by operating activities		148,550		294,952
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment		(997,421)		(1,256,784)
Proceeds from principal collections on loans		1,193,643		698,901
Proceeds from loans sold		121,276		378,576
Purchase of investment securities		(350,642)		(147,423)
Proceeds from sales of investment securities		1,269		5,098
Proceeds from principal collections on investment securities		47,544		247,774
Real estate business combinations, net of cash acquired		(91,186)		(95,891)
Proceeds from sale of properties		—		33,056
Purchase of other assets		(5,521)		—
Investment in unconsolidated entities		(3,854)		(32,065)
Distribution of capital from unconsolidated entities		1,244		22,127
Payments for purchase or termination of derivatives		(15,144)		(13,894)
Proceeds from termination of derivatives		27,447		24,782
Return of investment basis in purchased derivative asset		137		177
(Increase) decrease in restricted cash, net		(17,840)		16,090
Net cash used in investing activities		(89,048)		(119,476)

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,
	2016		2015
Cash Flows from Financing Activities:
Borrowings under financing agreements	$	2,059,599	$	2,464,018
Principal repayments on and repurchases of borrowings		(1,711,117)		(2,445,916)
Payment of deferred financing costs		(6,437)		(7,054)
Proceeds from common stock issuances		177		326,296
Payment of equity offering costs		—		(892)
Payment of dividends		(229,151)		(216,623)
Contributions from non-controlling interests		10,417		—
Distributions to non-controlling interests		(2,350)		(792)
Purchase of treasury stock		(19,723)		(2,268)
Issuance of debt of consolidated VIEs		596		7,513
Repayment of debt of consolidated VIEs		(147,523)		(120,529)
Distributions of cash from consolidated VIEs		22,986		14,584
Net cash (used in) provided by financing activities		(22,526)		18,337
Net increase in cash and cash equivalents		36,976		193,813
Cash and cash equivalents, beginning of period		368,815		255,187
Effect of exchange rate changes on cash		(971)		(2,522)
Cash and cash equivalents, end of period	$	404,820	$	446,478
Supplemental disclosure of cash flow information:
Cash paid for interest	$	91,961	$	81,208
Income taxes paid		2,177		17,663
Supplemental disclosure of non-cash investing and financing activities:
Fair value of assets acquired, net of cash	$	270,021	$	393,774
Fair value of liabilities assumed		170,429		297,883
Net assets acquired from consolidated VIEs		102,976		31,309
Unsettled common stock repurchased		—		6,561
Dividends declared, but not yet paid		115,013		115,575
Consolidation of VIEs (VIE asset/liability additions)		16,850,221		5,657,627
Deconsolidation of VIEs (VIE asset/liability reductions)		5,126,980		3,481,363

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, 2016

(Unaudited)

1. Business and Organization

Starwood Property Trust, Inc. (“STWD” and, together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering (“IPO”). We are focused primarily on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (“CMBS”), and other commercial real estate investments in both the U.S. and Europe. We refer to the following as our target assets: commercial real estate mortgage loans, preferred equity interests, CMBS and other commercial real estate-related debt investments. Our target assets may also include residential mortgage-backed securities (“RMBS”), certain residential mortgage loans, distressed or non-performing commercial loans, commercial properties subject to net leases and equity interests in commercial real estate. As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.

We have three reportable business segments as of June 30, 2016:

Real estate lending (the “Lending Segment”)—engages primarily in originating, acquiring, financing and managing commercial first mortgages, subordinated mortgages, mezzanine loans, preferred equity, CMBS, RMBS and other real estate and real estate-related debt investments in both the U.S. and Europe that are held for investment.

Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) servicing businesses in both the U.S. and Europe that manage and work out problem assets, (ii) an investment business that selectively acquires and manages unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business which originates conduit loans for the primary purpose of selling these loans into securitization transactions, and (iv) an investment business that selectively acquires commercial real estate assets, including properties acquired from CMBS trusts. This segment excludes the consolidation of securitization variable interest entities (“VIEs”).

Real estate property (the “Property Segment”)—engages primarily in acquiring and managing equity interests in stabilized commercial real estate properties, including multi-family properties, that are held for investment.

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

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

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2. Summary of Significant Accounting Policies

Balance Sheet Presentation of the Investing and Servicing Segment’s Variable Interest Entities

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

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

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

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, 2015 (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, 2016 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, 2015 due to a corporate action or increase in the significance of the underlying business activity.

Variable Interest Entities

We evaluate all of our interests in VIEs for consolidation. When our interests are determined to be variable interests, we assess whether we are deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. 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

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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.

Effective January 1, 2016, we implemented Accounting Standards Update (“ASU”) 2015-02, Consolidation (Topic 810) – Amendments to the Consolidation Analysis, which specifies that the right to remove the decision maker in a VIE must be exercisable without cause for the decision maker to not be deemed the party that has the power to direct the activities of a VIE. In connection with the implementation of this ASU, we consolidated VIE assets and VIE liabilities from CMBS trusts as of March 31, 2016 where the right to remove the Company as special servicer was not exercisable without cause.

Our implementation of the ASU also resulted in the determination that certain entities in which we hold interests, which prior to the implementation of the ASU were not considered VIEs, are now considered VIEs as the limited partners of these entities do not collectively possess (i) the right to remove the general partner without cause or (ii) the right to participate in significant decisions made by the partnership. The application of the ASU to these particular entities did not change our respective conclusions as to whether or not they should be consolidated. We applied the provisions of this ASU using a modified retrospective approach which does not require the restatement of prior period financial statements. There was no cumulative-effect adjustment to equity upon adoption. Refer to Note 14 for further discussion of the impact of our implementation of ASU 2015-02.

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 without cause, 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 securitization 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.

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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 securitization 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 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 securitization VIEs as individual line items on our condensed consolidated balance sheets. The liabilities of our consolidated securitization VIEs consist solely of obligations to the bondholders of the related CMBS trusts, and are thus presented as a single line item entitled “VIE liabilities.” The assets of our consolidated securitization VIEs consist principally of loans, but at times, also include foreclosed loans which have been temporarily converted into real estate owned (“REO”). These assets in the aggregate are likewise presented as a single line item entitled “VIE assets.”

Loans comprise the vast majority of our securitization VIE assets and are carried at fair value due to the election of the fair value option. When an asset becomes REO, it is due to nonperformance of the loan. Because the loan is already at fair value, the carrying value of an REO asset is also initially at fair value. Furthermore, when we consolidate a CMBS trust, any existing REO would be consolidated at fair value. Once an asset becomes REO, its disposition time is relatively short. As a result, the carrying value of an REO generally approximates fair value under GAAP.

In addition to sharing a similar measurement method as the loans in a CMBS trust, the securitization VIE assets as a whole can only be used to settle the obligations of the consolidated VIE. The assets of our securitization VIEs are not individually accessible by the bondholders, which creates inherent limitations from a valuation perspective. Also creating limitations from a valuation perspective is our role as special servicer, which provides us very limited visibility, if any, into the performing loans of a CMBS trust.

REO assets generally represent a very small percentage of the overall asset pool of a CMBS trust. In a new issue CMBS trust there are no REO assets. We estimate that REO assets constitute approximately 4% of our consolidated securitization VIE assets, with the remaining 96% representing loans. However, it is important to note that the fair value of our securitization VIE assets is determined by reference to our securitization VIE liabilities as permitted under ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. In other words, our VIE liabilities are more reliably measurable than the VIE assets, resulting in our current measurement methodology which utilizes this value to determine the fair value of our securitization VIE assets as a whole. As a result, these percentages are not necessarily indicative of the relative fair values of each of these asset categories if the assets were to be valued individually.

Due to our accounting policy election under ASU 2014-13, separately presenting two different asset categories would result in an arbitrary assignment of value to each, with one asset category representing a residual amount, as opposed to its fair value. However, as a pool, the fair value of the assets in total is equal to the fair value of the liabilities.

For these reasons, the assets of our securitization VIEs are presented in the aggregate.

Fair Value Option

The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are

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reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in our consolidated balance sheets from those instruments using another accounting method.

We have elected the fair value option for eligible financial assets and liabilities of our consolidated securitization 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 securitization VIEs at fair value pursuant to our election of the fair value option. The securitization 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 securitization 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 discussion regarding our fair value measurements.

Loans Held-for-Investment and Provision for Loan Losses

Loans that are held for investment are carried at cost, net of unamortized acquisition premiums or discounts, loan fees, and origination costs as applicable, unless the loans are deemed impaired. We evaluate each loan classified as held-for-investment for impairment at least quarterly. Impairment occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is considered to be impaired, we record an allowance through the provision for loan losses to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral. Actual losses, if any, could ultimately differ from these estimates.

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

Deferred Financing Costs

In accordance with ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30), effective January 1, 2016 we modified our presentation of deferred financing costs in our condensed consolidated balance sheets to present such 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. Deferred financing costs will continue to be amortized to

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interest expense over the terms of the respective debt agreements. As required by this ASU, we applied this change retrospectively to our prior period condensed consolidated balance sheet presentation.

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

Nearly all of the Company’s unvested RSUs and RSAs contain rights to receive non-forfeitable dividends and thus are participating securities. Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method, undistributed earnings are reallocated between shares of common stock and participating securities. For the three and six months ended June 30, 2016 and 2015, the two-class method resulted in the most dilutive EPS calculation.

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

In connection with our implementation of ASU 2015-03 discussed above, we reclassified deferred financing costs of $38.3 million and $1.4 million previously reported in other assets to secured financing agreements, net and convertible senior notes, net, respectively, within our condensed consolidated balance sheet as of December 31, 2015.

Recent Accounting Developments

On May 28, 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, which establishes key principles by which an entity determines the amount and timing of revenue recognized from customer contracts. At issuance, the ASU was effective for the first interim or annual period beginning after December 15, 2016. On August 12, 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers – Deferral of the Effective Date, which delayed the effective date of ASU 2014-09 by one year, resulting in the ASU becoming effective for the first interim or annual period beginning after December 15, 2017. Early application, which was not permissible under the initial effectiveness timeline, is now permissible though no earlier than as of the first interim or annual period beginning after December 15, 2016. We do not expect the application of this ASU to materially impact the Company.

On January 5, 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities, which impacts the accounting for equity investments, financial liabilities under the fair value option, and disclosure requirements for financial instruments. The ASU shall be applied prospectively and is effective for annual periods, and interim periods therein, beginning after December 15, 2017. Early application is not permitted. We are in the process of assessing the impact this ASU will have on the Company.

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On February 25, 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which establishes a right-of-use model for lessee accounting which results in the recognition of most leased assets and lease liabilities on the balance sheet of the lessee. Lessor accounting was not significantly changed. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2018 by applying a modified retrospective approach. Early application is permitted. We are in the process of assessing the impact this ASU will have on the Company.

On March 14, 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815) – Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that the change in counterparty to a derivative designated in a hedging relationship, in and of itself, would not require that the hedging relationship be de-designated for hedge accounting purposes. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2016. Early application is permitted. We do not expect the application of this ASU to materially impact the Company.

On March 15, 2016, the FASB issued ASU 2016-07, Investments – Equity Method and Joint Ventures (Topic 323) – Simplifying the Transition to the Equity Method of Accounting, which amends existing guidance to require that in instances where an investee is transitioning from the cost method of accounting to the equity method of accounting due to an increase in ownership level or degree of influence, the investee applies the equity method of accounting prospectively from the date significant influence is obtained, whereas existing guidance requires an investee to retrospectively apply the equity method of accounting for all previous periods in which the investment was held. The ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2016. Early application is permitted. We do not expect the application of this ASU to materially impact the Company.

On March 17, 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amends the principal-versus-agent implementation guidance and illustrations in the FASB’s revenue recognition standard issued in ASU 2014-09. The ASU provides further guidance to assist an entity in the determination of whether the nature of its promise to its customer is to provide the underlying goods or services, meaning the entity is a principal, or to arrange for a third party to provide the underlying goods or services, meaning the entity is an agent. The ASU is effective for the first interim or annual period beginning after December 15, 2017. Early application is permissible though no earlier than 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.

On March 30, 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment Accounting, which seeks to simplify the accounting for employee share-based payment transactions, including the accounting for associated income taxes and forfeitures. The ASU is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2016. Early application is permitted in any interim or annual period. We do not expect the application of this ASU to materially impact the Company.

On April 14, 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606) - Identifying Performance Obligations and Licensing, which amends guidance and illustrations in the FASB’s revenue recognition standard issued in ASU 2014-09 regarding the identification of performance obligations and the implementation guidance on licensing arrangements. The ASU is effective for the first interim or annual period beginning after December 15, 2017. Early application is permissible though no earlier than 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.

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which mandates use of an “expected loss” credit model for estimating future credit losses of certain financial instruments instead of the “incurred loss” credit model that existing GAAP currently mandates. The “expected loss” model requires the consideration of possible credit losses over the life of an instrument compared to only estimating credit losses upon the occurrence of a discrete loss event in accordance with the current “incurred loss” methodology. The ASU is effective for annual reporting periods, and interim periods

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therein, beginning after December 15, 2019. Early application is permissible though no earlier than the first interim or annual period beginning after December 15, 2018. We are in the process of assessing the impact this ASU will have on the Company.

3. Acquisitions

Woodstar Portfolio Acquisition

During the three months ended June 30, 2016, we acquired the final two of the 32 affordable housing communities which comprise our “Woodstar Portfolio.” During the three months ended March 31, 2016, we acquired 12 of the Woodstar Portfolio’s affordable housing communities. The Woodstar Portfolio in its entirety is comprised of 8,948 units concentrated primarily in the Tampa, Orlando and West Palm Beach metropolitan areas and is 98% occupied.

The two affordable housing communities acquired during the three months ended June 30, 2016 are comprised of 628 units with total assets of $48.9 million and assumed liabilities of $22.1 million, which includes state sponsored financing and other assumed debt. The 14 affordable housing communities acquired during the six months ended June 30, 2016 are comprised of 3,710 units with total assets of $276.3 million and assumed liabilities of $170.4 million, which includes federal, state and county sponsored financing and other assumed debt. Refer to Note 9 for further discussion of these assumed debt facilities.

For the 14 affordable housing communities acquired during 2016, we recognized revenues of $14.6 million and net income of $5.0 million during the six months ended June 30, 2016. Such net income includes (i) bargain purchase gains of $8.4 million, (ii) depreciation and amortization expense of $9.0 million and (iii) one-time acquisition-related costs, such as legal and due diligence costs, of approximately $0.8 million.

No goodwill was recognized in connection with the Woodstar Portfolio acquisition as the purchase price did not exceed the fair value of the net assets acquired. During the three months ended June 30, 2016, a bargain purchase gain of $8.4 million was recognized within other income, net in our condensed consolidated statements of operations as the fair value of the net assets acquired during the three months ended June 30, 2016 exceeded the purchase price due to favorable changes in net asset fair values occurring between the date the purchase price was negotiated and the closing date.

Investing and Servicing Segment Property Portfolio

During the three and six months ended June 30, 2016, our Investing and Servicing Segment acquired controlling interests in commercial real estate properties as well as a non-performing loan from CMBS trusts for $58.0 million and $87.8 million, respectively. In addition, during the three months ended June 30, 2016, we foreclosed on a non-performing loan that was previously acquired from a CMBS trust for $8.2 million. These properties, aggregated with the controlling interests in 14 U.S. commercial real estate properties acquired from CMBS trusts during the year ended December 31, 2015 for $138.7 million, comprise the Investing and Servicing Segment Property Portfolio (the “REO Portfolio”). When the properties are acquired from CMBS trusts that are consolidated as VIEs on our balance sheet, the acquisitions are reflected as repayment of debt of consolidated VIEs in our consolidated statements of cash flows. No goodwill or bargain purchase gain was recognized in connection with the REO Portfolio acquisitions as the purchase price equaled the fair value of the net assets acquired.

Ireland Portfolio Acquisition

During 2015, we acquired 12 net leased fully occupied office properties and one multi-family property all located in Dublin, Ireland. Collectively, these 13 properties comprise our “Ireland Portfolio”.

The Ireland Portfolio, which collectively is comprised of approximately 600,000 square feet, included total assets of $518.2 million and assumed debt of $283.0 million at acquisition. Following our acquisition, all assumed debt was immediately extinguished and replaced with new financing of $328.6 million from the Ireland Portfolio Mortgage (as set forth in Note 9). All properties within the Ireland Portfolio were acquired from entities controlled by the same

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third party investment fund. No goodwill or bargain purchase gain was recognized in connection with the Ireland Portfolio acquisition as the purchase price equaled the fair value of the net assets acquired.

Purchase Price Allocations of Acquisitions

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

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


	2016				2015
	Woodstar		REO		Woodstar		REO		Ireland
Assets acquired:	Portfolio		Portfolio		Portfolio		Portfolio		Portfolio
Cash and cash equivalents	$	6,254	$	—	$	—	$	—	$	—
Restricted cash		—		—		—		—		10,829
Properties		245,430		68,096		339,040		128,218		445,369
Intangible assets		8,174		25,387		11,337		19,381		59,529
Other assets		16,417		2,858		652		4,973		2,508
Total assets acquired		276,275		96,341		351,029		152,572		518,235
Liabilities assumed:
Accounts payable, accrued expenses and other liabilities		19,666		3,063		18,030		6,998		17,552
Secured financing agreements		150,763		—		8,982		—		283,010
Total liabilities assumed		170,429		3,063		27,012		6,998		300,562
Non-controlling interests		—		5,492		—		6,904		—
Net assets acquired	$	105,846	$	87,786	$	324,017	$	138,670	$	217,673

Pro-Forma Operating Data

The pro-forma revenues and net income attributable to the Company for the three and six months ended June 30, 2016 and 2015, assuming all the properties acquired within the Woodstar Portfolio, REO Portfolio and the Ireland Portfolio were acquired on January 1, 2014 for the 2015 acquisitions and January 1, 2015 for the 2016 acquisitions, are as follows (amounts in thousands, except per share amounts):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Revenues	$	202,304	$	212,251	$	405,577	$	428,261
Net income attributable to STWD		102,983		115,354		131,819		237,563
Net income per share - Basic		0.43		0.49		0.55		1.03
Net income per share - Diluted		0.43		0.48		0.55		1.02

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


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Management fee expense addition	$	175	$	1,966	$	663	$	4,335

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, 2016 and December 31, 2015 (dollars in thousands):


							Weighted
					Weighted		Average Life
	Carrying		Face		Average		(“WAL”)
June 30, 2016	Value		Amount		Coupon		(years)(3)
First mortgages (1)	$	4,538,986	$	4,592,601	5.8	%	2.4
Subordinated mortgages (2)		392,208		413,228	8.5	%	3.0
Mezzanine loans (1)		769,555		756,400	9.9	%	2.1
Total loans held-for-investment		5,700,749		5,762,229
Loans held-for-sale, fair value option elected		237,106		235,296	5.0	%	9.8
Loans transferred as secured borrowings		93,268		94,668	6.1	%	2.0
Total gross loans		6,031,123		6,092,193
Loan loss allowance (loans held-for-investment)		(7,297)		—
Total net loans	$	6,023,826	$	6,092,193

December 31, 2015
First mortgages (1)	$	4,723,852	$	4,776,576	6.0	%	2.7
Subordinated mortgages (2)		392,563		416,713	8.5	%	3.4
Mezzanine loans (1)		862,693		850,024	9.9	%	2.5
Total loans held-for-investment		5,979,108		6,043,313
Loans held-for-sale, fair value option elected		203,865		203,710	4.9	%	9.8
Loans transferred as secured borrowings		86,573		88,000	6.1	%	2.4
Total gross loans		6,269,546		6,335,023
Loan loss allowance (loans held-for-investment)		(6,029)		—
Total net loans	$	6,263,517	$	6,335,023

(1)

First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. The application of this methodology resulted in mezzanine loans with carrying values of $949.2 million and $930.0 million being classified as first mortgages as of June 30, 2016 and December 31, 2015, respectively.

