Loans

12 Months Ended

Dec. 31, 2011

4. Loans

Our investments in loans held-for-investment are accounted for at amortized cost and the loans held-for-sale are accounted for at the lower of cost or fair value, unless we elect to record such loans at fair value. The following table summarizes our investments in loans by subordination class as of December 31, 2011 and December 31, 2010 (amounts in thousands):

December 31, 2011	Carrying Value		Face Amount

First mortgages	$	1,202,611	$	1,248,549	6.6	%	3.2
Subordinated mortgages(1)		437,163		487,175	7.4	%	4.1
Mezzanine loans		628,825		642,831	8.4	%	3.0

Total loans held for investment		2,268,599		2,378,555
First mortgages held for sale at fair value		128,593		122,833	5.9	%	8.9
Loans held in securitization trust		50,316		50,632	5.0	%	3.7

Total Loans	$	2,447,508	$	2,552,020

December 31, 2010	Carrying Value		Face Amount

First mortgages	$	757,684	$	797,154	6.9	%	3.3
Subordinated mortgages(1)		406,410		465,929	6.6	%	4.9
Mezzanine loans		66,689		67,883	10.8	%	4.8

Total loans held for investment		1,230,783		1,330,966
First mortgages held for sale at fair value		144,163		143,901	5.7	%	4.9
Loans held in securitization trust		50,297		50,738	5.0	%	4.2

Total Loans	$	1,425,243	$	1,525,605

(1): Subordinated mortgages include (i) subordinated mortgages that we retain after having sold first mortgage positions related to the same collateral, (ii) B-Notes, and (iii) subordinated loan participations.
(2): Represents the WAL of each respective group of loans. The WAL of each individual loan is calculated as a fraction, the numerator of which is the sum of the timing (in years) of each expected future principal payment multiplied by the balance of the respective payment, and with a denominator equal to the sum of the expected principal payments. This calculation was made as of December 31, 2011. Assumptions for the calculation of the WAL are adjusted as necessary for changes in projected principal repayments and/or maturity dates of the loan.

As of December 31, 2011, approximately $1.1 billion, or 45.2% of the loans are variable rate and pay interest at LIBOR plus a weighted-average spread of 4.33%. Of the approximately $1.1 billion of floating rate loans, $264.0 million pay interest using one-month LIBOR (0.2953%), $143.4 million pay interest using three-month LIBOR (0.5810%), $134.0 million pay interest using one-month Citibank LIBOR (0.2700%), $7.1 million pay interest using three-month Citibank LIBOR (0.5600%), $6.0 million pay interest using six-month Citibank LIBOR (0.7800%), and $551.3 million pay interest using a LIBOR floor (0.5%-2.0%). As of December 31, 2010, approximately $332.7 million, or 23.3% of the loans are variable rate and pay interest at LIBOR plus a weighted-average spread of 2.3%. Of the approximately $332.7 million of floating rate loans, $211.5 million pay interest using one-month LIBOR (0.2606%) and $121.2 million pay interest using three-month LIBOR (0.3028%).

As described in Note 2, we evaluate each of our loans for impairment at least quarterly. 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 of 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 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.

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

Rating		Characteristics

1		• Sponsor capability and financial condition—Sponsor is highly rated or investment grade or, if private, the equivalent thereof with significant management experience.
		• Loan collateral and performance relative to underwriting—The collateral has surpassed underwritten expectations.
		• Quality and stability of collateral cash flows—Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.
		• Loan structure—Loan-to-collateral value ratio ("LTV") does not exceed 65%. The loan has structural features that enhance the credit profile.
2		• Sponsor capability and financial condition—Strong sponsorship with experienced management team and a responsibly leveraged portfolio.
		• Loan collateral and performance relative to underwriting—Collateral performance equals or exceeds underwritten expectations and covenants and performance criteria are being met or exceeded.
		• Quality and stability of collateral cash flows—Occupancy is stabilized with a diverse tenant mix.
		• Loan structure—LTV does not exceed 70% and unique property risks are mitigated by structural features.
3		• Sponsor capability and financial condition—Sponsor has historically met its credit obligations, routinely pays off loans at maturity, and has a capable management team.
		• Loan collateral and performance relative to underwriting—Property performance is consistent with underwritten expectations.
		• Quality and stability of collateral cash flows—Occupancy is stabilized, near stabilized, or is on track with underwriting.
		• Loan structure—LTV does not exceed 80%.
4		• Sponsor capability and financial condition—Sponsor credit history includes missed payments, past due payment, and maturity extensions. Management team is capable but thin.
		• Loan collateral and performance relative to underwriting—Property performance lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers. A sale of the property may be necessary in order for the borrower to pay off the loan at maturity.
		• Quality and stability of collateral cash flows—Occupancy is not stabilized and the property has a large amount of rollover.
		• Loan structure—LTV is 80% to 90%.
5		• Sponsor capability and financial condition—Credit history includes defaults, deeds-in-lieu, foreclosures, and/or bankruptcies.
		• Loan collateral and performance relative to underwriting—Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Sale proceeds would not be sufficient to pay off the loan at maturity.
		• Quality and stability of collateral cash flows—The property has material vacancy and significant rollover of remaining tenants.
		• Loan structure—LTV exceeds 90%.

