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Table of Contents 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2021

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 001-34436

Starwood Property Trust, Inc.

(Exact name of registrant as specified in its charter)

Maryland

27-0247747

(State or Other Jurisdiction of
Incorporation or Organization)

(I.R.S. Employer
Identification No.)

591 West Putnam Avenue

Greenwich, Connecticut

06830

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s telephone number, including area code:

(203422-7700

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common stock, $0.01 par value per share

STWD

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer 

Accelerated filer 

Non-accelerated filer 

Smaller reporting company 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of April 30, 2021 was 286,985,112.

Table of Contents 

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including without limitation, statements concerning our operations, economic performance and financial condition. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are developed by combining currently available information with our beliefs and assumptions and are generally identified by the words “believe,” “expect,” “anticipate” and other similar expressions. Forward-looking statements do not guarantee future performance, which may be materially different from that expressed in, or implied by, any such statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their respective dates.

These forward-looking statements are based largely on our current beliefs, assumptions and expectations of our future performance taking into account all information currently available to us. These beliefs, assumptions and expectations can change as a result of many possible events or factors, not all of which are known to us or within our control, and which could materially affect actual results, performance or achievements. Factors that may cause actual results to vary from our forward-looking statements include, but are not limited to:

factors described in our Annual Report on Form 10-K for the year ended December 31, 2020 and this Quarterly Report on Form 10-Q, including those set forth under the captions “Risk Factors”, “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations”;

the severity and duration of the pandemic of the novel strain of coronavirus (“COVID-19”), actions that may be taken by governmental authorities to contain the COVID-19 outbreak or to treat its impact and the adverse impacts that the COVID-19 pandemic has had, and will likely continue to have, on the global economy, on the borrowers underlying our real estate-related assets and infrastructure loans and tenants of our owned properties, including their ability to make payments on their loans or to pay rent, as the case may be, and on our operations and financial performance;

defaults by borrowers in paying debt service on outstanding indebtedness;

impairment in the value of real estate property securing our loans or in which we invest;

availability of mortgage origination and acquisition opportunities acceptable to us;

potential mismatches in the timing of asset repayments and the maturity of the associated financing agreements;

our ability to integrate our prior acquisition of the project finance origination, underwriting and capital markets business of GE Capital Global Holdings, LLC into our business and to achieve the benefits that we anticipate from the acquisition;

national and local economic and business conditions, including continued disruption from the COVID-19 pandemic;

general and local commercial and residential real estate property conditions;

changes in federal government policies;

changes in federal, state and local governmental laws and regulations;

increased competition from entities engaged in mortgage lending and securities investing activities;

changes in interest rates; and

2

Table of Contents 

the availability of, and costs associated with, sources of liquidity.

In light of these risks and uncertainties, there can be no assurances that the results referred to in the forward-looking statements contained in this Quarterly Report on Form 10-Q will in fact occur. Except to the extent required by applicable law or regulation, we undertake no obligation to, and expressly disclaim any such obligation to, update or revise any forward-looking statements to reflect changed assumptions, the occurrence of anticipated or unanticipated events, changes to future results over time or otherwise.

3

Table of Contents 

TABLE OF CONTENTS

Page

Part I

Financial Information

Item 1.

Financial Statements

5

Condensed Consolidated Balance Sheets

5

Condensed Consolidated Statements of Operations

6

Condensed Consolidated Statements of Comprehensive Income

7

Condensed Consolidated Statements of Equity

8

Condensed Consolidated Statements of Cash Flows

9

Notes to Condensed Consolidated Financial Statements

11

Note 1 Business and Organization

11

Note 2 Summary of Significant Accounting Policies

12

Note 3 Acquisitions and Divestitures

18

Note 4 Loans

19

Note 5 Investment Securities

24

Note 6 Properties

27

Note 7 Investment in Unconsolidated Entities

29

Note 8 Goodwill and Intangibles

30

Note 9 Secured Borrowings

32

Note 10 Unsecured Senior Notes

35

Note 11 Loan Securitization/Sale Activities

36

Note 12 Derivatives and Hedging Activity

37

Note 13 Offsetting Assets and Liabilities

39

Note 14 Variable Interest Entities

39

Note 15 Related-Party Transactions

41

Note 16 Stockholders’ Equity and Non-Controlling Interests

43

Note 17 Earnings per Share

45

Note 18 Accumulated Other Comprehensive Income

46

Note 19 Fair Value

46

Note 20 Income Taxes

53

Note 21 Commitments and Contingencies

54

Note 22 Segment Data

55

Note 23 Subsequent Events

59

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

60

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

97

Item 4.

Controls and Procedures

99

Part II

Other Information

Item 1.

Legal Proceedings

100

Item 1A.

Risk Factors

100

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

100

Item 3.

Defaults Upon Senior Securities

100

Item 4.

Mine Safety Disclosures

100

Item 5.

Other Information

100

Item 6.

Exhibits

101

4

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited, amounts in thousands, except share data)

As of

As of

March 31, 2021

December 31, 2020

Assets:

Cash and cash equivalents

$

351,190

$

563,217

Restricted cash

 

118,724

 

158,945

Loans held-for-investment, net of credit loss allowances of $72,284 and $77,444 ($150,712 and $90,684 held at fair value)

 

12,321,493

 

11,087,073

Loans held-for-sale ($613,061 and $932,295 held at fair value)

 

844,631

 

1,052,835

Investment securities, net of credit loss allowances of $5,387 and $5,675 ($190,212 and $198,053 held at fair value)

 

678,287

 

736,658

Properties, net

2,244,748

2,271,153

Intangible assets ($12,406 and $13,202 held at fair value)

 

66,772

 

70,117

Investment in unconsolidated entities

 

100,907

 

108,054

Goodwill

 

259,846

 

259,846

Derivative assets

 

38,029

 

40,555

Accrued interest receivable

 

101,713

 

95,980

Other assets

 

208,873

 

190,748

Variable interest entity (“VIE”) assets, at fair value

 

62,367,110

 

64,238,328

Total Assets

$

79,702,323

$

80,873,509

Liabilities and Equity

Liabilities:

Accounts payable, accrued expenses and other liabilities

$

178,215

$

206,845

Related-party payable

 

36,135

 

39,170

Dividends payable

 

138,906

 

137,959

Derivative liabilities

 

34,805

 

41,324

Secured financing agreements, net

 

10,895,932

 

10,146,190

Collateralized loan obligations, net

931,178

930,554

Unsecured senior notes, net

 

1,735,658

 

1,732,520

VIE liabilities, at fair value

 

60,896,709

 

62,776,371

Total Liabilities

 

74,847,538

 

76,010,933

Commitments and contingencies (Note 21)

Equity:

Starwood Property Trust, Inc. Stockholders’ Equity:

Preferred stock, $0.01 per share, 100,000,000 shares authorized, no shares issued and outstanding

 

 

Common stock, $0.01 per share, 500,000,000 shares authorized, 294,300,251 issued and 286,851,560 outstanding as of March 31, 2021 and 292,091,601 issued and 284,642,910 outstanding as of December 31, 2020

 

2,943

 

2,921

Additional paid-in capital

 

5,225,037

 

5,209,739

Treasury stock (7,448,691 shares)

 

(138,022)

 

(138,022)

Accumulated other comprehensive income

 

41,654

 

43,993

Accumulated deficit

 

(654,750)

 

(629,733)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

4,476,862

 

4,488,898

Non-controlling interests in consolidated subsidiaries

 

377,923

 

373,678

Total Equity

 

4,854,785

 

4,862,576

Total Liabilities and Equity

$

79,702,323

$

80,873,509

Note: In addition to the VIE assets and liabilities which are separately presented, our condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 include assets of $1.1 billion and liabilities of $0.9 billion related to a consolidated collateralized loan obligation (“CLO”), which is considered to be a VIE.  The CLO’s assets can only be used to settle obligations of the CLO, and the CLO’s liabilities do not have recourse to Starwood Property Trust, Inc. Refer to Note 14 for additional discussion of VIEs.

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

(Unaudited, amounts in thousands, except per share data)

For the Three Months Ended

March 31,

    

2021

    

2020

Revenues:

Interest income from loans

$

190,575

$

217,427

Interest income from investment securities

 

11,610

 

15,240

Servicing fees

 

8,402

 

4,793

Rental income

76,338

74,146

Other revenues

 

305

 

954

Total revenues

 

287,230

 

312,560

Costs and expenses:

Management fees

 

38,736

 

40,728

Interest expense

 

103,374

 

120,025

General and administrative

 

38,636

 

38,702

Acquisition and investment pursuit costs

 

185

 

909

Costs of rental operations

28,745

28,214

Depreciation and amortization

 

22,474

 

23,980

Credit loss provision, net

 

44

 

48,669

Other expense

 

685

 

388

Total costs and expenses

 

232,879

 

301,615

Other income (loss):

Change in net assets related to consolidated VIEs

 

39,745

 

(45,493)

Change in fair value of servicing rights

 

(796)

 

(393)

Change in fair value of investment securities, net

 

(306)

 

2,504

Change in fair value of mortgage loans, net

 

(9,478)

 

(16,134)

Earnings from unconsolidated entities

 

1,734

 

97

Gain on sale of investments and other assets, net

 

17,693

 

296

Gain on derivative financial instruments, net

 

33,989

 

9,710

Foreign currency loss, net

 

(11,681)

 

(34,486)

Loss on extinguishment of debt

(516)

(170)

Other income, net

 

21

 

126

Total other income (loss)

 

70,405

 

(83,943)

Income (loss) before income taxes

 

124,756

 

(72,998)

Income tax (provision) benefit

 

(2,230)

 

6,729

Net income (loss)

 

122,526

 

(66,269)

Net income attributable to non-controlling interests

 

(11,148)

 

(500)

Net income (loss) attributable to Starwood Property Trust, Inc.

$

111,378

$

(66,769)

Earnings (loss) per share data attributable to Starwood Property Trust, Inc.:

Basic

$

0.39

$

(0.24)

Diluted

$

0.38

$

(0.24)

See notes to condensed consolidated financial statements.

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Table of Contents 

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, amounts in thousands)

For the Three Months Ended

March 31,

    

2021

2020

Net income (loss)

$

122,526

$

(66,269)

Other comprehensive (loss) income (net change by component):

Available-for-sale securities

 

(2,403)

 

(15,048)

Foreign currency translation

 

64

 

Other comprehensive loss

 

(2,339)

 

(15,048)

Comprehensive income (loss)

 

120,187

 

(81,317)

Less: Comprehensive income attributable to non-controlling interests

 

(11,148)

 

(500)

Comprehensive income (loss) attributable to Starwood Property Trust, Inc.

$

109,039

$

(81,817)

See notes to condensed consolidated financial statements.

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Table of Contents 

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

For the Three Months Ended March 31, 2021 and 2020

(Unaudited, amounts in thousands, except share data)

Total

Starwood

Accumulated

Property

Common stock

Additional

Other

Trust, Inc.

Non-

Par

Paid-in

Treasury Stock

Accumulated

Comprehensive

Stockholders’

Controlling

Total

    

Shares

    

Value

    

Capital

    

Shares

    

Amount

    

Deficit

    

Income

    

Equity

    

Interests

    

Equity

Balance, December 31, 2020

 

292,091,601

$

2,921

$

5,209,739

 

7,448,691

$

(138,022)

$

(629,733)

$

43,993

$

4,488,898

$

373,678

$

4,862,576

Cumulative effect of convertible notes accounting standard update adopted January 1, 2021

(3,755)

2,219

(1,536)

(1,536)

Proceeds from DRIP Plan

12,234

262

262

262

Redemption of Class A Units

50,000

1

1,038

1,039

(1,039)

Equity offering costs

(22)

(22)

(22)

Share-based compensation

1,814,414

18

10,292

10,310

10,310

Manager fees paid in stock

 

332,002

3

7,483

7,486

7,486

Net income

 

111,378

111,378

11,148

122,526

Dividends declared, $0.48 per share

 

(138,614)

(138,614)

(138,614)

Other comprehensive loss, net

 

(2,339)

(2,339)

(2,339)

Contributions from non-controlling interests

2,969

2,969

Distributions to non-controlling interests

 

(8,833)

(8,833)

Balance, March 31, 2021

 

294,300,251

$

2,943

$

5,225,037

 

7,448,691

$

(138,022)

$

(654,750)

$

41,654

$

4,476,862

$

377,923

$

4,854,785

Balance, December 31, 2019

 

287,380,891

$

2,874

$

5,132,532

5,180,140

$

(104,194)

$

(381,719)

$

50,932

$

4,700,425

$

436,589

$

5,137,014

Cumulative effect of credit loss accounting standard effective January 1, 2020

(32,286)

(32,286)

(32,286)

Proceeds from DRIP Plan

7,718

153

153

153

Redemption of Class A Units

409,712

4

8,534

8,538

(8,538)

Equity offering costs

(14)

(14)

(14)

Common stock repurchased

 

1,925,421

(28,830)

(28,830)

(28,830)

Share-based compensation

 

1,195,208

12

8,788

8,800

 

8,800

Manager fees paid in stock

 

355,910

4

9,076

9,080

 

9,080

Net loss

 

(66,769)

(66,769)

500

 

(66,269)

Dividends declared, $0.48 per share

 

(135,991)

(135,991)

 

(135,991)

Other comprehensive loss, net

 

(15,048)

(15,048)

 

(15,048)

VIE non-controlling interests

 

(2,188)

(2,188)

Contributions from non-controlling interests

 

9,406

9,406

Distributions to non-controlling interests

 

(66,476)

 

(66,476)

Balance, March 31, 2020

 

289,349,439

$

2,894

$

5,159,069

 

7,105,561

$

(133,024)

$

(616,765)

$

35,884

$

4,448,058

$

369,293

$

4,817,351

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

For the Three Months Ended

March 31,

 

2021

    

2020

Cash Flows from Operating Activities:

Net income (loss)

$

122,526

$

(66,269)

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Amortization of deferred financing costs, premiums and discounts on secured borrowings

 

10,515

 

9,634

Amortization of discounts and deferred financing costs on unsecured senior notes

 

1,726

 

1,962

Accretion of net discount on investment securities

 

(3,476)

 

(2,783)

Accretion of net deferred loan fees and discounts

 

(16,745)

 

(12,080)

Share-based compensation

 

10,310

 

8,800

Manager fees paid in stock

 

7,486

 

9,080

Change in fair value of investment securities

 

306

 

(2,504)

Change in fair value of consolidated VIEs

 

(7,042)

 

80,683

Change in fair value of servicing rights

 

796

 

393

Change in fair value of loans

 

9,478

 

16,134

Change in fair value of derivatives

 

(34,768)

 

(7,617)

Foreign currency loss, net

 

11,681

 

34,486

Gain on sale of investments and other assets

 

(17,693)

 

(296)

Credit loss provision, net

 

44

 

48,669

Depreciation and amortization

 

22,528

 

23,864

Earnings from unconsolidated entities

 

(1,734)

 

(97)

Distributions of earnings from unconsolidated entities

 

17

 

27

Loss on extinguishment of debt

516

170

Origination and purchase of loans held-for-sale, net of principal collections

 

(327,352)

 

(621,832)

Proceeds from sale of loans held-for-sale

 

571,927

 

751,140

Changes in operating assets and liabilities:

Related-party payable, net

 

(3,035)

 

(1,659)

Accrued and capitalized interest receivable, less purchased interest

 

(41,833)

 

(31,465)

Other assets

 

(19,467)

 

(40,944)

Accounts payable, accrued expenses and other liabilities

 

(25,945)

 

(6,764)

Net cash provided by operating activities

 

270,766

 

190,732

Cash Flows from Investing Activities:

Origination, purchase and funding of loans held-for-investment

 

(2,296,124)

 

(1,252,745)

Proceeds from principal collections on loans

 

1,051,695

 

812,187

Proceeds from loans sold

 

 

39,019

Purchase and funding of investment securities

 

 

(5,729)

Proceeds from sales of investment securities

 

 

7,940

Proceeds from principal collections on investment securities

 

59,514

 

13,559

Proceeds from sales of real estate

 

30,566

 

Purchases and additions to properties and other assets

(3,512)

(7,056)

Investment in unconsolidated entities

(3,100)

Distribution of capital from unconsolidated entities

 

15,980

 

153

Payments for purchase or termination of derivatives

 

(851)

 

(67,323)

Proceeds from termination of derivatives

 

23,527

 

8,912

Net cash used in investing activities

 

(1,119,205)

 

(454,183)

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

For the Three Months Ended

March 31,

 

2021

    

2020

Cash Flows from Financing Activities:

Proceeds from borrowings

$

2,748,317

$

2,756,915

Principal repayments on and repurchases of borrowings

 

(2,001,336)

 

(1,923,754)

Payment of deferred financing costs

 

(5,052)

 

(3,577)

Proceeds from common stock issuances

 

262

 

153

Payment of equity offering costs

(22)

(14)

Payment of dividends

 

(137,667)

 

(135,889)

Contributions from non-controlling interests

2,969

9,406

Distributions to non-controlling interests

 

(8,833)

 

(66,476)

Purchase of treasury stock

 

 

(28,830)

Issuance of debt of consolidated VIEs

 

11,604

 

24,376

Repayment of debt of consolidated VIEs

 

(27,490)

 

(36,953)

Distributions of cash from consolidated VIEs

 

14,481

 

24,723

Net cash provided by financing activities

 

597,233

 

620,080

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(251,206)

 

356,629

Cash, cash equivalents and restricted cash, beginning of period

 

722,162

 

574,031

Effect of exchange rate changes on cash

 

(1,042)

 

733

Cash, cash equivalents and restricted cash, end of period

$

469,914

$

931,393

Supplemental disclosure of cash flow information:

Cash paid for interest

$

80,624

$

109,341

Income taxes paid

 

425

 

569

Supplemental disclosure of non-cash investing and financing activities:

Dividends declared, but not yet paid

$

139,113

$

135,994

Consolidation of VIEs (VIE asset/liability additions)

 

393,373

 

2,477,422

Reclassification of loans held-for-investment to loans held-for-sale

166,901

422,691

Reclassification of loans held-for-sale to loans held-for-investment

124,935

Loan principal collections temporarily held at master servicer

31,965

9,779

Net assets acquired through conversion to equity interest

7,320

Redemption of Class A Units for common stock

1,039

8,538

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of March 31, 2021

(Unaudited)

1. Business and Organization

Starwood Property Trust, Inc. (“STWD” and, together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering. We are focused primarily on originating, acquiring, financing and managing mortgage loans and other real estate investments in both the United States (“U.S.”) and Europe. As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.

We have four reportable business segments as of March 31, 2021 and we refer to the investments within these segments as our target assets:

Real estate commercial and residential lending (the “Commercial and Residential Lending Segment”)—engages primarily in originating, acquiring, financing and managing commercial first mortgages, non-agency residential mortgages (“residential loans”), subordinated mortgages, mezzanine loans, preferred equity, commercial mortgage-backed securities (“CMBS”), residential mortgage-backed securities (“RMBS”) and other real estate and real estate-related debt investments in both the U.S. and Europe (including distressed or non-performing loans). Our residential loans are secured by a first mortgage lien on residential property and consist of non-agency residential loans that are not guaranteed by any U.S. Government agency or federally chartered corporation.

Infrastructure lending (the “Infrastructure Lending Segment”)—engages primarily in originating, acquiring, financing and managing infrastructure debt investments.

Real estate property (the “Property Segment”)—engages primarily in acquiring and managing equity interests in stabilized commercial real estate properties, including multifamily properties and commercial properties subject to net leases, that are held for investment.

Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) a servicing business in the U.S. that manages and works out problem assets, (ii) an investment business that selectively acquires and manages unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business which originates conduit loans for the primary purpose of selling these loans into securitization transactions and (iv) an investment business that selectively acquires commercial real estate assets, including properties acquired from CMBS trusts.

Our segments exclude the consolidation of securitization variable interest entities (“VIEs”).

We are organized and conduct our operations to qualify as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”). As such, we will generally not be subject to U.S. federal corporate income tax on that portion of our net income that is distributed to stockholders if we distribute at least 90% of our taxable income to our stockholders by prescribed dates and comply with various other requirements.

We are organized as a holding company and conduct our business primarily through our various wholly-owned subsidiaries. We are externally managed and advised by SPT Management, LLC (our “Manager”) pursuant to the terms of a management agreement. Our Manager is controlled by Barry Sternlicht, our Chairman and Chief Executive Officer. Our Manager is an affiliate of Starwood Capital Group, a privately-held private equity firm founded by Mr. Sternlicht.

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2. Summary of Significant Accounting Policies

Balance Sheet Presentation of Securitization Variable Interest Entities

We operate investment businesses that acquire unrated, investment grade and non-investment grade rated CMBS and RMBS. These securities represent interests in securitization structures (commonly referred to as special purpose entities, or “SPEs”). These SPEs are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. Under accounting principles generally accepted in the United States of America (“GAAP”), SPEs typically qualify as VIEs. These are entities that, by design, either (1) lack sufficient equity to permit the entity to finance its activities without additional subordinated financial support from other parties, or (2) have equity investors that do not have the ability to make significant decisions relating to the entity’s operations through voting rights, or do not have the obligation to absorb the expected losses, or do not have the right to receive the residual returns of the entity.

Because we often serve as the special servicer or servicing administrator of the trusts in which we invest, or we have the ability to remove and replace the special servicer without cause, consolidation of these structures is required pursuant to GAAP as outlined in detail below. This results in a consolidated balance sheet which presents the gross assets and liabilities of the VIEs. The assets and other instruments held by these VIEs are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the VIEs do not have any recourse to the general credit of any other consolidated entities, nor to us as the consolidator of these VIEs.

The VIE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the consolidated VIEs are also eliminated. Finally, a portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.

Refer to the segment data in Note 22 for a presentation of our business segments without consolidation of these VIEs.

Basis of Accounting and Principles of Consolidation

The accompanying condensed consolidated financial statements include our accounts and those of our consolidated subsidiaries and VIEs. Intercompany amounts have been eliminated in consolidation. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flows have been included.

These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (our “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2021 are not necessarily indicative of the operating results for the full year.

Refer to our Form 10-K for a description of our recurring accounting policies. We have included disclosure in this Note 2 regarding principles of consolidation and other accounting policies that (i) are required to be disclosed quarterly, (ii) we view as critical, (iii) became significant since December 31, 2020 due to a corporate action or increase in the significance of the underlying business activity or (iv) changed upon adoption of an Accounting Standards Update (“ASU”) issued by the Financial Accounting Standards Board (“FASB”).

Variable Interest Entities

In addition to the securitization VIEs, we have financed a pool of our loans through a collateralized loan obligation (“CLO”) which is considered a VIE. We also hold interests in certain other entities which are considered VIEs as the limited partners of those entities with equity at risk do not collectively possess (i) the right to remove the general partner or dissolve the partnership without cause or (ii) the right to participate in significant decisions made by the partnership.

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We evaluate all of our interests in VIEs for consolidation. When our interests are determined to be variable interests, we assess whether we are deemed to be the primary beneficiary of the VIE. The primary beneficiary of a VIE is required to consolidate the VIE. Accounting Standards Codification (“ASC”) 810, Consolidation, defines the primary beneficiary as the party that has both (i) the power to direct the activities of the VIE that most significantly impact its economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the VIE which could be potentially significant. We consider our variable interests as well as any variable interests of our related parties in making this determination. Where both of these factors are present, we are deemed to be the primary beneficiary and we consolidate the VIE. Where either one of these factors is not present, we are not the primary beneficiary and do not consolidate the VIE.

To assess whether we have the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, we consider all facts and circumstances, including our role in establishing the VIE and our ongoing rights and responsibilities. This assessment includes: (i) identifying the activities that most significantly impact the VIE’s economic performance; and (ii) identifying which party, if any, has power over those activities. In general, the parties that make the most significant decisions affecting the VIE or have the right to unilaterally remove those decision makers are deemed to have the power to direct the activities of a VIE. The right to remove the decision maker in a VIE must be exercisable without cause for the decision maker to not be deemed the party that has the power to direct the activities of a VIE.

To assess whether we have the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE, we consider all of our economic interests, including debt and equity investments, servicing fees and other arrangements deemed to be variable interests in the VIE. This assessment requires that we apply judgment in determining whether these interests, in the aggregate, are considered potentially significant to the VIE. Factors considered in assessing significance include: the design of the VIE, including its capitalization structure; subordination of interests; payment priority; relative share of interests held across various classes within the VIE’s capital structure; and the reasons why the interests are held by us.

Our purchased investment securities include unrated and non-investment grade rated securities issued by securitization trusts. In certain cases, we may contract to provide special servicing activities for these trusts, or, as holder of the controlling class, we may have the right to name and remove the special servicer for these trusts. In our role as special servicer, we provide services on defaulted loans within the trusts, such as foreclosure or work-out procedures, as permitted by the underlying contractual agreements. In exchange for these services, we receive a fee. These rights give us the ability to direct activities that could significantly impact the trust’s economic performance. However, in those instances where an unrelated third party has the right to unilaterally remove us as special servicer without cause, we do not have the power to direct activities that most significantly impact the trust’s economic performance. We evaluated all of our positions in such investments for consolidation.

For securitization VIEs in which we are determined to be the primary beneficiary, all of the underlying assets, liabilities and equity of the structures are recorded on our books, and the initial investment, along with any associated unrealized holding gains and losses, are eliminated in consolidation. Similarly, the interest income earned from these structures, as well as the fees paid by these trusts to us in our capacity as special servicer, are eliminated in consolidation. Further, a portion of the identified servicing intangible asset associated with the servicing fee streams, and the corresponding amortization or change in fair value of the servicing intangible asset, are also eliminated in consolidation.

We perform ongoing reassessments of: (i) whether any entities previously evaluated under the majority voting interest framework have become VIEs, based on certain events, and therefore subject to the VIE consolidation framework, and (ii) whether changes in the facts and circumstances regarding our involvement with a VIE causes our consolidation conclusion regarding the VIE to change.

We elect the fair value option for initial and subsequent recognition of the assets and liabilities of our consolidated securitization VIEs. Interest income and interest expense associated with these VIEs are no longer relevant on a standalone basis because these amounts are already reflected in the fair value changes. We have elected to present these items in a single line on our condensed consolidated statements of operations. The residual difference shown on our condensed consolidated statements of operations in the line item “Change in net assets related to consolidated VIEs” represents our beneficial interest in the VIEs.

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We separately present the assets and liabilities of our consolidated securitization VIEs as individual line items on our condensed consolidated balance sheets. The liabilities of our consolidated securitization VIEs consist solely of obligations to the bondholders of the related trusts, and are thus presented as a single line item entitled “VIE liabilities.” The assets of our consolidated securitization VIEs consist principally of loans, but at times, also include foreclosed loans which have been temporarily converted into real estate owned (“REO”). These assets in the aggregate are likewise presented as a single line item entitled “VIE assets.”

Loans comprise the vast majority of our securitization VIE assets and are carried at fair value due to the election of the fair value option. When an asset becomes REO, it is due to non-performance of the loan. Because the loan is already at fair value, the carrying value of an REO asset is also initially at fair value. Furthermore, when we consolidate a trust, any existing REO would be consolidated at fair value. Once an asset becomes REO, its disposition time is relatively short. As a result, the carrying value of an REO generally approximates fair value under GAAP.

