5. Investment Securities

Investment securities were comprised of the following as of June 30, 2014 and December 31, 2013 (amounts in thousands):

	Carrying Value as of
	June 30, 2014			December 31, 2013
RMBS, available-for-sale	$	231,605		$	296,236
Single-borrower CMBS, available-for-sale	116,071			114,346
CMBS, fair value option (1)	638,069			550,282
Held-to-maturity (“HTM”) securities	370,096			368,318
Equity security, fair value option	16,104			15,247
Subtotal - Investment securities	1,371,945			1,344,429
VIE eliminations (1)	(469,521		)	(409,322		)
Total investment securities	$	902,424		$	935,107

(1) Certain fair value option CMBS are eliminated in consolidation against VIE liabilities pursuant to ASC 810.

Purchases, sales and principal collections for all investment securities were as follows (amounts in thousands):

Three Months ended	Available-for-sale					CMBS, fair		HTM		Equity
June 30, 2014	RMBS			CMBS		value option		Securities		Security		Total
Purchases	$	—		$	—	$	43,563	$	—	$	—	$	43,563
Sales	53,236			—		13,548		—		—		66,784
Principal collections	10,466			421		—		—		—		10,887

June 30, 2013
Purchases	20,090			—		1,618		—		—		21,708
Sales	—			—		10,072		—		—		10,072
Principal collections	15,771			2,627		—		—		—		18,398

Six Months ended
June 30, 2014
Purchases	$	—		$	—	$	53,453	$	—	$	—	$	53,453
Sales	62,546		(1)	—		32,032		—		—		94,578
Principal collections	18,285			829		—		—		—		19,114

June 30, 2013
Purchases	20,090			—		1,618		37,190		—		58,898
Sales	12,712			206,608		10,072		—		6,769		236,161
Principal collections	32,638			7,484		—		—		—		40,122

(1) Settlement of $44.4 million occurred subsequent to June 30, 2014. We account for all investment securities transactions on a trade-date basis.

RMBS and Single-borrower CMBS, Available-for-Sale

With the exception of one CMBS classified as HTM, the Company classified all of its RMBS and CMBS investments where the fair value option has not been elected as available-for-sale as of June 30, 2014 and December 31, 2013. These RMBS and CMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (“AOCI”).

The tables below summarize various attributes of our investments in available-for-sale RMBS and single-borrower CMBS where the fair value option has not been elected as of June 30, 2014 and December 31, 2013 (amounts in thousands):

								Unrealized Gains or (Losses) Recognized in AOCI
	Purchase Amortized Cost		Credit OTTI			Recorded Amortized Cost		Non-Credit OTTI			Gross Unrealized Gains		Gross Unrealized Losses			Net Fair Value Adjustment		Fair Value
June 30, 2014
RMBS	$	193,084	$	(10,322	)	$	182,762	$	(3	)	$	49,529	$	(683	)	$	48,843	$	231,605
Single-borrower CMBS	103,498		—			103,498		—			12,573		—			12,573		116,071
Total	$	296,582	$	(10,322	)	$	286,260	$	(3	)	$	62,102	$	(683	)	$	61,416	$	347,676
December 31, 2013
RMBS	$	253,912	$	(11,134	)	$	242,778	$	(55	)	$	55,154	$	(1,641	)	$	53,458	$	296,236
Single-borrower CMBS	100,687		—			100,687		—			13,659		—			13,659		114,346
Total	$	354,599	$	(11,134	)	$	343,465	$	(55	)	$	68,813	$	(1,641	)	$	67,117	$	410,582

	Weighted Average Coupon(1)		Weighted Average Rating (Standard & Poor’s)		WAL (Years)(3)
June 30, 2014
RMBS	1.0	%	B-		7.4
Single-borrower CMBS	11.6	%	BB+	(2)	3.7
December 31, 2013
RMBS	1.0	%	B-		6.8
Single-borrower CMBS	11.5	%	BB+	(2)	5.9

(1) Calculated using the June 30, 2014 and December 31, 2013 one-month LIBOR rate of 0.155% and 0.168%, respectively, for floating rate securities.

(2) As of June 30, 2014 and December 31, 2013, approximately 99.3% and 98.8%, respectively, of the CMBS securities were rated BB+.

(3) Represents the WAL of each respective group of securities calculated as of the respective balance sheet date. 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. 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 June 30, 2014, $0.9 million, or 0.7%, of the single-borrower CMBS were variable rate. As of December 31, 2013, $1.3 million, or 1.2%, of the single-borrower CMBS were variable rate. As of June 30, 2014, approximately $195.4 million, or 84.3%, of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 0.44%. As of December 31, 2013, approximately $256.1 million, or 86.5%, of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 0.37%. 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 RMBS and single-borrower CMBS as of June 30, 2014 and December 31, 2013, excluding CMBS where we have elected the fair value option (amounts in thousands):

	June 30, 2014					December 31, 2013
	RMBS			CMBS		RMBS			CMBS
Principal balance	$	312,280		$	103,498	$	414,020		$	100,687
Accretable yield	(90,876		)	—		(101,046		)	—
Non-accretable difference	(38,642		)	—		(70,196		)	—
Total discount	(129,518		)	—		(171,242		)	—
Amortized cost	$	182,762		$	103,498	$	242,778		$	100,687

The principal balance of credit deteriorated RMBS was $240.8 million and $320.4 million as of June 30, 2014 and December 31, 2013, respectively. Accretable yield related to these securities totaled $73.5 million and $78.3 million as of June 30, 2014 and December 31, 2013, respectively.

