5. COMMERCIAL REAL ESTATE INVESTMENTS

On December 11, 2015, the Company originated a $335.0 million recapitalization financing with respect to eight class A/B office properties in Orange County, California.

As of December 31, 2015, such financing is comprised of a $280.0 million senior mortgage loan ($278.6 million, net of origination fees), and mezzanine debt with an initial principal balance of $55.0 million ($52.7 million, net of origination fees) and a future funding component of $30.0 million. The senior loan was held for sale as of December 31, 2015. In April 2016, the Company sold $115.0 million ($114.3 million, net of origination fees) of the senior loan to an unrelated third party at carrying value, accordingly, no gain or loss was recorded in connection with the sale. The balance of the senior loan of $165.0 million ($164.2 million, net of origination fees) remains held for sale as of June 30, 2016.

The following tables present commercial real estate investments held for investment at June 30, 2016 and December 31, 2015.

CRE Debt and Preferred Equity Investments

	June 30, 2016								December 31, 2015
	Outstanding Principal			Carrying Value⁽¹⁾		Percentage of Loan Portfolio⁽²⁾			Outstanding Principal		Carrying Value⁽¹⁾		Percentage of Loan Portfolio⁽²⁾
	(dollars in thousands)
Senior mortgages		$	480,665	$	478,260		42.0	%	$	387,314	$	385,838		28.6	%
Senior securitized mortgages(3)			187,322		187,246		16.4	%		263,072		262,703		19.4	%
Mezzanine loans			466,844		463,507		40.8	%		582,592		578,503		43.0	%
Preferred equity			9,000		8,958		0.8	%		122,444		121,773		9.0	%
Total (4)		$	1,143,831	$	1,137,971		100.0	%	$	1,355,422	$	1,348,817		100.0	%

(1) Carrying value includes unamortized origination fees of $5.9 million and $6.9 million as of June 30, 2016 and December 31, 2015, respectively.
(2) Based on outstanding principal.
(3) Assets of consolidated VIEs.
(4) Excludes Loans held for sale, net.

	June 30, 2016
	Senior Mortgages			Senior Securitized Mortgages⁽¹⁾			Mezzanine Loans			Preferred Equity			Total
	(dollars in thousands)
Beginning balance	$	385,838		$	262,703		$	578,503		$	121,773		$	1,348,817
Originations & advances (principal)		158,502			-			32,363			-			190,865
Principal payments		(65,153	)		(75,750	)		(148,111	)		(113,444	)		(402,458	)
Sales (principal)		-			-			-			-			-
Amortization & accretion of (premium) discounts		(66	)		-			(205	)		-			(271	)
Net (increase) decrease in origination fees		(1,566	)		-			(282	)		-			(1,848	)
Amortization of net origination fees		705			293			1,239			629			2,866
Transfers		-			-			-			-			-
Allowance for loan losses		-			-			-			-			-
Net carrying value ⁽²⁾	$	478,260		$	187,246		$	463,507		$	8,958		$	1,137,971

(1) Assets of consolidated VIE.
(2) Excludes Loans held for sale, net.

	December 31, 2015
	Senior Mortgages			Senior Securitized Mortgages⁽¹⁾			Mezzanine Loans			Preferred Equity			Total
	(dollars in thousands)
Beginning balance	$	383,895		$	398,634		$	522,731		$	212,905		$	1,518,165
Originations & advances (principal)		293,925			-			195,312			-			489,237
Principal payments		(243,270	)		(136,469	)		(153,693	)		(92,210	)		(625,642	)
Sales (principal)		(46,945	)		-			-			-			(46,945	)
Amortization & accretion of (premium) discounts		(142	)		-			(232	)		517			143
Net (increase) decrease in origination fees		(3,702	)		(279	)		(4,806	)		-			(8,787	)
Amortization of net origination fees		2,077			817			691			561			4,146
Transfers		-			-			18,500			-			18,500
Allowance for loan losses		-			-			-			-			-
Net carrying value ⁽²⁾	$	385,838		$	262,703		$	578,503		$	121,773		$	1,348,817

(1) Assets of consolidated VIE.
(2) Excludes Loans held for sale, net.

