5. Investment Securities

Investment securities were comprised of the following as of March 31, 2016 and December 31, 2015 (amounts in thousands):


	Carrying Value as of
	March 31, 2016		December 31, 2015
RMBS, available-for-sale	$	210,898	$	176,224
CMBS, fair value option (1)		1,012,618		1,038,200
Held-to-maturity (“HTM”) securities		327,831		321,244
Equity security, fair value option		13,911		14,498
Subtotal—Investment securities		1,565,258		1,550,166
VIE eliminations (1)		(915,894)		(825,219)
Total investment securities	$	649,364	$	724,947

(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):


	Available-for-sale				CMBS, fair		HTM		Equity
	RMBS		CMBS		value option		Securities		Security		Total
Three Months Ended March 31, 2016
Purchases	$	41,470	$	—	$	33,173	$	9,694	$	—	$	84,337
Sales		—		—		—		—		—		—
Principal collections		6,811		—		12,303		3,230		—		22,344
Three Months Ended March 31, 2015
Purchases	$	—	$	—	$	8,738	$	58,509	$	—	$	67,247
Sales		—		—		4,713		—		—		4,713
Principal collections		11,487		224		1		25		—		11,737

RMBS, Available-for-Sale

The Company classified all of its RMBS as available-for-sale as of March 31, 2016 and December 31, 2015. These RMBS 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 as of March 31, 2016 and December 31, 2015 (amounts in thousands):


							Unrealized Gains or (Losses)
							Recognized in AOCI
	Purchase				Recorded				Gross		Gross		Net
	Amortized		Credit		Amortized		Non-Credit		Unrealized		Unrealized		Fair Value
	Cost		OTTI		Cost		OTTI		Gains		Losses		Adjustment		Fair Value
March 31, 2016
RMBS	$	187,176	$	(10,185)	$	176,991	$	(335)	$	34,242	$	—	$	33,907	$	210,898
December 31, 2015
RMBS	$	149,102	$	(10,185)	$	138,917	$	(340)	$	37,647	$	—	$	37,307	$	176,224


	Weighted Average Coupon (1)		Weighted Average Rating	WAL (Years) (2)
March 31, 2016
RMBS	1.7	%	CCC+	6.1
December 31, 2015
RMBS	1.3	%	B−	6.2

(1)

Calculated using the March 31, 2016 and December 31, 2015 one-month LIBOR rate of 0.437% and 0.430%, respectively, for floating rate securities.

(2)

Represents the WAL of each respective group of securities as of the respective balance sheet date. The WAL of each individual security is calculated using projected amounts and projected timing of future principal payments.

As of March 31, 2016, approximately $159.4 million, or 75.6%, of our RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.02%. As of December 31, 2015, approximately $122.7 million, or 69.7%, of our RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 0.43%. 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 as of March 31, 2016 and December 31, 2015 (amounts in thousands):


	March 31, 2016		December 31, 2015
Principal balance	$	327,167	$	233,976
Accretable yield		(67,626)		(68,345)
Non-accretable difference		(82,550)		(26,714)
Total discount		(150,176)		(95,059)
Amortized cost	$	176,991	$	138,917

The principal balance of credit deteriorated RMBS was $293.8 million and $199.0 million as of March 31, 2016 and December 31, 2015, respectively. Accretable yield related to these securities totaled $57.4 million and $57.7 million as of March 31, 2016 and December 31, 2015, respectively.

The following table discloses the changes to accretable yield and non-accretable difference for our RMBS during the three months ended March 31, 2016 (amounts in thousands):


			Non-Accretable
Three Months Ended March 31, 2016	Accretable Yield		Difference
Balance as of January 1, 2016	$	68,345	$	26,714
Accretion of discount		(3,415)		—
Principal write-downs		—		(289)
Purchases		(618)		59,439
Sales		—		—
OTTI		—		—
Transfer to/from non-accretable difference		3,314		(3,314)
Balance as of March 31, 2016	$	67,626	$	82,550