(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, 2016, approximately $5.1 billion, or 89.1%, of our loans held-for-investment were variable rate and paid interest principally at LIBOR plus a weighted-average spread of 5.9%. The following table summarizes our investments in floating rate loans (dollars in thousands):


	June 30, 2016				December 31, 2015
			Carrying				Carrying
Index	Base Rate		Value		Base Rate		Value
One-month LIBOR USD	0.4651	%	$	572,062	0.4295	%	$	438,641
Three-month LIBOR GBP	N/A			—	0.5904	%		375,467
LIBOR floor	0.15 - 3.00	% (1)		4,508,359	0.15 - 3.00	% (1)		4,237,947
Total			$	5,080,421			$	5,052,055

(1)

The weighted-average LIBOR floor was 0.32% and 0.31% as of June 30, 2016 and December 31, 2015, 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—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, 2016, 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 (dollars in thousands):


	Balance Sheet Classification
	Loans Held-For-Investment								Loans
									Transferred				% of
Risk Rating	First		Subordinated		Mezzanine		Loans Held-		As Secured				Total
Category	Mortgages		Mortgages		Loans		For-Sale		Borrowings		Total		Loans
1	$	3,070	$	—	$	—	$	—	$	—	$	3,070	0.1	%
2		606,666		86,069		96,404		—		—		789,139	13.1	%
3		3,728,584		285,921		552,692		—		93,268		4,660,465	77.3	%
4		200,666		20,218		58,262		—		—		279,146	4.6	%
5		—		—		62,197		—		—		62,197	1.0	%
N/A		—		—		—		237,106		—		237,106	3.9	%
	$	4,538,986	$	392,208	$	769,555	$	237,106	$	93,268	$	6,031,123	100.0	%

As of December 31, 2015, the risk ratings for loans subject to our rating system by class of loan were as follows (dollars in thousands):


	Balance Sheet Classification
	Loans Held-For-Investment								Loans
									Transferred				% of
Risk Rating	First		Subordinated		Mezzanine		Loans Held-		As Secured				Total
Category	Mortgages		Mortgages		Loans		For-Sale		Borrowings		Total		Loans
1	$	664	$	—	$	—	$	—	$	—	$	664	—	%
2		496,372		88,857		90,449		—		—		675,678	10.8	%
3		3,979,247		270,435		651,204		—		86,573		4,987,459	79.6	%
4		247,569		33,271		121,040		—		—		401,880	6.4	%
5		—		—		—		—		—		—	—	%
N/A		—		—		—		203,865		—		203,865	3.2	%
	$	4,723,852	$	392,563	$	862,693	$	203,865	$	86,573	$	6,269,546	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, 2016 or December 31, 2015, as we expect to collect all outstanding principal and interest. None of our loans were 90 days or greater past due as of June 30, 2016.

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,
	2016		2015
Allowance for loan losses at January 1	$	6,029	$	6,031
Provision for loan losses		1,268		2,978
Charge-offs		—		—
Recoveries		—		—
Allowance for loan losses at June 30	$	7,297	$	9,009
Recorded investment in loans related to the allowance for loan loss	$	341,343	$	493,274

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


	For the Six Months Ended
	June 30,
	2016		2015
Balance at January 1	$	6,263,517	$	6,300,285
Acquisitions/originations/additional funding		1,492,845		2,150,080
Capitalized interest (1)		44,875		33,509
Basis of loans sold (2)		(596,454)		(1,411,912)
Loan maturities/principal repayments		(1,199,205)		(695,750)
Discount accretion/premium amortization		23,362		18,139
Changes in fair value		20,126		31,962
Unrealized foreign currency remeasurement loss		(33,325)		(4,419)
Change in loan loss allowance, net		(1,268)		(2,978)
Transfer to/from other asset classifications		9,353		(172)
Balance at June 30	$	6,023,826	$	6,418,744

(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.

5. Investment Securities

Investment securities were comprised of the following as of June 30, 2016 and December 31, 2015 (amounts in thousands):


	Carrying Value as of
	June 30, 2016		December 31, 2015
RMBS, available-for-sale	$	251,260	$	176,224
CMBS, fair value option (1)		1,050,909		1,038,200
Held-to-maturity (“HTM”) securities		520,342		321,244
Equity security, fair value option		12,861		14,498
Subtotal—Investment securities		1,835,372		1,550,166
VIE eliminations (1)		(936,569)		(825,219)
Total investment securities	$	898,803	$	724,947

(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, 2016
Purchases	$	46,866	$	—	$	24,403	$	195,036	$	—	$	266,305
Sales		—		—		1,269		—		—		1,269
Principal collections		16,197		—		7,142		1,861		—		25,200
Three Months Ended June 30, 2015
Purchases	$	—	$	—	$	250	$	79,926	$	—	$	80,176
Sales		—		—		385		—		—		385
Principal collections		7,127		—		—		228,910		—		236,037

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	Available-for-sale				CMBS, fair		HTM		Equity
	RMBS		CMBS		value option		Securities		Security		Total
Six Months Ended June 30, 2016
Purchases	$	88,336	$	—	$	57,576	$	204,730	$	—	$	350,642
Sales		—		—		1,269		—		—		1,269
Principal collections		23,008		—		19,445		5,091		—		47,544
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

RMBS, Available-for-Sale

The Company classified all of its RMBS as available-for-sale as of June 30, 2016 and December 31, 2015. These RMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (“AOCI”).

The tables below summarize various attributes of our investments in available-for-sale RMBS as of June 30, 2016 and December 31, 2015 (dollars 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, 2016
RMBS	$	221,587	$	(10,185)	$	211,402	$	(151)	$	40,146	$	(137)	$	39,858	$	251,260
December 31, 2015
RMBS	$	149,102	$	(10,185)	$	138,917	$	(340)	$	37,647	$	—	$	37,307	$	176,224


	Weighted Average Coupon (1)		Weighted Average Rating	WAL (Years) (2)
June 30, 2016
RMBS	1.8	%	CCC	6.0
December 31, 2015
RMBS	1.3	%	B−	6.2

(1)

Calculated using the June 30, 2016 and December 31, 2015 one-month LIBOR rate of 0.465% and 0.430%, 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, 2016, approximately $205.0 million, or 81.6%, of our RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.25%. As of December 31, 2015, approximately $122.7 million, or 69.7%, of our RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 0.43%. 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.

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The following table contains a reconciliation of aggregate principal balance to amortized cost for our RMBS as of June 30, 2016 and December 31, 2015 (amounts in thousands):


	June 30, 2016		December 31, 2015
Principal balance	$	408,521	$	233,976
Accretable yield		(78,116)		(68,345)
Non-accretable difference		(119,003)		(26,714)
Total discount		(197,119)		(95,059)
Amortized cost	$	211,402	$	138,917

The principal balance of credit deteriorated RMBS was $377.0 million and $199.0 million as of June 30, 2016 and December 31, 2015, respectively. Accretable yield related to these securities totaled $68.4 million and $57.7 million as of June 30, 2016 and December 31, 2015, respectively.

The following table discloses the changes to accretable yield and non-accretable difference for our RMBS during the three and six months ended June 30, 2016 (amounts in thousands):


			Non-Accretable
Three Months Ended June 30, 2016	Accretable Yield		Difference
Balance as of April 1, 2016	$	67,626	$	82,550
Accretion of discount		(3,742)		—
Principal recoveries, net		—		4,283
Purchases		9,765		36,637
Sales		—		—
OTTI		—		—
Transfer to/from non-accretable difference		4,467		(4,467)
Balance as of June 30, 2016	$	78,116	$	119,003

Six Months Ended June 30, 2016
Balance as of January 1, 2016	$	68,345	$	26,714
Accretion of discount		(7,157)		—
Principal recoveries, net		—		3,994
Purchases		9,147		96,076
Sales		—		—
OTTI		—		—
Transfer to/from non-accretable difference		7,781		(7,781)
Balance as of June 30, 2016	$	78,116	$	119,003

We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.3 million and $0.4 million for the three months ended June 30, 2016 and 2015, respectively, and $0.7 million for both the six months ended June 30, 2016 and 2015, which has been recorded as management fees in the accompanying condensed consolidated statements of operations.

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The following table presents the gross unrealized losses and estimated fair value of any available-for-sale securities that were in an unrealized loss position as of June 30, 2016 and December 31, 2015, and for which OTTIs (full or partial) have not been recognized in earnings (amounts in thousands):


	Estimated Fair Value				Unrealized Losses
	Securities with a		Securities with a		Securities with a		Securities with a
	loss less than		loss greater than		loss less than		loss greater than
	12 months		12 months		12 months		12 months
As of June 30, 2016
RMBS	$	14,602	$	639	$	(157)	$	(131)
As of December 31, 2015
RMBS	$	17,026	$	653	$	(180)	$	(160)

As of June 30, 2016 and December 31, 2015, there were four securities and five securities, respectively, with unrealized losses reflected in the table above. After evaluating these securities and recording adjustments for credit-related OTTI, we concluded that the remaining unrealized losses reflected above were noncredit-related and would be recovered from the securities’ estimated future cash flows. We considered a number of factors in reaching this conclusion, including that we did not intend to sell the securities, it was not considered more likely than not that we would be forced to sell the securities prior to recovering our amortized cost, and there were no material credit events that would have caused us to otherwise conclude that we would not recover our cost. Credit losses, which represent most of the OTTI 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, 2016, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, before consolidation of securitization VIEs, were $1.1 billion and $4.7 billion, respectively. The $1.1 billion fair value balance represents our economic interests in these assets. However, as a result of our consolidation of securitization VIEs, the vast majority of this fair value ($936.6 million at June 30, 2016) 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, 2016, we purchased $54.8 million and $101.3 million of CMBS, respectively, for which we elected the fair value option. Due to our consolidation of securitization VIEs, $30.3 million and $43.7 million, respectively, of this amount is eliminated and reflected primarily as repayment of debt of consolidated VIEs in our condensed consolidated statement of cash flows.

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As of June 30, 2016, 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, 2016 and December 31, 2015:


	Weighted Average Coupon		Weighted Average Rating (1)	WAL (Years) (2)
June 30, 2016
CMBS, fair value option	5.7	%	B−	1.8
December 31, 2015
CMBS, fair value option	3.9	%	CCC+	7.4

(1)

As of June 30, 2016 and December 31, 2015, excludes $6.2 million and $51.3 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.

HTM Securities

The table below summarizes unrealized gains and losses of our investments in HTM securities as of June 30, 2016 and December 31, 2015 (amounts in thousands):


	Net Carrying Amount		Gross Unrealized		Gross Unrealized
	(Amortized Cost)		Holding Gains		Holding Losses		Fair Value
June 30, 2016
CMBS	$	500,711	$	—	$	(14,502)	$	486,209
Preferred interests		19,631		—		(192)		19,439
Total	$	520,342	$	—	$	(14,694)	$	505,648
December 31, 2015
CMBS	$	301,858	$	257	$	(5,651)	$	296,464
Preferred interests		19,386		—		(595)		18,791
Total	$	321,244	$	257	$	(6,246)	$	315,255

The table below summarizes the maturities of our HTM CMBS and our HTM preferred equity interests in limited liability companies that own commercial real estate as of June 30, 2016 (amounts in thousands):


			Preferred
	CMBS		Interests		Total
Less than one year	$	210,834	$	—	$	210,834
One to three years		106,112		—		106,112
Three to five years		183,765		—		183,765
Thereafter		—		19,631		19,631
Total	$	500,711	$	19,631	$	520,342

Equity Security, Fair Value Option

During 2012, we acquired 9,140,000 ordinary shares from a related-party in Starwood European Real Estate Finance Limited (“SEREF”), a debt fund that is externally managed by an affiliate of our Manager and is listed on the London Stock Exchange. We have elected to report the investment using the fair value option because the shares are listed on an exchange, which allows us to determine the fair value using a quoted price from an active market, and also due to potential lags in reporting resulting from differences in the respective regulatory requirements. The fair value of the investment remeasured in USD was $12.9 million and $14.5 million as of June 30, 2016 and December 31, 2015, respectively. As of June 30, 2016, our shares represent an approximate 3% interest in SEREF.

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6. Properties

Our properties include the Woodstar Portfolio, the REO Portfolio and the Ireland Portfolio as discussed in Note 3. The table below summarizes our properties held as of June 30, 2016 and December 31, 2015 (dollars in thousands):


	Depreciable Life	June 30, 2016		December 31, 2015
Property Segment
Land and land improvements	0 – 10 years	$	324,616	$	247,589
Buildings and building improvements	10 – 40 years		686,214		516,117
Furniture & fixtures	2 – 7 years		21,607		11,980
Investing and Servicing Segment
Land and land improvements	0 – 10 years		67,187		39,103
Buildings and building improvements	10 – 40 years		156,146		112,524
Furniture & fixtures	3 – 7 years		1,227		747
Properties, cost			1,256,997		928,060
Less: accumulated depreciation			(24,142)		(8,835)
Properties, net		$	1,232,855	$	919,225

In March 2015, the Investing and Servicing Segment sold an operating property that we had previously acquired from a CMBS trust, which resulted in a $17.1 million gain on sale of investments and other assets in our condensed consolidated statement of operations for the six months ended June 30, 2015. There were no properties sold during the six months ended June 30, 2016.

7. Investment in Unconsolidated Entities

The table below summarizes our investments in unconsolidated entities as of June 30, 2016 and December 31, 2015 (dollars in thousands):


	Participation /	Carrying value as of
	Ownership % (1)	June 30, 2016		December 31, 2015
Equity method:
Retail Fund	33%	$	122,130	$	122,454
Investor entity which owns equity in an online real estate auction company	50%		23,074		23,972
Equity interests in commercial real estate (2)	16% - 50%		31,912		28,230
Various	25% - 50%		6,440		6,376
			183,556		181,032
Cost method:
Investment funds which own equity in a loan servicer and other real estate assets	4% - 6%		9,225		9,225
Various	0% - 3%		7,760		8,944
			16,985		18,169
		$	200,541	$	199,201

(1)

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

(2)

During the three months ended June 30, 2016, a partnership in which we hold a 50% interest acquired a real estate asset from a CMBS trust for $19.0 million. As of June 30, 2016, our investment in the partnership was $3.7 million.

There were no differences between the carrying value of our equity method investments and the underlying equity in the net assets of the investees as of June 30, 2016.

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8. Goodwill and Intangible Assets

Goodwill

Goodwill at June 30, 2016 and December 31, 2015 represents the excess of consideration transferred over the fair value of net assets of LNR Property LLC (“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, 2016 and December 31, 2015, the balance of the domestic servicing intangible was net of $29.6 million and $11.8 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, 2016 and December 31, 2015, the domestic servicing intangible had a balance of $112.9 million and $131.5 million, respectively, which represents our economic interest in this asset.

Lease Intangibles

In connection with our acquisitions of commercial real estate, we recognized in-place lease intangible assets and favorable lease intangible assets associated with certain noncancelable operating leases of the acquired properties. The following table summarizes our intangible assets, which are comprised of servicing rights intangibles and lease intangibles, as of June 30, 2016 and December 31, 2015 (amounts in thousands):


	As of June 30, 2016						As of December 31, 2015
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
	Value		Amortization		Value		Value		Amortization		Value
Domestic servicing rights, at fair value	$	83,301	$	—	$	83,301	$	119,698	$	—	$	119,698
European servicing rights (1)		28,523		(26,934)		1,589		31,593		(28,967)		2,626
In-place lease intangible assets		106,263		(29,707)		76,556		74,983		(8,898)		66,085
Favorable lease intangible assets		17,707		(2,100)		15,607		14,103		(942)		13,161
Total net intangible assets	$	235,794	$	(58,741)	$	177,053	$	240,377	$	(38,807)	$	201,570

(1)

The fair value as of June 30, 2016 and December 31, 2015 was $4.4 million and $5.3 million, respectively.

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The following table summarizes the activity within intangible assets for the six months ended June 30, 2016 (amounts in thousands):


	Domestic		European		In-place Lease		Favorable Lease
	Servicing		Servicing		Intangible		Intangible
	Rights		Rights		Assets		Assets		Total
Balance as of January 1, 2016	$	119,698	$	2,626	$	66,085	$	13,161	$	201,570
Impact of ASU 2015-02 Adoption (1)		(17,467)		—		—		—		(17,467)
Acquisition of additional Woodstar Portfolio properties		—		—		8,174		—		8,174
Acquisition of additional REO Portfolio properties		—		—		22,041		3,346		25,387
Amortization		—		(842)		(20,721)		(1,143)		(22,706)
Foreign exchange (loss) gain		—		(195)		977		243		1,025
Changes in fair value due to changes in inputs and assumptions		(18,930)		—		—		—		(18,930)
Balance as of June 30, 2016	$	83,301	$	1,589	$	76,556	$	15,607	$	177,053

(1)

As discussed in Notes 2 and 14, our implementation of ASU 2015-02 resulted in the consolidation of certain CMBS trusts effective January 1, 2016, which required the elimination of $17.5 million of domestic servicing rights associated with these newly consolidated trusts.

The following table sets forth the estimated aggregate amortization of our European servicing rights, in-place lease intangible assets and favorable lease intangible assets for the next five years and thereafter (amounts in thousands):


2016 (remainder of)	$	12,048
2017		16,855
2018		14,788
2019		10,278
2020		7,635
Thereafter		32,148
Total	$	93,752

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9. Secured Financing Agreements

The following table is a summary of our secured financing agreements in place as of June 30, 2016 and December 31, 2015 (dollars in thousands):


										Carrying value at
	Current	Extended			Pledged Asset		Maximum			June 30,		December 31,
	Maturity	Maturity (a)	Pricing		Carrying Value		Facility Size			2016		2015
Lender 1 Repo 1	(b)	(b)	LIBOR + 1.85% to 5.25%		$	2,179,007	$	1,600,000		$	1,490,949	$	975,735
Lender 2 Repo 1	Oct 2017	Oct 2020	LIBOR + 1.75% to 2.75%			300,368		500,000			238,479		233,705
Lender 3 Repo 1	May 2017	May 2019	LIBOR + 2.50% to 2.85%			112,022		79,325			79,325		131,997
Lender 4 Repo 1	Oct 2016	Oct 2017	LIBOR + 2.00%			—		—			—		309,498
Lender 4 Repo 2	Dec 2018	Dec 2020	LIBOR + 2.00% to 2.50%			253,813		1,000,000	(c)		164,940		—
Lender 6 Repo 1	Aug 2018	N/A	LIBOR + 2.50% to 3.00%			431,821		500,000			288,149		491,263
Lender 7 Secured Financing	Jul 2018	Jul 2019	LIBOR + 2.75%	(d)		108,120		650,000	(e)		—		38,055
Conduit Repo 1	N/A	N/A	N/A			—		—			—		80,741
Conduit Repo 2	Nov 2016	N/A	LIBOR + 2.10%			42,612		150,000			31,594		—
Conduit Repo 3	Feb 2018	Feb 2019	LIBOR + 2.10%			9,096		150,000			6,825		66,041
Conduit Repo 4	Oct 2017	Oct 2020	LIBOR + 2.25%			62,377		100,000			46,612		—
CMBS Repo 1	(f)	(f)	LIBOR + 1.90%			32,800		21,354			21,354		—
CMBS Repo 2	Jun 2020	N/A	LIBOR/EURIBOR + 2.00% to 2.70%			339,132		247,192			247,192		120,850
CMBS Repo 3	(g)	(g)	LIBOR + 1.40% to 1.85%			409,685		287,467			287,467		243,434
RMBS Repo 1	(h)	N/A	LIBOR + 1.90%			157,641		185,000			91,144		2,000
Investing and Servicing Segment Property Mortgages	Jun 2018 to Jun 2026	N/A	Various			150,199		124,061			118,163		82,964
Ireland Portfolio Mortgage	May 2020	N/A	EURIBOR + 1.69%			483,814		326,558			326,558		319,322
Woodstar Portfolio Mortgages	Jul 2017 to Jan 2026	N/A	3.72% to 7.46%	(i)		380,690		267,114			267,114		248,630
Woodstar Portfolio Government Financing	Jun 2017 to Jun 2049	N/A	1.00% to 5.00%			318,501		137,394			137,394		8,982
Term Loan	Apr 2020	N/A	LIBOR + 2.75%	(d)		2,937,230		654,886			654,886		658,270
FHLB Advances	Nov 2016	N/A	LIBOR + 0.37%			10,207		9,250			9,250		9,250
					$	8,719,135	$	6,989,601			4,507,395		4,020,737
Unamortized premium (discount), net											1,414		(1,702)
Unamortized deferred financing costs											(32,588)		(38,336)
										$	4,476,221	$	3,980,699

(a)

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

(b)

Maturity date for borrowings collateralized by loans is January 2017 before extension options and January 2019 assuming exercise of initial extension options. Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions and not to exceed January 2023.

