6. Investment Securities

Investment securities are comprised of the following as of September 30, 2013 and December 31, 2012, (amounts in thousands):

	September 30, 2013 Carrying Value		December 31, 2012 Carrying Value
CMBS	$	112,436	$	529,434
CMBS, fair value option (1)	85,710		—
RMBS	316,261		333,153
Held-to-maturity (“HTM”) Securities	37,370		—
Equity Securities	15,016		21,667
Total	$	566,793	$	884,254

(1) We also had $324.4 million of fair value option CMBS that are eliminated in consolidation against VIE liabilities pursuant to ASC 810.

During the three and nine months ended September 30, 2013, purchases, sales and principal collections for all investment securities were as follows (amounts in thousands):

Three months ended September 30, 2013	Equity Securities		HTM Security		RMBS			CMBS			CMBS, fair value option		Total
Purchases	$	—	$	—	$	—		$	1,889		$	21,982	$	23,871
Sales	—		—		—			(206,972		)	—		(206,972		)
Principal collections	—		—		(14,124		)	(2,546		)	—		(16,670		)

On September 16, 2013, we sold a CMBS position for proceeds of $206.9 million, resulting in a gain of $6.4 million.

Nine months ended September 30, 2013	Equity Securities			HTM Security		RMBS			CMBS			CMBS, fair value option			Total
Purchases	$	—		$	37,174	$	20,090		$	1,889		$	23,601		$	82,754
Sales	(6,769		)	—		(12,713		)	(413,323		)	(10,072		)	(442,877		)
Principal collections	—			—		(46,762		)	(10,031		)	—			(56,793		)

During the three and nine months ended September 30, 2012, purchases, sales and principal collections for all investment securities were as follows (amounts in thousands):

Three months ended September 30, 2012	RMBS			CMBS			Total
Purchases	$	95,820		$	—		$	95,820
Sales	(9,425		)	(173,461		)	(182,886		)
Principal collections	(18,542		)	(5,874		)	(24,416		)

Nine months ended September 30, 2012	RMBS			CMBS			Total
Purchases	$	203,438		$	372,252		$	575,690
Sales	(26,049		)	(173,461		)	(199,510		)
Principal collections	(52,310		)	(15,142		)	(67,452		)

For the three and nine months ended September 30, 2012, there were no purchases, sales or principal collections on Equity Securities, Held-to-Maturity Securities, or CMBS where the fair value option has been elected.

CMBS, Fair Value Option

As discussed in the Fair Value Option section in Note 2, we elect the fair value option for LNR’s CMBS in an effort to eliminate accounting mismatches resulting from the current or potential consolidation of securitization VIEs. As of September 30, 2013, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, before consolidation of securitization VIEs, were $410.1 million and $2.9 billion, respectively. These balances represent our economic interests in these assets. However, as a result of our consolidation of securitization VIEs, the vast majority of this fair value ($324.4 million at September 30, 2013) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option CMBS. During the three and nine months ended September 30, 2013, we purchased $33.4 million and $116.8 million, respectively, of CMBS for which we elected the fair value option. Due to our consolidation of securitization VIEs, a significant portion of this amount ($11.4 million and $93.2 million during the three and nine months ended September 30, 2013, respectively) is reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows.

As of September 30, 2013, none of our CMBS where we have elected the fair value option are variable rate. The table below summarizes various attributes of our investment in fair value option CMBS as of September 30, 2013 (amounts in thousands):

September 30, 2013		Weighted Average Coupon		Weighted Average Rating		Weighted Average Life (“WAL”) (Years)(1)
CMBS, fair value option		5.6	%	D	(2)	3.4

(1) The WAL of each security is calculated based on the period of time over which we expect to receive principal cash flows. Expected principal cash flows are based on contractual payments net of expected losses.

(2) Includes $56.1 million in fair value option CMBS that are not rated. The remaining $29.6 million in fair value option CMBS have a weighted average rating of CCC-.

CMBS and RMBS

The Company classified all of its CMBS and RMBS investments where the fair value option has not been elected as available-for-sale as of September 30, 2013 and December 31, 2012. Theses CMBS and RMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (loss).

