Loans

9 Months Ended

Sep. 30, 2011

Loans

Loans

4. Loans

Our investments in mortgages and 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 mortgages and loans by subordination class as of September 30, 2011 and December 31, 2010 (dollar amounts in 000’s):

September 30, 2011	Carrying Value		Face Amount		Weighted Average Coupon		Weighted Average Life (years)
First mortgages	$	765,198	$	781,829	7.8	%	3.3
Subordinated mortgages (1)	415,636		468,215		6.7	%	4.2
Mezzanine loans	635,213		653,348		8.5	%	3.2
Total loans held for investment	1,816,047		1,903,392
First mortgages held for sale at fair value	121,229		122,954		5.9	%	9.2
Loans held in securitization trust	50,311		50,660		5.0	%	3.7
Total Loans	$	1,987,587	$	2,077,006
December 31, 2010	Carrying Value		Face Amount		Weighted Average Coupon		Weighted Average Life (years)
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 includes (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.

As of September 30, 2011, approximately $797.6 million, or 40.1% of the loans are variable rate and pay interest at LIBOR plus a weighted average spread of 4.73%.  Of the approximately $797.6 million of floating rate loans, $670.3 million pay interest using one-month LIBOR (0.2394%) and $127.3 million pay interest using three-month LIBOR (0.3743%).  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 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 September 30, 2011, the risk ratings by class of loan were as follows (dollar amounts in 000’s):

	Balance Sheet Classification
Risk	Loans Held for Investment						Loans Held for Sale		Loans held in
Rating Category	First Mortgages		Subordinated Mortgages		Mezzanine Loans		First Mortgages		Securitization Trust		Total
1	$	—	$	—	$	—	$	—	$	—	$	—
2	88,436		129,831		138,294		84,295		13,214		454,070
3	642,689		232,202		489,253		36,934		37,097		1,438,175
4	34,073		53,603		7,666		—		—		95,342
5	—		—		—		—		—		—
	$	765,198	$	415,636	$	635,213	$	121,229	$	50,311	$	1,987,587

After reviewing our expected cash flows and risk ratings for each loan as described above, we concluded that no allowance for loan losses was necessary as of September 30, 2011 and December 31, 2010.

For the nine months ended September 30, 2011, we originated and acquired loans (including loans held-for-sale) as follows ($000’s):

Balance December 31, 2010	$	1,425,243
Acquisitions/Origination	1,243,740
Additional funding	44,807
Capitalized Interest	4,404
Loans sold	(288,812		)
Loan maturities	(264,615		)
Transfer out  – loan converted to a security	(176,635		)
Principal repayments	(13,092		)
Discount/premium amortization	18,461
Unrealized foreign currency remeasurement loss	(4,189		)
Unrealized loss on loans held for sale at fair value	(1,725		)
Balance September 30, 2011	$	1,987,587

As disclosed above, we acquired or originated $1.3 billion in loans during the nine months ended September 30, 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; and (v) an origination of a $60.5 million first mortgage loan secured by two retail centers in Pennsylvania.