4. Loans

Our loans held-for-investment are accounted for at amortized cost and our loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option. The following tables summarize our investments in mortgages and loans by subordination class as of March 31, 2016 and December 31, 2015 (amounts in thousands):


							Weighted
					Weighted		Average Life
	Carrying		Face		Average		(“WAL”)
March 31, 2016	Value		Amount		Coupon		(years)(3)
First mortgages (1)	$	5,030,487	$	5,081,967	5.9	%	2.4
Subordinated mortgages (2)		392,315		414,875	8.5	%	3.2
Mezzanine loans (1)		770,120		754,284	9.9	%	2.3
Total loans held-for-investment		6,192,922		6,251,126
Loans held-for-sale, fair value option elected		154,225		151,970	5.2	%	9.8
Loans transferred as secured borrowings		88,512		89,905	6.1	%	2.2
Total gross loans		6,435,659		6,493,001
Loan loss allowance (loans held-for-investment)		(5,268)		—
Total net loans	$	6,430,391	$	6,493,001

December 31, 2015
First mortgages (1)	$	4,723,852	$	4,776,576	6.0	%	2.7
Subordinated mortgages (2)		392,563		416,713	8.5	%	3.4
Mezzanine loans (1)		862,693		850,024	9.9	%	2.5
Total loans held-for-investment		5,979,108		6,043,313
Loans held-for-sale, fair value option elected		203,865		203,710	4.9	%	9.8
Loans transferred as secured borrowings		86,573		88,000	6.1	%	2.4
Total gross loans		6,269,546		6,335,023
Loan loss allowance (loans held-for-investment)		(6,029)		—
Total net loans	$	6,263,517	$	6,335,023

(1)

First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan. The application of this methodology resulted in mezzanine loans with carrying values of $1.0 billion and $930.0 million being classified as first mortgages as of March 31, 2016 and December 31, 2015, respectively.

(2)

Subordinated mortgages include B-Notes and junior participation in first mortgages where we do not own the senior A-Note or senior participation. If we own both the A-Note and B-Note, we categorize the loan as a first mortgage loan.

(3)

Represents the WAL of each respective group of loans as of the respective balance sheet date. The WAL of each individual loan is calculated using amounts and timing of future principal payments, as projected at origination.

As of March 31, 2016, approximately $5.3 billion, or 84.9%, of our loans held-for-investment were variable rate and paid interest principally at LIBOR plus a weighted-average spread of 5.9%. The following table summarizes our investments in floating rate loans (amounts in thousands):


	March 31, 2016				December 31, 2015
			Carrying				Carrying
Index	Base Rate		Value		Base Rate		Value
One-month LIBOR USD	0.4373	%	$	555,960	0.4295	%	$	438,641
Three-month LIBOR GBP	0.5881	%		366,478	0.5904	%		375,467
LIBOR floor	0.15 - 3.00	% (1)		4,333,422	0.15 - 3.00	% (1)		4,237,947
Total			$	5,255,860			$	5,052,055

(1)

The weighted-average LIBOR floor was 0.32% and 0.31% as of March 31, 2016 and December 31, 2015, respectively.

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 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 generally 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—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 March 31, 2016, the risk ratings for loans subject to our rating system, which excludes loans for which the fair value option has been elected, by class of loan were as follows (amounts in thousands):


	Balance Sheet Classification
	Loans Held-For-Investment										Loans
							Cost				Transferred				% of
Risk Rating	First		Subordinated		Mezzanine		Recovery		Loans Held-		As Secured				Total
Category	Mortgages		Mortgages		Loans		Loans		For-Sale		Borrowings		Total		Loans
1	$	6,533	$	—	$	—	$	—	$	—	$	—	$	6,533	0.1	%
2		477,910		85,363		98,656		—		—		—		661,929	10.3	%
3		4,331,630		286,702		546,746		—		—		88,512		5,253,590	81.6	%
4		206,252		20,250		124,718		—		—		—		351,220	5.5	%
5		—		—		—		—		—		—		—	—	%
N/A		—		—		—		8,162		154,225		—		162,387	2.5	%
	$	5,022,325	$	392,315	$	770,120	$	8,162	$	154,225	$	88,512	$	6,435,659	100.0	%

As of December 31, 2015, the risk ratings for loans subject to our rating system by class of loan were as follows (amounts in thousands):


	Balance Sheet Classification
	Loans Held-For-Investment										Loans
							Cost				Transferred				% of
Risk Rating	First		Subordinated		Mezzanine		Recovery		Loans Held-		As Secured				Total
Category	Mortgages		Mortgages		Loans		Loans		For-Sale		Borrowings		Total		Loans
1	$	664	$	—	$	—	$	—	$	—	$	—	$	664	—	%
2		496,372		88,857		90,449		—		—		—		675,678	10.8	%
3		3,979,247		270,435		651,204		—		—		86,573		4,987,459	79.6	%
4		247,569		33,271		121,040		—		—		—		401,880	6.4	%
5		—		—		—		—		—		—		—	—	%
N/A		—		—		—		—		203,865		—		203,865	3.2	%
	$	4,723,852	$	392,563	$	862,693	$	—	$	203,865	$	86,573	$	6,269,546	100.0	%

After completing our impairment evaluation process, we concluded that no impairment charges were required on any individual loans held-for-investment as of March 31, 2016 or December 31, 2015, as we expect to collect all outstanding principal and interest. During the three months ended March 31, 2016, our Investing and Servicing Segment acquired an $8.2 million non-performing commercial mortgage loan. With the exception of this loan, none of our loans were 90 days or greater past due as of March 31, 2016.

In accordance with our policies, we record an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4,” plus (ii) 5% of the aggregate carrying amount of loans rated as a “5.” The following table presents the activity in our allowance for loan losses (amounts in thousands):


	For the Three Months Ended
	March 31,
	2016		2015
Allowance for loan losses at January 1	$	6,029	$	6,031
Provision for loan losses		(761)		317
Charge-offs		—		—
Recoveries		—		—
Allowance for loan losses at March 31	$	5,268	$	6,348
Recorded investment in loans related to the allowance for loan loss	$	351,220	$	315,881

The activity in our loan portfolio was as follows (amounts in thousands):


	For the Three Months Ended
	March 31,
	2016		2015
Balance at January 1	$	6,263,517	$	6,300,285
Acquisitions/originations/additional funding		674,712		1,063,108
Capitalized interest (1)		21,290		17,490
Basis of loans sold (2)		(354,601)		(567,033)
Loan maturities/principal repayments		(195,073)		(320,379)
Discount accretion/premium amortization		8,696		10,179
Changes in fair value		6,891		21,131
Unrealized foreign currency remeasurement loss		(12,984)		(45,907)
Change in loan loss allowance, net		761		(317)
Transfer to/from other asset classifications		17,182		1,038
Balance at March 31	$	6,430,391	$	6,479,595

(1)

Represents accrued interest income on loans whose terms do not require current payment of interest.

(2)

See Note 11 for additional disclosure on these transactions.