Debt and Preferred Equity Investments

6 Months Ended

Jun. 30, 2012

Debt and Preferred Equity Investments

Debt and Preferred Equity Investments

5.  Debt and Preferred Equity Investments

During the six months ended June 30, 2012 and 2011, our debt and preferred equity investments (net of discounts) increased approximately $159.1 million and $162.9 million, respectively, due to originations, purchases, accretion of discounts and paid-in-kind interest.  We recorded approximately $162.8 million and $544.3 million in repayments, participations, sales, foreclosures and loan loss reserves during those periods, respectively, which offset the increases in debt and preferred equity investments.

As of June 30, 2012 and December 31, 2011, we held the following debt investments with an aggregate weighted average current yield of approximately 9.53% (amounts in thousands):

Loan Type	June 30, 2012 Senior Financing		June 30, 2012 Carrying Value, Net of Discounts			December 31, 2011 Carrying Value, Net of Discounts			Initial Maturity Date
Other Loan	$	15,000	$	3,500		$	3,500		September 2021
Mortgage/Mezzanine Loan(1)	1,109,000		108,549			108,817			March 2017
Mezzanine Loan	165,000		70,864			40,375			November 2016
Junior Participation	133,000		49,000			49,000			June 2016
Mortgage/ Mezzanine Loan	170,397		46,452			46,416			May 2016
Mezzanine Loan	177,000		16,500			17,112			May 2016
Mezzanine Loan	205,000		65,095			64,973			February 2016
Junior Participation(2)(4)	—		—			8,725			—
Junior Participation(3)(4)	—		—			11,000			—
Total fixed rate	$	1,974,397	$	359,960		$	349,918
Mezzanine Loan(5)	$	81,000	$	34,940		$	34,940		October 2016
Mezzanine Loan	55,000		35,000			35,000			July 2016
Mortgage/ Mezzanine Loan	—		36,700			—			February 2015
Mezzanine Loan	45,000		10,000			10,000			January 2015
Mezzanine Loan	170,000		60,000			60,000			August 2014
Mezzanine Loan	62,500		37,500			—			July 2014
Mezzanine Loan(6)	75,000		7,650			7,650			July 2013
Junior Participation(4)	60,250		10,875			10,875			June 2013
Mortgage(7)	28,500		3,000			3,000			February 2013
Mezzanine Loan(8)	796,693		8,392			8,392			August 2012
Mezzanine Loan(9)	467,000		49,900			30,747			July 2012
Mortgage(10)	—		—			86,339			June 2012
Other Loan	—		—			3,196			—
Total floating rate	$	1,840,943	$	293,957		$	290,139
Total	3,815,340		653,917			640,057
Loan loss reserve(4)	—		(7,000		)	(19,125		)	—
	$	3,815,340	$	646,917		$	620,932

(1)Interest is added to the principal balance for this accrual only loan.

(2)This loan was in default and on non-accrual status.  We sold our interest in the loan in February 2012 and recovered $0.4 million against the reserve on this loan.

(3)In March 2012, we sold our interest in this loan and recovered $2.0 million against the reserve on this loan.

(4)Loan loss reserves are specifically allocated to investments.  Our reserves reflect management’s judgment of the probability and severity of losses based on Level 3 data.  We cannot be certain that our judgment will prove to be correct or that reserves will be adequate over time to protect against potential future losses.

(5)As of June 30, 2012, we were committed to fund an additional $15.0 million in connection with this loan.

(6)In November 2011, we entered into a loan participation agreement in the amount of $7.4 million on a $15.0 million mortgage. Due to our continued involvement with the loan, the portion that was participated out has been recorded in other assets and other liabilities in the accompanying consolidated balance sheet.

(7)In June 2011, we funded an additional $5.5 million and extended the maturity date of this loan to February 2013. In September 2011, we entered into a loan participation in the amount of $28.5 million on a $31.5 million mortgage. We have assigned our right as servicer to a third party. Due to our continued involvement with the loan, the portion that was participated out has been recorded in other assets and other liabilities in the accompanying consolidated balance sheet.

(8)In connection with the extension of this loan, a portion of the mezzanine loan was converted to preferred equity. See note 4 to the next table. In June 2012, we acquired an additional 38.6% participation interest in this mezzanine loan. As a result of this acquisition, we have complete control over this position and can, therefore, control any restructuring. This mezzanine loan is on non-accrual status as of January 2012.

(9)As a result of the acquisition of the remaining 50% interest in November 2011 in the joint venture which held an investment in a debt position on the property located at 450 West 33rd Street, we have reclassified our investment as a debt investment. See Note 6, “Investments in Unconsolidated Joint Ventures”. This investment was repaid in full at maturity.