In addition to sharing a similar measurement method as the loans in a trust, the securitization VIE assets as a whole can only be used to settle the obligations of the consolidated VIE. The assets of our securitization VIEs are not individually accessible by the bondholders, which creates inherent limitations from a valuation perspective. Also creating limitations from a valuation perspective is our role as special servicer, which provides us very limited visibility, if any, into the performing loans of a trust.

REO assets generally represent a very small percentage of the overall asset pool of a trust. In new issue trusts there are no REO assets. We estimate that REO assets constitute approximately 1% of our consolidated securitization VIE assets, with the remaining 99% representing loans. However, it is important to note that the fair value of our securitization VIE assets is determined by reference to our securitization VIE liabilities as permitted under ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. In other words, our VIE liabilities are more reliably measurable than the VIE assets, resulting in our current measurement methodology which utilizes this value to determine the fair value of our securitization VIE assets as a whole. As a result, these percentages are not necessarily indicative of the relative fair values of each of these asset categories if the assets were to be valued individually.

Due to our accounting policy election under ASU 2014-13, separately presenting two different asset categories would result in an arbitrary assignment of value to each, with one asset category representing a residual amount, as opposed to its fair value. However, as a pool, the fair value of the assets in total is equal to the fair value of the liabilities.

For these reasons, the assets of our securitization VIEs are presented in the aggregate.

Fair Value Option

The guidance in ASC 825, Financial Instruments, provides a fair value option election that allows entities to make an irrevocable election of fair value as the initial and subsequent measurement attribute for certain eligible financial assets and liabilities. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and must be applied to an entire instrument and is irrevocable once elected. Assets and liabilities measured at fair value pursuant to this guidance are required to be reported separately in our consolidated balance sheets from those instruments using another accounting method.

We have elected the fair value option for certain eligible financial assets and liabilities of our consolidated securitization VIEs, residential loans held-for-investment, loans held-for-sale originated or acquired for future securitization and purchased CMBS issued by VIEs we could consolidate in the future. The fair value elections for VIE and securitization related items were made in order to mitigate accounting mismatches between the carrying value of the instruments and the related assets and liabilities that we consolidate at fair value. The fair value elections for residential loans held-for-investment were made in order to maintain consistency across all our residential loans. The fair value elections for mortgage loans held-for-sale were made due to the expected short-term holding period of these instruments.

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Fair Value Measurements

We measure our mortgage-backed securities, derivative assets and liabilities, domestic servicing rights intangible asset and any assets or liabilities where we have elected the fair value option at fair value. When actively quoted observable prices are not available, we either use implied pricing from similar assets and liabilities or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors.

As discussed above, we measure the assets and liabilities of consolidated securitization VIEs at fair value pursuant to our election of the fair value option. The securitization VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets and liabilities of the securitization VIEs, we maximize the use of observable inputs over unobservable inputs. Refer to Note 19 for further discussion regarding our fair value measurements.

Loans Held-for-Investment

Loans that are held for investment (“HFI”) are carried at cost, net of unamortized acquisition premiums or discounts, loan fees and origination costs, as applicable, and net of credit loss allowances as discussed below, unless the loans are credit deteriorated or we have elected to apply the fair value option at purchase.

Loans Held-For-Sale

Our loans that we intend to sell or liquidate in the short-term are classified as held-for-sale and are carried at the lower of amortized cost or fair value, unless we have elected to apply the fair value option at origination or purchase.

Investment Securities

We designate our debt investment securities as held-to-maturity (“HTM”), available-for-sale (“AFS”), or trading depending on our investment strategy and ability to hold such securities to maturity. HTM debt securities where we have not elected to apply the fair value option are stated at cost plus any premiums or discounts, which are amortized or accreted through the condensed consolidated statements of operations using the effective interest method. Debt securities we (i) do not hold for the purpose of selling in the near-term, or (ii) may dispose of prior to maturity, are classified as AFS and are carried at fair value in the accompanying financial statements. Unrealized gains or losses on AFS debt securities where we have not elected the fair value option are reported as a component of accumulated other comprehensive income (“AOCI”) in stockholders’ equity. Our HTM and AFS debt securities are also subject to credit loss allowances as discussed below.

Our only equity investment security is carried at fair value, with unrealized holding gains and losses recorded in earnings.

Credit Losses

Loans and Debt Securities Measured at Amortized Cost

ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2020. ASC 326 mandates the use of a current expected credit loss model (“CECL”) for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under GAAP. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model applies to our HFI loans and our HTM debt securities which are carried at amortized cost, including future funding commitments and accrued interest receivable related to those loans and securities. However, as permitted by ASC 326, we have elected not to measure an allowance for credit losses on accrued interest receivable (which is classified separately on our condensed consolidated balance sheet), but rather write off in a timely manner by reversing interest income and/or cease accruing interest that would likely be uncollectible. Our adoption of the CECL model resulted in a $32.3 million increase to our total allowance for credit losses, which was recognized as a cumulative-effect adjustment to accumulated deficit as of January 1, 2020.

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As we do not have a history of realized credit losses on our HFI loans and HTM securities, we have subscribed to third party database services to provide us with historical industry losses for both commercial real estate and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios. See Note 4 for further discussion of our methodologies.

We also evaluate each loan and security measured at amortized cost for credit deterioration at least quarterly. Credit deterioration occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan or security. If a loan or security is considered to be credit deteriorated, we depart from the industry loss rate approach described above and determine the credit loss allowance as any excess of the amortized cost basis of the loan or security over (i) the present value of expected future cash flows discounted at the contractual effective interest rate or (ii) the fair value of the collateral, if repayment is expected solely from the collateral.

Available-for-Sale Debt Securities

Separate provisions of ASC 326 apply to our AFS debt securities, which are carried at fair value with unrealized gains and losses reported as a component of AOCI. We are required to establish an initial credit loss allowance for those securities that are purchased with credit deterioration (“PCD”) by grossing up the amortized cost basis of each security and providing an offsetting credit loss allowance for the difference between expected cash flows and contractual cash flows, both on a present value basis. As of the January 1, 2020 effective date, no such credit loss allowance gross-up was required on our AFS debt securities with PCD due to their individual unrealized gain positions as of that date.

Subsequently, cumulative adverse changes in expected cash flows on our AFS debt securities are recognized currently as an increase to the allowance for credit losses. However, the allowance is limited to the amount by which the AFS debt security’s amortized cost exceeds its fair value. Favorable changes in expected cash flows are first recognized as a decrease to the allowance for credit losses (recognized currently in earnings). Such changes would be recognized as a prospective yield adjustment only when the allowance for credit losses is reduced to zero. A change in expected cash flows that is attributable solely to a change in a variable interest reference rate does not result in a credit loss and is accounted for as a prospective yield adjustment.

Convertible Senior Notes

Effective January 1, 2021, the Company early adopted ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40), which removes certain separation models for convertible debt instruments and convertible preferred stock that require the separation into a debt component and an equity or derivative component. Consequently, our convertible senior notes (the “Convertible Notes”), which were previously accounted for as having separate liability and equity components, are now accounted for as a single liability measured at amortized cost. The standard was adopted using the modified restrospective method of transition, which resulted in a cumulative decrease to additional paid-in capital of $3.7 million, partially offset by a cumulative decrease to accumulated deficit of $2.2 million as of January 1, 2021.

Revenue Recognition

Interest Income

Interest income on performing loans and financial instruments is accrued based on the outstanding principal amount and contractual terms of the instrument. For loans where we do not elect the fair value option, origination fees and direct loan origination costs are also recognized in interest income over the loan term as a yield adjustment using the effective interest method. When we elect the fair value option, origination fees and direct loan costs are recorded directly in income and are not deferred. Discounts or premiums associated with the purchase of non-performing loans and investment securities are amortized or accreted into interest income as a yield adjustment on the effective interest method, based on expected cash flows through the expected maturity date of the investment. On at least a quarterly basis, we review and, if appropriate, make adjustments to our cash flow projections.

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We cease accruing interest on non-performing loans at the earlier of (i) the loan becoming significantly past due or (ii) management concluding that a full recovery of all interest and principal is doubtful. Interest income on non-accrual loans in which management expects a full recovery of the loan’s outstanding principal balance is only recognized when received in cash. If a full recovery of principal is doubtful, the cost recovery method is applied whereby any cash received is applied to the outstanding principal balance of the loan. A non-accrual loan is returned to accrual status at such time as the loan becomes contractually current and management believes all future principal and interest will be received according to the contractual loan terms.

For loans acquired with deteriorated credit quality, interest income is only recognized to the extent that our estimate of undiscounted expected principal and interest exceeds our investment in the loan. Such excess, if any, is recognized as interest income on a level-yield basis over the life of the loan.

Upon the sale of loans or securities which are not accounted for pursuant to the fair value option, the excess (or deficiency) of net proceeds over the net carrying value of such loans or securities is recognized as a realized gain (loss).

Servicing Fees

We typically seek to be the special servicer on CMBS transactions in which we invest. When we are appointed to serve in this capacity, we earn special servicing fees from the related activities performed, which consist primarily of overseeing the workout of under-performing and non-performing loans underlying the CMBS transactions. These fees are recognized in income in the period in which the services are performed and the revenue recognition criteria have been met.

Rental Income

Rental income is recognized when earned from tenants. For leases that provide rent concessions or fixed escalations over the lease term, rental income is recognized on a straight-line basis over the noncancelable term of the lease. In net lease arrangements, costs reimbursable from tenants are recognized in rental income in the period in which the related expenses are incurred as we are generally the primary obligor with respect to purchasing goods and services for property operations. In instances where the tenant is responsible for property maintenance and repairs and contracts and settles such costs directly with third party service providers, we do not reflect those expenses in our consolidated statement of operations as the tenant is the primary obligor.

Earnings Per Share

We present both basic and diluted earnings per share (“EPS”) amounts in our financial statements. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the maximum potential dilution that could occur from (i) our share-based compensation, consisting of unvested restricted stock (“RSAs”) and restricted stock units (“RSUs”), (ii) shares contingently issuable to our Manager, (iii) the conversion options associated with our Convertible Notes (see Notes 10 and 17) and (iv) non-controlling interests that are redeemable with our common stock (see Note 16). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.

Nearly all of the Company’s unvested RSUs and RSAs contain rights to receive non-forfeitable dividends and thus are participating securities. In addition, the non-controlling interests that are redeemable with our common stock are considered participating securities because they earn a preferred return indexed to the dividend rate on our common stock (see Note 16). Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method, undistributed earnings are reallocated between shares of common stock and participating securities. For the three months ended March 31, 2021 and 2020, the two-class method resulted in the most dilutive EPS calculation.

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Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting periods. The most significant and subjective estimate that we make is the projection of cash flows we expect to receive on our investments, which has a significant impact on the amount of income that we record and/or disclose. In addition, the fair value of financial assets and liabilities that are estimated using a discounted cash flows method is significantly impacted by the rates at which we estimate market participants would discount the expected cash flows.

The outbreak of COVID-19 beginning in the first quarter of 2020 has had, and is expected to continue to have, an adverse impact on economic and market conditions and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2021. However, uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and our business in particular, makes any estimates and assumptions as of March 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19. Actual results may ultimately differ from those estimates.

Recent Accounting Developments

On March 12, 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848) – Facilitation of the Effects of Reference Rate Reform on Financial Reporting, and on January 11, 2021, issued ASU 2021-01, Reference Rate Reform (Topic 848) – Scope, both of which provide optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference LIBOR or other reference rates expected to be discontinued because of reference rate reform. These ASUs are effective through December 31, 2022. The Company has not adopted any of the optional expedients or exceptions through March 31, 2021, but will continue to evaluate the possible adoption of any such expedients or exceptions during the effective period as circumstances evolve.

3. Acquisitions and Divestitures

During the three months ended March 31, 2021, we sold an operating property within the Commercial and Residential Lending Segment relating to a grocery distribution facility located in Montgomery, Alabama that was previously acquired in March 2019 through foreclosure of a loan with a carrying value of $9.0 million ($20.9 million unpaid principal balance net of an $8.3 million allowance and $3.6 million of unamortized discount) at the foreclosure date. The operating property was sold for $30.6 million and we recognized a gain of $17.7 million within gain on sale of investments and other assets in our condensed consolidated statement of operations.

During the three months ended March 31, 2021 and 2020, we had no significant acquisitions of properties or businesses.

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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 for either. The following tables summarize our investments in mortgages and loans as of March 31, 2021 and December 31, 2020 (dollars in thousands):

  

    

    

    

Weighted

 

Weighted

Average Life

 

Carrying

Face

Average

(“WAL”)

 

March 31, 2021

Value

Amount

Coupon (1)

(years)(2)

Loans held-for-investment:

Commercial loans:

First mortgages (3), (8)

$

9,955,674

$

10,003,057

5.1

%  

1.7

Subordinated mortgages (4)

 

70,457

71,428

8.8

%  

2.5

Mezzanine loans (3)

 

603,119

601,080

10.1

%  

1.4

Other

18,200

20,267

8.2

%  

2.6

Total commercial loans

10,647,450

10,695,832

Infrastructure first priority loans (5)

1,595,615

1,616,716

4.3

%  

4.1

Residential loans, fair value option (6)

150,712

149,404

6.2

%  

N/A

(7)

Total loans held-for-investment

 

12,393,777

12,461,952

Loans held-for-sale:

Residential, fair value option (6)

444,835

435,025

5.7

%  

N/A

(7)

Commercial, $168,226 under fair value option (8)

310,428

314,917

4.3

%  

5.7

Infrastructure, lower of cost or fair value (5)

89,368

89,601

2.9

%  

2.6

Total loans held-for-sale

844,631

839,543

Total gross loans

 

13,238,408

$

13,301,495

Credit loss allowances:

Commercial loans held-for-investment

(63,477)

Infrastructure loans held-for-investment

(8,807)

Total allowances

(72,284)

Total net loans

$

13,166,124

December 31, 2020

Loans held-for-investment:

Commercial loans:

First mortgages (3)

$

8,931,772

$

8,978,373

5.3

%  

1.5

Subordinated mortgages (4)

 

71,185

 

72,257

8.8

%  

2.8

Mezzanine loans (3)

 

620,319

 

619,352

10.1

%  

1.6

Other

30,284

33,626

8.9

%  

1.8

Total commercial loans

9,653,560

9,703,608

Infrastructure first priority loans

1,420,273

 

1,439,940

4.4

%  

4.3

Residential loans, fair value option

90,684

86,796

6.0

%  

N/A

(7)

Total loans held-for-investment

 

11,164,517

11,230,344

Loans held-for-sale:

Residential, fair value option

841,963

820,807

6.0

%  

N/A

(7)

Commercial, fair value option

90,332

90,789

3.9

%  

10.0

Infrastructure, lower of cost or fair value

120,540

120,900

3.1

%  

3.2

Total loans held-for-sale

1,052,835

1,032,496

Total gross loans

 

12,217,352

$

12,262,840

Credit loss allowances:

Commercial loans held-for-investment

(69,611)

Infrastructure loans held-for-investment

(7,833)

Total allowances

(77,444)

Total net loans

$

12,139,908

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(1)Calculated using LIBOR or other applicable index rates as of March 31, 2021 and December 31, 2020 for variable rate loans.

(2)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 or acquisition.

(3)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 $917.8 million and $877.3 million being classified as first mortgages as of March 31, 2021 and December 31, 2020, respectively.

(4)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.

(5)During the three months ended March 31, 2021, $30.7 million of infrastructure loans held-for-sale were reclassified into loans held-for-investment.

(6)During the three months ended March 31, 2021, a net amount of $69.5 million of residential loans held-for-sale were reclassified into loans held-for-investment.

(7)Residential loans have a weighted average remaining contractual life of 28.9 years and 27.9 years as of March 31, 2021 and December 31, 2020, respectively.

(8)During the three months ended March 31, 2021, $142.2 million of commercial loans held-for-investment were reclassified into loans held-for-sale.

As of March 31, 2021, our variable rate loans held-for-investment were as follows (dollars in thousands):

Carrying

Weighted-average

March 31, 2021

Value

Spread Above Index

Commercial loans

$

9,969,387

4.3

%  

Infrastructure loans

1,595,615

3.8

%  

Total variable rate loans held-for-investment

$

11,565,002

4.2

%  

Credit Loss Allowances

As discussed in Note 2, we do not have a history of realized credit losses on our HFI loans and HTM securities, so we have subscribed to third party database services to provide us with industry losses for both commercial real estate and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios.

For our commercial loans, we utilize a loan loss model that is widely used among banks and commercial mortgage REITs and is marketed by a leading CMBS data analytics provider. It employs logistic regression to forecast expected losses at the loan level based on a commercial real estate loan securitization database that contains activity dating back to 1998. We provide specific loan-level inputs which include loan-to-stabilized-value (“LTV”) and debt service coverage ratio (DSCR) metrics, as well as principal balances, property type, location, coupon, origination year, term, subordination, expected repayment dates and future fundings. We also select from a group of independent five-year macroeconomic forecasts included in the model that are updated regularly based on current economic trends. We categorize the results by LTV range, which we consider the most significant indicator of credit quality for our commercial loans, as set forth in the credit quality indicator table below. A lower LTV ratio typically indicates a lower credit loss risk.

The macroeconomic forecasts do not differentiate among property types or asset classes. Instead, these forecasts reference general macroeconomic growth factors which apply broadly across all assets. However, the COVID-19 pandemic has had a more negative impact on certain property types, principally retail and hospitality, which have

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withstood extended government mandated closures, and more recently office, which is experiencing lower demand due to remote working arrangements. The broad macroeconomic forecasts do not account for such differentiation. Accordingly, we have selected a more adverse macroeconomic recovery forecast related to these property types in determining our credit loss allowance.

For our infrastructure loans, we utilize a database of historical infrastructure loan performance that is shared among a consortium of banks and other lenders and compiled by a major bond credit rating agency. The database is representative of industry-wide project finance activity dating back to 1983. We derive historical loss rates from the database filtered by industry, sub-industry, term and construction status for each of our infrastructure loans. Those historical loss rates reflect global economic cycles over a long period of time as well as average recovery rates. We categorize the results between the power and oil and gas industries, which we consider the most significant indicator of credit quality for our infrastructure loans, as set forth in the credit quality indicator table below.

As discussed in Note 2, we use a discounted cash flow or collateral value approach, rather than the industry loan loss approach described above, to determine credit loss allowances for any credit deteriorated loans.

We regularly evaluate the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral, as well as the financial and operating capability of the borrower. Specifically, the collateral’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 and/or (iii) the collateral’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 collateral. In addition, we consider the overall economic environment, real estate or industry sector, and geographic sub-market in which the borrower operates. Such 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.

The significant credit quality indicators for our loans measured at amortized cost, which excludes loans held-for-sale, were as follows as of March 31, 2021 (dollars in thousands):

  

Term Loans

  

Revolving Loans

  

Total

  

Credit

Amortized Cost Basis by Origination Year

Amortized Cost

Amortized

Loss

As of March 31, 2021

2021

  

2020

  

2019

  

2018

  

2017

  

Prior

Total

Cost Basis

Allowance

Commercial loans:

Credit quality indicator:

LTV < 60%

$

1,152,309

$

709,735

$

1,314,912

$

1,225,605

$

729,227

$

425,570

$

$

5,557,358

$

7,015

LTV 60% - 70%

859,035

480,542

1,530,002

825,212

39,916

82,088

3,816,795

31,535

LTV > 70%

240,217

599,518

312,972

61,426

1,214,133

16,661

Credit deteriorated

28,986

11,977

40,963

8,266

Defeased and other

18,201

18,201

Total commercial

$

2,011,344

$

1,430,494

$

3,444,432

$

2,392,775

$

769,143

$

599,262

$

$

10,647,450

$

63,477

Infrastructure loans:

Credit quality indicator:

Power

$

$

77,525

$

220,901

$

397,619

$

124,959

$

371,072

$

10,057

$

1,202,133

$

5,074

Oil and gas

19,902

267,727

100,803

5,050

393,482

3,733

Total infrastructure

$

$

97,427

$

488,628

$

498,422

$

124,959

$

371,072

$

15,107

$

1,595,615

$

8,807

Residential loans held-for-investment, fair value option

150,712

Loans held-for-sale

844,631

Total gross loans

$

13,238,408

$

72,284

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As of March 31, 2021, we had credit deteriorated commercial loans with an amortized cost basis of $41.0 million, of which $29.0 million had no credit loss allowance.  These loans were on nonaccrual status, with the cost recovery method of interest income recognition applied. In addition to these credit deteriorated loans, we had a $187.6 million commercial loan and $20.2 million of residential loans that were 90 days or greater past due at March 31, 2021. In March 2021, $7.3 million relating to the $187.6 million commercial loan that was 90 days or greater past due was converted to equity interests pursuant to a consensual transfer under pre-existing equity pledges of additional collateral (see Note 7). The $187.6 million commercial loan, along with a $14.8 million infrastructure loan in forbearance, were placed on nonaccrual status during the three months ended March 31, 2021, but are not considered credit deteriorated as we presently expect to recover all amounts due. Any loans which are modified to provide for the deferral of interest are not considered past due and are accounted for in accordance with our revenue recognition policy on interest income.

The following tables present the activity in our credit loss allowance for funded loans and unfunded commitments (amounts in thousands):

Funded Commitments Credit Loss Allowance

Loans Held-for-Investment

Total

Three Months Ended March 31, 2021

Commercial

Infrastructure

Funded Loans

Credit loss allowance at December 31, 2020

$

69,611

$

7,833

$

77,444

Credit loss provision (reversal), net

 

1,880

 

717

 

2,597

Charge-offs

(7,757)

(1)

(7,757)

Recoveries

 

 

 

Transfers

 

(257)

 

257

 

Credit loss allowance at March 31, 2021

$

63,477

$

8,807

$

72,284

Unfunded Commitments Credit Loss Allowance (2)

Loans Held-for-Investment

Three Months Ended March 31, 2021

   

Commercial

   

Infrastructure

   

Total

Credit loss allowance at December 31, 2020

$

5,258

$

812

$

6,070

Credit loss reversal, net

 

(2,122)

 

(143)

 

(2,265)

Credit loss allowance at March 31, 2021

$

3,136

$

669

$

3,805

Memo: Unfunded commitments as of March 31, 2021 (3)

$

1,291,304

$

65,791

$

1,357,095

(1)Relates to an unsecured promissory note deemed uncollectible in connection with a residential conversion project located in New York City. The note was previously considered credit deteriorated and was fully reserved.

(2)Included in accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheets.

(3)Represents amounts expected to be funded (see Note 21).

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Loan Portfolio Activity

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

Held-for-Investment Loans

Three Months Ended March 31, 2021

Commercial

Infrastructure

Residential

Held-for-Sale Loans

Total Loans

Balance at December 31, 2020

$

9,583,949

$

1,412,440

$

90,684

$

1,052,835

$

12,139,908

Acquisitions/originations/additional funding

 

2,196,813

 

99,311

 

 

375,270

 

2,671,394

Capitalized interest (1)

 

36,646

 

 

 

 

36,646

Basis of loans sold (2)

 

 

 

 

(571,927)

 

(571,927)

Loan maturities/principal repayments

 

(1,021,393)

 

(18,055)

 

(9,210)

 

(44,326)

 

(1,092,984)

Discount accretion/premium amortization

 

15,824

 

921

 

 

 

16,745

Changes in fair value

 

 

 

(290)

 

(9,188)

 

(9,478)

Unrealized foreign currency translation loss

 

(14,082)

 

(181)

 

 

 

(14,263)

Credit loss provision, net

 

(1,880)

 

(717)

 

 

 

(2,597)

Transfer to/from other asset classifications or between segments

(211,904)

93,089

69,528

41,967

(7,320)

Balance at March 31, 2021

$

10,583,973

$

1,586,808

$

150,712

$

844,631

$

13,166,124

Held-for-Investment Loans

Three Months Ended March 31, 2020

Commercial

Infrastructure

Residential

Held-for-Sale Loans

Total Loans

Balance at December 31, 2019

$

8,517,054

$

1,397,448

$

671,572

$

884,150

$

11,470,224

Cumulative effect of ASC 326 effective January 1, 2020

(10,112)

(10,328)

(20,440)

Acquisitions/originations/additional funding

 

1,089,096

 

62,929

 

100,720

 

646,160

 

1,898,905

Capitalized interest (1)

 

36,072

 

 

 

 

36,072

Basis of loans sold (2)

 

 

 

(604)

 

(789,259)

 

(789,863)

Loan maturities/principal repayments

 

(689,972)

 

(37,051)

 

(48,620)

 

(20,680)

 

(796,323)

Discount accretion/premium amortization

 

11,559

 

411

 

 

110

 

12,080

Changes in fair value

 

 

 

(25,619)

 

9,485

 

(16,134)

Unrealized foreign currency translation loss

 

(83,263)

 

 

 

(4,056)

 

(87,319)

Credit loss provision, net

 

(37,527)

 

(5,805)

 

 

 

(43,332)

Transfer to/from other asset classifications

(26,333)

(422,691)

449,024

Balance at March 31, 2020

$

8,832,907

$

1,381,271

$

274,758

$

1,174,934

$

11,663,870

(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.

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5. Investment Securities

Investment securities were comprised of the following as of March 31, 2021 and December 31, 2020 (amounts in thousands):

Carrying Value as of

March 31, 2021

    

December 31, 2020

RMBS, available-for-sale

$

160,301

$

167,349

RMBS, fair value option (1)

249,005

235,997

CMBS, fair value option (1), (2)

 

1,202,883

 

1,209,030

HTM debt securities, amortized cost net of credit loss allowance of $5,387 and $5,675

 

488,075

 

538,605

Equity security, fair value

 

10,655

 

11,247

SubtotalInvestment securities

 

2,110,919

 

2,162,228

VIE eliminations (1)

 

(1,432,632)

(1,425,570)

Total investment securities

$

678,287

$

736,658

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

(2)Includes $180.9 million and $179.5 million of non-controlling interests in the consolidated entities which hold certain of these CMBS as of March 31, 2021 and December 31, 2020, respectively.

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

RMBS,

RMBS, fair

CMBS, fair

HTM

Securitization

    

available-for-sale

    

value option

    

value option

    

Securities

    

VIEs (1)

    

Total

Three Months Ended March 31, 2021

Purchases

$

$

27,333

$

$

$

(27,333)

$

Sales

 

 

 

11,604

 

 

(11,604)

 

Principal collections

 

7,251

 

13,344

 

1,710

 

51,690

 

(14,481)

 

59,514

Three Months Ended March 31, 2020

Purchases/fundings

$

$

29,292

$

7,661

$

5,729

$

(36,953)

$

5,729

Sales

 

 

 

32,316

 

 

(24,376)

 

7,940

Principal collections

 

6,549

 

8,572

 

16,523

 

6,638

 

(24,723)

 

13,559

(1)Represents RMBS and CMBS, fair value option amounts eliminated due to our consolidation of securitization VIEs. These amounts are reflected as issuance or repayment of debt of, or distributions from, consolidated VIEs in our condensed consolidated statements of cash flows.