Internal CRE Debt and Preferred Equity Investment Ratings

The Company’s internal loan risk ratings are based on the guidance provided by the Office of the Comptroller of the Currency for commercial real estate lending. The Company’s internal risk rating categories include “Performing”, “Performing - Closely Monitored”, “Performing - Special Mention”, “Substandard”, “Doubtful” or “Loss”. Performing loans meet all present contractual obligations. Performing - Closely Monitored loans meet all present contractual obligations, are transitional or could be exhibiting some weakness in both leverage and liquidity. Performing - Special Mention loans meet all present contractual obligations, but exhibit potential weakness that deserves management’s close attention and if uncorrected, may result in deterioration of repayment prospects. Substandard loans are inadequately protected by sound worth and paying capacity of the obligor or of the collateral pledged with a distinct possibility that loss will be sustained if some of the deficiencies are not corrected. Doubtful loans are Substandard loans whereby collection of all contractual principal and interest is highly questionable or improbable. Loss loans are considered uncollectible. The presentation of prior period internal risk ratings have been revised to conform to the current period presentation.

The Company did not have any impaired loans, nonaccrual loans, or loans in default as all of the loans were performing as of June 30, 2016 and December 31, 2015. Accordingly, no allowance for loan losses was deemed necessary as of June 30, 2016 and December 31, 2015.

	June 30, 2016
			Percentage of CRE Debt and Preferred Equity Portfolio			Internal Ratings
Investment Type	Outstanding Principal⁽¹⁾		Percentage of CRE Debt and Preferred Equity Portfolio			Performing		Performing - Closely Monitored		Performing - Special Mention		Substandard		Doubtful		Loss		Total
	(dollars in thousands)
Senior mortgages	$	480,665		42.0	%	$	91,620	$	243,605	$	145,440	$	-	$	-	$	-	$	480,665
Senior securitized mortgages⁽²⁾		187,322		16.4	%		58,426		17,500		111,396		-		-		-		187,322
Mezzanine loans		466,844		40.8	%		276,658		153,869		36,317		-		-		-		466,844
Preferred equity		9,000		0.8	%		-		-		9,000		-		-		-		9,000
	$	1,143,831		100.0	%	$	426,704	$	414,974	$	302,153	$	-	$	-	$	-	$	1,143,831

(1) Excludes Loans held for sale, net.
(2) Assets of consolidated VIE.

	December 31, 2015
			Percentage of CRE Debt and Preferred Equity Portfolio			Internal Ratings
Investment Type	Outstanding Principal⁽¹⁾		Percentage of CRE Debt and Preferred Equity Portfolio			Performing		Performing - Closely Monitored		Performing - Special Mention		Substandard		Doubtful		Loss		Total
	(dollars in thousands)
Senior mortgages	$	387,314		28.6	%	$	71,000	$	283,148	$	33,166	$	-	$	-	$	-	$	387,314
Senior securitized mortgages⁽²⁾		263,072		19.4	%		106,770		15,500		140,802		-		-		-		263,072
Mezzanine loans		582,592		43.0	%		342,493		219,969		20,130		-		-		-		582,592
Preferred equity		122,444		9.0	%		-		81,944		40,500		-		-		-		122,444
	$	1,355,422		100.0	%	$	520,263	$	600,561	$	234,598	$	-	$	-	$	-	$	1,355,422

(1) Excludes Loans held for sale, net.
(2) Assets of consolidated VIE.

Investments in Commercial Real Estate

There were no acquisitions of new real estate holdings during the quarter and six months ended June 30, 2016.