The tables below summarize various attributes of our investments in available-for-sale CMBS and RMBS where the fair value option has not been elected as of September 30, 2013 and December 31, 2012, (amounts in thousands):

								Unrealized Gains or (Losses) Recognized in Accumulated Other Comprehensive Income
September 30, 2013	Purchase Amortized Cost		Credit OTTI			Recorded Amortized Cost		Non-Credit OTTI			Unrealized Gains		Unrealized Losses			Net Fair Value Adjustment		Fair Value
CMBS	$	99,081	$	—		$	99,081	$	—		$	13,355	$	—		$	13,355	$	112,436
RMBS	273,836		(10,573		)	263,263		(34		)	56,390		(3,358		)	52,998		316,261
Total	$	372,917	$	(10,573	)	$	362,344	$	(34	)	$	69,745	$	(3,358	)	$	66,353	$	428,697

September 30, 2013	Weighted Average Coupon(1)		Weighted Average Rating	Weighted Average Life (“WAL”) (Years)(2)
CMBS	11.5	%	BB+	6.0
RMBS	1.0	%	CCC	5.9

(1) Calculated using the one-month LIBOR rate as of September 30, 2013 of 0.17885% for variable rate securities.

(2) Represents the WAL of each respective group of MBS. The WAL of each individual security 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 the denominator equal to the sum of the expected principal payments using the contractually extended maturity dates of the assets. This calculation was made as of September 30, 2013. Assumptions for the calculation of the WAL are adjusted as necessary for changes in projected principal repayments and/or maturity dates of the security.

								Unrealized Gains or (Losses) Recognized in Accumulated Other Comprehensive Income
December 31, 2012	Purchase Amortized Cost		Credit OTTI			Recorded Amortized Cost		Non-Credit OTTI		Unrealized Gains		Unrealized Losses			Net Fair Value Adjustment		Fair Value
CMBS	$	498,064	$	—		$	498,064	$	—	$	31,370	$	—		$	31,370	$	529,434
RMBS	293,321		(10,194		)	283,127		—		50,717		(691		)	50,026		333,153
Total	$	791,385	$	(10,194	)	$	781,191	$	—	$	82,087	$	(691	)	$	81,396	$	862,587

December 31, 2012	Weighted Average Coupon(1)		Weighted Average Rating		Weighted Average Life (“WAL”) (Years)(3)
CMBS	4.3	%	BB+	(2)	3.3
RMBS	1.1	%	CCC+		5.4

(1) Calculated using the December 31, 2012 one-month LIBOR rate of 0.2087% for floating rate securities.

(2) Approximately 20.4% of the CMBS securities are rated BB+. The remaining 79.6% 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 not rated but the loan-to-value ratio was estimated to be in the range of 39%-44% at December 31, 2012.

(3) Represents the WAL of each respective group of MBS. The WAL of each individual security or 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 using the contractually extended maturity dates of the assets. This calculation was made as of December 31, 2012. Assumptions for the calculation of the WAL are adjusted as necessary for changes in projected principal repayments and/or maturity dates of the security.

As of September 30, 2013, 1.5% of the CMBS where we have not elected the fair value option are variable rate. As of December 31, 2012, 79.6% of our CMBS are variable rate and paid interest at LIBOR plus a weighted average spread of 2.3%. As of September 30, 2013, approximately $275.4 million, or 87.1%, of the RMBS are variable rate and pay interest at LIBOR plus a weighted average spread of 0.37%. As of December 31, 2012, approximately $281.2 million, or 84.4%, of the RMBS were variable rate and pay interest at LIBOR plus a weighted average spread of 0.38%. 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 contains a reconciliation of aggregate principal balance to amortized cost for our CMBS and RMBS as of September 30, 2013 and December 31, 2012, excluding CMBS where we have elected the fair value option (amounts in thousands):

	September 30, 2013					December 31, 2012
	CMBS		RMBS			CMBS			RMBS
Principal balance	$	99,081	$	452,868		$	519,575		$	489,218
Accretable yield	—		(110,265		)	(21,511		)	(108,486		)
Non-accretable difference	—		(79,340		)	—			(97,605		)
Total discount	—		(189,605		)	(21,511		)	(206,091		)
Amortized cost	$	99,081	$	263,263		$	498,064		$	283,127

The principal balance of credit deteriorated RMBS was $350.4 million and $438.0 million as of September 30, 2013 and December 31, 2012, respectively. Accretable yield related to these securities totaled $85.5 million and $93.6 million, as of September 30, 2013 and December 31, 2012, respectively.