RMBS, Available-for-Sale

The Company classified all of its RMBS not eliminated in consolidation as available-for-sale as of March 31, 2021 and December 31, 2020. These RMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (“AOCI”).

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The tables below summarize various attributes of our investments in available-for-sale RMBS as of March 31, 2021 and December 31, 2020 (amounts in thousands):

Unrealized Gains or (Losses)

Recognized in AOCI

   

   

Credit

   

   

Gross

   

Gross

   

Net

   

Amortized

Loss

Net

Unrealized

Unrealized

Fair Value

Cost

Allowance

Basis

Gains

Losses

Adjustment

Fair Value

March 31, 2021

RMBS

$

118,647

$

$

118,647

$

41,688

$

(34)

$

41,654

$

160,301

December 31, 2020

RMBS

$

123,292

$

$

123,292

$

44,123

$

(66)

$

44,057

$

167,349

    

Weighted Average Coupon (1)

    

WAL 
(Years) (2)

March 31, 2021

RMBS

    

1.2

%  

5.9

(1)Calculated using the March 31, 2021 one-month LIBOR rate of 0.111% for floating rate securities.

(2)Represents the remaining WAL of each respective group of securities as of the 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, 2021, approximately $139.4 million, or 87.0%, of RMBS were variable rate. We purchased all of the RMBS at a discount, a portion of which is 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 this accretable discount.

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 $0.4 million for the three months ended March 31, 2021 and 2020, respectively, 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, 2021 and December 31, 2020, and for which an allowance for credit losses has not been recorded (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, 2021

RMBS

$

$

1,170

$

$

(34)

As of December 31, 2020

RMBS

$

438

$

1,195

$

(25)

$

(41)

As of March 31, 2021 and December 31, 2020, there were one and two securities, respectively, with unrealized losses reflected in the table above. After evaluating the securities and recording adjustments for credit losses, 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 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 net amortized cost basis. Significant judgment is used in projecting cash flows for our non-agency RMBS. As a result, actual income and/or credit losses could be materially different from what is currently projected and/or reported.

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CMBS and RMBS, Fair Value Option

As discussed in the “Fair Value Option” section of Note 2 herein, we elect the fair value option for certain CMBS and RMBS in an effort to eliminate accounting mismatches resulting from the current or potential consolidation of securitization VIEs. As of March 31, 2021, the fair value and unpaid principal balance of CMBS where we have elected the fair value option, excluding the notional value of interest-only securities and before consolidation of securitization VIEs, were $1.2 billion and $2.7 billion, respectively. As of March 31, 2021, the fair value and unpaid principal balance of RMBS where we have elected the fair value option, excluding the notional value of interest-only securities and before consolidation of securitization VIEs, were $249.0 million and $160.1 million, respectively. The $1.5 billion total fair value balance of CMBS and RMBS represents our economic interests in these assets. However, as a result of our consolidation of securitization VIEs, the vast majority of this fair value (all except $19.3 million at March 31, 2021) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option investment securities.

As of March 31, 2021, $96.9 million of our CMBS were variable rate and none of our RMBS were variable rate.

HTM Debt Securities, Amortized Cost

The table below summarizes our investments in HTM debt securities as of March 31, 2021 and December 31, 2020 (amounts in thousands):

Amortized

Credit Loss

Net Carrying

Gross Unrealized

Gross Unrealized

 

Cost Basis

Allowance

Amount

Holding Gains

Holding Losses

Fair Value

 

March 31, 2021

    

    

    

 

CMBS

$

339,120

$

$

339,120

$

$

(25,169)

$

313,951

Preferred interests

116,466

(2,462)

114,004

3,346

117,350

Infrastructure bonds

37,876

(2,925)

34,951

435

35,386

Total

$

493,462

$

(5,387)

$

488,075

$

3,781

$

(25,169)

$

466,687

December 31, 2020

CMBS

$

339,059

$

$

339,059

$

$

(23,286)

$

315,773

Preferred interests

166,614

(2,749)

163,865

432

(913)

163,384

Infrastructure bonds

38,607

(2,926)

35,681

415

36,096

Total

$

544,280

$

(5,675)

$

538,605

$

847

$

(24,199)

$

515,253

The following table presents the activity in our credit loss allowance for HTM debt securities (amounts in thousands):

Total HTM

Preferred

Infrastructure

Credit Loss

Interests

Bonds

Allowance

Three Months Ended March 31, 2021

Credit loss allowance at December 31, 2020

$

2,749

$

2,926

$

5,675

Credit loss reversal, net

(287)

(1)

(288)

Credit loss allowance at March 31, 2021

$

2,462

$

2,925

$

5,387

The table below summarizes the maturities of our HTM debt securities by type as of March 31, 2021 (amounts in thousands):

Preferred

Infrastructure

CMBS

Interests

Bonds

Total

Less than one year

    

$

313,863

$

$

$

313,863

One to three years

25,257

114,004

139,261

Three to five years

Thereafter

 

34,951

34,951

Total

$

339,120

$

114,004

$

34,951

$

488,075

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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. The fair value of the investment remeasured in USD was $10.7 million and $11.2 million as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021, our shares represent an approximate 2% interest in SEREF.

6. Properties

Our properties are held within the following portfolios:

Woodstar I Portfolio

The Woodstar I Portfolio is comprised of 32 affordable housing communities with 8,948 units concentrated primarily in the Tampa, Orlando and West Palm Beach metropolitan areas. During the year ended December 31, 2015, we acquired 18 of the 32 affordable housing communities of the Woodstar I Portfolio with the final 14 communities acquired during the year ended December 31, 2016. The Woodstar I Portfolio includes total gross properties and lease intangibles of $636.7 million and debt of $572.8 million as of March 31, 2021.

Woodstar II Portfolio

The Woodstar II Portfolio is comprised of 27 affordable housing communities with 6,109 units concentrated primarily in Central and South Florida. We acquired eight of the 27 affordable housing communities in December 2017, with the final 19 communities acquired during the year ended December 31, 2018. The Woodstar II Portfolio includes total gross properties and lease intangibles of $610.6 million and debt of $512.6 million as of March 31, 2021.

Medical Office Portfolio

The Medical Office Portfolio is comprised of 34 medical office buildings acquired during the year ended December 31, 2016. These properties, which collectively comprise 1.9 million square feet, are geographically dispersed throughout the U.S. and primarily affiliated with major hospitals or located on or adjacent to major hospital campuses. The Medical Office Portfolio includes total gross properties and lease intangibles of $760.3 million and debt of $592.9 million as of March 31, 2021.

Master Lease Portfolio

The Master Lease Portfolio is comprised of 16 retail properties geographically dispersed throughout the U.S., with more than 50% of the portfolio, by carrying value, located in Florida, Texas and Minnesota. These properties, which we acquired in September 2017, collectively comprise 1.9 million square feet and were leased back to the seller under corporate guaranteed master net lease agreements with initial terms of 24.6 years and periodic rent escalations. The Master Lease Portfolio includes total gross properties of $343.8 million and debt of $192.8 million as of March 31, 2021.

Investing and Servicing Segment Property Portfolio

The Investing and Servicing Segment Property Portfolio (“REIS Equity Portfolio”) is comprised of 15 commercial real estate properties and one equity interest in an unconsolidated commercial real estate property which were acquired from CMBS trusts during the previous five years. The REIS Equity Portfolio includes total gross properties and lease intangibles of $270.4 million and debt of $192.6 million as of March 31, 2021.

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The table below summarizes our properties held as of March 31, 2021 and December 31, 2020 (dollars in thousands):

    

Depreciable Life

    

March 31, 2021

    

December 31, 2020

Property Segment

Land and land improvements

015 years

$

485,026

$

484,846

Buildings and building improvements

545 years

1,691,423

1,690,701

Furniture & fixtures

37 years

60,926

59,632

Investing and Servicing Segment

Land and land improvements

015 years

50,617

50,585

Buildings and building improvements

340 years

179,813

179,014

Furniture & fixtures

25 years

2,804

2,606

Commercial and Residential Lending Segment (1)

Land and land improvements

07 years

9,691

11,416

Buildings and building improvements

1020 years

9,927

19,251

Construction in progress

N/A

75,245

75,245

Properties, cost

2,565,472

2,573,296

Less: accumulated depreciation

(320,724)

(302,143)

Properties, net

$

2,244,748

$

2,271,153

(1)Represents properties acquired through loan foreclosure or exercise of control over loan borrower pledged equity interests.

During the three months ended March 31, 2021, we sold an operating property within the Commercial and Residential Lending Segment for $30.6 million and recognized a gain of $17.7 million within gain on sale of investments and other assets in our condensed consolidated statement of operations. Refer to Note 3 for further discussion. No operating properties were sold during the three months ended March 31, 2020.

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7. Investment in Unconsolidated Entities

The table below summarizes our investments in unconsolidated entities as of March 31, 2021 and December 31, 2020 (dollars in thousands):

Participation /

Carrying value as of

    

Ownership % (1)

    

March 31, 2021

    

December 31, 2020

Equity method investments:

Equity interest in a natural gas power plant

10%

$

24,840

$

25,095

Investor entity which owns equity in an online real estate company

50%

9,573

9,397

Equity interests in commercial real estate

50%

1,368

1,543

Equity interest in and advances to a residential mortgage originator (2)

 

N/A

 

18,458

 

17,852

Various (3)

 

15% - 50%

 

16,896

 

8,831

 

71,135

 

62,718

Other equity investments:

Equity interest in a servicing and advisory business

2%

17,584

 

17,584

Investment funds which own equity in a loan servicer and other real estate assets

 

4% - 6%

 

7,267

 

7,267

Various, including Federal Home Loan Bank stock

 

0% - 2%

 

4,921

 

20,485

 

29,772

 

45,336

$

100,907

$

108,054

(1)None of these investments are publicly traded and therefore quoted market prices are not available.

(2)Includes a $4.5 million subordinated loan as of both March 31, 2020 and December 31, 2020.

(3)In March 2021, we obtained 15% equity interests in two investor entities that own 49% equity interests in two entertainment and retail centers in satisfaction of $7.3 million principal amount of a commercial loan. As discussed in Note 4, the equity interests in the entertainment and retail centers were transferred under pre-existing equity pledges of additional collateral for the commercial loan.

As of March 31, 2021, the carrying value of our equity investment in a residential mortgage originator exceeded the underlying equity in net assets of such investee by $1.6 million. This difference is the result of the Company recording its investment in the investee at its acquisition date fair value, which included certain non-amortizing intangible assets not recognized by the investee. Should the Company determine these intangible assets held by the investee are impaired, the Company will recognize such impairment loss through earnings from unconsolidated entities in our consolidated statement of operations, otherwise, such difference between the carrying value of our equity investment in the residential mortgage originator and the underlying equity in the net assets of the residential mortgage originator will continue to exist.

Other than our equity interest in the residential mortgage originator, there were no differences between the carrying value of our equity method investments and the underlying equity in the net assets of the investees as of March 31, 2021.

During the three months ended March 31, 2021, we did not become aware of (i) any observable price changes in our other equity investments accounted for under the fair value practicability election or (ii) any indicators of impairment.

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8. Goodwill and Intangibles

Goodwill

Goodwill is tested for impairment annually in the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Management considered the general economic decline and the impact of the COVID-19 pandemic, but did not identify any such event or circumstances. However, future changes in the expectations of the impact of COVID-19 on our operations, financial performance and cash flows could cause our goodwill to be impaired.

Infrastructure Lending Segment

The Infrastructure Lending Segment’s goodwill of $119.4 million at both March 31, 2021 and December 31, 2020 represents the excess of consideration transferred over the fair value of net assets acquired on September 19, 2018 and October 15, 2018. The goodwill recognized is attributable to value embedded in the acquired Infrastructure Lending Segment’s lending platform.

LNR Property LLC (“LNR”)

The Investing and Servicing Segment’s goodwill of $140.4 million at both March 31, 2021 and December 31, 2020 represents the excess of consideration transferred over the fair value of net assets of LNR acquired on April 19, 2013. The goodwill recognized is attributable to value embedded in LNR’s existing platform, which includes a network of commercial real estate asset managers, work-out specialists, underwriters and administrative support professionals as well as proprietary historical performance data on commercial real estate assets.

Intangible Assets

Servicing Rights Intangibles

In connection with the LNR acquisition, we identified domestic servicing rights that existed at the purchase date, based upon the expected future cash flows of the associated servicing contracts. As of March 31, 2021 and December 31, 2020, the balance of the domestic servicing intangible was net of $42.9 million and $41.4 million, respectively, which was eliminated in consolidation pursuant to ASC 810 against VIE assets in connection with our consolidation of securitization VIEs. Before VIE consolidation, as of March 31, 2021 and December 31, 2020, the domestic servicing intangible had a balance of $55.3 million and $54.6 million, respectively, which represents our economic interest in this asset.

Lease Intangibles

In connection with our acquisitions of commercial real estate, we recognized in-place lease intangible assets and favorable lease intangible assets associated with certain non-cancelable operating leases of the acquired properties.

The following table summarizes our intangible assets, which are comprised of servicing rights intangibles and lease intangibles, as of March 31, 2021 and December 31, 2020 (amounts in thousands):

As of March 31, 2021

As of December 31, 2020

  

Gross Carrying

Accumulated

   

Net Carrying

  

Gross Carrying

   

Accumulated

   

Net Carrying

Value

Amortization

Value

Value

Amortization

Value

Domestic servicing rights, at fair value

$

12,406

$

$

12,406

$

13,202

$

$

13,202

In-place lease intangible assets

 

133,203

 

(94,726)

 

38,477

 

133,203

 

(92,540)

 

40,663

Favorable lease intangible assets

24,181

(8,292)

15,889

24,181

(7,929)

16,252

Total net intangible assets

$

169,790

$

(103,018)

$

66,772

$

170,586

$

(100,469)

$

70,117

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The following table summarizes the activity within intangible assets for the three months ended March 31, 2021 (amounts in thousands):

Domestic

In-place Lease

Favorable Lease

Servicing

Intangible

Intangible

  

Rights

    

Assets

    

Assets

   

Total

Balance as of January 1, 2021

$

13,202

$

40,663

$

16,252

$

70,117

Amortization

(2,186)

(363)

(2,549)

Changes in fair value due to changes in inputs and assumptions

(796)

(796)

Balance as of March 31, 2021

$

12,406

$

38,477

$

15,889

$

66,772

The following table sets forth the estimated aggregate amortization of our in-place lease intangible assets and favorable lease intangible assets for the next five years and thereafter (amounts in thousands):

2021 (remainder of)

    

$

7,094

2022

 

7,862

2023

 

6,115

2024

 

4,722

2025

 

3,846

Thereafter

 

24,727

Total

$

54,366

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9. Secured Borrowings

Secured Financing Agreements

The following table is a summary of our secured financing agreements in place as of March 31, 2021 and December 31, 2020 (dollars in thousands):

Outstanding Balance at

Current

Extended

Weighted Average

Pledged Asset

Maximum

March 31,

December 31,

 

Maturity

   

Maturity (a)

   

Pricing

  

Carrying Value

   

Facility Size

   

2021

   

2020

Repurchase Agreements:

Commercial Loans

May 2021 to Aug 2025

(b)

May 2023 to Mar 2029

(b)

(c)

$

8,088,081

$

9,164,525

(d)

$

5,592,652

$

4,878,939

Residential Loans

Jan 2022 to Oct 2023

N/A

LIBOR + 2.09%

428,877

1,750,000

328,620

22,590

Infrastructure Loans

Feb 2022

N/A

LIBOR + 2.00%

295,516

500,000

246,136

232,961

Conduit Loans

Feb 2022 to Jun 2023

Feb 2023 to Jun 2024

LIBOR + 2.15%

147,523

350,000

111,087

53,554

CMBS/RMBS

Dec 2021 to Oct 2030

(e)

Mar 2022 to Apr 2031

(e)

(f)

1,112,819

823,365

668,993

(g)

620,763

Total Repurchase Agreements

10,072,816

12,587,890

6,947,488

5,808,807

Other Secured Financing:

Borrowing Base Facility

Apr 2022

Apr 2024

LIBOR + 2.25%

304,076

650,000

(h)

223,302

43,014

Commercial Financing Facility

Mar 2022

Mar 2029

GBP LIBOR + 1.75%

101,559

81,847

81,847

81,218

Residential Financing Facility

Sep 2022

Sep 2025

3.50%

163,545

250,000

1,515

215,024

Infrastructure Acquisition Facility

Sep 2021

Sep 2022

(i)

525,611

517,498

414,503

467,450

Infrastructure Financing Facilities

Jul 2022 to Oct 2022

Oct 2024 to Jul 2027

LIBOR + 2.04%

699,684

1,250,000

548,956

538,645

Property Mortgages - Fixed rate

Nov 2024 to Aug 2052

(j)

N/A

4.03%

1,271,385

1,155,306

1,155,306

1,077,528

Property Mortgages - Variable rate

Nov 2021 to Jul 2030

N/A

(k)

929,800

985,453

960,901

960,903

Term Loan and Revolver

(l)

N/A

(l)

N/A

(l)

763,375

643,375

645,000

Federal Home Loan Bank

N/A

N/A

N/A

396,000

Total Other Secured Financing

3,995,660

5,653,479

4,029,705

4,424,782

$

14,068,476

$

18,241,369

10,977,193

10,233,589

Unamortized net discount

(13,149)

(13,569)

Unamortized deferred financing costs

(68,112)

(73,830)

$

10,895,932

$

10,146,190

(a)Subject to certain conditions as defined in the respective facility agreement.
(b)For certain facilities, borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions.
(c)Certain facilities with an outstanding balance of $1.9 billion as of March 31, 2021 are indexed to GBP LIBOR and EURIBOR. The remainder have a weighted average rate of LIBOR + 2.01%.
(d)The aggregate initial maximum facility size may be increased at our option, subject to certain conditions. The $9.2 billion amount includes such upsizes.
(e)Certain facilities with an outstanding balance of $280.3 million as of March 31, 2021 carry a rolling 11-month or 12-month term which may reset monthly or quarterly with the lender's consent. These facilities carry no maximum facility size.
(f)A facility with an outstanding balance of $212.0 million as of March 31, 2021 has a weighted average fixed annual interest rate of 3.29%. All other facilities are variable rate with a weighted average rate of LIBOR + 1.92%.
(g)Includes: (i) $212.0 million outstanding on a repurchase facility that is not subject to margin calls; and (ii) $38.3 million outstanding on one of our repurchase facilities that represents the 49% pro rata share owed by a non-controlling partner in a consolidated joint venture (see Note 14).
(h)The initial maximum facility size of $300.0 million may be increased to $650.0 million, subject to certain conditions.
(i)Consists of an annual interest rate of the applicable currency benchmark index + 2.00%.
(j)The weighted average maturity is 6.5 years as of March 31, 2021.

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(k)Includes a $600.0 million first mortgage and mezzanine loan secured by our Medical Office Portfolio. This debt has a weighted average interest rate of LIBOR + 2.07% that we swapped to a fixed rate of 3.34%. The remainder have a weighted average rate of LIBOR + 2.59%.
(l)Consists of: (i) a 643.4 million term loan facility that matures in July 2026, of which $394.0 million has an annual interest rate of LIBOR + 2.50% and $249.4 million has an annual interest rate of LIBOR + 3.50%, subject to a 75 bps LIBOR floor, and (ii) a $120.0 million revolving credit facility that matures in July 2024 with an annual interest rate of LIBOR + 3.00%. These facilities are secured by the equity interests in certain of our subsidiaries which totaled $4.2 billion as of March 31, 2021.

In the normal course of business, the Company is in discussions with its lenders to extend, amend or replace any financing facilities which contain near term expirations.

In January 2021, we entered into a Residential Loans repurchase facility to finance residential loans. The facility carries a one-year term, which we intend to extend every three months, and an annual interest rate of one-month LIBOR + 2.00% to 2.50%, subject to a 25 bps LIBOR floor. The maximum facility size was initially $375.0 million and was increased to $1.0 billion in March 2021.

In March 2021, we entered into mortgage loans with total borrowings of $82.9 million to refinance our Woodstar II Portfolio. The loans carry seven-year terms and a weighted average fixed annual interest rate of 4.36%. A portion of the net proceeds from the mortgage loans was used to repay $4.9 million of outstanding government sponsored mortgage loans.

Our secured financing agreements contain certain financial tests and covenants. As of March 31, 2021, we were in compliance with all such covenants.

We seek to mitigate risks associated with our repurchase agreements by managing risk related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value. The margin call provisions under the majority of our repurchase facilities, consisting of 72% of these agreements, do not permit valuation adjustments based on capital markets activity. Instead, margin calls on these facilities are limited to collateral-specific credit marks. To monitor credit risk associated with the performance and value of our loans and investments, our asset management team regularly reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary. For the 28% of repurchase agreements containing margin call provisions for general capital markets activity, approximately 15% of these pertain to our loans held-for-sale, for which we manage credit risk through the purchase of credit index instruments. We further seek to manage risks associated with our repurchase agreements by matching the maturities and interest rate characteristics of our loans with the related repurchase agreement.

For the three months ended March 31, 2021 and 2020, approximately $9.5 million and $8.8 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations.

Collateralized Loan Obligations

In August 2019, we refinanced a pool of our commercial loans held-for-investment through a CLO, STWD 2019-FL1. On the closing date, the CLO issued $1.1 billion principal amount of notes, of which $936.4 million was purchased by third party investors. We retained $86.6 million of notes, along with preferred shares with a liquidation preference of $77.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash. During the three months ended March 31, 2021, we utilized the reinvestment feature, contributing $98.6 million of additional interests into the CLO.

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The following table is a summary of our CLO as of March 31, 2021 and December 31, 2020 (amounts in thousands):

Face

Carrying

Weighted

March 31, 2021

Count

Amount

Value

Average Spread

Maturity

Collateral assets

25

$

1,099,693

$

1,099,639

LIBOR + 4.21%

(a)

May 2024

(b)

Financing

1

 

936,375

931,178

LIBOR + 1.63%

(c)

July 2038

(d)

December 31, 2020

Collateral assets

23

$

1,002,445

$

1,099,439

LIBOR + 3.93%

(a)

Apr 2024

(b)

Financing

1

 

936,375

930,554

LIBOR + 1.64%

(c)

July 2038

(d)

(a)Represents the weighted-average coupon earned on variable rate loans during the respective year-to-date period. There were no fixed-rate loans financed by the CLO as of March 31, 2021 and December 31, 2020.
(b)Represents the weighted-average maturity, assuming the extended contractual maturity of the collateral assets.
(c)Represents the weighted-average cost of financing incurred during the respective year-to-date period, inclusive of deferred issuance costs.
(d)Repayments of the CLO are tied to timing of the related collateral asset repayments. The term of the CLO financing obligation represents the legal final maturity date.

We incurred $9.2 million of issuance costs in connection with the CLO, which are amortized on an effective yield basis over the estimated life of the CLO. For both the three months ended March 31, 2021 and 2020, approximately $0.6 million of amortization of deferred financing costs was included in interest expense on our condensed consolidated statements of operations. As of March 31, 2021 and December 31, 2020, our unamortized issuance costs were $5.2 million and $5.8 million, respectively.

The CLO is considered a VIE, for which we are deemed the primary beneficiary. We therefore consolidate the CLO. Refer to Note 14 for further discussion.

Maturities

Our credit facilities generally require principal to be paid down prior to the facilities’ respective maturities if and when we receive principal payments on, or sell, the investment collateral that we have pledged. The following table sets forth our principal repayments schedule for secured financings based on the earlier of (i) the extended contractual maturity of each credit facility or (ii) the extended contractual maturity of each of the investments that have been pledged as collateral under the respective credit facility (amounts in thousands):

    

Repurchase

    

Other Secured

    

Agreements

Financing

CLO

Total

2021 (remainder of)

    

$

302,200

    

$

58,768

    

$

$

360,968

2022

 

1,548,791

 

419,128

 

1,967,919

2023

 

1,450,262

 

803,315

 

2,253,577

2024

 

1,480,044

 

475,383

 

1,955,427

2025

 

1,510,607

 

248,376

 

1,758,983

Thereafter

 

655,584

 

2,024,735

936,375

(a)

 

3,616,694

Total

$

6,947,488

$

4,029,705

$

936,375

$

11,913,568

(a)Assumes utilization of the reinvestment feature.

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10. Unsecured Senior Notes

The following table is a summary of our unsecured senior notes outstanding as of March 31, 2021 and December 31, 2020 (dollars in thousands):

Remaining

Coupon

Effective

Maturity

Period of

Carrying Value at

Rate

Rate (1)

Date

Amortization

March 31, 2021

December 31, 2020

2021 Senior Notes

5.00

%  

5.32

%  

12/15/2021

0.7

years

$

700,000

$

700,000

2023 Senior Notes

5.50

%  

5.71

%  

11/1/2023

 

2.6

years

 

300,000

 

300,000

2023 Convertible Notes

4.38

%  

4.57

%  

4/1/2023

2.0

years

250,000

250,000

2025 Senior Notes

4.75

%  

(2)

5.04

%  

3/15/2025

4.0

years

500,000

500,000

Total principal amount

1,750,000

1,750,000

Unamortized discount—Convertible Notes

(910)

(2,559)

Unamortized discount—Senior Notes

(8,356)

(9,332)

Unamortized deferred financing costs

 

(5,076)

 

(5,589)

Carrying amount of debt components

$

1,735,658

$

1,732,520

Carrying amount of conversion option equity components recorded in additional paid-in capital for outstanding convertible notes

N/A

$

3,755

(1)Effective rate includes the effects of underwriter purchase discount.
(2)The coupon on the 2025 Senior Notes is 4.75%.  At closing, we swapped $470.0 million of the notes to a floating rate of LIBOR + 2.53%.  

Our unsecured senior notes contain certain financial tests and covenants. As of March 31, 2021, we were in compliance with all such covenants.

Convertible Senior Notes

On March 29, 2017, we issued $250.0 million of 4.375% Convertible Senior Notes due 2023 (the “2023 Convertible Notes”) which remain outstanding at March 31, 2021 and mature on April 1, 2023.

We recognized interest expense of $2.9 million and $3.0 million during the three months ended March 31, 2021 and 2020, respectively, from our Convertible Notes.

The following table details the conversion attributes of our Convertible Notes outstanding as of March 31, 2021 (amounts in thousands, except rates):

March 31, 2021

Conversion

Conversion

Rate (1)

Price (2)

2023 Convertible Notes

38.5959

 

$

25.91

(1)The conversion rate represents the number of shares of common stock issuable per $1,000 principal amount of 2023 Convertible Notes converted, as adjusted in accordance with the indenture governing the 2023 Convertible Notes (including the applicable supplemental indenture).

(2)As of March 31, 2021, the market price of the Company’s common stock was $24.74.