(c)

The initial maximum facility size of $600.0 million may be increased to $1.0 billion at our option, subject to certain conditions.

(d)

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.

(e)

The initial maximum facility size of $450.0 million may be increased to $650.0 million at our option, subject to certain conditions.

(f)

Facility carries a rolling 11 month term which may reset monthly with the lender’s consent not to exceed December 2018. This facility carries no maximum facility size. Amount herein reflects the outstanding balance as of June 30, 2016.

(g)

Facility carries a rolling 12 month term which may reset monthly with the lender’s consent. Current maturity is June 2017. This facility carries no maximum facility size. Amount herein reflects the outstanding balance as of June 30, 2016.

(h)

The date that is 270 days after the buyer delivers notice to seller, subject to a maximum date of May 2018.

(i)

The Woodstar Portfolio Mortgages carry a weighted average interest rate of 3.99% as of June 30, 2016.

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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.

During the six months ended June 30, 2016, we executed four mortgage facilities with aggregate borrowings of $32.2 million to finance commercial real estate acquired by our Investing and Servicing Segment. As of June 30, 2016, these facilities carry a remaining weighted average term of 6.1 years. One of the facilities carry floating annual interest rates with average spreads of LIBOR + 2.25% while the remaining facilities carry average fixed annual interest rates of 3.50%.

During the three and six months ended June 30, 2016, we assumed one and 17 federal, state and county sponsored mortgage facilities (“Woodstar Portfolio Government Financing”), respectively, associated with certain properties acquired in our Woodstar Portfolio with aggregate outstanding balances of $2.5 million and $129.2 million, respectively, as of the acquisition dates. During the three months ended June 30, 2016, we also assumed two other mortgage facilities (“Woodstar Portfolio Mortgages”) associated with properties acquired in our Woodstar Portfolio with aggregate outstanding balances of $18.6 million, as of the acquisition dates.

In January 2016, we amended the CMBS Repo 2 facility to extend the maturity from December 2016 to December 2017.

In March 2016, we amended the Lender 2 Repo 1 facility to upsize available borrowings from $500.0 million to $600.0 million. This additional $100.0 million of borrowing capacity is exclusively for the financing of conduit mortgage loans and therefore this component of the Lender 2 Repo 1 facility is separately presented in the secured financing agreements table above as Conduit Repo 4.

In April 2016, we amended the Lender 4 Repo 2 facility to allow for up to $200.0 million of financing for conduit mortgage loan originations under the existing borrowing capacity.

In April 2016, we terminated the Conduit Repo 1 facility.

In May 2016, we amended the RMBS Repo 1 facility to upsize available borrowings from $125.0 million to $185.0 million and amend the maturity date to the earlier of (i) 270 days from when the lender delivers notice to the Company or (ii) May 2018.

In June 2016, we expanded our CMBS Repo 2 facility to finance our acquisition of one first mortgage loan and one first mortgage loan portfolio, each of which had been securitized into single-borrower securitizations by the seller. This financing, which totaled €124.1 million as of June 30, 2016, matures in June 2020 and carries an annual interest rate of three-month EURIBOR + 2.00%.

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, 2016, 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
2016 (remainder of)	$	166,552	$	14,313	$	180,865
2017		827,610		30,390		858,000
2018		994,507		30,808		1,025,315
2019		617,347		19,310		636,657
2020		308,421		971,302		1,279,723
Thereafter		79,593		447,242		526,835
Total	$	2,994,030	$	1,513,365	$	4,507,395

Secured financing maturities for 2016 primarily relate to $62.9 million on the Lender 4 Repo 2 facility and $46.6 million on the Conduit Repo 4 facility.

For the three and six months ended June 30, 2016, approximately $4.3 million and $8.2 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations. For the three and six months ended June 30, 2015, approximately $3.5 million and $7.0 million, respectively, of amortization of deferred financing costs was included in interest expense on our condensed consolidated statements of operations.

The following table sets forth our outstanding balance of repurchase agreements related to the following asset collateral classes as of June 30, 2016 and December 31, 2015 (amounts in thousands):


Class of Collateral	June 30, 2016		December 31, 2015
Loans held-for-investment	$	2,198,902	$	2,142,198
Loans held-for-sale		147,971		146,782
Investment securities		647,157		366,284
	$	2,994,030	$	2,655,264

We seek to mitigate risks associated with our repurchase agreements by managing risk related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value. The margin call provisions under the majority of our repurchase facilities, consisting of 62% 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 33% 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, 2016 (dollars in thousands):


									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	1.3	years
2018 Notes	$	599,981	4.55	%	6.10	%	46.7513	3/1/2018	1.7	years
2019 Notes	$	341,363	4.00	%	5.35	%	49.4927	1/15/2019	2.5	years


	As of		As of
	June 30, 2016		December 31, 2015
Total principal	$	1,372,594	$	1,372,594
Unamortized discount		(37,055)		(47,351)
Unamortized deferred financing costs		(1,115)		(1,448)
Carrying amount of debt components	$	1,334,424	$	1,323,795
Carrying amount of conversion option equity components recorded in additional paid-in capital	$	46,343	$	46,343

(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 indentures governing the Convertible Notes (including the applicable supplemental indentures) as a result of the spin-off of our former single family residential (“SFR”) segment to our stockholders in January 2014 and cash dividend payments.

The if-converted value of the 2019 Notes exceeded their principal amount by $8.8 million at June 30, 2016 since the closing market price of the Company’s common stock of $20.72 per share exceeded the implicit conversion price of $20.20 per share. The if‑converted values of the 2017 Notes and 2018 Notes were less than their principal amounts by $58.3 million and $18.8 million at June 30, 2016, respectively, since the closing market price of the Company’s common stock of $20.72 per share was less than the implicit conversion prices of $23.96 and $21.39, respectively. The Company has asserted its intent and ability to settle the principal amount of the Convertible Notes in cash. As a result, conversion of this principal amount, totaling 62.5 million shares, was not included in the computation of diluted EPS. However, the conversion spread value for the 2019 Notes, representing 0.4 million shares and 0.5 million shares for the three and six months ended June 30, 2016, respectively, was included in the computation of diluted EPS as the notes were “in-the-money.” No dilution related to the 2017 Notes or 2018 Notes was included in the computation of diluted EPS for the three and six months ended June 30, 2016 as these notes were not “in-the-money.” See further discussion in Note 17.

We did not repurchase any Convertible Notes during the three and six months ended June 30, 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, 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

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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.

Conditions for Conversion

Prior to April 15, 2017 for the 2017 Notes, September 1, 2017 for the 2018 Notes and July 15, 2018 for the 2019 Notes, the Convertible Notes will be convertible only upon satisfaction of one or more of the following conditions: (1) the closing market price of the Company’s common stock is at least 110%, in the case of the 2017 Notes, or 130%, in the case of the 2018 Notes and the 2019 Notes, of the conversion price of the respective Convertible Notes for at least 20 out of 30 trading days prior to the end of the preceding fiscal quarter, (2) the trading price of the Convertible Notes is less than 98% of the product of (i) the conversion rate and (ii) the closing price of the Company’s common stock during any five consecutive trading day period, (3) the Company issues certain equity instruments at less than the 10-day average closing market price of its common stock or the per-share value of certain distributions exceeds the market price of the Company’s common stock by more than 10% or (4) other specified corporate events (significant consolidation, sale, merger, share exchange, fundamental change, etc.) occur.

On or after April 15, 2017, in the case of the 2017 Notes, September 1, 2017, in the case of the 2018 Notes, and July 15, 2018, in the case of the 2019 Notes, holders may convert each of their Convertible Notes at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.

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. The following summarizes the fair value and par value of loans sold from our conduit platform, as well as the amount of sale proceeds used in part to repay the outstanding balance of the repurchase agreements associated with these loans for the three and six months ended June 30, 2016 and 2015 (amounts in thousands):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Fair value of loans sold	$	218,369	$	551,635	$	475,333	$	1,033,644
Par value of loans sold		204,960		533,447		456,862		998,021
Repayment of repurchase agreements		153,574		400,078		342,781		744,456

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Within the Lending Segment, we originate or acquire loans and then subsequently sell a portion, which can be in various forms including first mortgages, A-Notes, senior participations and mezzanine loans. Typically, our motivation for entering into these transactions is to effectively create leverage on the subordinated position that we will retain and hold for investment. In certain instances, we continue to service the loan following its sale. The following table summarizes our loans sold and loans transferred as secured borrowings by the Lending Segment net of expenses (amounts in thousands):


					Loan Transfers
	Loan Transfers Accounted				Accounted for as Secured
	for as Sales				Borrowings
	Face Amount		Proceeds		Face Amount		Proceeds
For the Three Months Ended June 30,
2016	$	23,977	$	23,394	$	—	$	—
2015		295,961		293,455		38,925		38,925
For the Six Months Ended June 30,
2016	$	122,514	$	121,276	$	—	$	—
2015		381,461		378,576		38,925		38,925

During the three and six months ended June 30, 2016 and 2015, gains (losses) recognized by the Lending Segment on sales of loans were not material.

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 13 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 six 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, 2016, the aggregate notional amount of our interest rate swaps designated as cash flow hedges of interest rate risk totaled $66.4 million. Under these agreements, we will pay fixed monthly coupons at fixed rates ranging from 0.60% to 1.52% of the notional amount to the counterparty and receive floating rate LIBOR. Our interest rate swaps designated as cash flow hedges of interest rate risk have maturities ranging from August 2017 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, 2016 and 2015, we did not recognize any hedge ineffectiveness in earnings.

Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the associated variable-rate debt. Over the next 12 months, we estimate that an additional $0.3 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 59 months.

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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.

We have entered into a series of forward contracts whereby we agreed to sell an amount of foreign currency for an agreed upon amount of USD at various dates through June 2020. These forward contracts were executed to economically fix the USD amounts of foreign denominated cash flows expected to be received by us related to foreign denominated loan investments and properties.

The following table summarizes our non-designated foreign exchange (“Fx”) forwards, interest rate swaps, interest rate caps and credit index instruments as of June 30, 2016 (notional amounts in thousands):


		Aggregate
	Number	Notional	Notional
Type of Derivative	of Contracts	Amount	Currency	Maturity
Fx contracts – Buy Danish Krone ("DKK")	2	137	DKK	December 2016
Fx contracts – Buy Euros ("EUR")	2	94	EUR	December 2016
Fx contracts – Buy Norwegian Krone ("NOK")	2	15	NOK	December 2016
Fx contracts – Buy Swedish Krona ("SEK")	2	1,321	SEK	December 2016
Fx contracts – Sell Danish Krone ("DKK")	1	6,251	DKK	December 2016
Fx contracts – Sell Euros ("EUR") (1)	93	364,047	EUR	July 2016 – June 2020
Fx contracts – Sell Pounds Sterling ("GBP")	81	150,831	GBP	July 2016 – June 2019
Fx contracts – Sell Norwegian Krone ("NOK")	1	878	NOK	December 2016
Fx contracts – Sell Swedish Krona ("SEK")	1	7,032	SEK	December 2016
Interest rate swaps – Paying fixed rates	56	370,206	USD	July 2016 – July 2026
Interest rate swaps – Receiving fixed rates	2	9,800	USD	July 2017 – June 2026
Interest rate caps	2	294,000	EUR	May 2020
Interest rate caps	4	34,474	USD	June 2018 – October 2020
Credit index instruments	9	36,000	USD	September 2058
Total	258

(1)

Includes 49 Fx contracts executed to hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio. As of June 30, 2016, these contracts have an aggregate notional amount of €246.9 million and varying maturities through June 2020.

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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, 2016 and December 31, 2015 (amounts in thousands):


	Fair Value of Derivatives				Fair Value of Derivatives
	in an Asset Position (1) As of				in a Liability Position (2) As of
	June 30,		December 31,		June 30,		December 31,
	2016		2015		2016		2015
Derivatives designated as hedging instruments:
Interest rate swaps	$	—	$	57	$	386	$	122
Total derivatives designated as hedging instruments		—		57		386		122
Derivatives not designated as hedging instruments:
Interest rate swaps and caps		967		2,360		17,160		4,970
Foreign exchange contracts		39,399		41,137		324		104
Credit index instruments		2,326		1,537		—		—
Total derivatives not designated as hedging instruments		42,692		45,034		17,484		5,074
Total derivatives	$	42,692	$	45,091	$	17,870	$	5,196

(1)

Classified as derivative assets in our condensed consolidated balance sheets.

(2)

Classified as derivative liabilities in our condensed consolidated balance sheets.

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, 2016 and 2015 (amounts in thousands):


			Gain (Loss)
	Gain (Loss)		Reclassified		Gain (Loss)
	Recognized		from AOCI		Recognized
Derivatives Designated as 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
2016	$	(136)	$	(88)	$	—	Interest expense
2015	$	(71)	$	(194)	$	—	Interest expense

For the Six Months Ended June 30,
2016	$	(504)	$	(183)	$	—	Interest expense
2015	$	(538)	$	(398)	$	—	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	2016		2015		2016		2015
Interest rate swaps and caps	Gain (loss) on derivative financial instruments	$	(7,273)	$	7,958	$	(25,273)	$	(4,964)
Foreign exchange contracts	Gain (loss) on derivative financial instruments		27,899		(27,799)		21,349		10,172
Credit index instruments	Gain (loss) on derivative financial instruments		(373)		311		(541)		(115)
		$	20,253	$	(19,530)	$	(4,465)	$	5,093

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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, 2016
Derivative assets	$	42,692	$	—	$	42,692	$	780	$	—	$	41,912
Derivative liabilities	$	17,870	$	—	$	17,870	$	780	$	17,090	$	—
Repurchase agreements		2,994,030		—		2,994,030		2,994,030		—		—
	$	3,011,900	$	—	$	3,011,900	$	2,994,810	$	17,090	$	—
As of December 31, 2015
Derivative assets	$	45,091	$	—	$	45,091	$	243	$	—	$	44,848
Derivative liabilities	$	5,196	$	—	$	5,196	$	243	$	4,953	$	—
Repurchase agreements		2,655,264		—		2,655,264		2,655,264		—		—
	$	2,660,460	$	—	$	2,660,460	$	2,655,507	$	4,953	$	—

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.

Securitization 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

As discussed in Note 2, our implementation of ASU 2015-02 resulted in the consolidation of certain CMBS trusts where the right to remove the Company as special servicer was not exercisable without cause. These 14 trusts had $15.1 billion of VIE assets and $15.1 billion of VIE liabilities as of March 31, 2016. The carrying value of our CMBS investments in these 14 trusts, totaling $120.9 million, was eliminated in consolidation against VIE liabilities as of March 31, 2016.

The inclusion of the assets and liabilities of securitization VIEs in which we are deemed the primary beneficiary has no economic effect on us. Our exposure to the obligations of securitization VIEs is generally limited to our

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investment in these entities. We are not obligated to provide, nor have we provided, any financial support for any of these consolidated structures.

As discussed in Note 2, our implementation of ASU 2015-02 resulted in the determination that certain entities in which we hold controlling interests, which were already consolidated prior to the implementation of ASU 2015-02, are now considered VIEs. We are the primary beneficiaries of these VIEs, which were established to facilitate the purchase of certain properties acquired with third party minority interest partners, as we possess both the power to direct the activities of the VIEs that most significantly impact their economic performance and hold significant economic interests. These VIEs had assets of $140.2 million and liabilities of $62.2 million as of June 30, 2016.

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 without cause. 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, 2016, 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, 2016, this CDO structure was not consolidated.

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, 2016, our maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $114.3 million on a fair value basis.

As of June 30, 2016, the securitization VIEs which we do not consolidate had debt obligations to beneficial interest holders with unpaid principal balances of $21.8 billion. The corresponding assets are comprised primarily of commercial mortgage loans with unpaid principal balances corresponding to the amounts of the outstanding debt obligations.

As discussed in Note 2, our implementation of ASU 2015-02 resulted in the determination that certain unconsolidated entities in which we hold passive non-controlling interests are now considered VIEs. We are not the primary beneficiaries of these VIEs as we do not possess the power to direct the activities of the VIEs that most significantly impact their economic performance and therefore continue to report our interests, which totaled $131.4 million as of June 30, 2016, within investment in unconsolidated entities on our condensed consolidated balance sheet. Our maximum risk of loss is limited to our carrying value of the investments of $131.4 million plus $29.2 million of unfunded commitments related to one of these VIEs.

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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 16 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, 2016 and 2015, approximately $15.1 million and $14.9 million, respectively, was incurred for base management fees. For the six months ended June 30, 2016 and 2015, approximately $30.2 million and $28.8 million, respectively, was incurred for base management fees. As of June 30, 2016 and December 31, 2015, there were $15.1 million and $15.2 million, respectively, of unpaid base management fees included in the related-party payable in our condensed consolidated balance sheets.

Incentive Fee. For the three months ended June 30, 2016 and 2015, approximately $2.9 million and $4.1 million, respectively, was incurred for incentive fees. For the six months ended June 30, 2016 and 2015, approximately $7.5 million and $10.8 million, respectively, was incurred for incentive fees. As of June 30, 2016 and December 31, 2015, approximately $2.9 million and $21.8 million, respectively, of unpaid incentive fees were included in related-party payable in our condensed consolidated balance sheets.

Expense Reimbursement. For the three months ended June 30, 2016 and 2015, approximately $1.5 million and $1.5 million, respectively, was incurred for executive compensation and other reimbursable expenses and recognized within general and administrative expenses in our condensed consolidated statements of operations. For the six months ended June 30, 2016 and 2015, approximately $2.6 million and $2.9 million, respectively, was incurred for executive compensation and other reimbursable expenses. As of June 30, 2016 and December 31, 2015, approximately $1.9 million and $3.6 million, respectively, of unpaid reimbursable executive compensation and other expenses were included in related-party payable in our condensed consolidated balance sheets.