The following table summarizes real estate held for investment acquired in 2015:

Date of Acquisition	Type	Location	Original Purchase Price			Remaining Lease Term (Years)⁽¹⁾
(dollars in thousands)

July 2015	Single Tenant Retail	Ohio		$	11,000		4.4
August 2015	Multi Tenant Retail	Florida		$	18,900		4.9
October 2015	Multifamily Property	Washington, DC		$	75,000		0.1
October 2015	Multi Tenant Retail	California		$	37,750		2.8
November 2015	Multi Tenant Retail	Texas		$	131,950		4.6

(1) Does not include extension options.

In the second quarter of 2016, the Company finalized the purchase price allocation of the eleven multi-tenant retail properties portfolio (“Texas Portfolio”) acquired in November 2015 for a total purchase price of $132.0 million and recognized $4.2 million of additional depreciation and amortization as a result. The following presents the aggregate final purchase price allocation of the Texas Portfolio:

	Texas
	(dollars in thousands)
Purchase Price Allocation:
Land	$	32,452
Buildings		82,552
Site improvements		5,446
Tenant Improvements		6,835
Real estate held for investment		127,285

Intangible assets (liabilities):
Leasehold intangible assets		14,598
Above market lease		274
Below market lease		(10,207	)
Total purchase price	$	131,950

The Company sold three non-core properties of the Texas Portfolio in June 2016 for $12.8 million and recognized a gain on sale of $0.8 million.

The weighted average amortization period for intangible assets and liabilities as of June 30, 2016 is 4.6 years.

Above market leases and leasehold intangible assets are included in Intangible assets, net and below market leases are included in Accounts payable and other liabilities in the Consolidated Statements of Financial Condition.

	June 30, 2016			December 31, 2015
	(dollars in thousands)
Real estate held for investment, at amortized cost
Land	$	117,023		$	113,494
Buildings and improvements		355,082			373,603
Subtotal		472,105			487,097
Less: accumulated depreciation		(27,260	)		(16,886	)
Total real estate held for investment, at amortized cost, net		444,845			470,211
Equity in unconsolidated joint ventures		59,760			65,735
Investments in commercial real estate, net	$	504,605		$	535,946

Depreciation expense was $6.1 million and $10.7 million for the quarter and six months ended June 30, 2016, respectively. Depreciation expense was $2.9 million and $5.7 million for the quarter and six months ended June 30, 2015, respectively. Depreciation expense is included in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss).

Rental Income

The minimum rental amounts due under leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse us for certain operating costs. Approximate future minimum rents payments under non-cancelable operating leases in effect at June 30, 2016 for consolidated investments in real estate are as follows:

	June 30, 2016
	(dollars in thousands)
2016 (remaining)	$	17,762
2017		35,242
2018		31,518
2019		27,614
2020		23,401
Later years		58,656
	$	194,193

Mortgage loans payable as of June 30, 2016 and December 31, 2015, were as follows:

June 30, 2016
Property	Mortgage Carrying Value			Mortgage Principal			Interest Rate			Fixed/Floating Rate	Maturity Date	Priority
(dollars in thousands)
Joint Ventures		$	285,804		$	289,125	2.30% to 4.61%			Fixed	2016, 2024 and 2025	First liens
Tennessee			12,244			12,350		4.01	%	Fixed	9/6/2019	First liens
Virginia			11,013			11,025		3.58	%	Fixed	6/6/2019	First liens
Arizona			16,176			16,145		3.50	%	Fixed	1/1/2017	First liens
Nevada			2,406			2,401		3.45	%	Floating⁽¹⁾	3/29/2017	First liens
		$	327,643		$	331,046

(1) Includes a mortgage with a fixed rate via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200).


December 31, 2015
Property	Mortgage Carrying Value			Mortgage Principal			Interest Rate			Fixed/Floating Rate	Maturity Date	Priority
(dollars in thousands)
Joint Ventures		$	292,658		$	296,325	2.30% to 4.61%			Fixed	2016, 2024 and 2025	First liens
Tennessee			12,228			12,350		4.01	%	Fixed	9/6/2019	First liens
Virginia			11,012			11,025		3.58	%	Fixed	6/6/2019	First liens
Arizona			16,365			16,308		3.50	%	Fixed	1/1/2017	First liens
Nevada			2,444			2,436		3.45	%	Floating⁽¹⁾	3/29/2017	First liens
		$	334,707		$	338,444

(1) Includes a mortgage with a fixed rate via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200).