Subject to certain limitations on durations, we have allocated an amount to invest in RMBS that cannot exceed 10% of our total assets excluding the Investing and Servicing VIEs. We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.4 million for both the three months ended March 31, 2016 and 2015, 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 any available-for-sale securities that were in an unrealized loss position as of March 31, 2016 and December 31, 2015, and for which OTTIs (full or partial) have not been recognized in earnings (amounts in thousands):


	Estimated Fair Value				Unrealized Losses
	Securities with a		Securities with a		Securities with a		Securities with a
	loss less than		loss greater than		loss less than		loss greater than
	12 months		12 months		12 months		12 months
As of March 31, 2016
RMBS	$	15,466	$	643	$	(191)	$	(144)
As of December 31, 2015
RMBS	$	17,026	$	653	$	(180)	$	(160)

As of March 31, 2016 and December 31, 2015, there were four securities and five securities, respectively, with unrealized losses reflected in the table above. After evaluating these securities and recording adjustments for credit-related OTTI, we concluded that the remaining unrealized losses reflected above were noncredit-related and would be recovered from the securities’ estimated future cash flows. We considered a number of factors in reaching this conclusion, including that we did not intend to sell the securities, it was not considered more likely than not that we would be forced to sell the securities 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 OTTI we record on securities, 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 the Investing and Servicing Segment’s CMBS in an effort to eliminate accounting mismatches resulting from the current or potential consolidation of securitization VIEs. As of March 31, 2016, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, before consolidation of securitization VIEs, were $1.0 billion and $4.6 billion, respectively. The $1.0 billion fair value balance represents our economic interests in these assets. However, as a result of our consolidation of securitization VIEs, the vast majority of this fair value ($915.9 million at March 31, 2016, which includes $120.9 million of CMBS consolidated as a result of our implementation of ASU 2015-02) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option CMBS.

During the three months ended March 31, 2016, we purchased $46.6 million of CMBS, for which we elected the fair value option. Due to our consolidation of securitization VIEs, $13.4 million of this amount is eliminated and reflected primarily as repayment of debt of consolidated VIEs in our condensed consolidated statement of cash flows.

As of March 31, 2016, 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 March 31, 2016 and December 31, 2015 (amounts in thousands):


	Weighted Average Coupon		Weighted Average Rating (1)	WAL (Years) (2)
March 31, 2016
CMBS, fair value option	5.5	%	B−	2.0
December 31, 2015
CMBS, fair value option	3.9	%	CCC+	7.4

(1)

As of March 31, 2016 and December 31, 2015, excludes $8.7 million and $51.3 million, respectively, in fair value option CMBS that are not rated.

(2)

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.

HTM Securities

The table below summarizes unrealized gains and losses of our investments in HTM securities as of March 31, 2016 and December 31, 2015 (amounts in thousands):


	Net Carrying Amount		Gross Unrealized		Gross Unrealized
	(Amortized Cost)		Holding Gains		Holding Losses		Fair Value
March 31, 2016
CMBS	$	308,323	$	29	$	(14,573)	$	293,779
Preferred interests		19,508		1,884		—		21,392
Total	$	327,831	$	1,913	$	(14,573)	$	315,171
December 31, 2015
CMBS	$	301,858	$	257	$	(5,651)	$	296,464
Preferred interests		19,386		—		(595)		18,791
Total	$	321,244	$	257	$	(6,246)	$	315,255

The table below summarizes the maturities of our HTM CMBS and our HTM preferred equity interests in limited liability companies that own commercial real estate as of March 31, 2016 (amounts in thousands):


			Preferred
	CMBS		Interests		Total
Less than one year	$	200,603	$	—	$	200,603
One to three years		107,720		—		107,720
Three to five years		—		—		—
Thereafter		—		19,508		19,508
Total	$	308,323	$	19,508	$	327,831

Equity Security, Fair Value Option

During 2012, we acquired 9,140,000 ordinary shares from a related-party 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 USD was $13.9 million and $14.5 million as of March 31, 2016 and December 31, 2015, respectively. As of March 31, 2016, our shares represent an approximate 3% interest in SEREF.