Equity Awards. In certain instances, we issue RSAs to certain employees of affiliates of our Manager who perform services for us. During the three months ended June 30, 2015, we granted 41,539 RSAs at a grant date fair value of $1.0 million. There were no RSAs granted during the three months ended June 30, 2016. Expenses related to the vesting of awards to employees of affiliates of our Manager were $0.6 million and $0.3 million during the three months ended June 30, 2016 and 2015, respectively, and are reflected in general and administrative expenses in our condensed consolidated statements of operations. During the six months ended June 30, 2016 and 2015, we granted 169,104 and 78,119 RSAs, respectively, at grant date fair values of $3.3 million and $1.9 million, respectively. Expenses related to the vesting of awards to employees of affiliates of our Manager were $1.0 million and $0.3 million during the six months ended June 30, 2016 and 2015, respectively. These shares generally vest over a three-year period.

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 connection with this grant and prior similar grants, we recognized share-based compensation expense of $5.3 million and $7.4 million within management fees in our condensed consolidated statements of operations for the three months ended June 30, 2016 and 2015, respectively. For the six months ended June 30, 2016 and 2015, we recognized $10.1 million and $14.3 million, respectively, related to these awards. Refer to Note 16 for further discussion of these grants.

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Investments in Loans and Securities

In December 2013, we acquired a subordinate CMBS investment in a securitization issued by an affiliate of our Manager. The security was acquired for $84.1 million and is secured by five regional malls in Ohio, California and Washington. In January 2016, we acquired an additional $9.7 million of this subordinate CMBS investment.

In June 2016, we co-originated a £75.0 million first mortgage for the development of a three-property mixed use portfolio located in Greater London with SEREF, an affiliate of our Manager. We originated £60.0 million of the loan and SEREF originated £15.0 million. The loan matures in June 2019.

Acquisitions from Consolidated CMBS Trusts

Our Investing and Servicing Segment acquires interests in properties for its REO Portfolio from CMBS trusts, some of which are consolidated as VIEs on our balance sheet. Acquisitions from consolidated VIEs are reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows. During the three months ended June 30, 2016 and 2015, we acquired $60.5 million and $33.2 million, respectively, of net real estate assets from consolidated CMBS trusts and subsequently issued non-controlling interests of $2.4 million and $2.1 million, respectively. Also during the three months ended June 30, 2016, a partnership in which we hold a 50% interest acquired a real estate asset from a CMBS trust for $19.0 million. During the six months ended June 30, 2016 and 2015, we acquired $85.1 million and $33.2 million, respectively, of net real estate assets from consolidated CMBS trusts and subsequently issued non-controlling interests of $5.5 million and $2.1 million, respectively. Refer to Notes 3 and 7 for further discussion of these acquisitions.

Our Investing and Servicing Segment also acquires controlling interests in performing and non-performing commercial mortgage loans from CMBS trusts, some of which are consolidated as VIEs on our balance sheet. Acquisitions from consolidated VIEs are reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows. During the three months ended June 30, 2016, we did not acquire any performing or non-performing loans from consolidated CMBS trusts. During the six months ended June 30, 2016, we acquired $9.7 million and $8.2 million of performing and non-performing loans, respectively, from consolidated CMBS trusts.

Other Related-Party Arrangements

During the three months ended March 31, 2016, we established a co-investment fund which provides key personnel with the opportunity to invest in certain properties included in our REO Portfolio. These personnel include certain of our employees as well as employees of affiliates of our Manager (collectively “Fund Participants”). The fund carries an aggregate commitment of $15.0 million and owns a 10% equity interest in REO Portfolio properties acquired subsequent to January 1, 2015. As of June 30, 2016, Fund Participants have fully funded their maximum expected capital contribution amount of $4.9 million. The capital contributed by Fund Participants is reflected on our condensed consolidated balance sheet as non-controlling interests in consolidated subsidiaries. In an effort to retain key personnel, the fund provides for disproportionate distributions which allows Fund Participants to earn an incremental 60% on all operating cash flows attributable to their capital account, net of a preferred return to us as general partner of the fund. Amounts earned by Fund Participants pursuant to this waterfall are reflected within net income attributable to non-controlling interests in our condensed consolidated statement of operations. During both the three and six months ended June 30, 2016, the non-controlling interests related to this fund recognized an immaterial loss.

Refer to Note 16 to the consolidated financial statements included in our Form 10-K for further discussion of related-party agreements.

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16. Stockholders’ Equity

During the six months ended June 30, 2016, our board of directors declared the following dividends:


Declare Date	Record Date	Ex-Dividend Date	Payment Date	Amount		Frequency
5/9/16	6/30/16	6/28/16	7/15/16	$	0.48	Quarterly
2/25/16	3/31/16	3/29/16	4/15/16	$	0.48	Quarterly

During the six months ended June 30, 2016, there were no shares issued under our At-The-Market Equity Offering Sales Agreement (the “ATM Agreement”). During the six months ended June 30, 2016, shares issued under the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) were not material.

There were no share repurchases during the three months ended June 30, 2016. During the six months ended June 30, 2016, we repurchased 1,052,889 shares of common stock for $19.7 million under our $500.0 million repurchase program. Refer to Note 17 to the consolidated financial statements included in our Form 10-K for further information regarding the repurchase program. As of June 30, 2016, we have $282.1 million of remaining capacity to repurchase common stock or Convertible Notes under the repurchase program through January 2017.

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 17 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 or vested under the Manager Equity Plan during the six months ended June 30, 2016 and 2015 (dollars in thousands):


Grant Date	Type	Amount Granted	Grant Date Fair Value		Vesting Period
May 2015	RSU	675,000	$	16,511	3 years
January 2014	RSU	489,281		14,776	3 years
January 2014	RSU	2,000,000		55,420	3 years

As of June 30, 2016, there were 2.3 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


	Non-Executive				Weighted Average
	Director		Manager		Grant Date Fair Value
	Stock Plan	Equity Plan	Equity Plan	Total	(per share)
Balance as of January 1, 2016	16,988	548,378	1,302,850	1,868,216	$	25.84
Granted	3,776	430,014	—	433,790		18.96
Vested	—	(261,420)	(510,800)	(772,220)		26.08
Forfeited	—	(21,796)	—	(21,796)		23.45
Balance as of June 30, 2016	20,764	695,176	792,050	1,507,990		23.77

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17. Earnings per Share

The following table provides a reconciliation of net income and the number of shares of common stock used in the computation of basic EPS and diluted EPS (amounts in thousands, except per share amounts):


	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2016		2015		2016		2015
Basic Earnings
Income attributable to STWD common stockholders	$	111,473	$	117,148	$	138,130	$	237,511
Less: Income attributable to participating shares		(580)		(1,207)		(1,287)		(2,183)
Basic earnings	$	110,893	$	115,941	$	136,843	$	235,328

Diluted Earnings
Basic — Income attributable to STWD common stockholders	$	111,473	$	117,148	$	138,130	$	237,511
Less: Income attributable to participating shares		(580)		(1,207)		(1,287)		(2,183)
Add: Undistributed earnings to participating shares		—		15		—		126
Less: Undistributed earnings reallocated to participating shares		—		(15)		—		(126)
Diluted earnings	$	110,893	$	115,941	$	136,843	$	235,328

Number of Shares:
Basic — Average shares outstanding		237,060		235,087		236,808		229,346
Effect of dilutive securities — Convertible Notes		441		649		456		644
Effect of dilutive securities — Contingently issuable shares		70		95		70		95
Effect of dilutive securities — Unvested non-participating shares		26		—		33		—
Diluted — Average shares outstanding		237,597		235,831		237,367		230,085

Earnings Per Share Attributable to STWD Common Stockholders:
Basic	$	0.47	$	0.49		0.58		1.03
Diluted	$	0.47	$	0.49		0.58		1.02

As of June 30, 2016 and 2015, participating shares of 1.2 million and 2.5 million, respectively, were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above.

Also as of June 30, 2016, there were 62.9 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 62.5 million shares at June 30, 2016, 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 2019 Notes exceeded their principal amount by $8.8 million at June 30, 2016. 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 0.4 million shares and 0.5 million shares for the three and six months ended June 30, 2016, respectively. The conversion option associated with the 2017 Notes and 2018 Notes are “out-of-the-money” because the if-converted values of the 2017 Notes and 2018 Notes were less than their principal amounts by $58.3 million and $18.8 million, respectively, at June 30, 2016. Therefore, there was no dilutive effect to EPS for the 2017 Notes or 2018 Notes for the three and six months ended June 30, 2016.

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18. Accumulated Other Comprehensive Income

The changes in AOCI by component are as follows (amounts 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, 2016
Balance at March 31, 2016	$	(338)	$	33,907	$	(112)	$	33,457
OCI before reclassifications		(136)		5,951		(6,733)		(918)
Amounts reclassified from AOCI		88		—		—		88
Net period OCI		(48)		5,951		(6,733)		(830)
Balance at June 30, 2016	$	(386)	$	39,858	$	(6,845)	$	32,627
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
Six Months Ended June 30, 2016
Balance at January 1, 2016	$	(65)	$	37,307	$	(7,513)	$	29,729
OCI before reclassifications		(504)		2,551		668		2,715
Amounts reclassified from AOCI		183		—		—		183
Net period OCI		(321)		2,551		668		2,898
Balance at June 30, 2016	$	(386)	$	39,858	$	(6,845)	$	32,627
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

The reclassifications out of AOCI impacted the condensed consolidated statements of operations for the three and six months ended June 30, 2016 and 2015 as follows (amounts 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	2016		2015		2016		2015		of Operations
Losses on cash flow hedges:
Interest rate contracts	$	(88)	$	(194)	$	(183)	$	(398)	Interest expense
Unrealized gains (losses) on available-for-sale securities:
Interest realized upon collection		—		—		—		5,396	Interest income from investment securities
Total reclassifications for the period	$	(88)	$	(194)	$	(183)	$	4,998

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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.

Fair Value Disclosures

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, 2016 and December 31, 2015 (amounts in thousands):


	June 30, 2016
	Total		Level I		Level II		Level III
Financial Assets:
Loans held-for-sale, fair value option	$	237,106	$	—	$	—	$	237,106
RMBS		251,260		—		—		251,260
CMBS		114,340		—		—		114,340
Equity security		12,861		12,861		—		—
Domestic servicing rights		83,301		—		—		83,301
Derivative assets		42,692		—		42,692		—
VIE assets		80,076,117		—		—		80,076,117
Total	$	80,817,677	$	12,861	$	42,692	$	80,762,124
Financial Liabilities:
Derivative liabilities	$	17,870	$	—	$	17,870	$	—
VIE liabilities		79,087,142		—		75,546,490		3,540,652
Total	$	79,105,012	$	—	$	75,564,360	$	3,540,652

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	December 31, 2015
	Total		Level I		Level II		Level III
Financial Assets:
Loans held-for-sale, fair value option	$	203,865	$	—	$	—	$	203,865
RMBS		176,224		—		—		176,224
CMBS		212,981		—		—		212,981
Equity security		14,498		14,498		—		—
Domestic servicing rights		119,698				—		119,698
Derivative assets		45,091		—		45,091		—
VIE assets		76,675,689		—		—		76,675,689
Total	$	77,448,046	$	14,498	$	45,091	$	77,388,457
Financial Liabilities:
Derivative liabilities	$	5,196	$	—	$	5,196	$	—
VIE liabilities		75,817,014		—		73,264,566		2,552,448
Total	$	75,822,210	$	—	$	73,269,762	$	2,552,448

The changes in financial assets and liabilities classified as Level III are as follows for the three and six months ended June 30, 2016 and 2015 (amounts in thousands):


							Domestic
	Loans						Servicing				VIE
Three Months Ended June 30, 2016	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
April 1, 2016 balance	$	154,225	$	210,898	$	96,724	$	95,492	$	85,115,662	$	(3,038,534)	$	82,634,467
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		13,235		—		1,349		(12,191)		(4,250,779)		57,477		(4,190,909)
OTTI		—		—		—		—		—		—		—
Net accretion		—		3,742		—		—		—		—		3,742
Included in OCI		—		5,951		—		—		—		—		5,951
Purchases / Originations		288,186		46,866		24,403		—		—		—		359,455
Sales		(218,369)		—		(1,269)		—		—		—		(219,638)
Issuances		—		—		—		—		—		—		—
Cash repayments / receipts		(171)		(16,197)		(7,142)		—		—		14,922		(8,588)
Transfers into Level III		—		—		—		—		—		(557,543)		(557,543)
Transfers out of Level III		—		—		—		—		—		35,759		35,759
Consolidation of VIEs		—		—		—		—		1,746,946		(53,252)		1,693,694
Deconsolidation of VIEs		—		—		275		—		(2,535,712)		519		(2,534,918)
June 30, 2016 balance	$	237,106	$	251,260	$	114,340	$	83,301	$	80,076,117	$	(3,540,652)	$	77,221,472
Amount of total gains (losses) included in earnings attributable to assets still held at June 30, 2016	$	1,810	$	3,742	$	2,208	$	(12,191)	$	(4,250,779)	$	57,477	$	(4,197,733)

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							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)
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
Consolidation of VIEs		—		—		—		—		1,244,019		(34,133)		1,209,886
Deconsolidation 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
Six Months Ended June 30, 2016	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
January 1, 2016 balance	$	203,865	$	176,224	$	212,981	$	119,698	$	76,675,689	$	(2,552,448)	$	74,836,009
Impact of ASU 2015-02 Adoption (1)		—		—		—		(17,467)		17,467		—		—
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		20,126		—		2,316		(18,930)		(8,340,280)		293,600		(8,043,168)
OTTI		—		—		—		—		—		—		—
Net accretion		—		7,157		—		—		—		—		7,157
Included in OCI		—		2,551		—		—		—		—		2,551
Purchases / Originations		488,756		88,336		57,576		—		—		—		634,668
Sales		(475,333)		—		(1,269)		—		—		—		(476,602)
Issuances		—		—		—		—		—		(596)		(596)
Cash repayments / receipts		(308)		(23,008)		(19,445)		—		—		20,772		(21,989)
Transfers into Level III		—		—		—		—		—		(972,587)		(972,587)
Transfers out of Level III		—		—		—		—		—		146,724		146,724
Consolidation of VIEs		—		—		(138,342)		—		16,850,221		(483,905)		16,227,974
Deconsolidation of VIEs		—		—		523		—		(5,126,980)		7,788		(5,118,669)
June 30, 2016 balance	$	237,106	$	251,260	$	114,340	$	83,301	$	80,076,117	$	(3,540,652)	$	77,221,472
Amount of total gains (losses) included in earnings attributable to assets still held at June 30, 2016	$	1,810	$	7,157	$	3,778	$	(18,930)	$	(8,340,280)	$	293,600	$	(8,052,865)

(1)

Table of Contents


							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)
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
Consolidation of VIEs		—		—		(24,310)		—		5,657,627		(145,205)		5,488,112
Deconsolidation 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)

Amounts were transferred from Level II to Level III due to a decrease in the observable relevant market activity and amounts were transferred from Level III to Level II due to an increase in the observable relevant market activity.

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


	June 30, 2016				December 31, 2015
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets not carried at fair value:
Loans held-for-investment and loans transferred as secured borrowings	$	5,786,720	$	5,813,816	$	6,059,652	$	6,125,881
HTM securities		520,342		505,648		321,244		315,255
European servicing rights		1,589		4,406		2,626		5,302
Financial liabilities not carried at fair value:
Secured financing agreements and secured borrowings on transferred loans	$	4,570,889	$	4,564,186	$	4,068,699	$	4,092,264
Convertible senior notes		1,334,424		1,347,889		1,323,795		1,331,979

Table of Contents

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 (dollars in thousands):


	Carrying Value at		Valuation	Unobservable	Range as of (1)
	June 30, 2016		Technique	Input	June 30, 2016	December 31, 2015
Loans held-for-sale, fair value option	$	237,106	Discounted cash flow	Yield (b)	4.2% - 6.2%	4.8% - 5.3%
				Duration (c)	5.0 - 10.7 years	5.0 - 10.0 years
RMBS		251,260	Discounted cash flow	Constant prepayment rate (a)	2.9% - 15.6%	2.6% - 17.8%
				Constant default rate (b)	0.9% - 8.8%	1.0% - 8.9%
				Loss severity (b)	7% - 79% (e)	10% - 79% (e)
				Delinquency rate (c)	2% - 28%	2% - 29%
				Servicer advances (a)	18% - 94%	30% - 94%
				Annual coupon deterioration (b)	0% - 0.6%	0% - 0.5%
				Putback amount per projected total collateral loss (d)	0% - 15%	0% - 11%
CMBS		114,340	Discounted cash flow	Yield (b)	0% - 332.8%	0% - 435.8%
				Duration (c)	0 - 9.5 years	0 - 18.5 years
Domestic servicing rights		83,301	Discounted cash flow	Debt yield (a)	8.00%	8.25%
				Discount rate (b)	15%	15%
				Control migration (b)	0% - 80%	0% - 80%
VIE assets		80,076,117	Discounted cash flow	Yield (b)	0% - 779.7%	0% - 920.2%
				Duration (c)	0 - 14.3 years	0 - 17.5 years
VIE liabilities		3,540,652	Discounted cash flow	Yield (b)	0% - 779.7%	0% - 920.2%
				Duration (c)	0 - 14.3 years	0 - 17.5 years

(1)

The ranges of significant unobservable inputs are represented in percentages and years.

Sensitivity of the Fair Value to Changes in the Unobservable Inputs

(a)

Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.

(b)

Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.

(c)

Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or higher (lower or higher) fair value measurement depending on the structural features of the security in question.

(d)

Any delay in the putback recovery date leads to a decrease in fair value, for the majority of securities in our RMBS portfolio.

(e)

66% and 76% of the portfolio falls within a range of 45%-80% as of June 30, 2016 and December 31, 2015, respectively.

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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, 2016 and December 31, 2015, approximately $867.8 million and $858.5 million, respectively, of the Investing and Servicing Segment’s assets, including $72.4 million and $185.6 million in cash, respectively, were owned by TRS entities. Our TRSs are not consolidated for U.S. 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.

The following table is a reconciliation of our U.S. 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, 2016 and 2015 (dollars in thousands):


	For the Three Months Ended June 30,								For the Six Months Ended June 30,
	2016				2015				2016				2015
Federal statutory tax rate	$	39,472	35.0	%	$	42,501	35.0	%	$	48,971	35.0	%	$	90,357	35.0	%
REIT and other non-taxable income		(39,171)	(34.7)	%		(40,510)	(33.3)	%		(48,135)	(34.4)	%		(75,482)	(29.2)	%
State income taxes		72	0.1	%		179	0.1	%		(23)	—	%		2,180	0.8	%
Federal benefit of state tax deduction		(25)	(0.1)	%		(63)	(0.1)	%		8	—	%		(763)	(0.3)	%
Valuation allowance		—	—	%		1,618	1.3	%		—	—	%		2,873	1.1	%
Other		358	0.3	%		67	0.1	%		(21)	—	%		578	0.2	%
Effective tax rate	$	706	0.6	%	$	3,792	3.1	%	$	800	0.6	%	$	19,743	7.6	%

21. Commitments and Contingencies

As of June 30, 2016, we had future funding commitments on 54 loans totaling $1.7 billion, of which we expect to fund $1.4 billion. These future funding commitments primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions. Generally, funding commitments are subject to certain conditions that must be met, such as customary construction draw certifications, minimum debt service coverage ratios or executions of new leases before advances are made to the borrower.

In the ordinary course of business, we provide various forms of guarantees. In limited instances, specifically involving construction loans, the Company has guaranteed the future funding obligations of certain third party lenders in the event that such third parties fail to fund their proportionate share of the obligation in a timely manner. We are currently unaware of any circumstances which would require us to make payments under any of these guarantees.