The if-converted value of the 2023 Convertible Notes was less than their principal amount by $11.3 million at March 31, 2021 as the closing market price of the Company’s common stock of $24.74 was less than the implicit conversion price of $25.91 per share. The if-converted value of the principal amount of the 2023 Convertible Notes was $238.7 million as of March 31, 2021. As of March 31, 2021, the net carrying amount and fair value of the 2023 Convertible Notes was $248.6 million and $255.8 million, respectively.

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Upon conversion of the 2023 Convertible Notes, settlement may be made in common stock, cash or a combination of both, at the option of the Company.

Conditions for Conversion

Prior to October 1, 2022, the 2023 Convertible Notes will be convertible only upon satisfaction of one or more of the following conditions: (1) the closing market price of the Company’s common stock is at least 110% of the conversion price of the 2023 Convertible Notes for at least 20 out of 30 trading days prior to the end of the preceding fiscal quarter, (2) the trading price of the 2023 Convertible Notes is less than 98% of the product of (i) the conversion rate and (ii) the closing price of the Company’s common stock during any five consecutive trading day period, (3) the Company issues certain equity instruments at less than the 10-day average closing market price of its common stock or the per-share value of certain distributions exceeds the market price of the Company’s common stock by more than 10% or (4) certain other specified corporate events (significant consolidation, sale, merger, share exchange, fundamental change, etc.) occur.

On or after October 1, 2022, holders of the 2023 Convertible Notes may convert each of their notes at the applicable conversion rate at any time prior to the close of business on the second scheduled trading day immediately preceding the maturity date.

11. Loan Securitization/Sale Activities

As described below, we regularly sell loans and notes under various strategies. We evaluate such sales as to whether they meet the criteria for treatment as a sale—legal isolation, ability of transferee to pledge or exchange the transferred assets without constraint and transfer of control.

Loan Securitizations

Within the Investing and Servicing Segment, we originate commercial mortgage loans with the intent to sell these mortgage loans to VIEs for the purposes of securitization. These VIEs then issue CMBS that are collateralized in part by these assets, as well as other assets transferred to the VIE by third parties. Within the Commercial and Residential Lending Segment, we acquire residential loans with the intent to sell these mortgage loans to VIEs for the purpose of securitization. These VIEs then issue RMBS that are collateralized by these assets.

In certain instances, we retain an interest in the CMBS or RMBS VIE and serve as special servicer or servicing administrator for the VIE. In these circumstances, we generally consolidate the VIE into which the loans were sold. The securitizations are subject to optional redemption after a certain period of time or when the pool balance falls below a specified threshold.

The following summarizes the face amount and proceeds of commercial and residential loans securitized for the three months ended March 31, 2021 and 2020 (amounts in thousands):

Commercial Loans

Residential Loans

    

Face Amount

    

Proceeds

    

Face Amount

    

Proceeds

For the Three Months Ended March 31,

2021

$

85,037

$

89,710

$

383,549

$

389,798

2020

 

335,835

352,393

 

381,279

 

398,747

The securitization of these commercial and residential loans does not result in a discrete gain or loss since they are carried under the fair value option.

Our securitizations have each been structured as bankruptcy-remote entities whose assets are not intended to be available to the creditors of any other party.

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Commercial and Residential Loan Sales

Within the Commercial and Residential Lending Segment, we originate or acquire commercial mortgage loans, subsequently selling all or a portion thereof. Typically, our motivation for entering into these transactions is to effectively create leverage on the subordinated position that we will retain and hold for investment. We also may sell certain of our previously-acquired residential loans to third parties outside a securitization. The following table summarizes our loans sold by the Commercial and Residential Lending Segment, net of expenses (amounts in thousands):

Residential

    

Face Amount

    

Proceeds

For the Three Months Ended March 31,

2021

$

89,418

$

92,419

2020

550

604

There were no sales of commercial loans within the Commercial and Residential Lending Segment during the three months ended March 31, 2021 and 2020.

Infrastructure Loan Sales

During the three months ended March 31, 2020, the Infrastructure Lending Segment sold loans held-for-sale with an aggregate face amount of $38.7 million for proceeds of $38.4 million, recognizing gains of $0.3 million. There were no sales of loans within the Infrastructure Lending Segment during the three months ended March 31, 2021.

12. Derivatives and Hedging Activity

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions. Refer to Note 13 to the consolidated financial statements included in our Form 10-K for further discussion of our risk management objectives and policies.

Designated Hedges

The Company does not generally elect to apply the hedge accounting designation to its hedging instruments. As of March 31, 2021 and December 31, 2020, the Company did not have any designated hedges.

Non-designated Hedges and Derivatives

We have entered into the following types of non-designated hedges and derivatives:

Foreign exchange (“Fx”) forwards whereby we agree to buy or sell a specified amount of foreign currency for a specified amount of USD at a future date, economically fixing the USD amounts of foreign denominated cash flows we expect to receive or pay related to certain foreign denominated loan investments and properties;
Interest rate contracts which hedge a portion of our exposure to changes in interest rates;
Credit index instruments which hedge a portion of our exposure to the credit risk of our commercial loans held-for-sale; and
Interest rate swap guarantees whereby we guarantee the interest rate swap obligations of certain Infrastructure Lending borrowers. Our interest rate swap guarantees were assumed in connection with the acquisition of the Infrastructure Lending Segment.

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The following table summarizes our non-designated derivatives as of March 31, 2021 (notional amounts in thousands):

Type of Derivative

    

Number of Contracts

    

Aggregate Notional Amount

    

Notional Currency

    

Maturity

Fx contracts – Buy Euros ("EUR")

2

3,973

EUR

November 2022

Fx contracts – Buy Pounds Sterling ("GBP")

8

16,675

GBP

April 2021 – July 2022

Fx contracts – Sell EUR

208

252,796

EUR

April 2021 – November 2025

Fx contracts – Sell GBP

156

556,798

GBP

April 2021 – May 2024

Fx contracts – Sell Australian dollar ("AUD")

19

188,554

AUD

August 2021 – June 2022

Interest rate swaps – Paying fixed rates

46

1,791,332

USD

May 2023 – April 2031

Interest rate swaps – Receiving fixed rates

1

470,000

USD

March 2025

Interest rate caps

22

985,635

USD

April 2021 – April 2025

Credit index instruments

3

49,000

USD

September 2058 – August 2061

Interest rate swap guarantees

6

371,890

USD

March 2022 – June 2025

Total

471

The table below presents the fair value of our derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of March 31, 2021 and December 31, 2020 (amounts in thousands):

Fair Value of Derivatives

Fair Value of Derivatives

in an Asset Position (1) as of

in a Liability Position (2) as of

March 31,

December 31,

March 31,

December 31,

    

2021

2020

2021

2020

Interest rate contracts

$

25,331

$

33,841

$

4

$

4

Interest rate swap guarantees

498

849

Foreign exchange contracts

 

12,617

 

6,585

 

34,002

 

39,951

Credit index instruments

 

81

 

129

 

301

 

520

Total derivatives

$

38,029

$

40,555

$

34,805

$

41,324

(1)Classified as derivative assets in our condensed consolidated balance sheets.

(2)Classified as derivative liabilities in our condensed consolidated balance sheets.

The table below presents the effect of our derivative financial instruments on the condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020 (amounts in thousands):

Amount of Gain (Loss)

Recognized in Income for the

Derivatives Not Designated

Location of Gain (Loss)

Three Months Ended March 31,

as Hedging Instruments

    

Recognized in Income

    

2021

    

2020

Interest rate contracts

 

Gain on derivative financial instruments

$

20,158

$

(45,125)

Interest rate swap guarantees

Gain on derivative financial instruments

351

(675)

Foreign exchange contracts

 

Gain on derivative financial instruments

 

13,602

 

53,265

Credit index instruments

 

Gain on derivative financial instruments

 

(122)

 

2,245

$

33,989

$

9,710

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13. Offsetting Assets and Liabilities

The following tables present the potential effects of netting arrangements on our financial position for financial assets and liabilities within the scope of ASC 210-20, Balance Sheet—Offsetting, which for us are derivative assets and liabilities as well as repurchase agreement liabilities (amounts in thousands):

(iv)

Gross Amounts Not

Offset in the Statement

(ii)  

(iii) = (i) - (ii)

of Financial Position

    

Gross Amounts

   

Net Amounts

   

   

Cash

   

(i)

Offset in the

Presented in

Collateral

Gross Amounts

Statement of

the Statement of

Financial

Received /

(v) = (iii) - (iv)

Recognized

Financial Position

Financial Position

Instruments

Pledged

Net Amount

As of March 31, 2021

Derivative assets

$

38,029

$

$

38,029

$

11,491

$

24,235

$

2,303

Derivative liabilities

$

34,805

$

$

34,805

$

11,491

$

22,618

$

696

Repurchase agreements

 

6,947,488

 

 

6,947,488

 

6,947,488

 

 

$

6,982,293

$

$

6,982,293

$

6,958,979

$

22,618

$

696

As of December 31, 2020

Derivative assets

$

40,555

$

$

40,555

$

6,716

$

33,772

$

67

Derivative liabilities

$

41,324

$

$

41,324

$

6,716

$

27,416

$

7,192

Repurchase agreements

 

5,808,807

 

 

5,808,807

 

5,808,807

 

 

$

5,850,131

$

$

5,850,131

$

5,815,523

$

27,416

$

7,192

14. Variable Interest Entities

Investment Securities

As discussed in Note 2, we evaluate all of our investments and other interests in entities for consolidation, including our investments in CMBS, RMBS and our retained interests in securitization transactions we initiated, all of which are generally considered to be variable interests in VIEs.

Securitization VIEs consolidated in accordance with ASC 810 are structured as pass through entities that receive principal and interest on the underlying collateral and distribute those payments to the certificate holders. The assets and other instruments held by these securitization entities are restricted and can only be used to fulfill the obligations of the entity. Additionally, the obligations of the securitization entities do not have any recourse to the general credit of any other consolidated entities, nor to us as the primary beneficiary. The VIE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the consolidated VIEs are also eliminated. Finally, a portion of the identified servicing intangible associated with the eliminated fee streams is eliminated in consolidation.

VIEs in which we are the Primary Beneficiary

The inclusion of the assets and liabilities of securitization VIEs in which we are deemed the primary beneficiary has no economic effect on us. Our exposure to the obligations of securitization VIEs is generally limited to our investment in these entities. We are not obligated to provide, nor have we provided, any financial support for any of these consolidated structures.

During the year ended December 31, 2019, we refinanced a pool of our commercial loans held-for-investment through a CLO, which is considered to be a VIE. We are the primary beneficiary of, and therefore consolidate, the CLO in our financial statements as we have both (i) the power to direct the activities in our role as collateral manager that most significantly impact the CLO’s economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the CLO that could be potentially significant through the subordinate interests we own.

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The following table details the assets and liabilities of our consolidated CLO as of March 31, 2021 and December 31, 2020 (amounts in thousands):

March 31, 2021

December 31, 2020

Assets:

Cash and cash equivalents

$

$

96,998

Loans held-for-investment

1,099,639

 

1,002,441

Accrued interest receivable

 

4,068

5,454

Other assets

307

 

557

Total Assets

$

1,104,014

$

1,105,450

Liabilities

Accounts payable, accrued expenses and other liabilities

$

640

$

663

Collateralized loan obligations, net

 

931,178

 

930,554

Total Liabilities

$

931,818

$

931,217

Assets held by this CLO are restricted and can be used only to settle obligations of the CLO, including the subordinate interests owned by us. The liabilities of this CLO are non-recourse to us and can only be satisfied from the assets of the CLO.

We also hold controlling interests in other non-securitization entities that are considered VIEs. SPT Dolphin Intermediate LLC (“SPT Dolphin”), the entity which holds the Woodstar II Portfolio, is a VIE because the third party interest holders do not carry kick-out rights or substantive participating rights. We were deemed to be the primary beneficiary of the VIE because we possess both the power to direct the activities of the VIE that most significantly impact its economic performance and a significant economic interest in the entity. This VIE had total assets of $685.4 million and liabilities of $520.6 million as of March 31, 2021.

We also hold a 51% controlling interest in a joint venture (the “CMBS JV”) within our Investing and Servicing Segment, which is considered a VIE because the third party interest holder does not carry kick-out rights or substantive participating rights. We are deemed the primary beneficiary of the CMBS JV. This VIE had total assets of $335.4 million and liabilities of $78.9 million as of March 31, 2021. Refer to Note 16 for further discussion.

In addition to the above non-securitization entities, we have smaller VIEs with total assets of $98.7 million and liabilities of $53.8 million as of March 31, 2021.

VIEs in which we are not the Primary Beneficiary

In certain instances, we hold a variable interest in a VIE in the form of CMBS, but either (i) we are not appointed, or do not serve as, special servicer or servicing administrator or (ii) an unrelated third party has the rights to unilaterally remove us as special servicer without cause. In these instances, we do not have the power to direct activities that most significantly impact the VIE’s economic performance. In other cases, the variable interest we hold does not obligate us to absorb losses or provide us with the right to receive benefits from the VIE which could potentially be significant. For these structures, we are not deemed to be the primary beneficiary of the VIE, and we do not consolidate these VIEs.

As of March 31, 2021, five of our six collateralized debt obligation (“CDO”) structures within our Investing and Servicing Segment were in default or imminent default, which, pursuant to the underlying indentures, changes the rights of the variable interest holders. Two of the five CDOs defaulted during the year ended December 31, 2020. Upon default of a CDO, the trustee or senior note holders are allowed to exercise certain rights, including liquidation of the collateral, which at that time, is the activity which would most significantly impact the CDO’s economic performance. Further, when the CDO is in default, the collateral administrator no longer has the option to purchase securities from the CDO. In cases where the CDO is in default and we do not have the ability to exercise rights which would most significantly impact the CDO’s economic performance, we do not consolidate the VIE. As of March 31, 2021, none of these five CDO structures were consolidated.

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As noted above, we are not obligated to provide, nor have we provided, any financial support for any of our securitization VIEs, whether or not we are deemed to be the primary beneficiary. As such, the risk associated with our involvement in these VIEs is limited to the carrying value of our investment in the entity. As of March 31, 2021, our maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $19.3 million on a fair value basis.

As of March 31, 2021, the securitization VIEs which we do not consolidate had debt obligations to beneficial interest holders with unpaid principal balances, excluding the notional value of interest-only securities, of $3.9 billion. The corresponding assets are comprised primarily of commercial mortgage loans with unpaid principal balances corresponding to the amounts of the outstanding debt obligations.

We also hold passive non-controlling interests in certain unconsolidated entities that are considered VIEs. We are not the primary beneficiaries of these VIEs as we do not possess the power to direct the activities of the VIEs that most significantly impact their economic performance and therefore report our interests, which totaled $25.7 million as of March 31, 2021, within investment in unconsolidated entities on our condensed consolidated balance sheet. Our maximum risk of loss is limited to our carrying value of the investments.

15. Related-Party Transactions

Management Agreement

We are party to a management agreement (the “Management Agreement”) with our Manager. Under the Management Agreement, our Manager, subject to the oversight of our board of directors, is required to manage our day to day activities, for which our Manager receives a base management fee and is eligible for an incentive fee and stock awards. Our Manager’s personnel perform certain due diligence, legal, management and other services that outside professionals or consultants would otherwise perform. As such, in accordance with the terms of our Management Agreement, our Manager is paid or reimbursed for the documented costs of performing such tasks, provided that such costs and reimbursements are in amounts no greater than those which would be payable to outside professionals or consultants engaged to perform such services pursuant to agreements negotiated on an arm’s-length basis. Refer to Note 16 to the consolidated financial statements included in our Form 10-K for further discussion of this agreement.

Base Management Fee. For the three months ended March 31, 2021 and 2020, approximately $19.2 million and $19.1 million, respectively, was incurred for base management fees. As of both March 31, 2021 and December 31, 2020, there were $19.2 million of unpaid base management fees included in related-party payable in our condensed consolidated balance sheets.

Incentive Fee. For the three months ended March 31, 2021 and 2020, approximately $13.1 million and $15.8 million, respectively, was incurred for incentive fees. As of March 31, 2021 and December 31, 2020, there were $13.1 million and $15.0 million of unpaid incentive fees included in related-party payable in our condensed consolidated balance sheets.

Expense Reimbursement. For the three months ended March 31, 2021 and 2020, approximately $1.5 million and $2.2 million, respectively, was incurred for executive compensation and other reimbursable expenses and recognized within general and administrative expenses in our condensed consolidated statements of operations. As of March 31, 2021 and December 31, 2020, there were $3.8 million and $5.0 million, respectively, of unpaid reimbursable executive compensation and other expenses included in related-party payable in our condensed consolidated balance sheets.

Equity Awards. In certain instances, we issue RSAs to certain employees of affiliates of our Manager who perform services for us. During the three months ended March 31, 2021 and 2020, we granted 981,951 and 341,635 RSAs, respectively, at grant date fair values of $19.6 million and $3.9 million, respectively. Expenses related to the vesting of awards to employees of affiliates of our Manager were $2.4 million and $1.1 million during the three months ended March 31, 2021 and 2020, respectively, and are reflected in general and administrative expenses in our condensed consolidated statements of operations. These shares generally vest over a three-year period.

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Manager Equity Plan

In May 2017, the Company’s shareholders approved the Starwood Property Trust, Inc. 2017 Manager Equity Plan (the “2017 Manager Equity Plan”), which replaced the Starwood Property Trust, Inc. Manager Equity Plan (“Manager Equity Plan”). In November 2020, we granted 1,800,000 RSUs to our Manager under the 2017 Manager Equity Plan. In September 2019, we granted 1,200,000 RSUs to our Manager under the 2017 Manager Equity Plan. In April 2018, we granted 775,000 RSUs to our Manager under the 2017 Manager Equity Plan. In March 2017, we granted 1,000,000 RSUs to our Manager under the Manager Equity Plan. In connection with these grants and prior similar grants, we recognized share-based compensation expense of $5.9 million and $5.2 million within management fees in our condensed consolidated statements of operations for the three months ended March 31, 2021 and 2020, respectively. Refer to Note 16 for further discussion of these grants.

Investments in Loans and Securities

During the three months ended March 31, 2021, the Company acquired $141.6 million of loans from a residential mortgage originator in which it holds an equity interest. Additionally, as of March 31, 2021, the Company had outstanding residential mortgage loan purchase commitments of $27.4 million to this residential mortgage originator. Refer to Note 7 for further discussion.

Lease Arrangements

In March 2020, we entered into an office lease agreement with an entity which is controlled by our Chairman and CEO through majority equity ownership of the entity. The leased premises are currently under construction and will serve as our new Miami Beach office when our existing lease in Miami Beach expires on December 31, 2021. The lease will commence after delivery of the office space to us, but no earlier than July 30, 2021. The lease is for approximately 74,000 square feet of office space, has an initial term of 15 years and requires monthly lease payments starting in the tenth month after lease commencement. The lease payments are based on an annual base rate of $52.00 per square foot that increases by 3% each anniversary following commencement, plus our pro rata share of building operating expenses. In April 2020, we provided a $1.9 million cash security deposit to the landlord. Prior to the execution of this lease, we engaged an independent third party leasing firm and external counsel to advise the independent directors of our board of directors on market terms for the lease.  The terms of the lease were approved by our independent directors.

Other Related-Party Arrangements

Highmark Residential (“Highmark”), an affiliate of our Manager, provides property management services for the properties within our Woodstar I Portfolio. Fees paid to Highmark are calculated as a percentage of gross receipts and are at market terms. During the three months ended March 31, 2021 and 2020, property management fees to Highmark of $0.7 million and $0.5 million, respectively, were recognized in our condensed consolidated statements of operations.

Refer to Note 16 to the consolidated financial statements included in our Form 10-K for further discussion of related-party agreements.

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16. Stockholders’ Equity and Non-Controlling Interests

During the three months ended March 31, 2021, our board of directors declared the following dividends:

Declaration Date

    

Record Date

    

Ex-Dividend Date

    

Payment Date

    

Amount

    

Frequency

3/11/21

 

3/31/21

 

3/30/21

4/15/21

0.48

 

Quarterly

During the three months ended March 31, 2021 and 2020, there were no shares issued under our At-The-Market Equity Offering Sales Agreement. During the three months ended March 31, 2021 and 2020, shares issued under the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) were not material.

Equity Incentive Plans

In May 2017, the Company’s shareholders approved the 2017 Manager Equity Plan and the Starwood Property Trust, Inc. 2017 Equity Plan (the “2017 Equity Plan”), which allow for the issuance of up to 11,000,000 stock options, stock appreciation rights, RSAs, RSUs or other equity-based awards or any combination thereof to the Manager, directors, employees, consultants or any other party providing services to the Company. The 2017 Manager Equity Plan succeeds and replaces the Manager Equity Plan and the 2017 Equity Plan succeeds and replaces the Starwood Property Trust, Inc. Equity Plan (the “Equity Plan”) and the Starwood Property Trust, Inc. Non-Executive Director Stock Plan (the “Non-Executive Director Stock Plan”).

The table below summarizes our share awards granted or vested under the Manager Equity Plan and the 2017 Manager Equity Plan during the three months ended March 31, 2021 and 2020 (dollar amounts in thousands):

Grant Date

    

Type

    

Amount Granted

    

Grant Date Fair Value

    

Vesting Period

 

November 2020

RSU

1,800,000

$

30,078

3 years

September 2019

RSU

1,200,000

29,484

(1)

April 2018

RSU

775,000

16,329

3 years

March 2017

RSU

1,000,000

22,240

3 years

(1)Of the amount granted, 218,898 vested immediately on the grant date and the remaining amount vests over a three-year period.

Schedule of Non-Vested Shares and Share Equivalents

2017

Weighted Average

2017

Manager

Grant Date Fair

Equity Plan

Equity Plan

Total

Value (per share)

Balance as of January 1, 2021

 

1,594,605

 

2,286,896

 

3,881,501

 

$

17.26

Granted

1,518,072

 

1,518,072

 

21.81

Vested

 

(633,893)

(296,342)

 

(930,235)

 

17.48

Balance as of March 31, 2021

 

2,478,784

 

1,990,554

 

4,469,338

 

18.76

As of March 31, 2021, there were 3.2 million shares of common stock available for future grants under the 2017 Manager Equity Plan and the 2017 Equity Plan.

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Non-Controlling Interests in Consolidated Subsidiaries

In connection with our Woodstar II Portfolio acquisitions, we issued 10.2 million Class A Units in our consolidated subsidiary, SPT Dolphin, and rights to receive an additional 1.9 million Class A Units if certain contingent events occur. As of March 31, 2021, all of the 1.9 million contingent Class A Units were issued. The Class A Units are redeemable for consideration equal to the current share price of the Company’s common stock on a one-for-one basis, with the consideration paid in either cash or the Company’s common stock, at the determination of the Company. During the three months ended March 31, 2021, redemptions of 0.1 million of the Class A Units were received and settled in common stock, leaving 10.6 million Class A Units outstanding as of March 31, 2021. In consolidation, the outstanding Class A Units are reflected as non-controlling interests in consolidated subsidiaries on our condensed consolidated balance sheets, the balance of which was $225.6 million and $226.7 million as of March 31, 2021 and December 31, 2020, respectively.

To the extent SPT Dolphin has sufficient cash available, the Class A Units earn a preferred return indexed to the dividend rate of the Company’s common stock. Any distributions made pursuant to this waterfall are recognized within net income attributable to non-controlling interests in our condensed consolidated statements of operations. During both the three months ended March 31, 2021 and 2020, we recognized net income attributable to non-controlling interests of $5.1 million associated with these Class A Units.

As discussed in Note 14, we hold a 51% controlling interest in the CMBS JV within our Investing and Servicing Segment. Because the CMBS JV is deemed a VIE for which we are the primary beneficiary, the 49% interest of our joint venture partner is reflected as a non-controlling interest in consolidated subsidiaries on our condensed consolidated balance sheets, and any net income attributable to this 49% joint venture interest is reflected within net income attributable to non-controlling interests in our consolidated statement of operations. The non-controlling interests in the CMBS JV were $132.4 million and $126.7 million as of March 31, 2021 and December 31, 2020, respectively. During the three months ended March 31, 2021 and 2020, net income (loss) attributable to non-controlling interests was $5.4 million and $(6.0) million, respectively.

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17. Earnings per Share

The following table provides a reconciliation of net income (loss) and the number of shares of common stock used in the computation of basic EPS and diluted EPS (amounts in thousands, except per share amounts):

For the Three Months Ended

March 31,

    

2021

    

2020

Basic Earnings (Loss)

Income (loss) attributable to STWD common stockholders

$

111,378

$

(66,769)

Less: Income attributable to participating shares not already deducted as non-controlling interests

 

(1,925)

 

(1,222)

Basic earnings (loss)

$

109,453

$

(67,991)

Diluted Earnings (Loss)

Income (loss) attributable to STWD common stockholders

$

111,378

$

(66,769)

Less: Income attributable to participating shares not already deducted as non-controlling interests

 

(1,925)

 

(1,222)

Add: Interest expense on Convertible Notes

2,916

*

Diluted earnings (loss)

$

112,369

$

(67,991)

Number of Shares:

Basic — Average shares outstanding

 

283,319

 

280,990

Effect of dilutive securities — Convertible Notes

 

9,649

 

*

Effect of dilutive securities — Contingently issuable shares

 

263

 

Diluted — Average shares outstanding

 

293,231

 

280,990

Earnings (Loss) Per Share Attributable to STWD Common Stockholders:

Basic

$

0.39

$

(0.24)

Diluted

$

0.38

$

(0.24)

*Our Convertible Notes were not dilutive for the three months ended March 31, 2020.

As of March 31, 2021 and 2020, participating shares of 14.6 million and 13.2 million, respectively, were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above. Such participating shares at both March 31, 2021 and 2020 included 10.6 million potential shares of our common stock issuable upon redemption of the Class A Units in SPT Dolphin, as discussed in Note 16.

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18. Accumulated Other Comprehensive Income

The changes in AOCI by component are as follows (amounts in thousands):

    

Cumulative

    

    

Unrealized Gain

(Loss) on

Foreign

Available-for-

Currency

Sale Securities

Translation

Total

Three Months Ended March 31, 2021

Balance at January 1, 2021

$

44,057

$

(64)

$

43,993

OCI before reclassifications

 

(2,403)

 

 

(2,403)

Amounts reclassified from AOCI

 

 

64

 

64

Net period OCI

 

(2,403)

 

64

 

(2,339)

Balance at March 31, 2021

$

41,654

$

$

41,654

Three Months Ended March 31, 2020

Balance at January 1, 2020

$

50,996

$

(64)

$

50,932

OCI before reclassifications

 

(15,048)

 

 

(15,048)

Amounts reclassified from AOCI

 

 

 

Net period OCI

 

(15,048)

 

 

(15,048)

Balance at March 31, 2020

$

35,948

$

(64)

$

35,884

19. Fair Value

GAAP establishes a hierarchy of valuation techniques based on the observability of inputs utilized in measuring financial assets and liabilities at fair value. GAAP establishes market-based or observable inputs as the preferred source of values, followed by valuation models using management assumptions in the absence of market inputs. The three levels of the hierarchy are described below:

Level I—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.