The following table details future mortgage loan principal payments as of June 30, 2016:

	Mortgage Loan Principal Payments
	(dollars in thousands)
2016 (remaining)	$	202
2017		18,344
2018		-
2019		23,375
2020		-
Later years		289,125
	$	331,046

VIEs

Securitization

In January 2014, the Company closed NLY Commercial Mortgage Trust 2014-FL1 (the “Trust”), a $399.5 million securitization financing transaction which provides permanent, non-recourse financing collateralized by floating-rate first mortgage debt investments originated or co-originated by the Company and is not subject to margin calls. A total of $260.7 million of investment grade bonds were issued by the Trust, representing an advance rate of 65.3% at a weighted average coupon of LIBOR plus 1.74% at closing. The Company used the proceeds to originate commercial real estate investments. The Company retained bonds rated below investment grade and the interest-only bond issued by the Trust, which are referred to as the subordinate bonds.

The Company incurred approximately $4.3 million of costs in connection with the securitization that have been capitalized and are being amortized to interest expense. Deferred financing costs are included in Securitized debt of consolidated VIEs in the accompanying Consolidated Statements of Financial Condition.

As of June 30, 2016 the carrying value of the Trust’s assets was $187.2 million, net of $0.1 million of unamortized origination fees, which are included in Commercial real estate debt and preferred equity in the accompanying Consolidated Statements of Financial Condition. As of June 30, 2016, the carrying value of the Trust’s liabilities was $59.3 million, net of $0.1 million of deferred financing costs, classified as Securitized debt of consolidated VIEs in the accompanying Consolidated Statements of Financial Condition.

In February 2015, the Company purchased the junior-most tranche, Class C Certificate of the Freddie Mac securitization, FREMF Mortgage Trust 2015-KLSF (“FREMF 2015-KLSF”) for $102.1 million. The underlying portfolio is a pool of 11 floating rate multifamily mortgage loans with a cut-off principal balance of $1.4 billion. The Company was required to consolidate the FREMF 2015-KLSF Trust’s assets and liabilities of $1.3 billion and $1.2 billion, respectively, at June 30, 2016.

In April 2015, the Company purchased the junior-most tranche, Class C Certificate of the Freddie Mac securitization, FREMF Mortgage Trust 2015-KF07 (“FREMF 2015-KF07”) for $89.4 million. The underlying portfolio is a pool of 40 floating rate multifamily mortgage loans with a cut-off principal balance of $1.2 billion. The Company was required to consolidate the FREMF 2015-KF07 Trust’s assets and liabilities of $1.1 billion and $1.0 billion, respectively, at June 30, 2016.

In February 2016, the Company purchased the junior-most tranche, Class C Certificate of the Freddie Mac securitization, FREM Mortgage Trust 2016-KLH1 (“FREM 2016-KLH1”) for $107.6 million, net of a $4.4 million discount to face value of $112.0 million. The underlying portfolio is a pool of 28 floating rate multifamily mortgage loans with a cut-off principal balance of $1.5 billion. The Company was required to consolidate the FREM 2016-KLH1 Trust’s assets and liabilities of $1.5 billion and $1.4 billion, respectively, at June 30, 2016. FREMF 2015-KLSF, FREMF 2015-KF07 and FREM 2016-KLH1 are collectively referred to herein as the FREMF Trusts.