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.

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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 securitization VIEs under ASC 810. The segment information within this note is reported on that basis.

The table below presents our results of operations for the three months ended June 30, 2016 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	$	119,296	$	3,261	$	—	$	—	$	122,557	$	—	$	122,557
Interest income from investment securities		11,046		32,435		—		—		43,481		(28,180)		15,301
Servicing fees		206		37,249		—		—		37,455		(14,143)		23,312
Rental income		—		8,223		29,620		—		37,843		—		37,843
Other revenues		58		1,076		18		—		1,152		(173)		979
Total revenues		130,606		82,244		29,638		—		242,488		(42,496)		199,992
Costs and expenses:
Management fees		395		12		—		23,304		23,711		56		23,767
Interest expense		22,572		3,328		5,678		26,057		57,635		—		57,635
General and administrative		4,540		26,721		837		3,130		35,228		181		35,409
Acquisition and investment pursuit costs		942		780		166		1,000		2,888		—		2,888
Costs of rental operations		—		3,661		12,191		—		15,852		—		15,852
Depreciation and amortization		—		3,730		15,343		—		19,073		—		19,073
Loan loss allowance, net		2,029		—		—		—		2,029		—		2,029
Total costs and expenses		30,478		38,232		34,215		53,491		156,416		237		156,653
Income (loss) before other (loss) income, income taxes and non-controlling interests		100,128		44,012		(4,577)		(53,491)		86,072		(42,733)		43,339
Other income (loss):
Change in net assets related to consolidated VIEs		—		—		—		—		—		50,707		50,707
Change in fair value of servicing rights		—		(11,034)		—		—		(11,034)		(1,157)		(12,191)
Change in fair value of investment securities, net		(30)		7,459		—		—		7,429		(6,110)		1,319
Change in fair value of mortgage loans held-for-sale, net		—		13,235		—		—		13,235		—		13,235
Earnings from unconsolidated entities		1,224		1,286		2,429		—		4,939		(460)		4,479
(Loss) gain on sale of investments and other assets, net		(90)		—		—		—		(90)		—		(90)
Gain (loss) on derivative financial instruments, net		15,868		(3,945)		8,330		—		20,253		—		20,253
Foreign currency (loss) gain, net		(17,840)		870		(18)		—		(16,988)		—		(16,988)
Other income, net		—		34		8,680		—		8,714		—		8,714
Total other (loss) income		(868)		7,905		19,421		—		26,458		42,980		69,438
Income (loss) before income taxes		99,260		51,917		14,844		(53,491)		112,530		247		112,777
Income tax provision		—		(706)		—		—		(706)		—		(706)
Net income (loss)		99,260		51,211		14,844		(53,491)		111,824		247		112,071
Net income attributable to non-controlling interests		(348)		(3)		—		—		(351)		(247)		(598)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	98,912	$	51,208	$	14,844	$	(53,491)	$	111,473	$	—	$	111,473

Table of Contents

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 (loss) income, income taxes and non-controlling interests		101,878		67,773		(3,725)		(54,578)		111,348		(65,279)		46,069
Other income (loss):
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

Table of Contents

The table below presents our results of operations for the six months ended June 30, 2016 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	$	233,954	$	6,135	$	—	$	—	$	240,089	$	—	$	240,089
Interest income from investment securities		20,674		80,061		—		—		100,735		(66,031)		34,704
Servicing fees		365		73,467		—		—		73,832		(25,829)		48,003
Rental income		—		14,698		55,822		—		70,520		—		70,520
Other revenues		81		2,418		24		—		2,523		(354)		2,169
Total revenues		255,074		176,779		55,846		—		487,699		(92,214)		395,485
Costs and expenses:
Management fees		770		30		—		47,832		48,632		98		48,730
Interest expense		44,907		6,566		10,627		52,055		114,155		—		114,155
General and administrative		8,462		52,015		1,392		5,980		67,849		358		68,207
Acquisition and investment pursuit costs		1,280		1,135		758		1,000		4,173		—		4,173
Costs of rental operations		—		6,723		21,784		—		28,507		—		28,507
Depreciation and amortization		—		6,781		31,052		—		37,833		—		37,833
Loan loss allowance, net		1,268		—		—		—		1,268		—		1,268
Other expense		—		100		—		—		100		—		100
Total costs and expenses		56,687		73,350		65,613		106,867		302,517		456		302,973
Income (loss) before other (loss) income, income taxes and non-controlling interests		198,387		103,429		(9,767)		(106,867)		185,182		(92,670)		92,512
Other income (loss):
Change in net assets related to consolidated VIEs		—		—		—		—		—		46,540		46,540
Change in fair value of servicing rights		—		(19,704)		—		—		(19,704)		774		(18,930)
Change in fair value of investment securities, net		(244)		(44,069)		—		—		(44,313)		46,385		2,072
Change in fair value of mortgage loans held-for-sale, net		—		20,126		—		—		20,126		—		20,126
Earnings from unconsolidated entities		1,692		2,663		4,858		—		9,213		(669)		8,544
Gain on sale of investments and other assets, net		155		—		—		—		155		—		155
Gain (loss) on derivative financial instruments, net		12,842		(15,190)		(2,117)		—		(4,465)		—		(4,465)
Foreign currency (loss) gain, net		(19,662)		2,330		(34)		—		(17,366)		—		(17,366)
Other income, net		—		77		9,102		1,550		10,729		—		10,729
Total other (loss) income		(5,217)		(53,767)		11,809		1,550		(45,625)		93,030		47,405
Income (loss) before income taxes		193,170		49,662		2,042		(105,317)		139,557		360		139,917
Income tax provision		(75)		(725)		—		—		(800)		—		(800)
Net income (loss)		193,095		48,937		2,042		(105,317)		138,757		360		139,117
Net (income) loss attributable to non-controlling interests		(698)		71		—		—		(627)		(360)		(987)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	192,397	$	49,008	$	2,042	$	(105,317)	$	138,130	$	—	$	138,130

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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 (loss):
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 condensed consolidated balance sheet as of June 30, 2016 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	$	127,803	$	69,803	$	18,723	$	187,335	$	403,664	$	1,156	$	404,820
Restricted cash		17,359		16,092		7,680		—		41,131		—		41,131
Loans held-for-investment, net		5,687,399		6,053		—		—		5,693,452		—		5,693,452
Loans held-for-sale		—		237,106		—		—		237,106		—		237,106
Loans transferred as secured borrowings		93,268		—		—		—		93,268		—		93,268
Investment securities		784,463		1,050,909		—		—		1,835,372		(936,569)		898,803
Properties, net		—		220,340		1,012,515		—		1,232,855		—		1,232,855
Intangible assets		—		154,975		51,650		—		206,625		(29,572)		177,053
Investment in unconsolidated entities		30,873		55,432		122,130		—		208,435		(7,894)		200,541
Goodwill		—		140,437		—		—		140,437		—		140,437
Derivative assets		32,446		2,736		7,510		—		42,692		—		42,692
Accrued interest receivable		29,028		1,008		—		—		30,036		—		30,036
Other assets		12,234		74,481		32,544		1,163		120,422		(2,372)		118,050
VIE assets, at fair value		—		—		—		—		—		80,076,117		80,076,117
Total Assets	$	6,814,873	$	2,029,372	$	1,252,752	$	188,498	$	10,285,495	$	79,100,866	$	89,386,361
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	9,352	$	58,583	$	48,600	$	23,295	$	139,830	$	782	$	140,612
Related-party payable		—		555		—		19,763		20,318		—		20,318
Dividends payable		—		—		—		115,013		115,013		—		115,013
Derivative liabilities		13,706		4,163		1		—		17,870		—		17,870
Secured financing agreements, net		2,600,851		503,864		725,856		645,650		4,476,221		—		4,476,221
Convertible senior notes, net		—		—		—		1,334,424		1,334,424		—		1,334,424
Secured borrowings on transferred loans		94,668		—		—		—		94,668		—		94,668
VIE liabilities, at fair value		—		—		—		—		—		79,087,142		79,087,142
Total Liabilities		2,718,577		567,165		774,457		2,138,145		6,198,344		79,087,924		85,286,268
Equity:
Starwood Property Trust, Inc. Stockholders’ Equity:
Common stock		—		—		—		2,427		2,427		—		2,427
Additional paid-in capital		2,062,358		1,183,776		467,993		506,760		4,220,887		—		4,220,887
Treasury stock		—		—		—		(92,104)		(92,104)		—		(92,104)
Accumulated other comprehensive income (loss)		39,472		(6,973)		128		—		32,627		—		32,627
Retained earnings (accumulated deficit)		1,983,102		270,081		10,174		(2,366,730)		(103,373)		—		(103,373)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,084,932		1,446,884		478,295		(1,949,647)		4,060,464		—		4,060,464
Non-controlling interests in consolidated subsidiaries		11,364		15,323		—		—		26,687		12,942		39,629
Total Equity		4,096,296		1,462,207		478,295		(1,949,647)		4,087,151		12,942		4,100,093
Total Liabilities and Equity	$	6,814,873	$	2,029,372	$	1,252,752	$	188,498	$	10,285,495	$	79,100,866	$	89,386,361

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The table below presents our condensed consolidated balance sheet as of December 31, 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	$	83,836	$	62,649	$	2,944	$	218,408	$	367,837	$	978	$	368,815
Restricted cash		9,775		8,826		4,468		—		23,069		—		23,069
Loans held-for-investment, net		5,973,079		—		—		—		5,973,079		—		5,973,079
Loans held-for-sale		—		203,865		—		—		203,865		—		203,865
Loans transferred as secured borrowings		86,573		—		—		—		86,573		—		86,573
Investment securities		511,966		1,038,200		—		—		1,550,166		(825,219)		724,947
Properties, net		—		150,497		768,728		—		919,225		—		919,225
Intangible assets		—		152,278		61,121		—		213,399		(11,829)		201,570
Investment in unconsolidated entities		30,827		53,145		122,454		—		206,426		(7,225)		199,201
Goodwill		—		140,437		—		—		140,437		—		140,437
Derivative assets		33,412		2,087		9,592		—		45,091		—		45,091
Accrued interest receivable		34,028		286		—		—		34,314		—		34,314
Other assets		7,938		71,505		23,657		1,436		104,536		(2,057)		102,479
VIE assets, at fair value		—		—		—		—		—		76,675,689		76,675,689
Total Assets	$	6,771,434	$	1,883,775	$	992,964	$	219,844	$	9,868,017	$	75,830,337	$	85,698,354
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	18,822	$	90,399	$	25,427	$	21,468	$	156,116	$	689	$	156,805
Related-party payable		—		423		—		40,532		40,955		—		40,955
Dividends payable		—		—		—		114,947		114,947		—		114,947
Derivative liabilities		5,190		6		—		—		5,196		—		5,196
Secured financing agreements, net		2,341,897		422,260		568,738		647,804		3,980,699		—		3,980,699
Convertible senior notes, net		—		—		—		1,323,795		1,323,795		—		1,323,795
Secured borrowings on transferred loans		88,000		—		—		—		88,000		—		88,000
VIE liabilities, at fair value		—		—		—		—		—		75,817,014		75,817,014
Total Liabilities		2,453,909		513,088		594,165		2,148,546		5,709,708		75,817,703		81,527,411
Equity:
Starwood Property Trust, Inc. Stockholders’ Equity:
Common stock		—		—		—		2,410		2,410		—		2,410
Additional paid-in capital		2,477,987		1,146,926		394,465		173,466		4,192,844		—		4,192,844
Treasury stock		—		—		—		(72,381)		(72,381)		—		(72,381)
Accumulated other comprehensive income (loss)		37,242		(3,714)		(3,799)		—		29,729		—		29,729
Retained earnings (accumulated deficit)		1,790,705		221,073		8,133		(2,032,197)		(12,286)		—		(12,286)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,305,934		1,364,285		398,799		(1,928,702)		4,140,316		—		4,140,316
Non-controlling interests in consolidated subsidiaries		11,591		6,402		—		—		17,993		12,634		30,627
Total Equity		4,317,525		1,370,687		398,799		(1,928,702)		4,158,309		12,634		4,170,943
Total Liabilities and Equity	$	6,771,434	$	1,883,775	$	992,964	$	219,844	$	9,868,017	$	75,830,337	$	85,698,354

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23. Subsequent Events

Dividend Declaration

On August 4, 2016, our board of directors declared a dividend of $0.48 per share for the third quarter of 2016, which is payable on October 17, 2016 to common stockholders of record as of September 30, 2016.

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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, 2015 (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

Starwood Property Trust, Inc. (“STWD” and together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering (“IPO”). We are focused primarily on originating, acquiring, financing and managing commercial mortgage loans and other commercial real estate debt investments, commercial mortgage-backed securities (“CMBS”), and other commercial real estate investments in both the U.S. and Europe. We refer to the following as our target assets: commercial real estate mortgage loans, preferred equity interests, CMBS and other commercial real estate-related debt investments. Our target assets may also include residential mortgage-backed securities (“RMBS”), certain residential mortgage loans, distressed or non-performing commercial loans, commercial properties subject to net leases and equity interests in commercial real estate. As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.

We have three reportable business segments as of June 30, 2016:

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 property (the “Property Segment”)— engages primarily in acquiring and managing equity interests in stabilized commercial real estate properties, including multi-family properties, that are held for investment.

Refer to Note 1 of our condensed consolidated financial statements included herein (the “Condensed Consolidated Financial Statements”) for further discussion of our business and organization.

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Developments During the Second Quarter of 2016

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

$330.0 million first mortgage and mezzanine loan for the development of an 856-unit luxury multi-family project located in Brooklyn, New York, of which the Company funded $17.1 million.

$216.0 million portfolio of three first mortgage loans secured by 25 office properties located in Long Island, New York and a two-building office complex located in San Jose, California, of which the Company funded $211.9 million.

€165.4 million investment in one first mortgage loan and one first mortgage loan portfolio, each of which had been securitized into single-borrower securitizations by the seller. The €98.9 million first mortgage loan is secured by a shopping center in the metropolitan area of Lisbon, Portugal. The €66.5 million first mortgage loan portfolio is secured by five food-related retail properties across Portugal, with four of the assets located in the Greater Lisbon metropolitan area.

$183.0 million first mortgage and mezzanine loan for the refinancing and renovation of a four-tower luxury multi-family complex located in the Greater Philadelphia area, of which the Company funded $138.3 million.

Funded $123.8 million of previously originated loan commitments.

Received proceeds of $1.0 billion from maturities, sales and principal repayments on loans.

Originated new conduit loans of $288.2 million and received proceeds of $218.4 million from sales of conduit loans.

Purchased $65.0 million and $46.9 million of CMBS and RMBS, respectively, including $39.5 million of new issue B-pieces.

Named special servicer on two new issue CMBS deals, of which we retained the related B-pieces, with a total unpaid principal balance of $1.5 billion.

Acquired the final two of the 32 affordable housing communities which comprise our “Woodstar Portfolio.” These two properties include 628 units, total assets of $48.9 million and assumed liabilities of $22.1 million, which include state sponsored financing and other assumed debt.

Acquired commercial real estate from CMBS trusts for a gross purchase price of $58.9 million.

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Developments During the First Quarter of 2016

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

$162.0 million first mortgage and mezzanine loan for the acquisition and renovation of a 10-building office and warehouse complex located in Brooklyn, New York, of which the Company funded $80.0 million.

$105.0 million first mortgage loan secured by two Class A multi-family properties located in Orlando, Florida, which was fully funded upon acquisition.

$65.0 million first mortgage and mezzanine loan for the refinancing of a data center located in Orlando, Florida, of which the Company funded $60.0 million.

$54.2 million first mortgage and mezzanine loan for the acquisition and renovation of a 491-room hotel located in Cincinnati, Ohio, of which the Company funded $46.4 million.

Acquired 12 of the 32 affordable housing communities in our Woodstar Portfolio. These 12 properties include 3,082 units, total assets of $227.4 million and assumed liabilities of $147.5 million, which includes federal, state and county sponsored financing.

Funded $185.6 million of previously originated loan commitments.

Received proceeds of $290.6 million from maturities, sales and principal repayments on loans.

Purchased $46.6 million and $41.5 million of CMBS and RMBS, respectively.

Originated new conduit loans of $200.6 million and received proceeds of $257.0 million from sales of conduit loans.

Acquired commercial real estate from CMBS trusts for a gross purchase price of $24.9 million.

Repurchased 1,052,889 shares of common stock at a total cost of $19.7 million.

Subsequent Events

Refer to Note 23 to the Condensed Consolidated Financial Statements for disclosure regarding significant transactions that occurred subsequent to June 30, 2016.

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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 securitization variable interest entities (“VIEs”), particularly within revenues and other income, as discussed in Note 2 to the Condensed Consolidated Financial Statements. 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 securitization 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, 2016 and 2015 by business segment (amounts in thousands):


	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2016		2015		$ Change		2016		2015		$ Change
Revenues:
Lending Segment	$	130,606	$	131,410	$	(804)	$	255,074	$	267,341	$	(12,267)
Investing and Servicing Segment		82,244		108,764		(26,520)		176,779		193,967		(17,188)
Property Segment		29,638		3,536		26,102		55,846		3,536		52,310
Investing and Servicing VIEs		(42,496)		(65,050)		22,554		(92,214)		(107,335)		15,121
		199,992		178,660		21,332		395,485		357,509		37,976
Costs and expenses:
Lending Segment		30,478		29,532		946		56,687		57,391		(704)
Investing and Servicing Segment		38,232		40,991		(2,759)		73,350		78,688		(5,338)
Property Segment		34,215		7,261		26,954		65,613		7,263		58,350
Corporate		53,491		54,578		(1,087)		106,867		110,211		(3,344)
Investing and Servicing VIEs		237		229		8		456		465		(9)
		156,653		132,591		24,062		302,973		254,018		48,955
Other income (loss):
Lending Segment		(868)		(693)		(175)		(5,217)		3,448		(8,665)
Investing and Servicing Segment		7,905		8,751		(846)		(53,767)		43,997		(97,764)
Property Segment		19,421		2,497		16,924		11,809		5,105		6,704
Corporate		—		(629)		629		1,550		(5,907)		7,457
Investing and Servicing VIEs		42,980		65,437		(22,457)		93,030		108,028		(14,998)
		69,438		75,363		(5,925)		47,405		154,671		(107,266)
Income (loss) before income taxes:
Lending Segment		99,260		101,185		(1,925)		193,170		213,398		(20,228)
Investing and Servicing Segment		51,917		76,524		(24,607)		49,662		159,276		(109,614)
Property Segment		14,844		(1,228)		16,072		2,042		1,378		664
Corporate		(53,491)		(55,207)		1,716		(105,317)		(116,118)		10,801
Investing and Servicing VIEs		247		158		89		360		228		132
		112,777		121,432		(8,655)		139,917		258,162		(118,245)
Income tax provision		(706)		(3,792)		3,086		(800)		(19,743)		18,943
Net income attributable to non-controlling interests		(598)		(492)		(106)		(987)		(908)		(79)
Net income attributable to Starwood Property Trust, Inc.	$	111,473	$	117,148	$	(5,675)	$	138,130	$	237,511	$	(99,381)

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Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015

Lending Segment

Revenues

For the three months ended June 30, 2016, revenues of our Lending Segment decreased $0.8 million to $130.6 million, compared to $131.4 million for the three months ended June 30, 2015. This decrease was primarily due to (i) a $6.0 million decrease in interest income from investment securities principally due to maturities during 2015 of two preferred equity interests we held in companies that own commercial real estate, partially offset by (ii) a $5.4 million increase in interest income from loans principally due to higher loan fee income due to increased levels of loan prepayments during the second quarter of 2016.