Level II—Inputs (other than quoted prices included in Level I) are either directly or indirectly observable for the asset or liability through correlation with market data at the measurement date and for the duration of the instrument’s anticipated life.

Level III—Inputs reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. Consideration is given to the risk inherent in the valuation technique and the risk inherent in the inputs to the model.

Valuation Process

We have valuation control processes in place to validate the fair value of the Company’s financial assets and liabilities measured at fair value including those derived from pricing models. These control processes are designed to assure that the values used for financial reporting are based on observable inputs wherever possible. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and the assumptions are reasonable.

Pricing Verification—We use recently executed transactions, other observable market data such as exchange data, broker/dealer quotes, third party pricing vendors and aggregation services for validating the fair values generated using valuation models. Pricing data provided by approved external sources is evaluated using a number of approaches; for example, by corroborating the external sources’ prices to executed trades, analyzing the methodology and assumptions used by the external source to generate a price and/or by evaluating how active the third party pricing source (or originating sources used by the third party pricing source) is in the market.

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Unobservable Inputs—Where inputs are not observable, we review the appropriateness of the proposed valuation methodology to ensure it is consistent with how a market participant would arrive at the unobservable input. The valuation methodologies utilized in the absence of observable inputs may include extrapolation techniques and the use of comparable observable inputs.

Any changes to the valuation methodology will be reviewed by our management to ensure the changes are appropriate. The methods used may produce a fair value calculation that is not indicative of net realizable value or reflective of future fair values. Furthermore, while we anticipate that our valuation methods are appropriate and consistent with other market participants, the use of different methodologies, or assumptions, to determine the fair value could result in a different estimate of fair value at the reporting date.

Fair Value on a Recurring Basis

We determine the fair value of our financial assets and liabilities measured at fair value on a recurring basis as follows:

Loans held-for-sale, commercial

We measure the fair value of our commercial mortgage loans held-for-sale using a discounted cash flow analysis unless observable market data (i.e., securitized pricing) is available. A discounted cash flow analysis requires management to make estimates regarding future interest rates and credit spreads. The most significant of these inputs relates to credit spreads and is unobservable. Thus, we have determined that the fair values of mortgage loans valued using a discounted cash flow analysis should be classified in Level III of the fair value hierarchy, while mortgage loans valued using securitized pricing should be classified in Level II of the fair value hierarchy. Mortgage loans classified in Level III are transferred to Level II if securitized pricing becomes available.

Loans held-for-sale and loans held-for-investment, residential

We measure the fair value of our residential loans held-for-sale and held-for-investment based on the net present value of expected future cash flows using a combination of observable and unobservable inputs. Observable market participant assumptions include pricing related to trades of residential loans with similar characteristics. Unobservable inputs include the expectation of future cash flows, which involves judgments about the underlying collateral, the creditworthiness of the borrower, estimated prepayment speeds, estimated future credit losses, forward interest rates, investor yield requirements and certain other factors. At each measurement date, we consider both the observable and unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable inputs, these loans have been classified within Level III.

RMBS

RMBS are valued utilizing observable and unobservable market inputs. The observable market inputs include recent transactions, broker quotes and vendor prices (“market data”). However, given the implied price dispersion amongst the market data, the fair value determination for RMBS has also utilized significant unobservable inputs in discounted cash flow models including prepayments, default and severity estimates based on the recent performance of the collateral, the underlying collateral characteristics, industry trends, as well as expectations of macroeconomic events (e.g., housing price curves, interest rate curves, etc.). At each measurement date, we consider both the observable and unobservable valuation inputs in the determination of fair value. However, given the significance of the unobservable inputs these securities have been classified within Level III.

CMBS

CMBS are valued utilizing both observable and unobservable market inputs. These factors include projected future cash flows, ratings, subordination levels, vintage, remaining lives, credit issues, recent trades of similar securities and the spreads used in the prior valuation. We obtain current market spread information where available and use this information in evaluating and validating the market price of all CMBS. Depending upon the significance of the fair value inputs used in determining these fair values, these securities are classified in either Level II or Level III of the fair value hierarchy. CMBS may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs used to price the CMBS become or cease to be observable.

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Equity security

The equity security is publicly registered and traded in the U.S. and its market price is listed on the London Stock Exchange. The security has been classified within Level I.

Domestic servicing rights

The fair value of this intangible is determined using discounted cash flow modeling techniques which require management to make estimates regarding future net servicing cash flows, including forecasted loan defeasance, control migration, delinquency and anticipated maturity defaults which are calculated assuming a debt yield at which default occurs. Since the most significant of these inputs are unobservable, we have determined that the fair values of this intangible in its entirety should be classified in Level III of the fair value hierarchy.

Derivatives

The valuation of derivative contracts are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market based inputs, including interest rate curves, spot and market forward points and implied volatilities. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts. The variable cash receipts are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

We incorporate credit valuation adjustments to appropriately reflect both our own non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of non-performance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

The valuation of over the counter derivatives are determined using discounted cash flows based on Overnight Index Swap (“OIS”) rates. Fully collateralized trades are discounted using OIS with no additional economic adjustments to arrive at fair value. Uncollateralized or partially collateralized trades are also discounted at OIS, but include appropriate economic adjustments for funding costs (i.e., a LIBOR OIS basis adjustment to approximate uncollateralized cost of funds) and credit risk. For credit index instruments, fair value is determined based on changes in the relevant indices from the date of initiation of the instrument to the reporting date, as these changes determine the amount of any future cash settlement between us and the counterparty. These indices are considered Level II inputs as they are directly observable.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level II of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level III inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of March 31, 2021 and December 31, 2020, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level II of the fair value hierarchy.

Liabilities of consolidated VIEs

Our consolidated VIE liabilities generally represent bonds that are not owned by us. The majority of these are either traded in the marketplace or can be analogized to similar securities that are traded in the marketplace. For these liabilities, pricing is considered to be Level II, where the valuation is based upon quoted prices for similar instruments traded in active markets. We generally utilize third party pricing service providers for valuing these liabilities. In order to determine whether to utilize the valuations provided by third parties, we conduct an ongoing evaluation of their valuation methodologies and processes, as well as a review of the individual valuations themselves. In evaluating third party pricing for reasonableness, we consider a variety of factors, including market transaction information for the particular bond, market transaction information for bonds within the same trust, market transaction information for similar bonds, the bond’s ratings and the bond’s subordination levels.

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For the minority portion of our consolidated VIE liabilities which consist of unrated or non-investment grade bonds that are not owned by us, pricing may be either Level II or Level III. If independent third party pricing similar to that noted above is available, we consider the valuation to be Level II. If such third party pricing is not available, the valuation is generated from model-based techniques that use significant unobservable assumptions, and we consider the valuation to be Level III. For VIE liabilities classified as Level III, valuation is determined based on discounted expected future cash flows which take into consideration expected duration and yields based on market transaction information, ratings, subordination levels, vintage and current market spread. VIE liabilities may shift between Level II and Level III of the fair value hierarchy if the significant fair value inputs used to price the VIE liabilities become or cease to be observable.

Assets of consolidated VIEs

The securitization VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets of the VIE, we maximize the use of observable inputs over unobservable inputs. The individual assets of a VIE are inherently incapable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Because our methodology for valuing these assets does not value the individual assets of a VIE, but rather uses the value of the VIE liabilities as an indicator of the fair value of VIE assets as a whole, we have determined that our valuations of VIE assets in their entirety should be classified in Level III of the fair value hierarchy.

Fair Value Only Disclosed

We determine the fair value of our financial instruments and assets where fair value is disclosed as follows:

Loans held-for-investment and loans held-for-sale

We estimate the fair values of our loans not carried at fair value on a recurring basis by discounting their expected cash flows at a rate we estimate would be demanded by the market participants that are most likely to buy our loans. The expected cash flows used are generally the same as those used to calculate our level yield income in the financial statements. Since these inputs are unobservable, we have determined that the fair value of these loans in their entirety would be classified in Level III of the fair value hierarchy.

HTM debt securities

We estimate the fair value of our mandatorily redeemable preferred equity interests in commercial real estate companies and infrastructure bonds using the same methodology described for our loans held-for-investment. We estimate the fair value of our HTM CMBS using the same methodology described for our CMBS carried at fair value on a recurring basis.

Secured financing agreements and CLO

The fair value of the secured financing agreements and CLO are determined by discounting the contractual cash flows at the interest rate we estimate such arrangements would bear if executed in the current market. We have determined that our valuation of these instruments should be classified in Level III of the fair value hierarchy.

Unsecured senior notes

The fair value of our unsecured senior notes is determined based on the last available bid price for the respective notes in the current market. As these prices represent observable market data, we have determined that the fair value of these instruments would be classified in Level II of the fair value hierarchy.

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Fair Value Disclosures

The following tables present our financial assets and liabilities carried at fair value on a recurring basis in the condensed consolidated balance sheets by their level in the fair value hierarchy as of March 31, 2021 and December 31, 2020 (amounts in thousands):

March 31, 2021

    

Total

    

Level I

    

Level II

    

Level III

Financial Assets:

Loans under fair value option

$

763,773

$

$

$

763,773

RMBS

 

160,301

 

 

 

160,301

CMBS

 

19,256

 

 

 

19,256

Equity security

 

10,655

 

10,655

 

 

Domestic servicing rights

 

12,406

 

 

 

12,406

Derivative assets

 

38,029

 

 

38,029

 

VIE assets

 

62,367,110

 

 

 

62,367,110

Total

$

63,371,530

$

10,655

$

38,029

$

63,322,846

Financial Liabilities:

Derivative liabilities

$

34,805

$

$

34,805

$

VIE liabilities

 

60,896,709

 

 

58,669,281

 

2,227,428

Total

$

60,931,514

$

$

58,704,086

$

2,227,428

December 31, 2020

    

Total

    

Level I

    

Level II

    

Level III

Financial Assets:

Loans under fair value option

$

1,022,979

$

$

$

1,022,979

RMBS

 

167,349

 

 

 

167,349

CMBS

 

19,457

 

 

 

19,457

Equity security

 

11,247

 

11,247

 

 

Domestic servicing rights

 

13,202

 

 

 

13,202

Derivative assets

 

40,555

 

 

40,555

 

VIE assets

 

64,238,328

 

 

 

64,238,328

Total

$

65,513,117

$

11,247

$

40,555

$

65,461,315

Financial Liabilities:

Derivative liabilities

$

41,324

$

$

41,324

$

VIE liabilities

 

62,776,371

 

 

60,756,495

 

2,019,876

Total

$

62,817,695

$

$

60,797,819

$

2,019,876

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The changes in financial assets and liabilities classified as Level III are as follows for the three months ended March 31, 2021 and 2020 (amounts in thousands):

    

    

    

    

Domestic

    

    

    

Loans at

Servicing

VIE

Three Months Ended March 31, 2021

Fair Value

RMBS

CMBS

Rights

VIE Assets

Liabilities

Total

January 1, 2021 balance

$

1,022,979

$

167,349

$

19,457

$

13,202

$

64,238,328

$

(2,019,876)

$

63,441,439

Total realized and unrealized gains (losses):

Included in earnings:

Change in fair value / gain on sale

 

(9,478)

 

 

372

(796)

 

(2,264,591)

 

65,681

 

(2,208,812)

Net accretion

 

 

2,606

 

 

 

 

 

2,606

Included in OCI

 

 

(2,403)

 

 

 

 

 

(2,403)

Purchases / Originations

 

375,270

 

 

 

 

 

 

375,270

Sales

 

(571,927)

 

 

 

 

 

 

(571,927)

Issuances

 

 

 

 

 

 

(11,604)

 

(11,604)

Cash repayments / receipts

 

(53,071)

 

(7,251)

 

(573)

 

 

 

(1,137)

 

(62,032)

Transfers into Level III

 

 

 

 

 

 

(409,267)

 

(409,267)

Transfers out of Level III

 

 

 

 

 

 

148,775

 

148,775

Consolidation of VIEs

 

 

 

 

 

393,373

 

 

393,373

March 31, 2021 balance

$

763,773

$

160,301

$

19,256

$

12,406

$

62,367,110

$

(2,227,428)

$

61,095,418

Amount of unrealized gains (losses) attributable to assets still held at March 31, 2021:

Included in earnings

$

(7,708)

$

2,606

$

372

$

(796)

$

(2,264,591)

$

65,681

$

(2,204,436)

Included in OCI

$

$

(2,403)

$

$

$

$

$

(2,403)

    

    

    

    

Domestic

    

    

    

Loans at

Servicing

VIE

Three Months Ended March 31, 2020

Fair Value

RMBS

CMBS

Rights

VIE Assets

Liabilities

Total

January 1, 2020 balance

$

1,436,194

$

189,576

$

25,008

$

16,917

$

62,187,175

$

(2,537,392)

$

61,317,478

Total realized and unrealized gains (losses):

Included in earnings:

Change in fair value / gain on sale

 

(16,134)

 

 

5,738

(393)

 

(3,506,792)

 

146,282

 

(3,371,299)

Net accretion

 

 

2,661

 

 

 

 

 

2,661

Included in OCI

 

 

(15,048)

 

 

 

 

 

(15,048)

Purchases / Originations

746,880

 

 

 

 

 

746,880

Sales

 

(751,746)

 

 

(7,940)

 

 

 

 

(759,686)

Issuances

 

 

 

 

 

 

(24,376)

 

(24,376)

Cash repayments / receipts

(67,397)

 

(6,549)

 

(371)

 

 

 

(8,916)

 

(83,233)

Transfers into Level III

 

 

 

 

 

 

(101,265)

 

(101,265)

Transfers out of Level III

 

 

 

 

 

 

1,090,325

 

1,090,325

Consolidation of VIEs

 

 

 

 

 

2,477,422

 

(71,095)

 

2,406,327

March 31, 2020 balance

$

1,347,797

$

170,640

$

22,435

$

16,524

$

61,157,805

$

(1,506,437)

$

61,208,764

Amount of unrealized (losses) gains attributable to assets still held at March 31, 2020:

Included in earnings

$

(39,070)

$

2,661

$

(647)

$

(393)

$

(3,506,792)

$

146,282

$

(3,397,959)

Included in OCI

$

$

(15,048)

$

$

$

$

$

(15,048)

Amounts were transferred from Level II to Level III due to a decrease in the observable relevant market activity and amounts were transferred from Level III to Level II due to an increase in the observable relevant market activity.

The following table presents the fair values of our financial instruments not carried at fair value on the condensed consolidated balance sheets (amounts in thousands):

March 31, 2021

December 31, 2020

   

Carrying

   

Fair

Carrying

  

Fair

Value

Value

Value

Value

Financial assets not carried at fair value:

Loans held-for-investment and loans held-for-sale

$

12,402,351

$

12,460,388

$

11,116,929

$

11,107,316

HTM debt securities

 

488,075

 

466,687

 

538,605

 

515,253

Financial liabilities not carried at fair value:

Secured financing agreements and CLO

$

11,827,110

$

11,900,381

$

11,076,744

$

11,108,364

Unsecured senior notes

 

1,735,658

 

1,803,224

 

1,732,520

 

1,786,667

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The following is quantitative information about significant unobservable inputs in our Level III measurements for those assets and liabilities measured at fair value on a recurring basis (dollars in thousands):

Carrying Value at

Valuation

Unobservable

Range (Weighted Average) as of (1)

 

March 31, 2021

  

Technique

  

Input

March 31, 2021

December 31, 2020

Loans under fair value option

$

763,773

Discounted cash flow, market pricing

Coupon (d)

3.4% - 9.5% (5.5%)

3.3% - 9.7% (5.9%)

Remaining contractual term (d)

7.0 - 39.0 years (24.7 years)

7.3 - 39.3 years (26.3 years)

FICO score (a)

519 - 823 (732)

519 - 823 (727)

LTV (b)

15% - 94% (66%)

5% - 94% (68%)

Purchase price (d)

85.6% - 104.8% (101.7%)

84.4% - 104.8% (99.8%)

RMBS

 

160,301

Discounted cash flow

Constant prepayment rate (a)

3.5% - 17.3% (7.4%) 

3.6% - 19.4% (7.6%) 

Constant default rate (b)

0.7% - 5.0% (2.2%)

0.7% - 5.4% (2.4%)

Loss severity (b)

0% - 84% (17%) (f) 

0% - 85% (20%) (f) 

Delinquency rate (c)

9% - 32% (18%) 

10% - 32% (19%) 

Servicer advances (a)

23% - 84% (53%) 

23% - 82% (54%) 

Annual coupon deterioration (b)

0.0% - 1.2% (0.1%)

0.0% - 0.9% (0.1%)

Putback amount per projected total collateral loss (e)

0% -17% (0.8%)  

0% -17% (0.8%)  

CMBS

 

19,256

Discounted cash flow

Yield (b)

0% - 298.5% (5.9%) 

0% - 536.6% (7.1%) 

Duration (c)

0 - 7.6 years (6.0 years)

0 - 7.6 years (5.3 years)

Domestic servicing rights

 

12,406

Discounted cash flow

Debt yield (a)

7.25% (7.25%) 

7.50% (7.50%) 

Discount rate (b)

15% (15%) 

15% (15%) 

VIE assets

 

62,367,110

Discounted cash flow

Yield (b)

0% - 752.4% (16.9%)

0% - 312.2% (14.3%)

Duration (c)

0 - 20.6 years (3.8 years)

0 - 16.3 years (3.8 years)

VIE liabilities

 

(2,227,428)

Discounted cash flow

Yield (b)

0% - 752.4% (17.3%)

0% - 312.2% (14.4%)

Duration (c)

0 - 11.0 years (3.7 years)

0 - 10.8 years (3.8 years)

(1)Unobservable inputs were weighted by the relative carrying value of the instruments as of March 31, 2021 and December 31, 2020.

Information about Uncertainty of Fair Value Measurements

(a)Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement.
(b)Significant increase (decrease) in the unobservable input in isolation would result in a significantly lower (higher) fair value measurement.
(c)Significant increase (decrease) in the unobservable input in isolation would result in either a significantly lower or higher (higher or lower) fair value measurement depending on the structural features of the security in question.
(d)This unobservable input is not subject to variability as of the respective reporting dates.
(e)Any delay in the putback recovery date leads to a decrease in fair value for the majority of securities in our RMBS portfolio.
(f)14% and 23% of the portfolio falls within a range of 45% - 80% as of March 31, 2021 and December 31, 2020, respectively.

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20. Income Taxes

Certain of our domestic subsidiaries have elected to be treated as taxable REIT subsidiaries (“TRSs”). TRSs permit us to participate in certain activities from which REITs are generally precluded, as long as these activities meet specific criteria, are conducted within the parameters of certain limitations established by the Code and are conducted in entities which elect to be treated as taxable subsidiaries under the Code. To the extent these criteria are met, we will continue to maintain our qualification as a REIT.

Our TRSs engage in various real estate related operations, including special servicing of commercial real estate, originating and securitizing mortgage loans, and investing in entities which engage in real estate-related operations. As of March 31, 2021 and December 31, 2020, approximately $959.6 million and $1.4 billion, respectively, of assets were owned by TRS entities. Our TRSs are not consolidated for U.S. federal income tax purposes, but are instead taxed as corporations. For financial reporting purposes, a provision for current and deferred taxes is established for the portion of earnings recognized by us with respect to our interest in TRSs.

The following table is a reconciliation of our U.S. federal income tax provision (benefit) determined using our statutory federal tax rate to our reported income tax (benefit) provision for the three months ended March 31, 2021 and 2020 (dollars in thousands):

    

For the Three Months Ended March 31,

2021

2020

Federal statutory tax rate

$

26,199

  

21.0

%

  

$

(15,329)

  

21.0

%

REIT and other non-taxable loss

 

(24,501)

(19.6)

%

 

9,914

(13.6)

%

State income taxes

 

558

0.4

%

 

(1,779)

2.4

%

Federal benefit of state tax deduction

 

(117)

(0.1)

%

 

374

(0.5)

%

Other

 

91

0.1

%

 

91

(0.1)

%

Effective tax rate

$

2,230

1.8

%

$

(6,729)

9.2

%

In response to the COVID-19 pandemic, the U.S. and many other governments have enacted, or are contemplating enacting, measures to provide aid and economic stimulus.  These measures included deferring the due dates of tax payments and other changes to their income and non-income-based tax laws.  The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020 in the U.S., included measures to assist companies, including temporary changes to income and non-income-based tax laws, and allowed companies to carry back tax net operating losses (“NOLs”) generated in 2018 to 2020 to the five preceding tax years. The Company plans to carry back its NOL generated in 2020 to a year in which the federal tax rate was 35%. We continue to monitor additional guidance issued by the U.S. Treasury Department, the Internal Revenue Service and others.

The Company used the discrete tax approach in calculating the tax benefit for the three months ended March 31, 2020 due to the fact that a relatively small change in the Company’s projected pre-tax net loss could have resulted in a volatile effective tax rate. Under the discrete method, the tax benefit was determined based upon actual results as if the interim period was an annual period.

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21. Commitments and Contingencies

As of March 31, 2021, our Commercial and Residential Lending Segment had future commercial loan funding commitments totaling $1.5 billion, of which we expect to fund $1.3 billion. These future funding commitments primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions. Additionally, as of March 31, 2021, our Commercial and Residential Lending Segment had outstanding residential mortgage loan purchase commitments of $82.7 million.

As of March 31, 2021, our Infrastructure Lending Segment had future infrastructure loan funding commitments totaling $192.5 million, including $126.7 million under revolvers and letters of credit (“LCs”), and $65.8 million under delayed draw term loans. As of March 31, 2021, $15.6 million of revolvers and LCs were outstanding.

In connection with the Infrastructure Lending Segment acquisition, we assumed guarantees of certain borrowers’ performance under existing interest rate swaps.  As of March 31, 2021, we had six outstanding guarantees on interest rate swaps maturing between March 2022 and June 2025. Refer to Note 12 for further discussion.

Generally, funding commitments are subject to certain conditions that must be met, such as customary construction draw certifications, minimum debt service coverage ratios or executions of new leases before advances are made to the borrower.

Management is not aware of any other contractual obligations, legal proceedings, or any other contingent obligations incurred in the normal course of business that would have a material adverse effect on our condensed consolidated financial statements.

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22. Segment Data

In its operation of the business, management, including our chief operating decision maker, who is our Chief Executive Officer, reviews certain financial information, including segmented internal profit and loss statements prepared on a basis prior to the impact of consolidating securitization VIEs under ASC 810. The segment information within this Note is reported on that basis.

The table below presents our results of operations for the three months ended March 31, 2021 by business segment (amounts in thousands):

Commercial and

Residential

Infrastructure

Investing

Lending

Lending

Property

and Servicing

Securitization

Segment

Segment

Segment

Segment

Corporate

Subtotal

VIEs

Total

Revenues:

Interest income from loans

$

170,593

$

18,808

$

$

1,174

$

$

190,575

$

$

190,575

Interest income from investment securities

 

18,385

 

564

 

 

20,940

 

39,889

 

(28,279)

 

11,610

Servicing fees

 

124

 

 

 

12,456

 

12,580

 

(4,178)

 

8,402

Rental income

1,339

65,104

9,895

76,338

76,338

Other revenues

 

90

 

93

 

40

 

82

 

305

 

 

305

Total revenues

 

190,531

 

19,465

 

65,144

 

44,547

 

 

319,687

 

(32,457)

 

287,230

Costs and expenses:

Management fees

 

315

 

 

 

222

 

38,188

 

38,725

 

11

 

38,736

Interest expense

 

44,295

 

8,841

 

15,832

 

5,449

29,148

 

103,565

 

(191)

 

103,374

General and administrative

 

11,333

 

3,442

 

1,023

 

18,440

4,311

 

38,549

 

87

 

38,636

Acquisition and investment pursuit costs

 

185

 

 

 

 

185

 

 

185

Costs of rental operations

477

23,960

4,308

28,745

28,745

Depreciation and amortization

 

307

 

100

 

18,100

 

3,967

 

22,474

 

 

22,474

Credit loss (reversal) provision, net

 

(529)

 

573

 

 

 

44

 

 

44

Other expense

 

31

 

 

583

 

71

 

685

 

 

685

Total costs and expenses

 

56,414

 

12,956

 

59,498

 

32,457

71,647

 

232,972

 

(93)

 

232,879

Other income (loss):

Change in net assets related to consolidated VIEs

 

 

 

 

 

 

 

39,745

 

39,745

Change in fair value of servicing rights

 

 

 

 

745

 

745

 

(1,541)

 

(796)

Change in fair value of investment securities, net

 

(2,050)

 

 

 

7,170

 

5,120

 

(5,426)

 

(306)

Change in fair value of mortgage loans, net

 

(10,714)

 

 

 

1,236

 

(9,478)

 

 

(9,478)

Earnings (loss) from unconsolidated entities

 

1,753

 

(254)

 

 

589

 

2,088

 

(354)

 

1,734

Gain on sale of investments and other assets, net

 

17,693

 

 

 

 

17,693

 

 

17,693

Gain (loss) on derivative financial instruments, net

 

26,141

 

684

 

4,724

 

9,283

(6,843)

 

33,989

 

 

33,989

Foreign currency (loss) gain, net

 

(11,594)

 

(49)

 

25

 

(63)

 

(11,681)

 

 

(11,681)

Loss on extinguishment of debt

(68)

(307)

(141)

(516)

(516)

Other income, net

 

 

21

 

 

 

21

 

 

21

Total other income (loss)

 

21,161

 

95

 

4,608

 

18,960

(6,843)

 

37,981

 

32,424

 

70,405

Income (loss) before income taxes

 

155,278

 

6,604

 

10,254

 

31,050

(78,490)

 

124,696

 

60

 

124,756

Income tax provision

 

(1,505)

 

(92)

 

 

(633)

 

(2,230)

 

 

(2,230)

Net income (loss)

 

153,773

 

6,512

 

10,254

 

30,417

(78,490)

 

122,466

 

60

 

122,526

Net income attributable to non-controlling interests

 

(3)

 

 

(5,077)

 

(6,008)

 

(11,088)

 

(60)

 

(11,148)

Net income (loss) attributable to Starwood Property Trust, Inc.