The FREMF Trusts are structured as pass-through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The FREMF Trusts are VIEs and the Company is considered to be the primary beneficiary as a result of its ability to replace the special servicer without cause through its ownership of the Class C Certificates and its current designation as the directing certificate holder. The Company’s exposure to the obligations of the VIEs is generally limited to the Company’s investment in the FREMF Trusts of $298.2 million at June 30, 2016. Assets of the FREMF Trusts may only be used to settle obligations of the FREMF Trusts. Creditors of the FREMF Trusts have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the FREMF Trusts. No gain or loss was recognized upon initial consolidation of the FREMF Trusts, but $0.2 million and $0.8 million of related costs were expensed during the six months ended June 30, 2016 and the year ended December 31, 2015, respectively. The FREMF Trusts’ assets are included in Commercial real estate debt investments and the FREMF Trusts’ liabilities are included in Securitized debt of consolidated VIEs in the accompanying Consolidated Statements of Financial Condition.

Upon consolidation, the Company elected the fair value option for the financial assets and liabilities of the FREMF Trusts in order to avoid an accounting mismatch, and to more accurately represent the economics of its interest in the entities. The fair value option requires that changes in fair value be reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company has adopted ASU 2014-13 and applied the practical expedient fair value measurement whereby the Company determines whether the fair value of the financial assets or financial liabilities is more observable as a basis for measuring the less observable financial instruments. The Company has determined that the fair value of the financial liabilities of the FREMF Trusts is more observable, since the prices for these liabilities are primarily available from third-party pricing services utilized for multifamily mortgage-backed securities, while the fair value of the individual assets of the trusts are inherently less capable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Given that the Company’s methodology for valuing the financial assets of the FREMF Trusts is an aggregate fair value derived from the fair value of the financial liabilities, the Company has determined that the fair value of each of the financial assets in their entirety should be classified in Level 2 of the fair value measurement hierarchy.

The statement of financial condition of the FREMF Trusts that is reflected in the Company’s Consolidated Statements of Financial Condition at June 30, 2016 and December 31, 2015 are as follows:

	June 30, 2016		December 31, 2015
	(dollars in thousands)
Assets
Senior securitized commercial mortgages carried at fair value	$	3,987,191	$	2,554,023
Accrued interest receivable		8,166		4,994
Total assets	$	3,995,357	$	2,559,017

Liabilities
Securitized debt (non-recourse) at fair value	$	3,688,977	$	2,366,878
Accrued interest payable		4,214		4,183
Total liabilities	$	3,693,191	$	2,371,061

The FREMF Trusts mortgage loans had an unpaid principal balance of $4.0 billion at June 30, 2016. As of June 30, 2016 there are no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the underlying loans or securitized debt securities as of June 30, 2016 based upon the Company’s process of monitoring events of default on the underlying mortgage loans. Interest income and expense is recognized using the effective interest method.

The statement of comprehensive income (loss) of the FREMF Trusts that is reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss) for the quarter and six months ended June 30, 2016 are as follows:

	For the Quarter Ended			For the Six Months Ended
	June 30, 2016			June 30, 2016
	(dollars in thousands)
Net interest income:
Interest income	$	23,794		$	44,824
Interest expense		10,347			18,223
Net interest income		13,447			26,601

Other income (loss):
Unrealized gain (loss) on financial instruments at fair value⁽¹⁾		6,838			6,985
Guarantee fees and servicing costs		(6,791	)		(12,088	)
Other income (loss)		47			(5,103	)
General and administration expenses		-			2
Net income	$	13,494		$	21,496

(1) Included in Net unrealized gains (losses) on financial instruments measured at fair value through earnings.

The geographic concentrations of credit risk exceeding 5% of the total loan unpaid principal balances related to the FREMF Trusts as of June 30, 2016 are as follows:

Securitized Loans at Fair Value Geographic Concentration of Credit Risk
Property Location	Principal Balance		% of Balance
	(dollars in thousands)
Texas	$	749,569		18.8	%
North Carolina		537,375		13.5	%
Maryland		499,495		12.5	%
Florida		456,589		11.4	%
Other		1,751,918		43.8	%
Total	$	3,994,946		100.0	%