Costs and Expenses

For the three months ended June 30, 2016, costs and expenses of our Lending Segment increased $0.9 million to $30.5 million, compared to $29.5 million for the three months ended June 30, 2015. This increase was primarily due to a $2.4 million increase in interest expense associated with the various secured financing facilities used to fund a portion of our investment portfolio and a $0.7 million increase in investment pursuit costs, partially offset by a $1.5 million decrease in general and administrative (“G&A”) expenses primarily due to lower compensation costs.

Net Interest Income (amounts in thousands)


	For the Three Months Ended
	June 30,
	2016		2015		Change
Interest income from loans	$	119,296	$	113,928	$	5,368
Interest income from investment securities		11,046		17,050		(6,004)
Interest expense		(22,572)		(20,197)		(2,375)
Net interest income	$	107,770	$	110,781	$	(3,011)

For the three months ended June 30, 2016, net interest income of our Lending Segment decreased $3.0 million to $107.8 million, compared to $110.8 million for the three months ended June 30, 2015. This decrease reflects the net decrease in interest income explained in the Revenues discussion above and the increase in interest expense on our secured financing facilities.

During the three months ended June 30, 2016, the weighted average unlevered and levered yields on the Lending Segment’s loans and investment securities were 7.2% and 10.1%, respectively, excluding the impact of bridge financing. During the three months ended June 30, 2015, the weighted average unlevered and levered yields on the Lending Segment’s loans and investment securities were 7.5% and 10.0%, respectively, excluding the impact of bridge financing. The slight decrease in the weighted average unlevered and levered yields is primarily due to a gradual decline of interest rate spreads over the last twelve months.

During the three months ended June 30, 2016 and 2015, the Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 3.4% and 3.1%, respectively, and 3.3% and 2.9%, respectively, excluding the impact of bridge financing.

Other Loss

For the three months ended June 30, 2016, other loss of our Lending Segment increased $0.2 million to a loss of $0.9 million, compared to a loss of $0.7 million for the three months ended June 30, 2015. The increase was primarily due to a $39.0 million unfavorable swing in foreign currency gain (loss) and a $1.0 million decrease in income from other investments, partially offset by a favorable swing of $39.8 million in gain (loss) on derivatives. The favorable swing in gain (loss) on derivatives reflects a $46.5 million favorable swing in foreign currency hedges and a $6.7 million unfavorable swing in interest rate swaps. The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both

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interest and principal payments) we expect to receive from our foreign currency denominated loans and CMBS investments. The gains on those hedges reflect the overall strengthening of the U.S. dollar against the pound sterling (“GBP”). The interest rate swaps are used primarily to fix our interest rate payments on variable rate borrowings. The favorable swing in foreign currency hedges is greater than the offsetting unfavorable swing in foreign currency gain (loss) mainly because (i) the portion of unrealized foreign currency loss associated with an investment security held in 2015 was reported in accumulated other comprehensive income (“AOCI”) rather than earnings, in accordance with GAAP, whereas the full change in fair value of the related currency hedge was reported in earnings since it was not a designated hedge and (ii) the foreign currency hedges generally cover all the expected future cash flows from the hedged investments.

Investing and Servicing Segment and VIEs

Revenues

For the three months ended June 30, 2016, revenues of our Investing and Servicing Segment decreased $4.0 million to $39.7 million after consolidated VIE eliminations of $42.5 million, compared to $43.7 million after consolidated VIE eliminations of $65.0 million for the three months ended June 30, 2015. 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 2016 was primarily due to decreases of $7.0 million in servicing fees, $2.5 million in interest income from CMBS investments and $1.1 million in interest income on loans held-for-sale, partially offset by a $6.7 million increase in rental income on our expanded REO Portfolio (see Note 3 to the Condensed Consolidated Financial Statements). The $2.5 million decrease in CMBS interest income reflects a $12.3 million decrease in VIE eliminations related to the CMBS trusts we consolidate. Excluding the effect of these eliminations, CMBS interest income decreased by $14.8 million, reflecting a lower level of CMBS interest recoveries due to fewer asset liquidations by CMBS trusts, partially offset by the effect of a $221.2 million net increase in this segment’s CMBS investments between June 30, 2015 and 2016.

Costs and Expenses

For the three months ended June 30, 2016, costs and expenses of our Investing and Servicing Segment decreased $2.7 million to $38.5 million, compared to $41.2 million for the three months ended June 30, 2015, inclusive of VIE eliminations which were nominal for both periods. The decrease in costs and expenses was primarily due to lower incentive compensation, partially offset by an increase in costs of rental operations and an increase in interest expense on secured financings for CMBS and the REO Portfolio.

Other Income

For the three months ended June 30, 2016, other income of our Investing and Servicing Segment decreased $23.3 million to $50.9 million including additive net VIE eliminations of $43.0 million, from $74.2 million including additive net VIE eliminations of $65.4 million for the three months ended June 30, 2015. The decrease in other income in the second quarter of 2016 compared to the second quarter of 2015 was primarily due to (i) a $9.5 million greater reduction in fair value of servicing rights which reflects the expected amortization of this deteriorating asset net of increases in fair value due to the attainment of new servicing contracts, (ii) an $8.2 million unfavorable swing in gain (loss) on derivatives which principally hedge our interest rate risk on conduit loans held-for-sale and (iii) a decrease of $5.2 million in the change in value of net assets related to consolidated VIEs. The change in net assets related to consolidated VIEs reflects amounts associated with the Investing and Servicing Segment’s variable interests in CMBS trusts it consolidates, including special servicing fees, interest income, and changes in fair value of CMBS and servicing rights. As noted above, this number is merely a function of the number of CMBS trusts consolidated in any given period, and as such, is not a meaningful indicator of the operating results for this segment. Before VIE eliminations, there was an increase in fair value of CMBS securities of $7.5 million and a decrease of $3.2 million in the three months ended June 30, 2016 and 2015, respectively.

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Income Tax Provision

Historically, our consolidated income tax provision principally 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, 2016, as well as the overall effective tax rate, is lower than for the three months ended June 30, 2015 primarily due to a decrease in the taxable income of our TRSs.

Property Segment

Revenues

For the three months ended June 30, 2016, revenues of our Property Segment increased $26.1 million to $29.6 million, compared to $3.5 million for the three months ended June 30, 2015. The increase in revenues in the second quarter of 2016 was primarily due to increases in rental income of $21.3 million from our Woodstar Portfolio and $4.8 million from our Ireland Portfolio, both of which are described in Note 3 to the Condensed Consolidated Financial Statements.

Costs and Expenses

For the three months ended June 30, 2016, costs and expenses of our Property Segment increased $26.9 million to $34.2 million, compared to $7.3 million for the three months ended June 30, 2015. The increase in costs and expenses was primarily due to increases of $13.7 million in depreciation and amortization, $11.9 million in other rental related costs and $4.8 million in interest expense on the secured financing for the Woodstar and Ireland Portfolios, partially offset by a $4.1 million decrease in acquisition and investment pursuit costs.

Other Income

For the three months ended June 30, 2016, other income of our Property Segment increased $16.9 million to $19.4 million, compared to $2.5 million for the three months ended June 30, 2015. The increase in other income was primarily due to the recognition of an $8.4 million bargain purchase gain on the final two properties we purchased for the Woodstar Portfolio during the second quarter of 2016 and an increase of $8.2 million in gains on foreign currency derivatives that economically hedge our Euro currency exposure with respect to the Ireland Portfolio.

Corporate

Costs and Expenses

For the three months ended June 30, 2016, corporate expenses decreased $1.1 million to $53.5 million, compared to $54.6 million for the three months ended June 30, 2015. The decrease was primarily due to a $3.1 million decrease in management fees partially offset by a $2.0 million increase in other corporate expenses, including acquisition and investment pursuit costs.

Other Income (Loss)

For the three months ended June 30, 2016, there was no corporate other income (loss) compared to a loss of $0.6 million for the three months ended June 30, 2015 on the repurchase of $14.5 million principal amount of our convertible senior notes due 2019.

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Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015

Lending Segment

Revenues

For the six months ended June 30, 2016, revenues of our Lending Segment decreased $12.2 million to $255.1 million, compared to $267.3 million for the six months ended June 30, 2015. This decrease was primarily due to (i) an $18.7 million decrease in interest income from investment securities principally due to maturities during 2015 of two preferred equity interests we held in companies that own commercial real estate and the absence of $5.4 million of income realized upon the collection of a RMBS in the first quarter of 2015, partially offset by (ii) a $6.5 million increase in interest income from loans principally due to higher loan fee income due to increased levels of loan prepayments during the second quarter of 2016.

Costs and Expenses

For the six months ended June 30, 2016, costs and expenses of our Lending Segment decreased $0.7 million to $56.7 million, compared to $57.4 million for the six months ended June 30, 2015. This decrease was primarily due to a $2.5 million decrease in G&A expenses primarily due to lower compensation costs and a $1.7 million decrease in our provision for loan losses, partially offset by a $3.2 million increase in interest expense associated with the various secured financing facilities used to fund a portion of our investment portfolio.

Net Interest Income (amounts in thousands)


	For the Six Months Ended
	June 30,
	2016		2015		Change
Interest income from loans	$	233,954	$	227,400	$	6,554
Interest income from investment securities		20,674		39,346		(18,672)
Interest expense		(44,907)		(41,720)		(3,187)
Net interest income	$	209,721	$	225,026	$	(15,305)

For the six months ended June 30, 2016, net interest income of our Lending Segment decreased $15.3 million to $209.7 million, compared to $225.0 million for the six months ended June 30, 2015. This decrease reflects the net decrease in interest income explained in the Revenues discussion above and the increase in interest expense on our secured financing facilities.

During the six months ended June 30, 2016, the weighted average unlevered and levered yields on the Lending Segment’s loans and investment securities were 7.5% and 10.1%, respectively, excluding the impact of bridge financing. During the six months ended June 30, 2015, the weighted average unlevered and levered yields on the Lending Segment’s loans and investment securities were 7.7% and 10.2%, respectively, excluding the impact of bridge financing. The slight decrease in the weighted average unlevered and levered yields is primarily due to a gradual decline of interest rate spreads over the last twelve months.

During the six months ended June 30, 2016 and 2015, the Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 3.4% and 3.2%, respectively, and 3.3% and 3.0%, respectively, excluding the impact of bridge financing.

Other Income (Loss)

For the six months ended June 30, 2016, other income (loss) of our Lending Segment decreased $8.6 million to a loss of $5.2 million, compared to income of $3.4 million for the six months ended June 30, 2015. The decrease was primarily due to an $11.5 million increase in foreign currency loss partially offset by a $3.9 million increase in derivative gains. The $3.9 million increase in derivative gains reflects a $13.2 million increased gain on foreign currency hedges partially offset by a $9.3 million increased loss on interest rate swaps. The foreign currency hedges are used to fix the U.S.

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dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and CMBS investments. The gains on those hedges reflect the overall strengthening of the U.S. dollar against the GBP. The interest rate swaps are used primarily to fix our interest rate payments on variable rate borrowings. The increase in gain on foreign currency hedges is greater than the offsetting increase in foreign currency loss mainly because (i) the portion of unrealized foreign currency loss associated with an investment security held in 2015 was reported in AOCI rather than earnings, in accordance with GAAP, whereas the full change in fair value of the related currency hedge was reported in earnings since it was not a designated hedge and (ii) the foreign currency hedges generally cover all the expected future cash flows from the hedged investments.

Investing and Servicing Segment and VIEs

Revenues

For the six months ended June 30, 2016, revenues of our Investing and Servicing Segment decreased $2.0 million to $84.6 million after consolidated VIE eliminations of $92.2 million, compared to $86.6 million after consolidated VIE eliminations of $107.3 million for the six months ended June 30, 2015. 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 six months of 2016 was primarily due to decreases of $10.6 million in servicing fees and $3.2 million in interest income on loans held-for-sale, partially offset by increases of $10.5 million in rental income on our expanded REO Portfolio (see Note 3 to the Condensed Consolidated Financial Statements) and $1.8 million in interest income from CMBS investments. The $1.8 million increase in CMBS interest income reflects a $6.3 million increase in VIE eliminations related to the CMBS trusts we consolidate. Excluding the effect of these eliminations, CMBS interest income increased by $8.1 million, reflecting a $221.2 million net increase in this segment’s CMBS investments between June 30, 2015 and 2016, partially offset by a lower level of CMBS interest recoveries due to fewer asset liquidations by CMBS trusts during the second quarter of 2016.

Costs and Expenses

For the six months ended June 30, 2016, costs and expenses of our Investing and Servicing Segment decreased $5.4 million to $73.8 million, compared to $79.2 million for the six months ended June 30, 2015, inclusive of VIE eliminations which were nominal for both periods. The decrease in costs and expenses was primarily due to lower incentive compensation, partially offset by an increase in costs of rental operations and an increase in interest expense on secured financings for CMBS and the REO Portfolio.

Other Income

For the six months ended June 30, 2016, other income of our Investing and Servicing Segment decreased $112.7 million to $39.3 million including additive net VIE eliminations of $93.0 million, from $152.0 million including additive net VIE eliminations of $108.0 million for the six months ended June 30, 2015. The decrease in other income in the six months of 2016 compared to 2015 was primarily due to (i) a decrease of $57.2 million in the change in value of net assets related to consolidated VIEs, (ii) the absence of a $17.1 million gain on sale of a commercial real estate asset realized in the first quarter of 2015, (iii) a $14.7 million greater reduction in fair value of servicing rights which reflects the expected amortization of this deteriorating asset net of increases in fair value due to the attainment of new servicing contracts, (iv) an $11.8 million lesser increase in fair value of loans held-for-sale and (v) an $11.5 million increased loss on derivatives which principally hedge our interest rate risk on conduit loans held-for-sale and. The change in net assets related to consolidated VIEs reflects amounts associated with the Investing and Servicing Segment’s variable interests in CMBS trusts it consolidates, including special servicing fees, interest income, and changes in fair value of CMBS and servicing rights. As noted above, this number is merely a function of the number of CMBS trusts consolidated in any given period, and as such, is not a meaningful indicator of the operating results for this segment. Before VIE eliminations, there was a decrease in fair value of CMBS securities of $44.1 million and an increase of $5.1 million in the six months ended June 30, 2016 and 2015, respectively.

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Income Tax Provision

Historically, our consolidated income tax provision principally 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, 2016, as well as the overall effective tax rate, is lower than for the six months ended June 30, 2015 primarily due to a decrease in the taxable income of our TRSs.

Property Segment

Revenues

For the six months ended June 30, 2016, revenues of our Property Segment increased $52.3 million to $55.8 million, compared to $3.5 million for the six months ended June 30, 2015. The increase in revenues in the six months of 2016 was primarily due to increases in rental income of $39.6 million from our Woodstar Portfolio and $12.7 million from our Ireland Portfolio, both of which are described in Note 3 to the Condensed Consolidated Financial Statements.

Costs and Expenses

For the six months ended June 30, 2016, costs and expenses of our Property Segment increased $58.3 million to $65.6 million, compared to $7.3 million for the six months ended June 30, 2015. The increase in costs and expenses was primarily due to increases of $29.4 million in depreciation and amortization, $21.5 million in other rental related costs and $9.8 million in interest expense on the secured financing for the Woodstar and Ireland Portfolios, partially offset by a $3.5 million decrease in acquisition and investment pursuit costs.

Other Income

For the six months ended June 30, 2016, other income of our Property Segment increased $6.7 million to $11.8 million, compared to $5.1 million for the six months ended June 30, 2015. The increase in other income was primarily due to the recognition of an $8.4 million bargain purchase gain on the final two properties we purchased for the Woodstar Portfolio during the second quarter of 2016, partially offset by an increase of $2.0 million in losses on foreign currency derivatives that economically hedge our Euro currency exposure with respect to the Ireland Portfolio and interest rate derivatives related to debt financing for the Ireland Portfolio.

Corporate

Costs and Expenses

For the six months ended June 30, 2016, corporate expenses decreased $3.3 million to $106.9 million, compared to $110.2 million for the six months ended June 30, 2015. The decrease was primarily due to a $6.1 million decrease in management fees partially offset by a $2.8 million increase in other corporate expenses, including acquisition and investment pursuit costs.

Other Income (Loss)

For the six months ended June 30, 2016, corporate other income (loss) increased $7.4 million to income of $1.5 million, compared to a loss of $5.9 million for the six months ended June 30, 2015. Corporate other income of $1.5 million for the six months ended June 30, 2016 represents a reimbursement received related to a partnership guarantee arrangement. Corporate other loss of $5.9 million for the six months ended June 30, 2015 represents a loss on the repurchase of $118.6 million of our convertible senior 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 the following:

(i)

non-cash equity compensation expense;

(ii)

incentive fees due under our management agreement;

(iii)

depreciation and amortization of real estate and associated intangibles;

(iv)

losses on extinguishment of debt;

(v)

acquisition costs associated with successful acquisitions (effective July 1, 2015); and

(vi)

any unrealized gains, losses or other non-cash items recorded in net income for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income.

We believe that Core Earnings provides an additional measure of our core operating performance by eliminating the impact of certain non-cash expenses and facilitating a comparison of our financial results to those of other comparable REITs with fewer or no non-cash adjustments and comparison of our own operating results from period to period. Our management uses Core Earnings in this way, and also uses Core Earnings to compute the incentive fee due under our management agreement. The Company believes that its investors also use Core Earnings or a comparable supplemental performance measure to evaluate and compare the performance of the Company and its peers, and as such, the Company believes that the disclosure of Core Earnings is useful to (and expected by) its investors.

However, the Company cautions that Core Earnings does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), or an indication of our cash flows from operating activities (determined in accordance with GAAP), a measure of our liquidity, or an indication of funds available to fund our cash needs, including our ability to make cash distributions. In addition, our methodology for calculating Core Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and accordingly, our reported Core Earnings may not be comparable to the Core Earnings reported by other REITs.

In assessing the appropriate weighted average diluted share count to apply to Core Earnings for purposes of determining Core Earnings per share (“EPS”), management considered the following attributes of our current GAAP diluted share methodology: (i) our unvested stock awards representing participating securities were determined to be anti-dilutive and were thus excluded from the denominator of the EPS calculation; and (ii) the portion of the convertible senior notes that are “in-the-money” (referred to as the “conversion spread value”), representing the value that would be delivered to investors in shares upon an assumed conversion, is included in the denominator. Because compensation expense related to unvested stock awards is added back for Core Earnings purposes pursuant to the definition above, there is no dilution to Core Earnings resulting from the associated expense recognition. As a result, for purposes of determining Core EPS, our GAAP EPS methodology was adjusted to include (instead of exclude) such unvested awards. Further, conversion of the convertible senior notes is an event that is contingent upon numerous factors, none of which are in our control, and is an event that may or may not occur. Consistent with the treatment of other unrealized adjustments to Core Earnings, our GAAP EPS methodology was adjusted to exclude (instead of include) the conversion spread value in determining Core EPS until a conversion actually occurs. The following table presents our diluted

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weighted average shares used in our GAAP EPS calculation reconciled to our diluted weighted average shares used in our Core EPS calculation (amounts in thousands):


	For the Three Months Ended		For the Six Months Ended
	June 30,		June 30,
	2016	2015	2016	2015
Diluted weighted average shares - GAAP	237,597	235,831	237,367	230,085
Add: Unvested stock awards	1,722	2,295	1,778	2,155
Less: Conversion spread value	(441)	(649)	(456)	(644)
Diluted weighted average shares - Core	238,878	237,477	238,689	231,596

The definition of Core Earnings allows management to make adjustments, subject to the approval of a majority of our 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. No adjustments to the definition of Core Earnings occurred during the six months ended June 30, 2016.

