6. Investment Securities

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


	Carrying Value as of December 31,
	2016		2015
RMBS, available-for-sale	$	253,915	$	176,224
CMBS, fair value option (1)		990,570		1,038,200
Held-to-maturity (“HTM”) securities		509,980		321,244
Equity security, fair value option		12,177		14,498
Subtotal—Investment securities		1,766,642		1,550,166
VIE eliminations (1)		(959,024)		(825,219)
Total investment securities	$	807,618	$	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
Year Ended December 31, 2016
Purchases (1)	$	98,035	$	—	$	57,576	$	204,730	$	—	$	360,341
Sales (2)		—		—		18,725		—		—		18,725
Principal collections		43,445		—		58,435		6,910		—		108,790
Year Ended December 31, 2015
Purchases (1)	$	—	$	—	$	14,653	$	167,365	$	—	$	182,018
Sales (2)				—		6,410		—		—		6,410
Principal collections		35,244		92,018		8,720		292,587		—		428,569
Year Ended December 31, 2014
Purchases (1)	$	—	$	—	$	120,122	$	69,300	$	—	$	189,422
Sales (2)		68,134		—		32,032		—		—		100,166
Principal collections		53,126		1,121		3		45		—		54,295

(1)

During the years ended December 31, 2016, 2015 and 2014, we purchased $168.0 million, $354.2 million and $264.0 million of CMBS, respectively, for which we elected the fair value option. Due to our consolidation of securitization VIEs, $110.4 million, $339.5 million and $143.9 million, respectively, of this amount is eliminated and reflected as repayment of debt of consolidated VIEs in our consolidated statements of cash flows.

(2)

During the years ended December 31, 2016, 2015 and 2014, we sold $54.4 million, $15.5 million and $121.4 million of CMBS, respectively, for which we had previously elected the fair value option. Due to our consolidation of securitization VIEs, $35.7 million, $9.1 million and $89.4 million, respectively, of this amount is eliminated and reflected as issuance of debt of consolidated VIEs in our consolidated statements of cash flows.

RMBS, Available‑for‑Sale

The Company classified all of its RMBS as available‑for‑sale as of December 31, 2016 and 2015. These RMBS are reported at fair value in the balance sheet with changes in fair value recorded in AOCI.

The tables below summarize various attributes of our investments in available‑for‑sale RMBS as of December 31, 2016 and 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
December 31, 2016
RMBS	$	219,171	$	(10,185)	$	208,986	$	(94)	$	45,113	$	(90)	$	44,929	$	253,915
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)
December 31, 2016
RMBS	2.1	%	B	6.1
December 31, 2015
RMBS	1.3	%	B−	6.2

(1)

Calculated using the December 31, 2016 and 2015 one-month LIBOR rate of 0.772% 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 December 31, 2016, approximately $211.1 million, or 83.2%, of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.22%. As of December 31, 2015, approximately $122.7 million, or 69.7%, of 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 December 31, 2016 and 2015 (amounts in thousands):


	As of December 31,
	2016		2015
Principal balance	$	399,883	$	233,976
Accretable yield		(64,290)		(68,345)
Non-accretable difference		(126,607)		(26,714)
Total discount		(190,897)		(95,059)
Amortized cost	$	208,986	$	138,917

The principal balance of credit deteriorated RMBS was $371.5 million and $199.0 million as of December 31, 2016 and 2015, respectively. Accretable yield related to these securities totaled $55.9 million and $57.7 million as of December 31, 2016 and 2015, respectively.

The following table discloses the changes to accretable yield and non‑accretable difference for our RMBS during the years ended December 31, 2016 and 2015 (amounts in thousands):


			Non-Accretable
	Accretable Yield		Difference
Balance as of January 1, 2015	$	85,495	$	31,752
Accretion of discount		(20,625)		—
Principal write-downs, net		—		(1,563)
Purchases		—		—
Sales		—		—
OTTI		—		—
Transfer to/from non-accretable difference		3,475		(3,475)
Balance as of December 31, 2015		68,345		26,714
Accretion of discount		(15,479)		—
Principal write-downs, net		—		953
Purchases		11,349		99,015
Sales		—		—
OTTI		—		—
Transfer to/from non-accretable difference		75		(75)
Balance as of December 31, 2016	$	64,290	$	126,607

We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $1.8 million, $0.9 million and $1.9 million for the years ended December 31, 2016, 2015 and 2014, respectively, which has been recorded as management fees in the accompanying 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 December 31, 2016 and 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 December 31, 2016
RMBS	$	8,819	$	957	$	(90)	$	(94)
As of December 31, 2015
RMBS	$	17,026	$	653	$	(180)	$	(160)

As of December 31, 2016 and 2015, there were three 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 December 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 $4.5 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 ($959.0 million at December 31, 2016) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option CMBS.

As of December 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 December 31, 2016 and 2015:


	Weighted Average Coupon		Weighted Average Rating (1)	WAL (Years) (2)
December 31, 2016
CMBS, fair value option	5.5	%	C	4.0
December 31, 2015
CMBS, fair value option	3.9	%	CCC+	7.4

(1)

As of December 31, 2016 and 2015, excludes $5.1 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 December 31, 2016 and 2015 (amounts in thousands):


	Net Carrying Amount		Gross Unrealized		Gross Unrealized
	(Amortized Cost)		Holding Gains		Holding Losses		Fair Value
December 31, 2016
CMBS	$	490,107	$	2,106	$	(8,648)	$	483,565
Preferred interests		19,873		727		—		20,600
Total	$	509,980	$	2,833	$	(8,648)	$	504,165
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 December 31, 2016 (amounts in thousands):


			Preferred
	CMBS		Interests		Total
Less than one year	$	209,998	$	—	$	209,998
One to three years		89,927		—		89,927
Three to five years		190,182		—		190,182
Thereafter		—		19,873		19,873
Total	$	490,107	$	19,873	$	509,980

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 $12.2 million and $14.5 million as of December 31, 2016 and 2015, respectively. As of December 31, 2016, our shares represent an approximate 2% interest in SEREF.