$

153,770

$

6,512

$

5,177

$

24,409

$

(78,490)

$

111,378

$

$

111,378

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The table below presents our results of operations for the three months ended March 31, 2020 by business segment (amounts in thousands):

Commercial and

Residential

Infrastructure

Investing

Lending

Lending

Property

and Servicing

Securitization

Segment

Segment

Segment

Segment

Corporate

Subtotal

VIEs

Total

Revenues:

Interest income from loans

$

192,381

$

22,413

$

$

2,633

$

$

217,427

$

$

217,427

Interest income from investment securities

 

18,628

701

 

 

24,800

 

44,129

 

(28,889)

 

15,240

Servicing fees

 

172

 

 

6,442

 

6,614

 

(1,821)

 

4,793

Rental income

78

63,961

10,107

 

74,146

 

 

74,146

Other revenues

 

178

143

 

122

 

513

 

956

 

(2)

 

954

Total revenues

 

211,437

23,257

 

64,083

 

44,495

 

 

343,272

 

(30,712)

 

312,560

Costs and expenses:

Management fees

 

351

 

 

239

 

40,107

 

40,697

 

31

 

40,728

Interest expense

 

53,950

13,117

 

17,121

 

7,194

28,805

 

120,187

 

(162)

 

120,025

General and administrative

 

8,132

4,423

 

1,078

 

20,684

4,301

 

38,618

 

84

 

38,702

Acquisition and investment pursuit costs

 

860

17

 

12

 

20

 

909

 

 

909

Costs of rental operations

778

22,852

4,584

 

28,214

 

 

28,214

Depreciation and amortization

 

415

70

 

19,288

 

4,207

 

23,980

 

 

23,980

Credit loss provision, net

 

40,217

8,452

 

 

 

48,669

 

 

48,669

Other expense

 

77

 

311

 

 

388

 

 

388

Total costs and expenses

 

104,780

26,079

 

60,662

 

36,928

73,213

 

301,662

 

(47)

 

301,615

Other income (loss):

Change in net assets related to consolidated VIEs

 

 

 

 

 

 

(45,493)

 

(45,493)

Change in fair value of servicing rights

 

 

 

318

 

318

 

(711)

 

(393)

Change in fair value of investment securities, net

 

(27,879)

 

 

(47,216)

 

(75,095)

 

77,599

 

2,504

Change in fair value of mortgage loans, net

 

(35,517)

 

 

19,383

 

(16,134)

 

 

(16,134)

Earnings (loss) from unconsolidated entities

 

51

 

 

620

 

671

 

(574)

 

97

Gain on sale of investments and other assets, net

 

296

 

 

 

296

 

 

296

Gain (loss) on derivative financial instruments, net

 

30,805

(1,001)

 

(30,223)

 

(19,106)

29,235

 

9,710

 

 

9,710

Foreign currency (loss) gain, net

 

(34,001)

(473)

 

(19)

 

7

 

(34,486)

 

 

(34,486)

Loss on extinguishment of debt

(170)

(170)

(170)

Other income, net

 

 

50

 

76

 

126

 

 

126

Total other income (loss)

 

(66,541)

(1,348)

 

(30,192)

 

(45,918)

29,235

 

(114,764)

 

30,821

 

(83,943)

Income (loss) before income taxes

 

40,116

(4,170)

 

(26,771)

 

(38,351)

(43,978)

(73,154)

 

156

 

(72,998)

Income tax benefit

 

4,422

145

 

2,162

 

6,729

 

 

6,729

Net income (loss)

 

44,538

(4,025)

 

(26,771)

 

(36,189)

(43,978)

 

(66,425)

 

156

 

(66,269)

Net (income) loss attributable to non-controlling interests

 

(3)

 

(5,111)

 

4,770

 

(344)

 

(156)

 

(500)

Net income (loss) attributable to Starwood Property Trust, Inc.

$

44,535

$

(4,025)

$

(31,882)

$

(31,419)

$

(43,978)

$

(66,769)

$

$

(66,769)

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The table below presents our condensed consolidated balance sheet as of March 31, 2021 by business segment (amounts in thousands):

Commercial and

Residential

Infrastructure

Investing

Lending

Lending

Property

and Servicing

Securitization

Segment

Segment

Segment

Segment

Corporate

Subtotal

VIEs

Total

Assets:

Cash and cash equivalents

$

56,629

$

7,873

$

39,791

$

29,064

$

217,049

$

350,406

$

784

$

351,190

Restricted cash

 

69,882

 

27,973

 

6,672

 

14,197

 

 

118,724

 

 

118,724

Loans held-for-investment, net

 

10,733,752

 

1,586,808

 

 

933

 

 

12,321,493

 

 

12,321,493

Loans held-for-sale

 

587,037

 

89,368

 

 

168,226

 

 

844,631

 

 

844,631

Investment securities

 

969,968

 

34,951

 

 

1,106,000

 

 

2,110,919

 

(1,432,632)

 

678,287

Properties, net

93,718

1,954,880

196,150

2,244,748

2,244,748

Intangible assets

 

 

 

38,833

 

70,857

 

 

109,690

 

(42,918)

 

66,772

Investment in unconsolidated entities

 

47,514

 

24,840

 

 

44,435

 

 

116,789

 

(15,882)

 

100,907

Goodwill

 

 

119,409

 

 

140,437

 

 

259,846

 

 

259,846

Derivative assets

 

13,088

 

 

162

 

320

 

24,459

 

38,029

 

 

38,029

Accrued interest receivable

 

97,853

 

3,310

 

 

274

 

408

 

101,845

 

(132)

 

101,713

Other assets

 

61,677

 

7,107

 

85,740

 

44,719

 

9,646

 

208,889

 

(16)

 

208,873

VIE assets, at fair value

 

 

 

 

 

 

 

62,367,110

 

62,367,110

Total Assets

$

12,731,118

$

1,901,639

$

2,126,078

$

1,815,612

$

251,562

$

18,826,009

$

60,876,314

$

79,702,323

Liabilities and Equity

Liabilities:

Accounts payable, accrued expenses and other liabilities

$

37,206

$

16,010

$

44,184

$

24,110

$

56,614

$

178,124

$

91

$

178,215

Related-party payable

 

 

 

 

 

36,135

 

36,135

 

 

36,135

Dividends payable

 

 

 

 

 

138,906

 

138,906

 

 

138,906

Derivative liabilities

 

33,190

 

1,310

 

 

305

 

 

34,805

 

 

34,805

Secured financing agreements, net

 

6,502,059

 

1,259,813

 

1,871,026

 

653,222

 

631,655

 

10,917,775

 

(21,843)

 

10,895,932

Collateralized loan obligations, net

931,178

 

 

 

931,178

931,178

Unsecured senior notes, net

 

 

 

 

 

1,735,658

 

1,735,658

 

 

1,735,658

VIE liabilities, at fair value

 

 

 

 

 

 

 

60,896,709

 

60,896,709

Total Liabilities

 

7,503,633

 

1,277,133

 

1,915,210

 

677,637

 

2,598,968

 

13,972,581

 

60,874,957

 

74,847,538

Equity:

Starwood Property Trust, Inc. Stockholders’ Equity:

Common stock

 

 

 

 

 

2,943

 

2,943

 

 

2,943

Additional paid-in capital

 

1,074,553

 

599,666

 

25,905

 

(298,098)

 

3,823,011

 

5,225,037

 

 

5,225,037

Treasury stock

 

 

 

 

 

(138,022)

 

(138,022)

 

 

(138,022)

Accumulated other comprehensive income

 

41,654

 

 

 

 

 

41,654

 

 

41,654

Retained earnings (accumulated deficit)

 

4,111,160

 

24,840

 

(40,641)

 

1,285,229

 

(6,035,338)

 

(654,750)

 

 

(654,750)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

5,227,367

 

624,506

 

(14,736)

 

987,131

 

(2,347,406)

 

4,476,862

 

 

4,476,862

Non-controlling interests in consolidated subsidiaries

 

118

 

 

225,604

 

150,844

 

 

376,566

 

1,357

 

377,923

Total Equity

 

5,227,485

 

624,506

 

210,868

 

1,137,975

 

(2,347,406)

 

4,853,428

 

1,357

 

4,854,785

Total Liabilities and Equity

$

12,731,118

$

1,901,639

$

2,126,078

$

1,815,612

$

251,562

$

18,826,009

$

60,876,314

$

79,702,323

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The table below presents our condensed consolidated balance sheet as of December 31, 2020 by business segment (amounts in thousands):

Commercial and

Residential

Infrastructure

Investing

    

Lending

Lending

Property

and Servicing

Securitization

    

Segment

Segment

Segment

Segment

Corporate

Subtotal

VIEs

Total

Assets:

    

    

    

    

    

    

Cash and cash equivalents

    

$

160,007

    

$

4,440

$

32,080

    

$

19,546

    

$

346,372

    

$

562,445

    

$

772

    

$

563,217

Restricted cash

 

93,445

45,113

 

7,192

 

13,195

 

 

158,945

 

 

158,945

Loans held-for-investment, net

 

9,673,625

1,412,440

 

 

1,008

 

 

11,087,073

 

 

11,087,073

Loans held-for-sale

 

841,963

120,540

 

 

90,332

 

 

1,052,835

 

 

1,052,835

Investment securities

 

1,014,402

35,681

 

 

1,112,145

 

 

2,162,228

 

(1,425,570)

 

736,658

Properties, net

103,896

1,969,414

197,843

 

2,271,153

 

 

2,271,153

Intangible assets

 

 

40,370

 

71,123

 

 

111,493

 

(41,376)

 

70,117

Investment in unconsolidated entities

 

54,407

25,095

 

 

44,664

 

 

124,166

 

(16,112)

 

108,054

Goodwill

 

119,409

 

 

140,437

 

 

259,846

 

 

259,846

Derivative assets

 

6,595

 

41

 

147

 

33,772

 

40,555

 

 

40,555

Accrued interest receivable

 

87,922

2,091

 

 

123

 

5,978

 

96,114

 

(134)

 

95,980

Other assets

 

61,638

4,531

 

69,859

 

44,579

 

10,148

 

190,755

 

(7)

 

190,748

VIE assets, at fair value

 

 

 

 

 

 

64,238,328

 

64,238,328

Total Assets

$

12,097,900

$

1,769,340

$

2,118,956

$

1,735,142

$

396,270

$

18,117,608

$

62,755,901

$

80,873,509

Liabilities and Equity

Liabilities:

Accounts payable, accrued expenses and other liabilities

$

41,104

$

12,144

$

43,630

$

45,309

$

64,583

$

206,770

$

75

$

206,845

Related-party payable

 

 

 

5

 

39,165

 

39,170

 

 

39,170

Dividends payable

 

 

 

 

137,959

 

137,959

 

 

137,959

Derivative liabilities

 

39,082

1,718

 

 

524

 

 

41,324

 

 

41,324

Secured financing agreements, net

 

5,893,999

1,240,763

 

1,794,609

 

606,100

 

632,719

 

10,168,190

 

(22,000)

 

10,146,190

Collateralized loan obligations, net

930,554

 

 

 

 

930,554

 

 

930,554

Unsecured senior notes, net

 

 

 

 

1,732,520

 

1,732,520

 

 

1,732,520

VIE liabilities, at fair value

 

 

 

 

 

 

62,776,371

 

62,776,371

Total Liabilities

 

6,904,739

1,254,625

 

1,838,239

 

651,938

 

2,606,946

 

13,256,487

 

62,754,446

 

76,010,933

Equity:

Starwood Property Trust, Inc. Stockholders’ Equity:

Common stock

 

 

 

 

2,921

 

2,921

 

 

2,921

Additional paid-in capital

 

1,192,584

496,387

 

98,882

 

(322,992)

 

3,744,878

 

5,209,739

 

 

5,209,739

Treasury stock

 

 

 

 

(138,022)

 

(138,022)

 

 

(138,022)

Accumulated other comprehensive income (loss)

 

44,057

 

 

(64)

 

 

43,993

 

 

43,993

Retained earnings (accumulated deficit)

 

3,956,405

18,328

 

(44,832)

 

1,260,819

 

(5,820,453)

 

(629,733)

 

 

(629,733)

Total Starwood Property Trust, Inc. Stockholders’ Equity

 

5,193,046

514,715

 

54,050

 

937,763

 

(2,210,676)

 

4,488,898

 

 

4,488,898

Non-controlling interests in consolidated subsidiaries

 

115

 

226,667

 

145,441

 

 

372,223

 

1,455

 

373,678

Total Equity

 

5,193,161

514,715

 

280,717

 

1,083,204

 

(2,210,676)

 

4,861,121

 

1,455

 

4,862,576

Total Liabilities and Equity

$

12,097,900

$

1,769,340

$

2,118,956

$

1,735,142

$

396,270

$

18,117,608

$

62,755,901

$

80,873,509

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23. Subsequent Events

Our significant events subsequent to March 31, 2021 were as follows:

Collateralized Loan Obligations

In April 2021, we refinanced a pool of our infrastructure loans held-for-investment through a $500.0 million new issue CLO, STWD 2021-SIF1, with $410.0 million of third party financing at an average coupon of LIBOR + 181 bps. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO for a period of three years.

In May 2021, we refinanced a pool of our commercial loans held-for-investment through a $1.3 billion CLO, STWD 2021-FL2, with $1.1 billion of third party financing at an average coupon of LIBOR + 150 bps. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO for a period of two years.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the information included elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 (our “Form 10-K”). This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ significantly from the results discussed in the forward-looking statements. See “Special Note Regarding Forward-Looking Statements” at the beginning of this Quarterly Report on Form 10-Q.

Overview

Starwood Property Trust, Inc. (“STWD” and, together with its subsidiaries, “we” or the “Company”) is a Maryland corporation that commenced operations in August 2009, upon the completion of our initial public offering. We are focused primarily on originating, acquiring, financing and managing mortgage loans and other real estate investments in both the United States (“U.S.”) and Europe. As market conditions change over time, we may adjust our strategy to take advantage of changes in interest rates and credit spreads as well as economic and credit conditions.

We have four reportable business segments as of March 31, 2021 and we refer to the investments within these segments as our target assets:

Real estate commercial and residential lending (the “Commercial and Residential Lending Segment”)—engages primarily in originating, acquiring, financing and managing commercial first mortgages, non-agency residential mortgages (“residential loans”), subordinated mortgages, mezzanine loans, preferred equity, commercial mortgage-backed securities (“CMBS”), residential mortgage-backed securities (“RMBS”) and other real estate and real estate-related debt investments in both the U.S. and Europe (including distressed or non-performing loans). Our residential loans are secured by a first mortgage lien on residential property and consist of non-agency residential loans that are not guaranteed by any U.S. Government agency or federally chartered corporation.

Infrastructure lending (the “Infrastructure Lending Segment”)—engages primarily in originating, acquiring, financing and managing infrastructure debt investments.

Real estate property (the “Property Segment”)—engages primarily in acquiring and managing equity interests in stabilized commercial real estate properties, including multifamily properties and commercial properties subject to net leases, that are held for investment.

Real estate investing and servicing (the “Investing and Servicing Segment”)—includes (i) a servicing business in the U.S. that manages and works out problem assets, (ii) an investment business that selectively acquires and manages unrated, investment grade and non-investment grade rated CMBS, including subordinated interests of securitization and resecuritization transactions, (iii) a mortgage loan business which originates conduit loans for the primary purpose of selling these loans into securitization transactions and (iv) an investment business that selectively acquires commercial real estate assets, including properties acquired from CMBS trusts.

Our segments exclude the consolidation of securitization variable interest entities (“VIEs”).

Refer to Note 1 of our condensed consolidated financial statements included herein (the “Condensed Consolidated Financial Statements”) for further discussion of our business and organization.

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COVID-19 Pandemic

The outbreak of the COVID-19 pandemic beginning in the first quarter of 2020 and its continuing impact on the financial, economic and capital markets environment, and future developments in these and other areas, present uncertainty and risk with respect to our financial condition, results of operations, liquidity, and ability to pay distributions. We expect that these impacts are likely to continue to some extent as the outbreak persists and potentially even longer. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and the performance of our investments. The full extent of the impact and effects of COVID-19 will depend on future developments, including, among other factors, the duration and spread of the outbreak, along with related travel advisories, quarantines and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions, and uncertainty with respect to the duration of the global economic slowdown.

Further discussion of the potential impacts on our business, financial condition, results of operations, liquidity, the market price of our common stock and our ability to make distributions to our stockholders from the COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part I, Item 1A of our Form 10-K.

Asset Performance and Collections

We maintain an in-house team of asset management professionals who oversee our commercial loans and are in regular communication with these borrowers. We have utilized these relationships to address the potential impacts of the COVID-19 pandemic on the assets which secure our loans, particularly hospitality assets. Some of our borrowers have indicated that due to the impact of the COVID-19 pandemic, they will be unable to timely execute their business plans, have had to temporarily close their businesses, or have experienced other negative business consequences which have led to cash flow pressures at the underlying properties. In some cases, these borrowers have requested temporary interest deferral or forbearance, or other modifications of their loans.

Since the outbreak of the COVID-19 pandemic, we have granted certain payment related loan modifications to our commercial borrowers, consisting principally of partial and temporary deferrals of interest and the repurposing of reserves, many of which were coupled with additional equity commitments from sponsors. We are generally encouraged by our borrowers’ response to the COVID-19 pandemic’s impacts on their properties. While we believe the principal amounts of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain investments. As of March 31, 2021, we had one commercial loan held-for-investment with an aggregate principal balance of $40.8 million which remained on its post-COVID partial interest deferral.

In response to the impact of COVID-19 on certain of our residential borrowers, we began offering short-term relief starting in the first quarter of 2020. Under the terms of these plans, borrowers were granted up to a three to six-month “zero pay” forbearance with payments required to resume at the conclusion of the plan.  Since their peak last summer, we have seen the majority of these borrowers resume making payments, with some fully prepaying their loans.  We continue to see loans in forbearance decrease, with strong home price appreciation keeping any estimated credit losses low.  For those loans which have not yet resumed payments, we continue to evaluate loss mitigation options, including forbearance, repayment plans, loan modification and foreclosure.  In accordance with our policies, we placed any residential loans that were more than 90 days delinquent on nonaccrual.  

In our property segment, we collected 98% of rents due during the three months ended March 31, 2021. Collections were particularly strong in our Woodstar I and Woodstar II affordable housing portfolios, where 98% of rent due was collected. Given current demographic trends, which tend to favor flexible rental arrangements, we continue to see sustained demand in multifamily properties and decreased turnover.

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In our infrastructure segment, during the three months ended March 31, 2021, we collected 100% of interest due and did not grant any payment related loan modifications.

Goodwill and Intangible Assets

Goodwill is tested for impairment annually in the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.  Management considered the general economic decline and the impact of the COVID-19 pandemic, but did not identify any such event or circumstances.  However, future changes in the expectations of the impact of COVID-19 on our operations, financial performance and cash flows could cause our goodwill to be impaired.

Developments During the First Quarter of 2021

Commercial and Residential Lending Segment

Originated $2.2 billion of commercial loans during the quarter, including the following:

o£360.0 million ($504.5 million) first mortgage loan to finance the acquisition of a portfolio of vacation cottages, caravan homes and resorts across the United Kingdom, which the Company fully funded.

o£227.6 million ($317.5 million) first mortgage loan for the refinancing of 14 assisted living facilities located across the United Kingdom, which the Company fully funded.

o$295.0 million first mortgage and mezzanine loan for the refinancing of a 666 unit Class A high-rise multifamily property and 70,873 square foot office building located in California, of which the Company funded $280.0 million.

o$230.0 million first mortgage and mezzanine loan on a 41 property extended stay portfolio located across the U.S., which the Company fully funded.

o$155.0 million first mortgage and mezzanine loan for the refinancing of a 4.7 acre, industrially-zoned development parcel located in New York, of which the Company funded $104.3 million.

o$151.0 million first mortgage loan for the refinancing of a 368 unit student housing property located in Pennsylvania, which the Company fully funded.

o$120.0 million first mortgage loan for the refinancing of a 369,852 square foot Class A office building located in Washington, DC, which the Company fully funded.

o$109.8 million first mortgage and mezzanine loan for the acquisition of four 6-story office buildings located in Georgia, of which the Company funded $95.9 million.

Funded $174.9 million of previously originated commercial loan commitments.

Received gross proceeds of $1.1 billion ($354.0 million, net of debt repayments) from maturities and principal repayments on our commercial loans and preferred equity.

Sold commercial real estate in Montgomery, Alabama that was previously acquired through foreclosure in March 2019 for gross proceeds of $30.6 million and recognized a gain of $17.7 million. At the foreclosure date, the loan had a carrying value of $9.0 million ($20.9 million unpaid principal balance net of an $8.3 million allowance and $3.6 million of unamortized discount).

Acquired $208.8 million of residential loans.

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Received proceeds of $389.8 million, including retained RMBS of $27.3 million, from the securitization of $383.5 million of residential loans. Also received proceeds of $92.4 million from the sale of $89.4 million of residential loans outside of securitization.

Infrastructure Lending Segment

Acquired $86.3 million of infrastructure loans and funded $13.8 million of pre-existing infrastructure loan commitments.

Received proceeds of $19.2 million from principal repayments on our infrastructure loans and bonds.

Property Segment

Refinanced our Woodstar II Portfolio by entering into mortgage loans with total borrowings of $82.9 million. The loans carry seven-year terms and a weighted average fixed annual interest rate of 4.36%. A portion of the net proceeds from the mortgage loans was used to repay $4.9 million of outstanding government sponsored mortgage loans.

Investing and Servicing Segment

Originated commercial conduit loans of $166.5 million. Separately, received proceeds of $89.7 million from sales of previously originated commercial conduit loans.

Sold CMBS for total gross proceeds of $11.6 million.

Obtained two new special servicing assignments for CMBS trusts with a total unpaid principal balance of $381.0 million.

Subsequent Events

Refer to Note 23 to the Condensed Consolidated Financial Statements for disclosure regarding significant transactions that occurred subsequent to March 31, 2021.

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Results of Operations

The discussion below is based on accounting principles generally accepted in the United States of America (“GAAP”) and therefore reflects the elimination of certain key financial statement line items related to the consolidation of securitization variable interest entities (“VIEs”), particularly within revenues and other income, as discussed in Note 2 to the Condensed Consolidated Financial Statements. For a discussion of our results of operations excluding the impact of Accounting Standards Codification (“ASC”) Topic 810 as it relates to the consolidation of securitization VIEs, refer to the section captioned “Non-GAAP Financial Measures”.

We have elected to present a comparison of our results of operations for the current quarter with that of the immediately preceding quarter, as permitted under the recently amended SEC disclosure guidelines. Because our business is not seasonal, we believe this results in a more meaningful comparison of quarterly results than a comparison to the same quarter of the prior year. We continue to present the required comparison of current year-to-date results with the same period of the prior year. The following table compares our summarized results of operations for the three months ended March 31, 2021, December 31, 2020 and March 31, 2020 by business segment (amounts in thousands):

$ Change

$ Change

For the Three Months Ended

March 31, 2021 vs.

March 31, 2021 vs.

Revenues:

March 31, 2021

December 31, 2020

March 31, 2020

December 31, 2020

March 31, 2020

Commercial and Residential Lending Segment

$

190,531

$

196,309

$

211,437

$

(5,778)

$

(20,906)

Infrastructure Lending Segment

19,465

19,250

23,257

215

(3,792)

Property Segment

65,144

64,065

64,083

1,079

1,061

Investing and Servicing Segment

 

44,547

 

45,372

 

44,495

(825)

 

52

Corporate

 

Securitization VIE eliminations

 

(32,457)

 

(34,434)

 

(30,712)

1,977

 

(1,745)

 

287,230

 

290,562

 

312,560

 

(3,332)

 

(25,330)

Costs and expenses:

Commercial and Residential Lending Segment

 

56,414

 

50,999

 

104,780

5,415

 

(48,366)

Infrastructure Lending Segment

12,956

5,555

26,079

7,401

(13,123)

Property Segment

59,498

61,289

60,662

(1,791)

(1,164)

Investing and Servicing Segment

 

32,457

 

39,722

 

36,928

(7,265)

 

(4,471)

Corporate

71,647

73,965

 

73,213

(2,318)

(1,566)

Securitization VIE eliminations

 

(93)

 

(127)

 

(47)

34

 

(46)

 

232,879

 

231,403

 

301,615

 

1,476

 

(68,736)

Other income (loss):

Commercial and Residential Lending Segment

 

21,161

 

13,318

 

(66,541)

7,843

 

87,702

Infrastructure Lending Segment

95

(259)

(1,348)

354

1,443

Property Segment

4,608

391

(30,192)

4,217

34,800

Investing and Servicing Segment

 

18,960

 

22,349

 

(45,918)

(3,389)

 

64,878

Corporate

(6,843)

(1,239)

29,235

(5,604)

(36,078)

Securitization VIE eliminations

 

32,424

 

34,317

 

30,821

(1,893)

 

1,603

 

70,405

 

68,877

 

(83,943)

 

1,528

 

154,348

Income (loss) before income taxes:

Commercial and Residential Lending Segment

 

155,278

 

158,628

 

40,116

(3,350)

 

115,162

Infrastructure Lending Segment

6,604

13,436

(4,170)

(6,832)

10,774

Property Segment

10,254

3,167

(26,771)

7,087

37,025

Investing and Servicing Segment

 

31,050

 

27,999

 

(38,351)

3,051

 

69,401

Corporate

(78,490)

(75,204)

(43,978)

(3,286)

(34,512)

Securitization VIE eliminations

 

60

 

10

 

156

50

 

(96)

 

124,756

 

128,036

 

(72,998)

 

(3,280)

 

197,754

Income tax provision

 

(2,230)

 

(13,381)

 

6,729

11,151

 

(8,959)

Net income attributable to non-controlling interests

 

(11,148)

 

(7,687)

 

(500)

(3,461)

 

(10,648)

Net income attributable to Starwood Property Trust, Inc.

$

111,378

$

106,968

$

(66,769)

$

4,410

$

178,147

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Three Months Ended March 31, 2021 Compared to the Three Months Ended December 31, 2020

Commercial and Residential Lending Segment

Revenues

For the three months ended March 31, 2021, revenues of our Commercial and Residential Lending Segment decreased $5.8 million to $190.5 million, compared to $196.3 million for the three months ended December 31, 2020. This decrease was primarily due to decreases in interest income from loans of $2.4 million and investment securities of $2.7 million and a decrease in rental income from foreclosed properties of $0.6 million due to the sale of a property in the first quarter of 2021. The decrease in interest income from loans was principally due to lower average balances of residential loans reflecting the timing of purchases and securitizations. The decrease in interest income from investment securities was primarily due to lower average RMBS investment balances reflecting sales of RMBS late in the fourth quarter of 2020.

Costs and Expenses

For the three months ended March 31, 2021, costs and expenses of our Commercial and Residential Lending Segment increased $5.4 million to $56.4 million, compared to $51.0 million for the three months ended December 31, 2020. This increase was primarily due to a $4.5 million decrease in credit loss reversal and a $2.3 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio, partially offset by a $1.4 million decrease in general and administrative expenses reflecting lower professional fees. The credit loss reversal decreased from $5.0 million in the fourth quarter of 2020 to $0.5 million in the first quarter of 2021. The larger reversal in the fourth quarter of 2020 was primarily due to an improvement in macroeconomic forecasts and the effect on our then estimate of current expected credit losses (“CECL”). The increase in interest expense was primarily due to higher average borrowings outstanding, partially offset by lower average LIBOR rates.

Net Interest Income (amounts in thousands)

For the Three Months Ended

    

March 31, 2021

    

December 31, 2020

    

Change

Interest income from loans

$

170,593

$

173,014

$

(2,421)

Interest income from investment securities

 

18,385

 

21,132

 

(2,747)

Interest expense

 

(44,295)

 

(41,987)

 

(2,308)

Net interest income

$

144,683

$

152,159

$

(7,476)

For the three months ended March 31, 2021, net interest income of our Commercial and Residential Lending Segment decreased $7.5 million to $144.7 million, compared to $152.2 million for the three months ended December 31, 2020. This decrease reflects the decreases in interest income and the increase in interest expense on our secured financing facilities, both as discussed in the sections above.