The following table summarizes our quarterly Core Earnings per weighted average diluted share for the six months ended June 30, 2016 and 2015:


	Core Earnings For the Three-Month Periods Ended
	March 31		June 30
2016	$	0.50	$	0.50
2015		0.55		0.53

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Three Months Ended June 30, 2016 Compared to the Three Months Ended June 30, 2015

The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended June 30, 2016, by business segment (amounts in thousands, except per share data):


			Investing
	Lending		and Servicing		Property
	Segment		Segment		Segment		Corporate		Total
Revenues	$	130,606	$	82,244	$	29,638	$	—	$	242,488
Costs and expenses		(30,478)		(38,232)		(34,215)		(53,491)		(156,416)
Other (loss) income		(868)		7,905		19,421		—		26,458
Income (loss) before income taxes		99,260		51,917		14,844		(53,491)		112,530
Income tax provision		—		(706)		—		—		(706)
Income attributable to non-controlling interests		(348)		(3)		—		—		(351)
Net income (loss) attributable to Starwood Property Trust, Inc.		98,912		51,208		14,844		(53,491)		111,473
Add / (Deduct):
Non-cash equity compensation expense		704		1,401		29		5,524		7,658
Management incentive fee		—		—		—		2,868		2,868
Acquisition and investment pursuit costs		—		226		136		—		362
Depreciation and amortization		—		2,921		15,369		—		18,290
Loan loss allowance, net		2,029		—		—		—		2,029
Interest income adjustment for securities		(243)		5,857		—		—		5,614
Other non-cash items		—		17		(9,206)		—		(9,189)
Reversal of unrealized (gains) / losses on:
Loans held-for-sale		—		(13,235)		—		—		(13,235)
Securities		30		(7,459)		—		—		(7,429)
Derivatives		(16,530)		3,635		(8,330)		—		(21,225)
Foreign currency		17,840		(870)		18		—		16,988
Earnings from unconsolidated entities		(1,224)		(1,286)		(2,429)		—		(4,939)
Recognition of realized gains / (losses) on:
Loans held-for-sale		—		13,679		—		—		13,679
Securities		—		(4,554)		—		—		(4,554)
Derivatives		25,321		(3,104)		—		—		22,217
Foreign currency		(25,704)		839		(19)		—		(24,884)
Earnings from unconsolidated entities		1,224		630		2,333		—		4,187
Core Earnings (Loss)	$	102,359	$	49,905	$	12,745	$	(45,099)	$	119,910
Core Earnings (Loss) per Weighted Average Diluted Share	$	0.43	$	0.21	$	0.05	$	(0.19)	$	0.50

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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, 2015, by business segment (amounts in thousands, except per share data):


			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)
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

Lending Segment

The Lending Segment’s Core Earnings decreased by $5.7 million, from $108.1 million during the second quarter of 2015 to $102.4 million in the second quarter of 2016. After making adjustments for the calculation of Core Earnings, revenues were $130.4 million, costs and expenses were $27.7 million and other income was $0.1 million.

Core revenues, consisting principally of interest income on loans, decreased by $0.7 million in the second quarter of 2016 primarily due to (i) a $5.9 million decrease in interest income from investment securities principally due to maturities during 2015 of two preferred equity interests we held in companies that own commercial real estate, partially offset by (ii) a $5.4 million increase in interest income from loans principally due to higher loan fee income due to increased levels of loan prepayments during the second quarter of 2016.

Core costs and expenses increased by $2.0 million in the second quarter of 2016 primarily due a $2.4 million increase in interest expense associated with the various secured financing facilities used to fund a portion of our investment portfolio and a $0.7 million increase in investment pursuit costs, partially offset by a $1.1 million decrease in G&A expenses reflecting lower compensation costs.

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Core other income decreased by $2.9 million, principally due to an increase in losses on foreign currency denominated assets partially offset by an increase in gains on related derivatives.

Investing and Servicing Segment

The Investing and Servicing Segment’s Core Earnings decreased by $11.2 million, from $61.1 million during the second quarter of 2015 to $49.9 million in the second quarter of 2016. After making adjustments for the calculation of Core Earnings, revenues were $88.1 million, costs and expenses were $33.7 million, other loss was $3.8 million and income taxes were $0.7 million.

Core revenues decreased by $13.4 million in the second quarter of 2016, primarily due to decreases of $17.1 million in servicing fees, $1.7 million in interest income from our CMBS portfolio and $1.1 million in interest income on loans held-for-sale, partially offset by a $6.8 million increase in rental income on our expanded REO Portfolio.

Core costs and expenses decreased by $4.5 million in the second quarter of 2016, primarily due to lower incentive compensation and lower amortization of our European servicing rights, partially offset by an increase in costs of rental operations and an increase in interest expense on secured financings for CMBS and the REO Portfolio.

Core other income decreased by $5.4 million to a loss in the second quarter of 2016, primarily reflecting a $4.5 million decrease in gains on sales of conduit loans.

Income taxes, which principally relate to the operating results of our servicing and conduit businesses which are held in TRSs, decreased $3.1 million due to a decrease in the taxable income of our TRSs.

Property Segment

The Property Segment’s Core Earnings increased by $12.3 million, from $0.4 million during the second quarter of 2015 to $12.7 million in the second quarter of 2016. After making adjustments for the calculation of Core Earnings, revenues were $28.9 million, costs and expenses were $18.7 million and other income was $2.5 million.

Core revenues increased by $25.4 million in the second quarter of 2016, primarily due to an increase in rental income from the Woodstar and Ireland Portfolios.

Core costs and expenses increased by $13.1 million in the second quarter of 2016, primarily due to increases in rental related costs of $11.9 million and interest expense on the secured financing for the Woodstar and Ireland Portfolios of $4.8 million, partially offset by a $4.2 million decrease in acquisition and investment pursuit costs.

Core other income did not materially change in the second quarter of 2016 compared to the second quarter of 2015.

Corporate

Core corporate costs and expenses increased by $1.5 million, from $43.6 million in the second quarter of 2015 to $45.1 million in the second quarter of 2016, primarily due to an increase in acquisition and investment pursuit costs.

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Six Months Ended June 30, 2016 Compared to the Six Months Ended June 30, 2015

The following table presents our summarized results of operations and reconciliation to Core Earnings for the six months ended June 30, 2016, by business segment (amounts in thousands, except per share data):


			Investing
	Lending		and Servicing		Property
	Segment		Segment		Segment		Corporate		Total
Revenues	$	255,074	$	176,779	$	55,846	$	—	$	487,699
Costs and expenses		(56,687)		(73,350)		(65,613)		(106,867)		(302,517)
Other (loss) income		(5,217)		(53,767)		11,809		1,550		(45,625)
Income (loss) before income taxes		193,170		49,662		2,042		(105,317)		139,557
Income tax provision		(75)		(725)		—		—		(800)
(Income) loss attributable to non-controlling interests		(698)		71		—		—		(627)
Net income (loss) attributable to Starwood Property Trust, Inc.		192,397		49,008		2,042		(105,317)		138,130
Add / (Deduct):
Non-cash equity compensation expense		1,286		2,487		62		10,907		14,742
Management incentive fee		—		—		—		7,467		7,467
Acquisition and investment pursuit costs		—		815		694		—		1,509
Depreciation and amortization		—		5,127		31,089		—		36,216
Loan loss allowance, net		1,268		—		—		—		1,268
Interest income adjustment for securities		(504)		6,746		—		—		6,242
Other non-cash items		—		17		(10,814)		—		(10,797)
Reversal of unrealized (gains) / losses on:
Loans held-for-sale		—		(20,126)		—		—		(20,126)
Securities		244		44,069		—		—		44,313
Derivatives		(14,183)		14,398		2,117		—		2,332
Foreign currency		19,662		(2,330)		34		—		17,366
Earnings from unconsolidated entities		(1,692)		(2,663)		(4,858)		—		(9,213)
Recognition of realized gains / (losses) on:
Loans held-for-sale		—		18,471		—		—		18,471
Securities		—		(7,877)		—		—		(7,877)
Derivatives		25,875		(9,816)		(70)		—		15,989
Foreign currency		(25,771)		2,193		(34)		—		(23,612)
Earnings from unconsolidated entities		2,296		1,755		2,333		—		6,384
Core Earnings (Loss)	$	200,878	$	102,274	$	22,595	$	(86,943)	$	238,804
Core Earnings (Loss) per Weighted Average Diluted Share	$	0.84	$	0.43	$	0.09	$	(0.36)	$	1.00

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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, 2015, by business segment (amounts in thousands, except per share data):


			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

Lending Segment

The Lending Segment’s Core Earnings decreased by $14.5 million, from $215.4 million during the six months ended June 30, 2015 to $200.9 million during the six months ended June 30, 2016. After making adjustments for the calculation of Core Earnings, revenues were $254.6 million, costs and expenses were $54.1 million and other income was $1.2 million.

Core revenues, consisting principally of interest income on loans, decreased by $12.4 million during the six months ended June 30, 2016 primarily due to (i) an $18.8 million decrease in interest income from investment securities principally due to maturities during 2015 of two preferred equity interests we held in companies that own commercial real estate, and the absence of $5.4 million of income realized upon the collection of a RMBS in the first quarter of 2015, partially offset by (ii) a $6.5 million increase in interest income from loans principally due to higher loan fee income due to increased levels of loan prepayments during the second quarter of 2016.

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Core costs and expenses increased by $1.0 million during the six months ended June 30, 2016 primarily due to a $3.2 million increase in interest expense associated with the various secured financing facilities used to fund a portion of our investment portfolio partially offset by a $2.4 million decrease in G&A expenses reflecting lower compensation costs.

Core other income decreased by $1.0 million, principally due to an increase in losses on foreign currency denominated assets partially offset by an increase in gains on related derivatives.

Investing and Servicing Segment

The Investing and Servicing Segment’s Core Earnings decreased by $19.7 million, from $122.0 million during the six months ended June 30, 2015 to $102.3 million during the six months ended June 30, 2016. After making adjustments for the calculation of Core Earnings, revenues were $183.6 million, costs and expenses were $65.0 million, other loss was $15.6 million and income taxes were $0.7 million.

Core revenues decreased by $6.9 million during the six months ended June 30, 2016, primarily due to decreases of $31.8 million in servicing fees and $3.2 million in interest income on loans held-for-sale, partially offset by increases of $18.3 million in interest income from our CMBS portfolio and $10.6 million in rental income on our expanded REO Portfolio.

Core costs and expenses decreased by $10.5 million during the six months ended June 30, 2016, primarily due to lower incentive compensation and lower amortization of our European servicing rights, partially offset by an increase in cost of rental operations and an increase in interest expense on secured financings for CMBS and the REO Portfolio.

Core other income decreased by $42.4 million to a loss during the six months ended June 30, 2016, primarily reflecting a $17.2 million decrease in gains on sales of conduit loans, the absence of a $16.6 million gain on the sale of a commercial real estate asset and a $10.0 million decrease in gains on sales of CMBS.

Income taxes, which principally relate to the operating results of our servicing and conduit businesses which are held in TRSs, decreased $19.1 million due to a decrease in the taxable income of our TRSs.

Property Segment

The Property Segment’s Core Earnings increased by $19.6 million, from $3.0 million during the six months ended June 30, 2015 to $22.6 million during the six months ended June 30, 2016. After making adjustments for the calculation of Core Earnings, revenues were $53.5 million, costs and expenses were $33.8 million and other income was $2.9 million.

Core revenues increased by $50.0 million during the six months ended June 30, 2016 due to an increase in rental income from the Woodstar and Ireland Portfolios.

Core costs and expenses increased by $28.2 million during the six months ended June 30, 2016, primarily due to increases in rental related costs of $21.4 million and interest expense on the secured financing for the Woodstar and Ireland Portfolios of $9.8 million, partially offset by a $4.2 million decrease in acquisition and investment pursuit costs.

Core other income decreased by $2.2 million during the six months ended June 30, 2016, primarily due to a decrease in equity in earnings from our investment in four regional shopping malls (the “Retail Fund”).

Corporate

Core corporate costs and expenses decreased by $3.9 million, from $90.8 million during the six months ended June 30, 2015 to $86.9 million during the six months ended June 30, 2016. This decrease was primarily due to the absence of a $5.9 million loss on extinguishment of a portion of our convertible senior notes due 2019 during the six

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months of 2015 partially offset by a $2.0 million increase in other corporate net expenses, including acquisition and investment pursuit costs.

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, 2015, 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, 2016, we had cash and cash equivalents of $404.8 million.

Cash Flows for the Six Months Ended June 30, 2016 (amounts in thousands)


			VIE		Excluding Investing
	GAAP		Adjustments		and Servicing VIEs
Net cash provided by operating activities	$	148,550	$	(178)	$	148,372
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment		(997,421)		(17,860)		(1,015,281)
Proceeds from principal collections and sale of loans		1,314,919		—		1,314,919
Purchase of investment securities		(350,642)		(43,758)		(394,400)
Proceeds from sales and collections of investment securities		48,813		23,842		72,655
Real estate business combinations, net of cash acquired		(91,186)		(85,116)		(176,302)
Net cash flows from other investments and assets		4,309		(1,049)		3,260
Increase in restricted cash, net		(17,840)		—		(17,840)
Net cash used in investing activities		(89,048)		(123,941)		(212,989)
Cash Flows from Financing Activities:
Borrowings under financing agreements		2,059,599		—		2,059,599
Principal repayments on and repurchases of borrowings		(1,711,117)		—		(1,711,117)
Payment of deferred financing costs		(6,437)		—		(6,437)
Proceeds from common stock issuances, net of offering costs		177		—		177
Payment of dividends		(229,151)		—		(229,151)
Contributions from non-controlling interests		10,417		—		10,417
Distributions to non-controlling interests		(2,350)		—		(2,350)
Purchase of treasury stock		(19,723)		—		(19,723)
Issuance of debt of consolidated VIEs		596		(596)		—
Repayment of debt of consolidated VIEs		(147,523)		147,523		—
Distributions of cash from consolidated VIEs		22,986		(22,986)		—
Net cash (used in) provided by financing activities		(22,526)		123,941		101,415
Net increase in cash and cash equivalents		36,976		(178)		36,798
Cash and cash equivalents, beginning of period		368,815		(978)		367,837
Effect of exchange rate changes on cash		(971)		—		(971)
Cash and cash equivalents, end of period	$	404,820	$	(1,156)	$	403,664

The discussion below is on a non-GAAP basis, after removing adjustments principally resulting from the consolidation of the Investing and Servicing Segment’s VIEs under ASC 810. These adjustments principally relate to (i) purchase of CMBS, loans and real estate from consolidated VIEs, which are reflected as repayments of VIE debt on a GAAP basis and (ii) sales of CMBS related to consolidated VIEs, which are reflected as VIE distributions on a GAAP basis. There is no significant net impact to cash flows from operations or to overall cash resulting from these consolidations. Refer to Note 2 of our Condensed Consolidated Financial Statements for further discussion.

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Cash and cash equivalents increased by $36.8 million during the six months ended June 30, 2016, reflecting net cash provided by operating activities of $148.4 million and net cash provided by financing activities of $101.4 million partially offset by net cash used in investing activities of $213.0 million.

Net cash provided by operating activities of $148.4 million for the six months ended June 30, 2016 related primarily to cash interest income of $159.5 million from our loan origination and conduit programs, plus cash interest income on investment securities of $93.1 million. Servicing fees provided cash of $73.8 million, rental income provided cash of $42.0 million and other income provided $12.3 million. Offsetting these revenues were cash interest expense of $92.0 million, general and administrative expenses of $77.7 million, management fees of $43.9 million, a net change in operating assets and liabilities of $12.3 million, acquisition and investment pursuit costs of $4.2 million and income tax payments of $2.2 million.

Net cash used in investing activities of $213.0 million for the six months ended June 30, 2016 related primarily to the origination and acquisition of new loans held-for-investment of $1.0 billion, the purchase of investment securities of $394.4 million and the purchase of real estate property of $176.3 million, partially offset by proceeds received from principal collections and sales of loans of $1.3 billion and investment securities of $72.7 million.

Net cash provided by financing activities of $101.4 million for the six months ended June 30, 2016 related primarily to net borrowings after repayments of our secured debt of $348.5 million, partially offset by dividend distributions of $229.1 million, share repurchases of $19.7 million and payment of deferred financing costs of $6.4 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, 2016 and December 31, 2015 (dollars in thousands):


											Unlevered
	Face		Carrying		Asset Specific			Net			Return on
	Amount		Value		Financing			Investment		Vintage	Asset
June 30, 2016
First mortgages (1)	$	4,586,548	$	4,532,933	$	2,178,773		$	2,354,160	1989-2016	6.7	%
Subordinated mortgages		413,228		392,208		6,021			386,187	1998-2015	11.3	%
Mezzanine loans (1)		756,400		769,555		—			769,555	2006-2016	10.9	%
Loans transferred as secured borrowings		94,668		93,268		94,668			(1,400)	N/A
Loan loss allowance		—		(7,297)		—			(7,297)	N/A
RMBS		408,521		251,260		102,513			148,747	2003-2007	10.3	%
HTM securities (2)		526,448		520,342		313,544			206,798	2013-2015	5.8	%
Equity security		12,162		12,861		—			12,861	N/A
Investments in unconsolidated entities		N/A		30,873		—			30,873	N/A
	$	6,797,975	$	6,596,003	$	2,695,519		$	3,900,484

December 31, 2015
First mortgages (1)	$	4,776,576	$	4,723,852	$	2,154,287	(3)	$	2,569,565	1989-2015	6.9	%
Subordinated mortgages		416,713		392,563		6,021			386,542	1998-2015	11.2	%
Mezzanine loans (1)		850,024		862,693		—			862,693	2006-2015	10.9	%
Loans transferred as secured borrowings		88,000		86,573		88,000			(1,427)	N/A
Loan loss allowance		—		(6,029)		—			(6,029)	N/A
RMBS		233,976		176,224		2,000			174,224	2003-2007	11.9	%
HTM securities (2)		321,193		321,244		179,589			141,655	2013-2015	6.5	%
Equity security		13,471		14,498		—			14,498	N/A
Investments in unconsolidated entities		N/A		30,827		—			30,827	N/A
	$	6,699,953	$	6,602,445	$	2,429,897		$	4,172,548

(1)

(2)

CMBS held-to-maturity (“HTM”) and mandatorily redeemable preferred equity interests in commercial real estate entities.

(3)

Reflects amounts reclassified in accordance with ASU 2015-03 as discussed in Note 2 to the Condensed Consolidated Financial Statements.

