Debt Securities

9 Months Ended

Sep. 30, 2011

Debt Securities

Debt Securities

3. Debt Securities

We classified all CMBS and RMBS investments as available-for-sale as of September 30, 2011 and December 31, 2010. The CMBS and RMBS classified as available-for-sale are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive (loss) income. The tables below summarize various attributes of our investments in mortgage backed securities available-for-sale as of September 30, 2011 and December 31, 2010 ($000’s):

								Unrealized Gains or (Losses) Recognized in Accumulated Other Comprehensive Income (Loss)
September 30, 2011	Purchase Amortized Cost		Credit OTTI			Recorded Amortized Cost		Non-Credit OTTI			Unrealized Gains		Unrealized Losses			Net Fair Value Adjustment			Fair Value
CMBS	$	192,742	$	—		$	192,742	$	—		$	—	$	(5,035	)	$	(5,035	)	$	187,707
RMBS	166,013		(2,621		)	163,392		$	(435	)	3,345		(1,909		)	1,001			164,393
Total	$	358,755	$	(2,621	)	$	356,134	$	(435	)	$	3,345	$	(6,944	)	$	(4,034	)	$	352,100

September 30, 2011	Weighted Average Coupon(1)		Weighted Average Rating (2)		Weighted Average Life (Years)
CMBS	1.96	%		CCC+	5.3
RMBS	0.87	%		B-	4.2

(1)Generally calculated using the September 30, 2011 one-month LIBOR rate of 0.23944%.

(2)Excludes securities that are not rated, whose aggregate fair value was $177.5 million.  Of this amount, $174.7 million are securities where the obligors are certain special purpose entities that were formed to hold substantially all of the assets of a worldwide operator of hotels, resorts and timeshare properties; the securities are unrated but the loan-to-value ratio was approximately 31% at September 30, 2011.

December 31, 2010	Cost		Unrealized Gains	Unrealized Losses		Net Fair Value Adjustment	Fair Value		Weighted Average Coupon(1)		Weighted Average Rating	Weighted Average Life (Years)
CMBS	$	266,764	9,074	(683	)	8,391	$	275,155	5.6	%	AA-	1.8
RMBS	120,827		2,495	(797	)	1,698	122,525		0.6	%	BB-	1.3
	$	387,591	11,569	(1,480	)	10,089	$	397,680

(1)Calculated using the December 31, 2010 one-month LIBOR rate of 0.2606%.

During the nine-months ended September 30, 2011, the purchases and sales trades executed, as well as the principal payments received, were as follows (000’s):

	RMBS		CMBS
Purchases	$	139,953	$	—
Sales/Maturities	49,951		223,378
Principal payments received	52,607		42,220

In June 2011, we exercised a pre-existing right to convert one of our loans into a CMBS in order to maximize the liquidity of our investment.  We therefore reclassified the loan, which had a carrying amount of $176.6 million, from loans held for investment to mortgage-backed securities, available-for-sale, at fair value and recognized an unrealized gain at the time of $7.9 million.

During the three and nine months ended September 30, 2011, we sold various CMBS positions with aggregate gross proceeds of $0 million and $211.6 million ($74.0 million after repaying related financing), respectively, which generated gains of approximately $0 million and $9.9 million, respectively. Additionally, $0 million and $11.8 million of our CMBS portfolio matured and paid off during the three and nine months ended September 30, 2011.

From Inception through the first two quarters of 2010, a portion of our CMBS portfolio was designated as held-to-maturity. However, during the third quarter of 2010 our investment strategy with respect to these securities changed, and we no longer intended to hold them to maturity. As a result, we reclassified the securities to available-for-sale and recorded an unrealized gain in connection with this reclassification of approximately $10.3 million.

As of September 30, 2011, 100%, of the CMBS are variable rate and pay interest at LIBOR plus a weighted average spread of 1.72%.  As of December 31, 2010, 5.0% of the CMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.30%.

Subject to certain limitations on durations, we have allocated an amount to invest in RMBS that cannot exceed 10% of our total assets. We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.5 million for the nine-months ended September 30, 2011, which has been recorded as an offset to interest income in the accompanying consolidated statement of operations.  As of September 30, 2011, approximately $160.1 million or 97.4% of the RMBS are variable rate and pay interest at LIBOR plus a weighted average spread of 0.45%. As of December 31, 2010, approximately $120.7 million, or 98.5%, of the RMBS were variable rate and pay interest at LIBOR plus a weighted average spread of 0.31%.  We purchased all of the RMBS at a discount that will be accreted into income over the expected remaining life of the security. The majority of the income from this strategy is earned from the accretion of these discounts.

The following table presents the gross unrealized losses and estimated fair value of our securities that are in an unrealized loss position as of September 30, 2011 for which OTTIs (full or partial) have not been recognized in earnings ($000’s):

	Estimated Fair Value				Unrealized Losses
As of September 30, 2011	Securities in a loss less than 12 months		Securities in a loss greater than 12 months		Securities in a loss less than 12 months			Securities in a loss greater than 12 months
CMBS	$	187,707	$	—	$	(5,035	)	$	—
RMBS	101,692		680		(1,790		)	(118		)
Total	$	289,399	$	680	$	(6,825	)	$	(118	)

As of September 30, 2011 there were 33 securities with unrealized losses.  After evaluating each security we determined that the impairments on seven of these securities, which totaled $1.3 million, were other-than-temporary. Credit losses represented $0.9 million of this total, which we calculated by discounting the estimated future cash flows of each security at the yield determined as of the initial acquisition date or, if since revised, as of the last date previously revised.  For the three and nine months ended September 30, 2011, our aggregate MBS credit losses (as reported in the income statement) were $0.9 million and $2.6 million, respectively.  We further determined that none of the 26 remaining securities were other-than-temporarily impaired.  We considered a number of factors in reaching this conclusion, including that we did not intend to sell any individual security, it was not considered more likely than not that we would be forced to sell any individual security prior to recovering our amortized cost, and there were no material credit events that would have caused us to otherwise conclude that we would not recover our cost.  We acquired 12 of these securities during August and September 2011 and no material credit events had occurred from the date of acquisition through September 30, 2011.  For seven securities, we compared the present value of the estimated cash flows as of September 30, 2011 to the present value of the remaining cash flows expected to be collected when we first acquired the securities or, if since revised, as of the last date previously revised; we noted that there had not been an adverse change in the expected cash flows.  The unrealized loss amounts on the remaining seven securities were immaterial individually and in the aggregate.