During the three months ended March 31, 2021 and December 31, 2020, the weighted average unlevered yields on the Commercial and Residential Lending Segment’s loans and investment securities were as follows:

For the Three Months Ended

March 31, 2021

December 31, 2020

Commercial

5.9

%

6.3

%

Residential

7.5

%

7.2

%

Overall

6.1

%

6.4

%

The overall weighted average unlevered yield was lower primarily due to a $142.2 million commercial loan which was reclassified as held-for-sale, a $187.6 million commercial loan placed on nonaccrual and slightly lower LIBOR rates affecting our commercial yields, partially offset by a shift in the relative mix of loans and investment securities toward higher-yielding RMBS affecting our residential yields.

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During the three months ended March 31, 2021 and December 31, 2020, the Commercial and Residential Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 2.6% and 2.5%, respectively.

Other Income

For the three months ended March 31, 2021, other income of our Commercial and Residential Lending Segment increased $7.9 million to $21.2 million compared to $13.3 million for the three months ended December 31, 2020. This increase was primarily due to (i) a $75.3 million favorable change in gain (loss) on derivatives and (ii) a $17.7 million gain on sale of a foreclosed property, partially offset by (iii) a $55.6 million unfavorable change in foreign currency gain (loss) and (iv) a $30.7 million unfavorable change in fair value of residential loans. The favorable change in gain (loss) on derivatives in the first quarter of 2021 reflects a $63.4 million favorable change in gain (loss) on foreign currency hedges and an $11.9 million increased gain on interest rate swaps. The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and investments. The favorable change in gain (loss) on foreign currency hedges and the unfavorable change in foreign currency gain (loss) reflect the strengthening of the U.S. dollar against the Euro (“EUR”) and Australian dollar (“AUD”), partially offset by a weakening against the pound sterling (“GBP”), in the first quarter of 2021 compared to a weakening of the U.S. dollar against those currencies in the fourth quarter of 2020. The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments and to hedge our interest rate risk on residential loans held-for-sale.

Infrastructure Lending Segment

Revenues

For the three months ended March 31, 2021, revenues of our Infrastructure Lending Segment increased $0.2 million to $19.5 million, compared to $19.3 million for the three months ended December 31, 2020. This was primarily due to a slight increase in interest income from loans.

Costs and Expenses

For the three months ended March 31, 2021, costs and expenses of our Infrastructure Lending Segment increased $7.4 million to $13.0 million, compared to $5.6 million for the three months ended December 31, 2020. The increase was primarily due to a $7.7 million increase in credit loss provision, partially offset by a $0.4 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio. The credit loss provision was $0.6 million in the first quarter of 2021 compared to a reversal of $7.1 million in the fourth quarter of 2020. The reversal in the fourth quarter of 2020 was primarily due to an improvement in macroeconomic forecasts and the effect on our estimate of CECL allowances. The decrease in interest expense was primarily due to lower average LIBOR rates.

Net Interest Income (amounts in thousands)

For the Three Months Ended

    

March 31, 2021

    

December 31, 2020

    

Change

Interest income from loans

$

18,808

$

18,477

$

331

Interest income from investment securities

 

564

 

618

 

(54)

Interest expense

 

(8,841)

 

(9,204)

 

363

Net interest income

$

10,531

$

9,891

$

640

For the three months ended March 31, 2021, net interest income of our Infrastructure Lending Segment increased $0.6 million to $10.5 million, compared to $9.9 million for the three months ended December 31, 2020. The increase reflects the net increase in interest income and the decrease in interest expense on the secured financing facilities, both as discussed in the sections above.

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  During the three months ended March 31, 2021 and 2020, the weighted average unlevered yields on the Infrastructure Lending Segment’s investments were as follows:

For the Three Months Ended

March 31, 2021

December 31, 2020

Loans and investment securities held-for-investment

4.8

%

4.8

%

Loans held-for-sale

3.2

%

3.7

%

During the three months ended March 31, 2021 and December 31, 2020, the Infrastructure Lending Segment’s weighted average secured borrowing rate, inclusive of the amortization of deferred financing fees, was 2.9% and 3.0%, respectively.

Other Income (Loss)

For the three months ended March 31, 2021 and December 31, 2020, other income of our Infrastructure Lending Segment increased $0.4 million to $0.1 million, compared to a loss of $0.3 million for the three months ended December 31, 2020.

Property Segment

Change in Results by Portfolio (amounts in thousands)

    

$ Change from prior period

Costs and

Gain (loss) on derivative

Income (loss) before

Revenues

    

expenses

    

financial instruments

    

Other income (loss)

    

income taxes

Master Lease Portfolio

$

$

(13)

$

$

$

13

Medical Office Portfolio

125

(61)

3,833

4,019

Woodstar I Portfolio

524

(1,471)

133

2,128

Woodstar II Portfolio

449

(287)

(141)

595

Ireland Portfolio

Investment in unconsolidated entities

 

 

 

 

 

Other/Corporate

(19)

41

392

332

Total

$

1,079

$

(1,791)

$

3,966

$

251

$

7,087

See Note 6 to the Condensed Consolidated Financial Statements for a description of the above-referenced Property Segment portfolios.

Revenues

For the three months ended March 31, 2021, revenues of our Property Segment increased $1.0 million to $65.1 million, compared to $64.1 million for the three months ended December 31, 2020.

Costs and Expenses

For the three months ended March 31, 2021, costs and expenses of our Property Segment decreased $1.8 million to $59.5 million, compared to $61.3 million for the three months ended December 31, 2020.

Other Income

For the three months ended March 31, 2021, other income of our Property Segment increased $4.2 million to $4.6 million, compared to $0.4 million for the three months ended December 31, 2020. The improvement in other income was primarily due to a $4.0 million increased gain on derivatives which primarily hedge our interest rate risk on borrowings secured by our Medical Office Portfolio.

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Investing and Servicing Segment

Revenues

For the three months ended March 31, 2021, revenues of our Investing and Servicing Segment decreased $0.8 million to $44.5 million, compared to $45.3 million for the three months ended December 31, 2020. The decrease primarily reflects a $1.3 million decrease in interest income from conduit loans, partially offset by a $0.4 million increase in interest income from CMBS.

Costs and Expenses

For the three months ended March 31, 2021, costs and expenses of our Investing and Servicing Segment decreased $7.2 million to $32.5 million, compared to $39.7 million for the three months ended December 31, 2020. The decrease in costs and expenses was primarily due to a decrease of $7.1 million in general and administrative expenses reflecting lower incentive compensation, principally due to lower securitization volume.

Other Income

For the three months ended March 31, 2021, other income of our Investing and Servicing Segment decreased $3.3 million to $19.0 million, compared to $22.3 million for the three months ended December 31, 2020. The decrease in other income was primarily due to (i) a $32.2 million lesser increase in fair value of conduit loans, partially offset by (ii) a $22.5 million favorable change in fair value of CMBS investments and (iii) a $7.7 million increased gain on derivatives which primarily hedge our interest rate risk on conduit loans.

Corporate and Other Items

Corporate Costs and Expenses

For the three months ended March 31, 2021, corporate expenses decreased $2.3 million to $71.6 million, compared to $73.9 million for the three months ended December 31, 2020. This was primarily due to a decrease of $1.9 million in incentive management fees.

Corporate Other Loss

For the three months ended March 31, 2021, corporate other loss increased $5.6 million to $6.8 million, compared to $1.2 million for the three months ended December 31, 2020. This was due to a $6.1 million increased loss on interest rate swaps which hedge a portion of our unsecured senior notes used to repay variable-rate secured financing, partially offset by the non-recurrence of a $0.5 million loss on extinguishment of debt in the fourth quarter of 2020.

Securitization VIE Eliminations

Securitization VIE eliminations primarily reclassify interest income and servicing fee revenues to other income (loss) for the CMBS and RMBS VIEs that we consolidate as primary beneficiary. Such eliminations have no overall effect on net income (loss) attributable to Starwood Property Trust. The reclassified revenues, along with applicable changes in fair value of investment securities and servicing rights, comprise the other income (loss) caption “Change in net assets related to consolidated VIEs,” which represents our beneficial interest in those consolidated VIEs. The magnitude of the securitization VIE eliminations is merely a function of the number of CMBS and RMBS trusts consolidated in any given period, and as such, is not a meaningful indicator of operating results. The eliminations primarily relate to CMBS trusts for which the Investing and Servicing Segment is deemed the primary beneficiary and, to a much lesser extent, some CMBS and RMBS trusts for which the Commercial and Residential Lending Segment is deemed the primary beneficiary.

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Income Tax Provision

Our consolidated income taxes principally relate to the taxable nature of our loan servicing and loan securitization businesses which are housed in taxable REIT subsidiaries (“TRSs”). For the three months ended March 31, 2021, our income tax provision decreased $11.2 million to $2.2 million compared to $13.4 million for the three months ended December 31, 2020 due to a decrease in taxable income of our TRSs in the first quarter of 2021.

Net Income Attributable to Non-controlling Interests

During the three months ended March 31, 2021, net income attributable to non-controlling interests increased $3.4 million to $11.1 million, compared to $7.7 million during the three months ended December 31, 2020. The increase was primarily due to non-controlling interests in increased earnings of a consolidated CMBS joint venture in which we hold a 51% interest.

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

Commercial and Residential Lending Segment

Revenues

For the three months ended March 31, 2021, revenues of our Commercial and Residential Lending Segment decreased $20.9 million to $190.5 million, compared to $211.4 million for the three months ended March 31, 2020. This decrease was primarily due to decreases in interest income from loans of $21.8 million and investment securities of $0.2 million, partially offset by an increase in rental income from foreclosed properties of $1.2 million. The decrease in interest income from loans was principally due to lower prepayment related income, lower average balances of residential loans and lower average LIBOR rates (partially mitigated by the LIBOR floors on most of our commercial loans), partially offset by higher average balances of commercial loans. The slight decrease in interest income from investment securities was primarily due to lower average LIBOR rates and investment balances affecting interest income from our commercial investment securities, partially offset by higher average RMBS investment balances.

Costs and Expenses

For the three months ended March 31, 2021, costs and expenses of our Commercial and Residential Lending Segment decreased $48.4 million to $56.4 million, compared to $104.8 million for the three months ended March 31, 2020. This decrease was primarily due to a $40.7 million decrease in credit loss provision and a $9.7 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio. The credit loss provision decreased from $40.2 million in the first quarter of 2020 to a $0.5 million reversal in the first quarter of 2021. The large provision in the first quarter of 2020 was due to the significant deterioration in macroeconomic forecasts due to the initial disruption caused by the COVID-19 pandemic and its effect on our then estimate of CECL. The decrease in interest expense was primarily due to lower average LIBOR rates partially offset by higher average borrowings outstanding.

Net Interest Income (amounts in thousands)

For the Three Months Ended

March 31,

    

2021

    

2020

    

Change

Interest income from loans

$

170,593

$

192,381

$

(21,788)

Interest income from investment securities

 

18,385

 

18,628

 

(243)

Interest expense

 

(44,295)

 

(53,950)

 

9,655

Net interest income

$

144,683

$

157,059

$

(12,376)

For the three months ended March 31, 2021, net interest income of our Commercial and Residential Lending Segment decreased $12.4 million to $144.7 million, compared to $157.1 million for the three months ended March 31, 2020. This decrease reflects the decreases in interest income, partially offset by the decrease in interest expense on our secured financing facilities, both as discussed in the sections above.

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During the three months ended March 31, 2021 and 2020, the weighted average unlevered yields on the Commercial and Residential Lending Segment’s loans and investment securities were as follows:

For the Three Months Ended

March 31,

2021

2020

Commercial

5.9

%

6.8

%

Residential

7.5

%

6.8

%

Overall

6.1

%

6.8

%

The overall weighted average unlevered yield was lower primarily due to lower prepayment related income and LIBOR rates affecting our commercial yields, partially offset by the increased investment in higher-yielding RMBS affecting our residential yields.

During the three months ended March 31, 2021 and 2020, the Commercial and Residential Lending Segment’s weighted average secured borrowing rates, inclusive of interest rate hedging costs and the amortization of deferred financing fees, were 2.6% and 3.5%, respectively. The decrease in borrowing rates primarily reflects decreases in LIBOR.

Other Income (Loss)

For the three months ended March 31, 2021, other income of our Commercial and Residential Lending Segment increased $87.7 million to $21.2 million compared to a loss of $66.5 million for the three months ended March 31, 2020. This increase was primarily due to (i) a $25.8 million lesser decrease in fair value of investment securities, (ii) a $24.8 million lesser decrease in fair value of residential loans, (iii) a $22.4 million decrease in foreign currency loss and (iv) a $17.7 million gain on sale of a foreclosed property, all partially offset by (v) a $4.7 million lower gain on derivatives. The greater decreases in fair value of investment securities and residential loans in the first quarter of 2020 were primarily attributable to widening credit spreads resulting from market disruption and dislocation caused by the initial impacts of COVID-19. The lower gain on derivatives in the first quarter of 2021 reflects a $39.2 million lower gain on foreign currency hedges, partially offset by a $34.5 million favorable change in gain (loss) on interest rate swaps. The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and investments. The decreases in foreign currency loss and foreign currency hedge gains reflect the strengthening of the U.S. dollar against the EUR and AUD, partially offset by a weakening against the GBP, in the first quarter of 2021 compared to a greater overall strengthening of the U.S. dollar against those currencies in the first quarter of 2020. The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments and to hedge our interest rate risk on residential loans held-for-sale.

Infrastructure Lending Segment

Revenues

For the three months ended March 31, 2021, revenues of our Infrastructure Lending Segment decreased $3.8 million to $19.5 million, compared to $23.3 million for the three months ended March 31, 2020. This was primarily due to a decrease in interest income from loans of $3.6 million principally due to lower average LIBOR rates.

Costs and Expenses

For the three months ended March 31, 2021, costs and expenses of our Infrastructure Lending Segment decreased $13.1 million to $13.0 million, compared to $26.1 million for the three months ended March 31, 2020. The decrease was primarily due to a $7.9 million decrease in credit loss provision and a $4.3 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio. The credit loss provision in the first quarter of 2020 was magnified by the significant deterioration of macroeconomic forecasts due to the initial economic disruption caused by the COVID-19 pandemic. The decrease in interest expense was primarily due to lower average LIBOR rates.

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Net Interest Income (amounts in thousands)

For the Three Months Ended

March 31,

    

2021

    

2020

    

Change

Interest income from loans

$

18,808

$

22,413

$

(3,605)

Interest income from investment securities

 

564

 

701

 

(137)

Interest expense

 

(8,841)

 

(13,117)

 

4,276

Net interest income

$

10,531

$

9,997

$

534

For the three months ended March 31, 2021, net interest income of our Infrastructure Lending Segment increased $0.5 million to $10.5 million, compared to $10.0 million for the three months ended March 31, 2020. The increase reflects the decrease in interest expense on the secured financing facilities, partially offset by the decrease in interest income, both as discussed in the sections above.

  During the three months ended March 31, 2021 and 2020, the weighted average unlevered yields on the Infrastructure Lending Segment’s investments were as follows:

For the Three Months Ended

March 31,

2021

2020

Loans and investment securities held-for-investment

4.8

%

6.1

%

Loans held-for-sale

3.2

%

3.6

%

During the three months ended March 31, 2021 and 2020, the Infrastructure Lending Segment’s weighted average secured borrowing rate, inclusive of the amortization of deferred financing fees, was 2.9% and 4.4%, respectively.

Other Income (Loss)

For the three months ended March 31, 2021 and 2020, other income of our Infrastructure Lending Segment increased $1.4 million to $0.1 million, compared to a loss of $1.3 million for the three months ended March 31, 2020. The improvement in other income (loss) primarily reflects a $1.7 million favorable change in gain (loss) on derivatives consisting of a $2.2 million favorable change on interest rate swaps and swap guarantees, partially offset by a $0.5 million decrease in gains on foreign currency hedges.

Property Segment

Change in Results by Portfolio (amounts in thousands)

    

$ Change from prior period

Costs and

Gain (loss) on derivative

Income (loss) before

Revenues

    

expenses

    

financial instruments

    

Other income (loss)

    

income taxes

Master Lease Portfolio

$

$

(4)

$

$

$

4

Medical Office Portfolio

388

(753)

34,825

35,966

Woodstar I Portfolio

305

(139)

122

566

Woodstar II Portfolio

368

284

(141)

(57)

Ireland Portfolio

Investment in unconsolidated entities

 

 

 

 

 

Other/Corporate

(552)

(6)

546

Total

$

1,061

$

(1,164)

$

34,947

$

(147)

$

37,025

Revenues

For the three months ended March 31, 2021, revenues of our Property Segment increased $1.0 million to $65.1 million, compared to $64.1 million for the three months ended March 31, 2020.

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Costs and Expenses

For the three months ended March 31, 2021, costs and expenses of our Property Segment decreased $1.2 million to $59.5 million, compared to $60.7 million for the three months ended March 31, 2020. The decrease in costs and expenses primarily reflects a $1.3 million decrease in interest expense.

Other Income (Loss)

For the three months ended March 31, 2021, other income of our Property Segment increased $34.8 million to $4.6 million, compared to a loss of $30.2 million for the three months ended March 31, 2020. The improvement in other income (loss) was primarily due to a $34.9 million favorable change in gain (loss) on derivatives which primarily hedge our interest rate risk on borrowings secured by our Medical Office Portfolio.

Investing and Servicing Segment

Revenues

For the three months ended March 31, 2021 and 2020, revenues of our Investing and Servicing Segment were level at $44.5 million. A $6.0 million increase in servicing fees was offset by decreases in interest income from CMBS and conduit loans and, to a lesser extent, other revenues.

Costs and Expenses

For the three months ended March 31, 2021, costs and expenses of our Investing and Servicing Segment decreased $4.4 million to $32.5 million, compared to $36.9 million for the three months ended March 31, 2020. The decrease in costs and expenses was primarily due to decreases of $2.2 million in general and administrative expenses reflecting lower compensation costs and $1.7 million in interest expense on borrowings related to conduit loans, CMBS and properties held.

Other Income (Loss)

For the three months ended March 31, 2021, other income of our Investing and Servicing Segment increased $64.9 million to $19.0 million, compared to a loss of $45.9 million for the three months ended March 31, 2020. The improvement in other income (loss) was primarily due to (i) a $54.4 million favorable change in fair value of CMBS investments and (ii) a $28.4 million favorable change in gain (loss) on derivatives which primarily hedge our interest rate risk on conduit loans, partially offset by (iii) an $18.1 million lesser increase in fair value of conduit loans. The fair value of our CMBS investments was adversely affected in the first quarter of 2020 by widening credit spreads resulting from market disruption and dislocation caused by the initial impacts of COVID-19.

Corporate and Other Items

Corporate Costs and Expenses

For the three months ended March 31, 2021, corporate expenses decreased $1.6 million to $71.6 million, compared to $73.2 million for the three months ended March 31, 2020. This was primarily due to a decrease of $1.9 million in incentive management fees.

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Corporate Other Income (Loss)

For the three months ended March 31, 2021, corporate other income decreased $36.0 million to a loss of $6.8 million, compared to income of $29.2 million for the three months ended March 31, 2020. This was due to an unfavorable change in gain (loss) on interest rate swaps which hedge a portion of our unsecured senior notes used to repay variable-rate secured financing.

Securitization VIE Eliminations

Refer to the preceding comparison of the three months ended March 31, 2021 to the three months ended December 31, 2020 for a discussion of the effect of securitization VIE eliminations.

Income Tax Provision

Our consolidated income taxes principally relate to the taxable nature of our loan servicing and loan securitization businesses which are housed in TRSs. For the three months ended March 31, 2021, our income taxes increased $8.9 million to $2.2 million compared to a benefit of $6.7 million for the three months ended March 31, 2020 due to an increase in taxable income of our TRSs in the first quarter of 2021.

Net Income Attributable to Non-controlling Interests

During the three months ended March 31, 2021, net income attributable to non-controlling interests increased $10.6 million to $11.1 million, compared to $0.5 million during the three months ended March 31, 2020. The increase was primarily due to non-controlling interests in increased earnings of a consolidated CMBS joint venture in which we hold a 51% interest.

Non-GAAP Financial Measures

Distributable Earnings is a non-GAAP financial measure. We calculate Distributable Earnings as GAAP net income (loss) excluding the following:

(i)non-cash equity compensation expense;

(ii)incentive fees due under our management agreement;

(iii)depreciation and amortization of real estate and associated intangibles;

(iv)acquisition costs associated with successful acquisitions;

(v)any unrealized gains, losses or other non-cash items recorded in net income (loss) for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income (loss); and

(vi)any deductions for distributions payable with respect to equity securities of subsidiaries issued in exchange for properties or interests therein.

The CECL reserve has been excluded from Distributable Earnings consistent with other unrealized gains (losses) pursuant to our existing policy for reporting Distributable Earnings. We expect to only recognize such potential credit losses in Distributable Earnings if and when such amounts are deemed nonrecoverable upon a realization event. This is generally at the time a loan is repaid, or in the case of foreclosure, when the underlying asset is sold, but non-recoverability may also be determined if, in our determination, it is nearly certain that all amounts due will not be collected. The realized loss amount reflected in Distributable Earnings will equal the difference between the cash received, or expected to be received, and the book value of the asset, and is reflective of our economic experience as it relates to the ultimate realization of the loan.

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We believe that Distributable Earnings provides meaningful information to consider in addition to our net income (loss) and cash flow from operating activities determined in accordance with GAAP. We believe Distributable Earnings is a useful financial metric for existing and potential future holders of our common stock as historically, over time, Distributable Earnings has been a strong indicator of our dividends per share. As a REIT, we generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments, and therefore we believe our dividends are one of the principal reasons stockholders may invest in our common stock. Further, Distributable Earnings helps us to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations, and is a performance metric we consider when declaring our dividends. We also use Distributable Earnings (previously defined as “Core Earnings”) to compute the incentive fee due under our management agreement.

Distributable Earnings does not represent net income (loss) or cash generated from operating activities and should not be considered as an alternative to GAAP net income (loss), or an indication of our GAAP cash flows from operations, a measure of our liquidity, taxable income, or an indication of funds available for our cash needs. In addition, our methodology for calculating Distributable Earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures, and accordingly, our reported Distributable Earnings may not be comparable to the Distributable Earnings reported by other companies.

The weighted average diluted share count applied to Distributable Earnings for purposes of determining Distributable Earnings per share (“EPS”) is computed using the GAAP diluted share count, adjusted for the following:

(i)Unvested stock awards – Currently, unvested stock awards are excluded from the denominator of GAAP EPS. The related compensation expense is also excluded from Distributable Earnings. In order to effectuate dilution from these awards in the Distributable Earnings computation, we adjust the GAAP diluted share count to include these shares.

(ii)Convertible Notes – Conversion of our Convertible Notes is an event that is contingent upon numerous factors, none of which are in our control, and is an event that may or may not occur. Consistent with the treatment of other unrealized adjustments to Distributable Earnings, we adjust the GAAP diluted share count to exclude the potential shares issuable upon conversion until a conversion occurs.

(iii)Subsidiary equity – The intent of a February 2018 amendment to our management agreement (the “Amendment”) is to treat subsidiary equity in the same manner as if parent equity had been issued. The Class A Units issued in connection with the acquisition of assets in our Woodstar II Portfolio are currently excluded from our GAAP diluted share count, with the subsidiary equity represented as non-controlling interests in consolidated subsidiaries on our GAAP balance sheet. Consistent with the Amendment, we adjust GAAP diluted share count to include these subsidiary units.

The following table presents our diluted weighted average shares used in our GAAP EPS calculation reconciled to our diluted weighted average shares used in our Distributable EPS calculation (amounts in thousands):

For the Three Months Ended

March 31, 2021

December 31, 2020

March 31, 2020

Diluted weighted average shares - GAAP EPS

293,231

292,900

280,990

Add: Unvested stock awards

4,484

3,361

2,723

Add: Woodstar II Class A Units

10,622

10,598

10,738

Add: Other dilutive securities not included above

685

Less: Convertible Notes dilution

(9,649)

(9,649)

Diluted weighted average shares - Distributable EPS

 

298,688

 

297,210

 

295,136

The definition of Distributable Earnings allows management to make adjustments, subject to the approval of a majority of our independent directors, in situations where such adjustments are considered appropriate in order for Distributable Earnings to be calculated in a manner consistent with its definition and objective. No adjustments to the definition of Distributable Earnings became effective during the three months ended March 31, 2021.

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The following table presents our summarized results of operations and reconciliation to Distributable Earnings for the three months ended March 31, 2021, by business segment (amounts in thousands, except per share data):

 

Commercial

    

    

    

    

    

and

Residential

Infrastructure

Investing

Lending

Lending

Property

and Servicing

Segment

Segment

Segment

Segment

Corporate

Total

Revenues

$

190,531

$

19,465

$

65,144

$

44,547

$

$

319,687

Costs and expenses

 

(56,414)

 

(12,956)

 

(59,498)

 

(32,457)

(71,647)

 

(232,972)

Other income (loss)

 

21,161

 

95

 

4,608

 

18,960

 

(6,843)

 

37,981

Income (loss) before income taxes

 

155,278

 

6,604

 

10,254

 

31,050

(78,490)

 

124,696

Income tax provision

 

(1,505)

 

(92)

 

 

(633)

 

(2,230)

Income attributable to non-controlling interests

 

(3)

 

 

(5,077)

 

(6,008)

 

 

(11,088)

Net income (loss) attributable to Starwood Property Trust, Inc.

153,770

 

6,512

 

5,177

 

24,409

(78,490)

 

111,378

Add / (Deduct):

Non-controlling interests attributable to Woodstar II Class A Units

5,077

 

5,077

Non-cash equity compensation expense

1,781

300

31

881

7,317

 

10,310

Management incentive fee

13,123

 

13,123

Acquisition and investment pursuit costs

(164)

(89)

 

(253)

Depreciation and amortization

247

91

18,161

3,603

 

22,102

Credit loss (reversal) provision, net

(529)

573

 

44

Interest income adjustment for securities

(1,300)

3,995

 

2,695

Extinguishment of debt, net

(246)

(246)

Income tax (provision) benefit associated with realized (gains) losses

(6,495)

405

(6,090)

Other non-cash items

3

(337)

207

415

 

288

Reversal of GAAP unrealized (gains) / losses on:

Loans

10,714

(1,236)

 

9,478

Securities

2,050

(7,170)

(5,120)

Derivatives

(27,171)

(745)

(6,446)

(9,719)

9,313

 

(34,768)

Foreign currency

11,594

49

(25)

63

 

11,681

(Earnings) loss from unconsolidated entities

(1,753)

254

(589)

 

(2,088)

Sales of properties

(17,693)

 

(17,693)

Recognition of Distributable realized gains / (losses) on:

Loans

14,553

4,672

19,225

Realized credit loss

(7,757)

(7,757)

Securities

(2,861)

1,776

 

(1,085)

Derivatives

1,950

(35)

1,595

 

3,510

Foreign currency

4,784

(10)

25

(63)

 

4,736

Earnings (loss) from unconsolidated entities

3,218

(254)

964

 

3,928

Sales of properties

8,298

 

8,298

Distributable Earnings (Loss)

$

147,239

$

6,770

$

21,539

$

23,793

$

(48,568)

$

150,773

Distributable Earnings (Loss) per Weighted Average Diluted Share

$

0.49

$

0.02

$

0.07

$

0.08

$

(0.16)

$

0.50

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The following table presents our summarized results of operations and reconciliation to Distributable Earnings for the three months ended December 31, 2020, by business segment (amounts in thousands, except per share data):

    

Commercial

    

    

    

    

    

and

Residential

Infrastructure

Investing

Lending

Lending

Property

and Servicing

Segment

Segment

Segment

Segment

Corporate

Total

Revenues

$

196,309

$

19,250

$

64,065

$

45,372

$

$

324,996

Costs and expenses

 

(50,999)

(5,555)

(61,289)

(39,722)

(73,965)

(231,530)

Other income (loss)

 

13,318

(259)

391

22,349

(1,239)

34,560

Income (loss) before income taxes

 

158,628

13,436

3,167

27,999

(75,204)

128,026

Income tax provision

 

(5,556)

(120)

(7,705)

(13,381)

(Income) loss attributable to non-controlling interests

 

(4)

(5,100)

(2,573)

(7,677)

Net income (loss) attributable to Starwood Property Trust, Inc.