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As of June 30, 2016 and December 31, 2015, our Lending Segment’s investment portfolio, excluding RMBS and other investments, had the following characteristics based on carrying values:


Collateral Property Type	June 30, 2016		December 31, 2015
Office	33.9	%	39.4	%
Hospitality	24.4	%	28.2	%
Multi-family	15.1	%	9.0	%
Mixed Use	13.9	%	12.8	%
Retail	8.4	%	6.4	%
Residential	2.3	%	2.3	%
Industrial	2.0	%	1.9	%
	100.0	%	100.0	%


Geographic Location	June 30, 2016		December 31, 2015
North East	35.2	%	28.8	%
West	23.4	%	23.2	%
South East	16.4	%	17.3	%
South West	7.3	%	7.1	%
International	6.9	%	13.1	%
Midwest	6.7	%	6.4	%
Mid Atlantic	4.1	%	4.1	%
	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, 2016 and December 31, 2015 (amounts in thousands):


						Asset
	Face		Carrying			Specific			Net
	Amount		Value			Financing			Investment
June 30, 2016
CMBS, fair value option	$	4,654,339	$	1,050,909	(1)	$	240,082		$	810,827
Intangible assets - servicing rights		N/A		114,462	(2)		—			114,462
Lease intangibles, net		N/A		35,899			—			35,899
Loans held-for-sale, fair value option		235,296		237,106			146,626			90,480
Loans held-for-investment		6,053		6,053			—			6,053
Investment in unconsolidated entities		N/A		55,432			—			55,432
Properties, net		N/A		220,340			117,156			103,184
	$	4,895,688	$	1,720,201		$	503,864		$	1,216,337
December 31, 2015
CMBS, fair value option	$	4,704,136	$	1,038,200	(1)	$	193,944		$	844,256
Intangible assets - servicing rights		N/A		134,153	(2)		—			134,153
Lease intangibles, net		N/A		14,621			—			14,621
Loans held-for-sale, fair value option		203,710		203,865			145,803	(3)		58,062
Investment in unconsolidated entities		N/A		53,145			—			53,145
Properties, net		N/A		150,497			82,513	(3)		67,984
	$	4,907,846	$	1,594,481		$	422,260		$	1,172,221

(1)

Includes $936.6 million and $825.2 million of CMBS reflected in “VIE liabilities” in accordance with ASC 810 as of June 30, 2016 and December 31, 2015, respectively.

(2)

Includes $29.6 million and $11.8 million of servicing rights intangibles reflected in “VIE assets” in accordance with ASC 810 as of June 30, 2016 and December 31, 2015, respectively.

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(3)

Reflects amounts reclassified in accordance with ASU 2015-03 as discussed in Note 2 to the Condensed Consolidated Financial Statements.

Our Investing and Servicing Segment’s REO Portfolio, as defined in Note 3 to the Condensed Consolidated Financial Statements, had the following characteristics based on carrying values of $232.1 million and $140.9 million as of June 30, 2016 and December 31, 2015, respectively:


Property Type	June 30, 2016		December 31, 2015
Retail	57.8	%	71.4	%
Office	18.2	%	—	%
Multi-family	14.0	%	18.9	%
Self-storage	5.9	%	9.7	%
Mixed Use	4.1	%	—	%
	100.0	%	100.0	%


Geographic Location	June 30, 2016		December 31, 2015
South East	42.1	%	35.3	%
North East	21.4	%	35.7	%
Mid Atlantic	11.7	%	—	%
Midwest	9.7	%	10.5	%
South West	8.8	%	14.9	%
West	6.3	%	3.6	%
	100.0	%	100.0	%

Property Segment

The following table sets forth the amount of each category of investments, which are comprised of properties, the Retail Fund and intangible lease assets and liabilities, held within our Property Segment as of June 30, 2016 and December 31, 2015 (amounts in thousands):


	June 30, 2016		December 31, 2015
Properties, net	$	1,012,515	$	768,728
Lease intangibles, net		49,769		58,658
Investment in unconsolidated entities		122,130		122,454
	$	1,184,414	$	949,840

The following table sets forth our net investment and other information regarding the Property Segment’s properties and intangible lease assets and liabilities as of June 30, 2016 (dollars in thousands):


			Asset						Weighted Average
	Carrying		Specific		Net		Occupancy		Remaining
	Value		Financing		Investment		Rate		Lease Term
Office—Ireland Portfolio	$	485,211	$	310,876	$	174,335	98.6	%	10.1 years
Multi-family residential—Ireland Portfolio		17,399		11,305		6,094	97.0	%	0.5 years
Multi-family residential—Woodstar Portfolio		605,555		403,675		201,880	97.5	%	0.5 years
Subtotal—undepreciated carrying value		1,108,165		725,856		382,309
Accumulated depreciation and amortization		(45,881)		—		(45,881)
Net carrying value	$	1,062,284	$	725,856	$	336,428

New Credit Facilities and Amendments

Refer to Note 9 of our Condensed Consolidated Financial Statements for a detailed discussion of new credit facilities and amendments to existing credit facilities executed since December 31, 2015.

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Borrowings under Various Secured Financing Arrangements

The following table is a summary of our financing facilities as of June 30, 2016 (dollars 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%	$	2,179,007	$	1,600,000		$	1,490,949	$	49,915	$	59,136
Lender 2 Repo 1	Oct 2017	Oct 2020	LIBOR + 1.75% to 2.75%		300,368		500,000			238,479		—		261,521
Lender 3 Repo 1	May 2017	May 2019	LIBOR + 2.50% to 2.85%		112,022		79,325			79,325		—		—
Lender 4 Repo 1	Oct 2016	Oct 2017	LIBOR + 2.00%		—		—			—		—		—
Lender 4 Repo 2	Dec 2018	Dec 2020	LIBOR + 2.00% to 2.50%		253,813		1,000,000	(e)		164,940		50,000		785,060
Lender 6 Repo 1	Aug 2018	N/A	LIBOR + 2.50% to 3.00%		431,821		500,000			288,149		32,063		179,788
Lender 7 Secured Financing	Jul 2018	Jul 2019	LIBOR + 2.75% (f)		108,120		650,000	(g)		—		—		650,000
Conduit Repo 2	Nov 2016	N/A	LIBOR + 2.10%		42,612		150,000			31,594		—		118,406
Conduit Repo 3	Feb 2018	Feb 2019	LIBOR + 2.10%		9,096		150,000			6,825		—		143,175
Conduit Repo 4	Oct 2017	Oct 2020	LIBOR + 2.25%		62,377		100,000			46,612		—		53,388
CMBS Repo 1	(h)	(h)	LIBOR + 1.90%		32,800		21,354			21,354		—		—
CMBS Repo 2	Jun 2020	N/A	LIBOR/EURIBOR + 2.00% to 2.70%		339,132		247,192			247,192		—		—
CMBS Repo 3	(i)	(i)	LIBOR + 1.40% to 1.85%		409,685		287,467			287,467		—		—
RMBS Repo 1	(j)	N/A	LIBOR + 1.90%		157,641		185,000			91,144		19,977		73,879
Investing and Servicing Segment Property Mortgages	Jun 2018 to Jun 2026	N/A	Various		150,199		124,061			118,163		—		5,898
Ireland Portfolio Mortgage	May 2020	N/A	EURIBOR + 1.69%		483,814		326,558			326,558		—		—
Woodstar Portfolio Mortgages	Jul 2017 to Jan 2026	N/A	3.72% to 7.46% (k)		380,690		267,114			267,114		—		—
Woodstar Portfolio Government Financing	Jun 2017 to Jun 2049	N/A	1.00% to 5.00%		318,501		137,394			137,394		—		—
Term Loan	Apr 2020	N/A	LIBOR + 2.75% (f)		2,937,230		654,886			654,886		—		—
FHLB Advances	Nov 2016	N/A	LIBOR + 0.37%		10,207		9,250			9,250		—		—
				$	8,719,135	$	6,989,601			4,507,395	$	151,955	$	2,330,251
Unamortized premium, net										1,414
Unamortized deferred financing costs										(32,588)
									$	4,476,221

(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.

(d)

Maturity date for borrowings collateralized by loans is January 2017 before extension options and January 2019 assuming the exercise of initial extension options. Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions and not to exceed January 2023.

(e)

The initial maximum facility size of $600.0 million may be increased to $1.0 billion at our option, subject to certain conditions.

(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)

The initial maximum facility size of $450.0 million may be increased to $650.0 million at our option, subject to certain conditions.

(h)

(i)

(j)

The date that is 270 days after the buyer delivers notice to seller, subject to a maximum date of May 2018.

(k)

The Woodstar Portfolio Mortgages carry a weighted average interest rate of 3.99% as of June 30, 2016.

As of June 30, 2016, Wells Fargo Bank, N.A. is our largest creditor through two repurchase facilities (Lender 1 Repo 1 facility and RMBS Repo 1 facility).

Refer to Note 9 of our Condensed Consolidated Financial Statements for further disclosure regarding the terms of our financing arrangements.

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Borrowings under Convertible Senior Notes

The following table is a summary of our unsecured convertible senior notes outstanding as of June 30, 2016 (dollars in thousands):


									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	1.3	years
2018 Notes	$	599,981	4.55	%	6.10	%	46.7513	3/1/2018	1.7	years
2019 Notes	$	341,363	4.00	%	5.35	%	49.4927	1/15/2019	2.5	years

During each of the three and six months ended June 30, 2016 and 2015, the weighted average effective borrowing rate on our convertible senior notes was 5.7%. The effective borrowing rate includes 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 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 under 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 (amounts in thousands):


			Weighted-Average				Explanations
	Quarter-End		Balance During				for Significant
Quarter Ended	Balance		Quarter		Variance		Variances
December 31, 2015	$	4,020,737	$	3,809,666	$	211,071	(a)
March 31, 2016		4,516,008		4,227,953		288,055	(b)
June 30, 2016		4,507,395		4,298,538		208,857	(c)

(a)

Variance primarily due to the following: (i) $139.6 million drawn on the Lender 6 Repo 1 facility in December 2015; and (ii) $100.7 million of Woodstar Portfolio Mortgages in December 2015.

(b)

Variance primarily due to the following: (i) $196.3 million drawn on the Lender 1 Repo 1 facility in March 2016; and (ii) $27.2 million drawn on the CMBS Repo 3 facility in March 2016.

(c)

Variance primarily due to the following: (i) $137.7 million drawn on the CMBS Repo 2 facility in June 2016; and (ii) $85.0 million drawn on the RMBS Repo 1 facility in June 2016.

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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, 2016 (amounts in thousands):


	Scheduled Principal		Scheduled/Projected		Projected/Required		Scheduled Principal
	Repayments on Loans		Principal Repayments		Repayments of		Inflows Net of
	and HTM Securities		on RMBS and CMBS		Financing		Financing Outflows
Third Quarter 2016	$	403,339	$	24,408	$	(154,060)	$	273,687
Fourth Quarter 2016		231,289		57,083		(26,805)		261,567
First Quarter 2017		157,787		82,239		(125,445)		114,581
Second Quarter 2017		253,011		34,361		(317,069)		(29,697)
Total	$	1,045,426	$	198,091	$	(623,379)	$	620,138

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, 2016, we had 100,000,000 shares of preferred stock available for issuance and 261,953,024 shares of common stock available for issuance.

Other Potential Sources of Financing

In the future, we may also use other sources of financing to fund the acquisition of our target assets, including other secured as well as unsecured forms of borrowing and sale of certain investment securities which no longer meet our return requirements.

Repurchases of Equity Securities and Convertible Senior Notes

In September 2014, our board of directors authorized and announced the repurchase of up to $250 million of our outstanding common stock over a period of one year. Subsequent amendments to the repurchase program approved by our board of directors in December 2014, June 2015 and January 2016 resulted in the program being (i) amended to increase maximum repurchases to $500 million, (ii) expanded to allow for the repurchase of our outstanding convertible senior notes under the program and (iii) extended through January 2017. Purchases made pursuant to the program are made in either the open market or in privately negotiated transactions from time to time as permitted by federal securities laws and other legal requirements. The timing, manner, price and amount of any repurchases are discretionary and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. The program may be suspended or discontinued at any time. During the three months ended June 30, 2016, we did not repurchase any common stock or convertible senior notes under the repurchase program. During the six months ended June 30, 2016, we repurchased $19.7 million of common stock and no convertible senior notes under the repurchase program. As of June 30, 2016, we have $282.1 million of remaining capacity to repurchase common stock and/or convertible senior notes under the repurchase program.

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Off-Balance Sheet Arrangements

We have relationships with unconsolidated entities and financial partnerships, such as entities often referred to as VIEs. Our maximum risk of loss associated with our involvement in VIEs is limited to the carrying value of our investment in the entity and any unfunded capital commitments. Refer to Note 14 of our Condensed Consolidated Financial Statements for further discussion.

Dividends

We intend to continue to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We intend to continue to pay regular quarterly dividends to our stockholders in an amount approximating our net taxable income, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. Refer to our Form 10-K for a detailed dividend history.

The Company’s board of directors declared the following dividends during the six months ended June 30, 2016:


Declare Date	Record Date	Payment Date	Amount		Frequency
5/9/16	6/30/16	7/15/16	$	0.48	Quarterly
2/25/16	3/31/16	4/15/16	$	0.48	Quarterly

Leverage Policies

Our strategies with regards to use of leverage have not changed significantly since December 31, 2015. Refer to our Form 10-K for a description of our strategies regarding use of leverage.

Contractual Obligations and Commitments

Contractual obligations as of June 30, 2016 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)	$	4,507,395	$	623,379	$	1,954,324	$	1,417,998	$	511,694
Convertible senior notes		1,372,594		—		1,372,594		—		—
Secured borrowings on transferred loans (b)		104,954		35,000		69,954		—		—
Loan funding commitments (c)		1,392,339		872,255		502,981		17,103		—
Future lease commitments		32,161		7,106		13,638		11,417		—
Total	$	7,409,443	$	1,537,740	$	3,913,491	$	1,446,518	$	511,694

(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 $276.7 million of loan funding commitments in which management projects the Company will not be obligated to fund in the future due to repayments made by the borrower either earlier than, or in excess of, expectations. In addition, this amount excludes any funding commitments which may be required pursuant to Company guarantees. In limited instances, specifically with loans involving multiple construction lenders, the

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Company has guaranteed the future funding obligations of certain third party lenders in the event that such third parties fail to fund their proportionate share of the obligation in a timely manner. We are currently unaware of any circumstances which would require us to make payments under any of these guarantees and, as a result, have not included any such amounts in the above table.

The table above does not include interest payable, amounts due under our management agreement or amounts due under our 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, 2015.

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, 2015. 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, 2016 and December 31, 2015 (dollars in thousands):


	Face Value of		Aggregate Notional Value of		Number of
	Loans Held-for-Sale		Credit Index Instruments		Credit Index Instruments
June 30, 2016	$	235,296	$	36,000	9
December 31, 2015	$	203,710	$	40,000	11

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.

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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 derivatives of the same duration. The following table presents financial instruments where we have utilized interest rate derivatives to hedge interest rate risk and the related interest rate derivatives as of June 30, 2016 and December 31, 2015 (dollars 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, 2016
Loans held-for-investment	$	8,000	$	8,000	1
Loans held-for-sale		235,296		210,400	53
RMBS, available-for-sale		408,521		74,000	3
Secured financing agreements		520,844		515,066	13
	$	1,172,661	$	807,466	70
Instrument hedged as of December 31, 2015
Loans held-for-investment	$	8,000	$	8,000	1
Loans held-for-sale		203,710		162,700	27
RMBS, available-for-sale		233,976		74,000	3
Secured financing agreements		518,505		519,142	14
	$	964,191	$	763,842	45

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 decreases in LIBOR and adjusted for the effects of our interest rate hedging activities (amounts in thousands, except per share data):


	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	$	5,626,354	$	183,125	$	120,016	$	58,139	$	(16,286)
Interest expense from variable-rate debt		(4,028,663)		(120,861)		(80,574)		(40,287)		18,796
Net investment income from variable rate instruments	$	1,597,691	$	62,264	$	39,442	$	17,852	$	2,510
Impact per diluted average shares outstanding			$	0.26	$	0.17	$	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.

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The following table represents our current currency hedge exposure as it relates to our investments denominated in foreign currencies, along with the aggregate notional amount of the hedges in place (amounts in thousands except for number of contracts, using the June 30, 2016 GBP closing rate of 1.3306, Euro (“EUR”) closing rate of 1.1107, Swedish Krona (“SEK”) closing rate of 0.1182, Norwegian Krone (“NOK”) closing rate of 0.1196 and Danish Krone (“DKK”) closing rate of 0.1494):


Carrying Value of Net Investment		Local Currency	Number of Foreign Exchange Contracts		Aggregate Notional Value of Hedges Applied		Expiration Range of Contracts
$	69,693	GBP	19		$	74,837	January 2017 – March 2017
	86,724	GBP	16			101,867	January 2018
	5,060	GBP	36			8,072	July 2016 – June 2019
	5,618	EUR, DKK, NOK, SEK	12			7,419	December 2016
	1,757	GBP	2			2,269	June 2017 – March 2018
	161,633	EUR	49	(1)		274,276	July 2016 – June 2020
	12,861	GBP	8			13,651	July 2016 – January 2018
	61,351	EUR	23			62,806	October 2016
	18,531	EUR	10			24,849	August 2016 – November 2018
	27,540	EUR	10			37,164	September 2016 – December 2018
$	450,768		185		$	607,210

(1)

These foreign exchange contracts hedge our Euro currency exposure created by our acquisition of the Ireland Portfolio.

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 our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

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, 2016 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.

Except as set forth below, there have been no material changes to the risk factors previously disclosed in the Form 10-K.

Risks Related to Our Investments

The United Kingdom’s pending departure from the European Union could have a material adverse effect on us.

The United Kingdom held a referendum on June 23, 2016 in which a majority of voters voted to exit the European Union (“Brexit”), which has created significant volatility in the global financial markets and has adversely affected markets in the United Kingdom in particular. Negotiations are expected to commence to determine the future terms of the United Kingdom’s relationship with the European Union, including, among other things, the terms of trade between the United Kingdom and the European Union. The effects of the United Kingdom’s withdrawal from the European Union will depend on agreements the United Kingdom makes to retain access to European Union markets either during a transitional period or more permanently. Brexit is likely to continue to adversely affect the United Kingdom, European and worldwide economic and market conditions and could contribute to greater instability in global financial and foreign exchange markets before and after the terms of the United Kingdom’s future relationships with the European Union are settled. Further, financial and other markets may suffer losses as a result of other countries determining to withdraw from the European Union or from any future significant changes to the European Union’s structure and/or regulations. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the United Kingdom determines which European Union laws to replace or replicate.

We currently hold, and may acquire additional, investments that are denominated in Pounds Sterling and Euros (including loans secured by assets located in the United Kingdom or Europe), as well as equity interests in real estate properties located in Europe. We also own a servicing business in Europe and maintain offices in the United Kingdom. Any of the effects of Brexit described above, and others we cannot anticipate, could have a material adverse effect on our business, the value of our properties and investments and our potential growth in Europe, and could amplify the currency risks faced by us.

Government housing regulations may limit the opportunities at the affordable housing communities in which we invest, and failure to comply with resident qualification requirements may result in financial penalties or loss of benefits.

We own, and may acquire additional, equity interests in affordable housing communities and other properties that benefit from governmental programs intended to provide housing to individuals with low or moderate incomes. These programs, which are typically administered by the U.S. Department of Housing and Urban Development (HUD) or state housing finance agencies, typically provide mortgage insurance, favorable financing terms, tax credits or rental assistance payments to property owners. As a condition of the receipt of assistance under these programs, the properties must comply with various requirements, which typically limit rents to pre-approved amounts and impose restrictions on resident incomes. Failure to comply with these requirements and restrictions may result in financial penalties or loss of benefits. In addition, we will typically need to obtain the approval of HUD in order to acquire or dispose of a significant interest in or manage a HUD-assisted property. We may not always receive such approval.

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

There were no unregistered sales of securities during the three months ended June 30, 2016.

Issuer Purchases of Equity Securities

There were no purchases of common stock during the three months ended June 30, 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, 2016	By:	/s/ BARRY S. STERNLICHT
		Barry S. Sternlicht Chief Executive Officer Principal Executive Officer

Date: August 4, 2016	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
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