(10)We hold an 88% interest in the consolidated joint venture that acquired this loan. This investment is denominated in British Pounds. This loan was not repaid on its maturity date and was placed in receivership. The entity that holds the property which served as collateral for our loan position was determined to be a VIE under a reconsideration event and we have been determined to be the primary beneficiary. As a result of this determination, we consolidated the entity and reclassified the investment to assets held for sale on the consolidated balance sheet at June 30, 2012.

Preferred Equity Investments

As of June 30, 2012 and December 31, 2011, we held the following preferred equity investments, with an aggregate weighted average current yield of approximately 11.14% (amounts in thousands):

Type	June 30,  2012 SeniorFinancing		June 30, 2012 Carrying Value, Net of Discounts			December 31, 2011 Carrying Value, Net of Discounts			InitialMandatory Redemption
Preferred equity(1)	$	926,260	$	206,931		$	203,080		July 2016
Preferred equity(1)(2)	56,935		16,042			—			April 2016
Preferred equity(1)(3)(4)	480,000		95,653			141,980			July 2014
Preferred equity(1)(5)	974,673		50,716			51,000			August 2012
Loan loss reserve(6)	—		(34,050		)	(31,050		)	—
	$	2,437,868	$	335,292		$	365,010

(1)The difference between the pay and accrual rates is included as an addition to the principal balance outstanding.

(2)We are committed to fund an additional $10.0 million on this loan. As of June 30, 2012, we had funded $0.8 million of this commitment.

(3)This is a fixed rate investment.

(4)This investment was classified as held for sale at June 30, 2009, but as held-to-maturity for all periods subsequent to June 30, 2009.  The reserve previously taken against this loan is being accreted up to the face amount through the maturity date. In connection with a recapitalization of the investment, our mezzanine loan was converted to preferred equity in 2011. We also made an additional $50.0 million junior preferred equity loan.  This junior preferred equity loan was repaid at par in February 2012.

(5)This investment is on non-accrual status. In connection with the extension of this loan, a portion of the mezzanine loan was converted to preferred equity in 2011. See Note 7 to the prior table. In June 2012, we acquired 100% of the interests in the most senior preferred equity position.

(6)Loan loss reserves are specifically allocated to investments.  Our reserves reflect management’s judgment of the probability and severity of losses based on Level 3 data.  We cannot be certain that our judgment will prove to be correct and that reserves will be adequate over time to protect against potential future losses.

The following table is a rollforward of our total loan loss reserves at June 30, 2012 and December 31, 2011 (in thousands):

	June 30,2012			December 31, 2011
Balance at beginning of year	$	50,175		$	61,361
Expensed	3,000			10,875
Recoveries	(2,436		)	(4,370		)
Charge-offs	(9,689		)	(17,691		)
Balance at end of period	$	41,050		$	50,175

At June 30, 2012 and December 31, 2011, all debt and preferred equity investments, other than as noted above, were performing in accordance with the terms of the loan agreements.

We have determined that we have one portfolio segment of financing receivables at June 30, 2012 and December 31, 2011 comprising commercial real estate, which is primarily recorded in debt and preferred equity investments. Included in other assets is an additional amount of financing receivables totaling approximately $119.9 million at June 30, 2012 and $108.7 million at December 31, 2011. The nonaccrual balance of financing receivables at June 30, 2012 and December 31, 2011 was $25.1 million and $102.6 million, respectively. No financing receivables were 90 days past due at June 30, 2012. The recorded investment for financing receivables past due 90 days associated with two financing receivables was $17.3 million at December 31, 2011. All financing receivables are individually evaluated for impairment.

The following table presents impaired loans, which may include non-accrual loans, as of June 30, 2012 and December 31, 2011, respectively (amounts in thousands):

	June 30, 2012						December 31, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance Allocated		Unpaid Principal Balance		Recorded Investment		Allowance Allocated
With no related allowance recorded:
Commercial real estate	$	—	$	—	$	—	$	106,623	$	83,378	$	—
With an allowance recorded:
Commercial real estate	66,112		61,466		41,050		86,121		81,475		50,175
Total	$	66,112	$	61,466	$	41,050	$	192,744	$	164,853	$	50,175

The following table presents the average recorded investment in impaired loans, which may include non-accrual loans and the related investment and preferred equity income recognized during the three and six months ended June 30, 2012 and 2011, respectively (amounts in thousands):

	Three Months EndedJune 30,2012		Three Months EndedJune 30,2011		Six Months EndedJune 30,2012		Six Months EndedJune 30,2011
Average recorded investment in impaired loans	$	69,932	$	201,991	$	74,935	$	223,376
Investment and preferred equity income recognized	2,333		1,551		3,895		6,361

On an ongoing basis, we monitor the credit quality of our financing receivables based on payment activity. We assess credit quality indicators based on the underlying collateral.