The following table discloses the changes to accretable yield and non-accretable difference for our CMBS and RMBS during the three month period ended September 30, 2013, excluding CMBS where we have elected the fair value option (amounts in thousands):

	For the three months ended September 30, 2013
	Accretable Yield						Non-Accretable Difference
	CMBS			RMBS			CMBS		RMBS
Balance as of June 30, 2013	$	7,081		$	107,317		$	—	$	89,306
Accretion of discount	(885		)	(5,940		)	—		—
Principal write-downs	—			—			—		(1,130		)
Purchases	—			—			—		—
Sales	(6,196		)	—			—		—
OTTI	—			52			—		—
Transfer to/from non-accretable difference	—			8,836			—		(8,836		)
Balance as of September 30, 2013	$	—		$	110,265		$	—	$	79,340

The following table discloses the changes to accretable yield and non-accretable difference for our CMBS and RMBS during the nine month period ended September 30, 2013, excluding CMBS where we have elected the fair value option (amounts in thousands):

	For the nine months ended September 30, 2013
	Accretable Yield						Non-Accretable Difference
	CMBS			RMBS			CMBS		RMBS
Balance as of December 31, 2012	$	21,511		$	108,486		$	—	$	97,605
Accretion of discount	(5,442		)	(17,846		)	—		—
Principal write-downs	—			—			—		(2,133		)
Purchases	—			5,738			—		1,758
Sales	(16,069		)	(2,418		)	—		(2,038		)
OTTI	—			453			—		—
Transfer to/from non-accretable difference	—			15,852			—		(15,852		)
Balance as of September 30, 2013	$	—		$	110,265		$	—	$	79,340

Subject to certain limitations on durations, we have allocated an amount to invest in RMBS that cannot exceed 10% of our total assets excluding LNR VIEs. We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.3 million and $1.7 million for the three and nine months ended September 30, 2013, respectively, which has been recorded as management fees in the accompanying condensed consolidated statements of operations. These costs for the three and nine months ended September 30, 2012 were $0.7 million and $1.5 million, respectively.

The following table presents the gross unrealized losses and estimated fair value of the available-for-sale securities where (i) we have not elected the fair value option, (ii) that were in an unrealized loss position as of September 30, 2013, and (iii) for which OTTIs (full or partial) have not been recognized in earnings (amounts in thousands):

	Estimated Fair Value				Unrealized Losses
As of September 30, 2013	Securities with a loss less than 12 months		Securities with a loss greater than 12 months		Securities with a loss less than 12 months			Securities with a loss greater than 12 months
CMBS	$	—	$	—	$	—		$	—
RMBS	45,304		1,604		(2,874		)	(519		)
Total	45,304		$	1,604	$	(2,874	)	$	(519	)

As of September 30, 2013, there were 11 securities with unrealized losses. After evaluating each security we determined that the impairments on 2 of these securities, totaling $86 thousand, were other-than-temporary. Credit losses represented $52 thousand of this total, which we calculated by comparing (i) the estimated future cash flows of each security discounted at the yield determined as of the initial acquisition date or, if since revised, as of the last date previously revised, to (ii) our amortized cost basis. We further determined that the remaining security was not 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. Significant judgment is used in projecting cash flows for our non-agency RMBS. As a result, actual income and/or impairments could be materially different from what is currently projected and/or reported. For the three months ended September 30, 2012, our aggregate MBS credit losses (as reported in the condensed consolidated statement of operations) were $0.7 million.

The following table presents the gross unrealized losses and estimated fair value of our securities that were in an unrealized loss position as of December 31, 2012 for which OTTIs (full or partial) had not been recognized in earnings (amounts in thousands):

	Estimated Fair Value				Unrealized Losses
As of December 31, 2012	Securities with a loss less than 12 months		Securities with a loss greater than 12 months		Securities with a loss less than 12 months			Securities with a loss greater than 12 months
CMBS	$	—	$	—	$	—		$	—
RMBS	4,096		599		(654		)	(37		)
Total	$	4,096	$	599	$	(654	)	$	(37	)

HTM Securities

In March 2013, we originated a preferred equity interest of $37.2 million in a limited liability company that owns commercial real estate. The preferred equity interest matures in October 2014. Due to this mandatory redemption feature, we have classified this investment as a debt security in accordance with GAAP, and we expect to hold the investment to its maturity. The preferred equity investment is to receive a monthly return on investment at a rate of 1-Month LIBOR plus a spread of 10.0%.

Equity Securities

On December 14, 2012, we acquired 9,140,000 ordinary shares (approximately a 4% interest) in Starwood European Real Estate Finance Limited (“SEREF”), a debt fund that is externally managed by an affiliate of our Manager and is listed on the London Stock Exchange, for approximately $14.7 million. We have elected to report the investment at fair value because the shares are listed on an exchange, which allows us to determine the fair value using a quoted price from an active market, and also due to potential lags in reporting resulting from differences in the respective regulatory requirements. We have not received any distributions from SEREF, and the fair value of the investment remeasured in USD was $15.0 million as of September 30, 2013.