The following table discloses the changes to accretable yield and non-accretable difference for our RMBS and single-borrower CMBS during the three and six months ended June 30, 2014, excluding CMBS where we have elected the fair value option (amounts in thousands):

	Accretable Yield					Non-Accretable Difference
	RMBS			CMBS		RMBS			CMBS
Three Months ended June 30, 2014
Balance as of April 1, 2014	$	99,622		$	—	$	55,432		$	—
Accretion of discount	(3,323		)	—		—			—
Principal write-downs	—			—		(509		)	—
Purchases	—			—		—			—
Sales	(10,276		)	—		(11,428		)	—
OTTI	—			—		—			—
Transfer to/from non-accretable difference	4,853			—		(4,853		)	—
Balance as of June 30, 2014	$	90,876		$	—	$	38,642		$	—
Six Months ended June 30, 2014
Balance as of January 1, 2014	$	101,046		$	—	$	70,196		$	—
Accretion of discount	(9,887		)	—		—			—
Principal write-downs	—			—		(875		)	—
Purchases	—			—		—			—
Sales	(12,238		)	—		(18,937		)	—
OTTI	213			—		—			—
Transfer to/from non-accretable difference	11,742			—		(11,742		)	—
Balance as of June 30, 2014	$	90,876		$	—	$	38,642		$	—

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 $0.5 million and $0.8 million for the three months ended June 30, 2014 and 2013, respectively, and $1.1 million and $1.4 million for the six months ended June 30, 2014 and 2013, respectively, which has been recorded as management fees in the accompanying condensed consolidated statements of operations.

The following table presents the gross unrealized losses and estimated fair value of the available-for-sale securities (i) where we have not elected the fair value option, (ii) that were in an unrealized loss position as of June 30, 2014 and December 31, 2013, and (iii) for which OTTIs (full or partial) have not been recognized in earnings (amounts in thousands):

	Estimated Fair Value				Unrealized Losses
	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
As of June 30, 2014
RMBS	$	16,255	$	1,552	$	(480	)	$	(206	)
Single-borrower CMBS	—		—		—			—
Total	$	16,255	$	1,552	$	(480	)	$	(206	)
As of December 31, 2013
RMBS	$	26,344	$	1,809	$	(1,444	)	$	(252	)
Single-borrower CMBS	—		—		—			—
Total	$	26,344	$	1,809	$	(1,444	)	$	(252	)

As of June 30, 2014, there were three securities with unrealized losses reflected in the table above. After evaluating each security and recording adjustments, as necessary, for other-than-temporary impairments, the remaining unrealized losses reflected above were not considered to represent credit-related other-than-temporary impairments. 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. Credit losses, which represent most of the other-than-temporary impairments we record, are 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. 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.

CMBS, Fair Value Option

As discussed in the “Fair Value Option” section of Note 2 herein, 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 June 30, 2014, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, before consolidation of securitization VIEs, was $638.1 million and $4.1 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 ($469.5 million at June 30, 2014) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option CMBS. During the three and six months ended June 30, 2014, we purchased $107.1 million and $151.7 million of CMBS, respectively, for which we elected the fair value option. Due to our consolidation of securitization VIEs, $63.5 million and $98.3 million, respectively, of these amounts are reflected as repayment of debt of consolidated VIEs in our condensed consolidated statement of cash flows.

As of June 30, 2014 and December 31, 2013, none of our CMBS where we have elected the fair value option were variable rate. The table below summarizes various attributes of our investment in fair value option CMBS as of June 30, 2014 and December 31, 2013 (amounts in thousands):

	Weighted Average Coupon		Weighted Average Rating		WAL (Years)(1)
June 30, 2014
CMBS, fair value option	5.0	%	CCC	(2)	5.3
December 31, 2013
CMBS, fair value option	5.4	%	CC	(2)	4.4

(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) As of June 30, 2014 and December 31, 2013, excludes $27.3 million and $55.5 million, respectively, in fair value option CMBS that are not rated.

HTM Securities

The table below summarizes various attributes of our investments in HTM securities as of June 30, 2014 and December 31, 2013 (amounts in thousands):

	Net Carrying Amount (Amortized Cost)		Gross Unrealized Holding Gains		Gross Unrealized Holding Losses			Fair Value
June 30, 2014
Preferred interests	$	285,946	$	2,083	$	—		$	288,029
CMBS	84,150		—		(576		)	83,574
Total	$	370,096	$	2,083	$	(576	)	$	371,603
December 31, 2013
Preferred interests	$	284,087	$	135	$	—		$	284,222
CMBS	84,231		—		—			84,231
Total	$	368,318	$	135	$	—		$	368,453

During 2013, we originated two preferred equity interests of $246.1 million and $37.2 million, respectively, in limited liability companies that own commercial real estate. These preferred equity interests mature in December 2018 and October 2014, respectively. During 2013, we also purchased a CMBS security with a face value and purchase price of $84.1 million, which we expect to hold to maturity. The stated maturity of this security is November 2016.

Equity Security, Fair Value Option

During 2012, we acquired 9,140,000 ordinary shares from a related-party (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. We have elected to report the investment using the fair value option 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. The fair value of the investment remeasured in U.S. dollars (“USD”) was $16.1 million and $15.2 million as of June 30, 2014 and December 31, 2013, respectively.