As of December 31, 2011, the risk ratings by class of loan were as follows (amounts in thousands):

	Balance Sheet Classification

	Loans Held for Investment						Loans Held for Sale
Risk Rating Category	First Mortgages		Subordinated Mortgages		Mezzanine Loans		First Mortgages		Loans held in Securitization Trust		Total
1	$	—	$	—	$	—	$	—	$	—	$	—
2		108,900		131,281		139,167		89,760		13,193		482,301
3		1,054,717		251,788		481,982		38,833		37,123		1,864,443
4		38,994		54,094		7,676		—		—		100,764
5		—		—		—		—		—		—

	$	1,202,611	$	437,163	$	628,825	$	128,593	$	50,316	$	2,447,508

After completing our analysis of each loan, including the resulting risk ratings as described above, we concluded that no allowance for loan losses was necessary as of December 31, 2011 or December 31, 2010.

For the year ended December 31, 2011, the activity in our loan portfolio (including loans held-for-sale) was as follows (amounts in thousands):


Balance December 31, 2010	$	1,425,243
Acquisitions/originations		1,782,964
Additional funding		45,792
Capitalized interest(1)		7,485
Basis of loans sold		(331,312	)
Loan maturities		(305,316	)
Transfer out—loan converted to a security		(176,635	)
Principal repayments		(26,933	)
Discount accretion /premium amortization		26,966
Unrealized foreign currency remeasurement loss		(6,506	)
Unrealized gains on loans held for sale at fair value		5,760

Balance December 31, 2011,	$	2,447,508

(1): Represents accrued interest income on loans whose terms do not require current payment of interest.

As disclosed above, we acquired or originated $1.8 billion in loans for the year ended December 31, 2011, which included (i) a $165.5 million origination of a first mortgage loan, mezzanine loan and corporate loan on a portfolio of six full service hotels located throughout California; (ii) an acquisition of 90% interest in a $188 million (face amount) mezzanine loan collateralized by an ownership interest in a portfolio of ten office buildings in Northern Virginia for $156.5 million; (iii) an acquisition of a $137.8 million (face amount) mezzanine loan tranche collateralized by ownership interests in 28 hotels located throughout the U.S. for $127.1 million; (iv) an origination of a $175.0 million first mortgage collateralized by a furniture showroom located in North Carolina; (v) an origination of a $60.5 million first mortgage loan secured by two retail centers in Pennsylvania; (vi) an origination of a $34.5 million first mortgage loan secured by a multi-family apartment property located in Virginia; (vii) a discounted acquisition from a top tier international bank of a portfolio of 26 separate commercial mortgage loans with a face value of $333 million; and (viii) an acquisition of a $185 million A-note secured by a portfolio of 143 limited service hotels.

For the year ended December 31, 2010, the activity in our loan portfolio was as follows (amounts in thousands):


Balance December 31, 2009	$	214,521
Acquisitions/originations		1,352,253
Capitalized interest(1)		3,323
Carrying amount of loans sold		(28,911	)
Loan maturities		(114,717	)
Principal repayments		(13,642	)
Discount/premium amortization		6,339
Unrealized foreign currency remeasurement gain		6,077

Balance December 31, 2010	$	1,425,243

(1): Represents accrued interest income on loans whose terms do not require current payment of interest.

From Inception through December 31, 2009, the activity in our loan portfolio was as follows (amounts in thousands):


Balance at Inception	$	—
Originations/acquisitions		215,048
Additional fundings(1)		305
Principal pay downs		(1,150	)
Discount/premium amortization		318
Provision for credit losses		—

Balance December 31, 2009	$	214,521

(1): Represents accrued interest income on loans whose terms do not require current payment of interest.