153,068

13,316

(1,933)

17,721

(75,204)

106,968

Add / (Deduct):

Non-controlling interests attributable to Woodstar II Class A Units

5,100

5,100

Non-cash equity compensation expense

891

299

34

869

6,707

8,800

Management incentive fee

14,974

14,974

Acquisition and investment pursuit costs

(278)

(89)

(367)

Depreciation and amortization

372

86

18,736

3,832

23,026

Credit loss reversal, net

(5,037)

(7,094)

(12,131)

Interest income adjustment for securities

(1,102)

5,245

4,143

Extinguishment of debt, net

(247)

(247)

Income tax provision associated with fair value adjustments

4,883

550

5,433

Other non-cash items

4

(374)

239

161

30

Reversal of GAAP unrealized (gains) / losses on:

Loans

(20,002)

(33,422)

(53,424)

Securities

6,294

15,377

21,671

Derivatives

48,046

105

(2,480)

(2,218)

3,945

47,398

Foreign currency

(43,962)

(260)

(39)

5

(44,256)

Earnings from unconsolidated entities

(4,804)

(431)

(341)

(5,576)

Recognition of Distributable realized gains / (losses) on:

Loans

2,461

32,528

34,989

Securities

398

(9,389)

(8,991)

Derivatives

(3,858)

(34)

20

(3,872)

Foreign currency

631

14

39

(5)

679

Earnings from unconsolidated entities

2,914

431

745

4,090

Distributable Earnings (Loss)

$

140,919

$

6,466

$

18,960

$

31,756

$

(49,664)

$

148,437

Distributable Earnings (Loss) per Weighted Average Diluted Share

$

0.47

$

0.02

$

0.07

$

0.11

$

(0.17)

$

0.50

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The following table presents our summarized results of operations and reconciliation to Distributable Earnings for the three months ended March 31, 2020, by business segment (amounts in thousands, except per share data):

    

Commercial

    

    

    

    

    

and

Residential

Infrastructure

Investing

Lending

Lending

Property

and Servicing

Segment

Segment

Segment

Segment

Corporate

Total

Revenues

$

211,437

$

23,257

$

64,083

$

44,495

$

$

343,272

Costs and expenses

 

(104,780)

(26,079)

(60,662)

(36,928)

(73,213)

(301,662)

Other income (loss)

 

(66,541)

(1,348)

(30,192)

(45,918)

29,235

(114,764)

Income (loss) before income taxes

 

40,116

(4,170)

(26,771)

(38,351)

(43,978)

(73,154)

Income tax benefit

 

4,422

145

2,162

6,729

(Income) loss attributable to non-controlling interests

 

(3)

(5,111)

4,770

(344)

Net income (loss) attributable to Starwood Property Trust, Inc.

44,535

(4,025)

(31,882)

(31,419)

(43,978)

(66,769)

Add / (Deduct):

Non-controlling interests attributable to Woodstar II Class A Units

5,111

5,111

Non-cash equity compensation expense

1,112

466

73

1,263

5,886

8,800

Management incentive fee

15,799

15,799

Acquisition and investment pursuit costs

358

(89)

269

Depreciation and amortization

355

51

19,381

3,807

23,594

Credit loss provision, net

40,217

8,452

48,669

Interest income adjustment for securities

124

6,315

6,439

Extinguishment of debt, net

(246)

(246)

Income tax benefit associated with fair value adjustments

(5,821)

(1,442)

(7,263)

Other non-cash items

3

(491)

248

156

(84)

Reversal of GAAP unrealized (gains) / losses on:

Loans

35,517

(19,383)

16,134

Securities

27,879

47,216

75,095

Derivatives

(30,563)

1,013

30,569

19,013

(27,649)

(7,617)

Foreign currency

34,001

473

19

(7)

34,486

Earnings from unconsolidated entities

(51)

(620)

(671)

Recognition of Distributable realized gains / (losses) on:

Loans

2,164

(62)

16,559

18,661

Securities

(4,212)

(4,212)

Derivatives

3,250

118

(35)

(6,087)

(2,754)

Foreign currency

(4,271)

(194)

(19)

7

(4,477)

(Loss) earnings from unconsolidated entities

(556)

3,738

3,182

Distributable Earnings (Loss)

$

148,253

$

6,292

$

22,637

$

34,996

$

(50,032)

$

162,146

Distributable Earnings (Loss) per Weighted Average Diluted Share

$

0.50

$

0.02

$

0.08

$

0.12

$

(0.17)

$

0.55

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Three Months Ended March 31, 2021 Compared to the Three Months Ended December 31, 2020

Commercial and Residential Lending Segment

The Commercial and Residential Lending Segment’s Distributable Earnings increased by $6.3 million, from $140.9 million during the fourth quarter of 2020 to $147.2 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $189.2 million, costs and expenses were $62.8 million, other income was $28.8 million and income tax provision was $8.0 million.

Revenues, consisting principally of interest income on loans, decreased by $6.0 million in the first quarter of 2021, primarily due to decreases in interest income from loans of $2.4 million and investment securities of $2.9 million and a decrease in rental income from foreclosed properties of $0.6 million due to the sale of a property in the first quarter of 2021. The decrease in interest income from loans was principally due to lower average balances of residential loans reflecting the timing of purchases and securitizations. The decrease in interest income from investment securities was primarily due to lower average RMBS investment balances reflecting sales of RMBS late in the fourth quarter of 2020.

Costs and expenses increased by $7.8 million in the first quarter of 2021, primarily due to a $7.8 million write-off of an unsecured commercial loan and a $2.3 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio, partially offset by a $2.3 million decrease in general and administrative expenses reflecting lower professional fees.

Other income increased by $27.4 million in the first quarter of 2021, primarily due to a $12.1 million increase in residential loan securitization gains, an $8.3 million gain on sale of a foreclosed property in the first quarter of 2021 and a $5.9 million favorable change in realized gains (losses) on interest rate and foreign currency derivatives.

Income taxes, which principally relate to the taxable nature of this segment’s residential loan securitization activities which are housed in TRSs, increased $7.3 million due to an increase in realized gains from the securitization and sale of residential loans.  The majority of the GAAP income tax provision related to these loans was recorded in 2020 when the loans were marked to their fair values.  Because the net fair value increases were unrealized, they along with their corresponding income tax provision were previously adjusted in our reconciliation to Distributable Earnings. Upon recognition of the realized gains this quarter for Distributable Earnings purposes, the corresponding income tax provision was likewise recognized.  


Infrastructure Lending Segment

The Infrastructure Lending Segment’s Distributable Earnings increased by $0.3 million, from $6.5 million in the fourth quarter of 2020 to $6.8 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $19.5 million, costs and expenses were $12.0 million and other loss was $0.6 million.

Revenues, consisting principally of interest income on loans, increased by $0.2 million in the first quarter of 2021, primarily due to a slight increase in interest income from loans.

Costs and expenses decreased by $0.3 million in the first quarter of 2021, primarily due to a slight decrease in interest expense on the secured debt facilities used to finance this segment’s investments.

Other loss increased by $0.2 million in the first quarter of 2021.

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Property Segment

Distributable Earnings by Portfolio (amounts in thousands)

For the Three Months Ended

    

March 31, 2021

    

December 31, 2020

    

Change

Master Lease Portfolio

$

4,312

$

4,300

$

12

Medical Office Portfolio

5,513

5,339

174

Woodstar I Portfolio

6,338

4,907

1,431

Woodstar II Portfolio

6,100

5,470

630

Other/Corporate

(724)

(1,056)

332

Distributable Earnings

$

21,539

$

18,960

$

2,579

The Property Segment’s Distributable Earnings increased by $2.6 million, from $18.9 million during the fourth quarter of 2020 to $21.5 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $64.8 million, costs and expenses were $41.5 million and other loss was $1.8 million.

Revenues increased by $1.1 million in the first quarter of 2021.

Costs and expenses decreased by $1.2 million in the first quarter of 2021.

Other loss decreased by $0.3 million in the first quarter of 2021.

Investing and Servicing Segment

The Investing and Servicing Segment’s Distributable Earnings decreased by $8.0 million, from $31.8 million during the fourth quarter of 2020 to $23.8 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $48.8 million, costs and expenses were $28.0 million, other income was $6.8 million, income tax provision was $0.2 million and the deduction of income attributable to non-controlling interests was $3.6 million.

Revenues decreased by $2.1 million in the first quarter of 2021, primarily due to a decrease in interest income from CMBS and conduit loans. The treatment of CMBS interest income on a GAAP basis is complicated by our application of the ASC 810 consolidation rules. In an attempt to treat these securities similar to the trust’s other investment securities, we compute distributable interest income pursuant to an effective yield methodology. In doing so, we segregate the portfolio into various categories based on the components of the bonds’ cash flows and the volatility related to each of these components. We then accrete interest income on an effective yield basis using the components of cash flows that are reliably estimable. Other minor adjustments are made to reflect management’s expectations for other components of the projected cash flow stream. The decrease in interest income reflects decreases of $1.3 million from CMBS and $0.8 million from conduit loans held-for-sale.

Costs and expenses decreased by $7.0 million in the first quarter of 2021, primarily due to a decrease in general and administrative expenses reflecting lower incentive compensation, principally due to lower securitization volume.

Other income includes profit realized upon securitization of loans by our conduit business, gains on sales of CMBS and operating properties, gains and losses on derivatives that were either effectively terminated or novated, and earnings from unconsolidated entities. These items are typically offset by a decrease in the fair value of our domestic servicing rights intangible which reflects the expected amortization of this deteriorating asset, net of increases in fair value due to the attainment of new servicing contracts. Derivatives include instruments which hedge interest rate risk and credit risk on our conduit loans. For GAAP purposes, the loans, CMBS and derivatives are accounted for at fair value, with all changes in fair value (realized or unrealized) recognized in earnings. The adjustments to Distributable Earnings outlined above are also applied to the GAAP earnings of our unconsolidated entities. Other income decreased by $19.7 million in the first quarter of 2021 primarily due to a decrease in realized gains on conduit loans of $27.9 million, partially offset by a $10.2 million decrease in recognized losses on CMBS.

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Income taxes, which principally relate to the taxable nature of this segment’s loan servicing and loan securitization businesses which are housed in TRSs, decreased $6.9 million due to lower taxable income of those TRSs in the first quarter of 2021.

Income attributable to non-controlling interests increased $0.1 million in the first quarter of 2021.

Corporate

Corporate costs and expenses decreased by $1.1 million, from $49.7 million during the fourth quarter of 2020 to $48.6 million in the first quarter of 2021.

Three Months Ended March 31, 2021 Compared to the Three Months Ended March 31, 2020

Commercial and Residential Lending Segment

The Commercial and Residential Lending Segment’s Distributable Earnings decreased by $1.1 million, from $148.3 million during the first quarter of 2020 to $147.2 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $189.2 million, costs and expenses were $62.8 million, other income was $28.8 million and income tax provision was $8.0 million.

Revenues, consisting principally of interest income on loans, decreased by $22.4 million in the first quarter of 2021, primarily due to decreases in interest income from loans of $21.8 million and investment securities of $1.7 million, partially offset by an increase in rental income from foreclosed properties of $1.2 million. The decrease in interest income from loans was principally due to lower prepayment related income, lower average balances of residential loans and lower average LIBOR rates (partially mitigated by the LIBOR floors on most of our commercial loans), partially offset by higher average balances of commercial loans. The decrease in interest income from investment securities was primarily due to lower LIBOR rates and average investment balances affecting interest income from our commercial investment securities, partially offset by higher average RMBS investment balances.

Costs and expenses increased by $0.1 million in the first quarter of 2021, primarily due to a $7.8 million write-off of an unsecured commercial loan and a $2.5 million increase in general and administrative expenses, partially offset by a $9.7 million decrease in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio primarily due to lower average LIBOR rates partially offset by higher average borrowings outstanding.

Other income increased by $28.0 million in the first quarter of 2021, primarily due to residential loan securitization gains, including realized gains on related interest rate derivatives, and an $8.3 million gain on sale of a foreclosed property.

Income taxes, which principally relate to the taxable nature of this segment’s residential loan securitization activities which are housed in TRSs, increased $6.6 million due to an increase in realized gains from the securitization and sale of residential loans.  In the first quarter of 2020, we recorded a GAAP net tax benefit related to unrealized fair value decreases in our residential loans. This benefit was deducted from GAAP earnings to arrive at Distributable Earnings until a gain or loss on these loans was ultimately realized.  In the first quarter of 2021, we realized gains from the sale and securitization of loans which had been previously marked to their fair values, mostly in 2020.  Upon recognition of the realized gains this quarter for Distributable Earnings purposes, the corresponding income tax provision was likewise recognized.   

Infrastructure Lending Segment

The Infrastructure Lending Segment’s Distributable Earnings increased by $0.5 million, from $6.3 million in the first quarter of 2020 to $6.8 million in the first quarter of 2021. After making adjustments for the calculation of

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Distributable Earnings, revenues were $19.5 million, costs and expenses were $12.0 million and other loss was $0.6 million.

Revenues, consisting principally of interest income on loans, decreased by $3.8 million in the first quarter of 2021, primarily due to a decrease in interest income from loans of $3.6 million principally due to lower average LIBOR rates.

Costs and expenses decreased by $5.1 million in the first quarter of 2021, primarily due to a $4.3 million decrease in interest expense on the secured debt facilities used to finance this segment’s investment portfolio principally due to lower average LIBOR rates.

Other loss increased by $0.6 million in the first quarter of 2021.

Property Segment

Distributable Earnings by Portfolio (amounts in thousands)

For the Three Months Ended

March 31,

    

2021

    

2020

    

Change

Master Lease Portfolio

$

4,312

$

4,308

$

4

Medical Office Portfolio

5,513

6,765

(1,252)

Woodstar I Portfolio

6,338

6,784

(446)

Woodstar II Portfolio

6,100

6,009

91

Other/Corporate

(724)

(1,229)

505

Distributable Earnings

$

21,539

$

22,637

$

(1,098)

The Property Segment’s Distributable Earnings decreased by $1.1 million, from $22.6 million during the first quarter of 2020 to $21.5 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $64.8 million, costs and expenses were $41.5 million and other loss was $1.8 million.

Revenues increased by $1.2 million in the first quarter of 2021.

Costs and expenses increased by $0.1 million in the first quarter of 2021.

Other income decreased by $2.2 million to a loss in the first quarter of 2021 primarily due to an unfavorable change in realized gains (losses) on certain interest rate derivatives.

Investing and Servicing Segment

The Investing and Servicing Segment’s Distributable Earnings decreased by $11.2 million, from $35.0 million during the first quarter of 2020 to $23.8 million in the first quarter of 2021. After making adjustments for the calculation of Distributable Earnings, revenues were $48.8 million, costs and expenses were $28.0 million, other income was $6.8 million, income tax provision was $0.2 million and the deduction of income attributable to non-controlling interests was $3.6 million.

Revenues decreased by $2.3 million in the first quarter of 2021, primarily due to decreases of $7.6 million in interest income from CMBS and conduit loans, partially offset by a $6.0 million increase in servicing fees. The decrease in interest income reflects decreases of $6.2 million from CMBS and $1.4 million from conduit loans held-for-sale.

Costs and expenses decreased by $3.9 million in the first quarter of 2021, primarily due to decreases of $1.8 million in general and administrative expenses reflecting lower compensation costs and $1.7 million in interest expense on borrowings related to conduit loans, CMBS and properties held.

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Other income decreased by $15.4 million in the first quarter of 2021 primarily due to decreases in realized gains of $11.9 million on conduit loans and $11.5 million on CMBS, partially offset by a $7.3 million favorable change in gain (loss) on derivatives mostly related to the conduit loans.

Income taxes, which principally relate to the taxable nature of this segment’s loan servicing and loan securitization businesses which are housed in TRSs, increased $0.9 million from a benefit of $0.7 million to a provision of $0.2 million due to taxable income of those TRSs in the first quarter of 2021.

Income attributable to non-controlling interests decreased $3.5 million primarily relating to lower distributable earnings of a consolidated CMBS joint venture in which we hold a 51% interest.

Corporate

Corporate costs and expenses decreased by $1.4 million, from $50.0 million during the first quarter of 2020 to $48.6 million in the first quarter of 2021 primarily due to (i) a $0.9 million increase in realized gains on interest rate swaps which hedge a portion of our unsecured senior notes used to repay variable-rate secured financing and (ii) a $0.7 million decrease in professional fees.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet our cash requirements, including ongoing commitments to repay borrowings, fund and maintain our assets and operations, make new investments where appropriate, pay dividends to our stockholders, and other general business needs. We closely monitor our liquidity position and believe that we have sufficient current liquidity and access to additional liquidity to meet our financial obligations for at least the next 12 months. Our strategy for managing liquidity and capital resources has not changed since December 31, 2020. Refer to our Form 10-K for a description of these strategies.

COVID-19 Pandemic

We are continuing to monitor the COVID-19 pandemic and its impact on us, the borrowers underlying our commercial and residential real estate-related loans and infrastructure loans (and their tenants), the tenants in the properties we own, our financing sources, and the economy as a whole. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences are uncertain, rapidly changing and difficult to predict, the pandemic’s impact on our operations and liquidity remains uncertain and difficult to predict. Further discussion of the potential impacts on us from the COVID-19 pandemic is provided in the section entitled “Risk Factors” in Part I, Item 1A of our Form 10-K.

Credit Facilities

Shortly after the initial outbreak of the COVID-19 pandemic, we entered into agreements with certain of our secured credit facility lenders in our commercial lending portfolio to temporarily suspend credit mark provisions on certain of their portfolio assets in exchange for: (i) cash repayments; (ii) pledges of additional collateral; and (iii) reductions of available borrowings. 

We are in frequent, consistent dialogue with the providers of our secured credit facilities regarding our management of their collateral assets in light of the impacts of the COVID-19 pandemic, including the determination of whether any extensions to these agreements are necessary as these temporary suspensions expire. Our in-house asset management team, along with an experienced team of workout professionals within our special servicer, are skilled in managing loans throughout cycles, which we believe will assist us in achieving maximum resolution on any assets impacted by the COVID-19 pandemic.

No such modifications or agreements were made with lenders on credit facilities related to our property, residential lending or infrastructure lending portfolios.

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Sources of Liquidity

Our primary sources of liquidity are as follows:

Cash Flows for the Three Months ended March 31, 2021 (amounts in thousands)

    

    

VIE

    

Excluding Investing

GAAP

Adjustments

and Servicing VIEs

Net cash provided by operating activities

$

270,766

$

(353)

$

270,413

Cash Flows from Investing Activities:

Origination, purchase and funding of loans held-for-investment

 

(2,296,124)

 

 

(2,296,124)

Proceeds from principal collections and sale of loans

 

1,051,695

 

 

1,051,695

Purchase and funding of investment securities

 

 

(27,333)

 

(27,333)

Proceeds from sales and collections of investment securities

 

59,514

 

26,085

 

85,599

Proceeds from sales of real estate

30,566

30,566

Purchases and additions to properties and other assets

(3,512)

(3,512)

Net cash flows from other investments and assets

 

38,656

 

183

 

38,839

Net cash used in investing activities

 

(1,119,205)

 

(1,065)

 

(1,120,270)

Cash Flows from Financing Activities:

Proceeds from borrowings

 

2,748,317

 

 

2,748,317

Principal repayments on and repurchases of borrowings

 

(2,001,336)

 

(157)

 

(2,001,493)

Payment of deferred financing costs

 

(5,052)

 

 

(5,052)

Proceeds from common stock issuances, net of offering costs

 

240

 

 

240

Payment of dividends

 

(137,667)

 

 

(137,667)

Contributions from non-controlling interests

2,969

 

2,969

Distributions to non-controlling interests

 

(8,833)

 

158

 

(8,675)

Issuance of debt of consolidated VIEs

 

11,604

 

(11,604)

 

Repayment of debt of consolidated VIEs

 

(27,490)

 

27,490

 

Distributions of cash from consolidated VIEs

 

14,481

 

(14,481)

 

Net cash provided by financing activities

 

597,233

 

1,406

 

598,639

Net decrease in cash, cash equivalents and restricted cash

 

(251,206)

 

(12)

 

(251,218)

Cash, cash equivalents and restricted cash, beginning of period

 

722,162

 

(772)

 

721,390

Effect of exchange rate changes on cash

 

(1,042)

 

 

(1,042)

Cash, cash equivalents and restricted cash, end of period

$

469,914

$

(784)

$

469,130

The discussion below is on a non-GAAP basis, after removing adjustments principally resulting from the consolidation of the securitization VIEs under ASC 810. These adjustments principally relate to (i) the purchase of CMBS, RMBS, loans and real estate from consolidated VIEs, which are reflected as repayments of VIE debt on a GAAP basis and (ii) sales and principal collections of CMBS and RMBS related to consolidated VIEs, which are reflected as VIE distributions on a GAAP basis. There is no significant net impact to overall cash resulting from these consolidations. Refer to Note 2 to the Condensed Consolidated Financial Statements for further discussion.

Cash and cash equivalents decreased by $251.2 million during the three months ended March 31, 2021, reflecting net cash used in investing activities of $1.1 billion, partially offset by net cash provided by operating activities of $270.4 million and net cash provided by financing activities of $598.6 million.

Net cash provided by operating activities of $270.4 million during the three months ended March 31, 2021 related primarily to proceeds from sales of loans held-for-sale, net of originations and purchases, of $244.6 million and cash interest income of $131.9 million from our loans and $36.1 million from our investment securities. Net rental income provided cash of $48.9 million and servicing fees provided cash of $12.9 million. Offsetting these cash inflows was cash interest expense of $80.6 million, general and administrative expenses of $29.0 million, management fees of $27.4 million and a net change in operating assets and liabilities of $66.3 million.

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Net cash used in investing activities of $1.1 billion for the three months ended March 31, 2021 related primarily to the origination and acquisition of loans held-for-investment of $2.3 billion and the purchase and funding of investment securities of $27.3 million, partially offset by proceeds received from principal collections and sales of loans of $1.1 billion and investment securities of $85.6 million and sale of an operating property for $30.6 million.

Net cash provided by financing activities of $598.6 million for the three months ended March 31, 2021 related primarily to borrowings on our debt, net of repayments and deferred loan costs, of $741.8 million, partially offset by dividend distributions of $137.7 million.

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Our Investment Portfolio

The following is a review of our investment portfolio by segment.

Commercial and Residential Lending Segment

The following table sets forth the amount of each category of investments we owned across various property types within our Commercial and Residential Lending Segment as of March 31, 2021 and December 31, 2020 (dollars in thousands):

Unlevered

    

Face

    

Carrying

    

Asset Specific

    

Net

    

Return on

Amount

Value

Financing

Investment

Asset

March 31, 2021

First mortgages (1)

$

10,002,124

$

9,954,741

$

6,665,879

$

3,288,862

 

6.1

%

Subordinated mortgages

 

71,428

 

70,457

 

 

70,457

 

8.7

%

Mezzanine loans (1)

 

601,080

 

603,119

 

 

603,119

 

11.6

%

Residential loans, fair value option

149,404

 

150,712

 

58,656

 

92,056

6.1

%

Other loans

20,267

 

18,200

 

 

18,200

 

13.3

%

Loans held-for-sale, fair value option, residential

435,025

 

444,835

 

270,096

 

174,739

 

5.6

%

Loans held-for-sale, commercial

142,798

 

142,202

 

80,500

 

61,702

 

5.9

%

RMBS, available-for-sale

 

245,472

 

160,301

 

106,447

 

53,854

 

10.9

%

RMBS, fair value option

160,124

249,005

(2)

39,700

209,305

9.2

%

CMBS, fair value option

102,900

96,883

(2)

49,798

47,085

5.5

%

HTM debt securities (3)

 

454,283

 

455,586

 

113,143

 

342,443

 

6.6

%

Credit loss allowance

 

 

(65,939)

 

 

(65,939)

 

Equity security

 

12,594

 

10,655

 

 

10,655

 

Investment in unconsolidated entities

 

N/A

 

47,514

 

 

47,514

 

Properties, net

N/A

 

93,718

 

49,018

 

44,700

$

12,397,499

$

12,431,989

$

7,433,237

$

4,998,752

December 31, 2020

First mortgages (1)

$

8,977,365

$

8,930,764

$

5,892,684

$

3,038,080

 

6.4

%

Subordinated mortgages

 

72,257

 

71,185

 

 

71,185

 

8.7

%

Mezzanine loans (1)

 

619,352

 

620,319

 

 

620,319

 

11.5

%

Residential loans, fair value option

86,796

 

90,684

 

58,885

 

31,799

5.9

%

Other loans

33,626

 

30,284

 

 

30,284

9.8

%

Loans held-for-sale, fair value option, residential

820,807

 

841,963

 

573,584

 

268,379

 

6.1

%

RMBS, available-for-sale

252,738

 

167,349

 

110,724

 

56,625

11. 0

%

RMBS, fair value option

 

142,288

235,997

(2)

30,267

205,730

 

6.3

%

CMBS, fair value option

 

102,900

96,885

(2)

25,313

71,572

 

5.6

%

HTM debt securities (3)

 

505,247

 

505,673

 

84,233

 

421,440

 

6.8

%

Credit loss allowance

 

 

(72,360)

 

 

(72,360)

 

Equity security

 

12,497

 

11,247

 

 

11,247

 

Investment in unconsolidated entities

 

N/A

 

54,407

 

 

54,407

 

Properties, net

N/A

 

103,896

 

48,863

 

55,033

$

11,625,873

$

11,688,293

$

6,824,553

$

4,863,740

(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 $917.8 million and $877.3 million being classified as first mortgages as of March 31, 2021 and December 31, 2020, respectively.

(2)Eliminated in consolidation against VIE liabilities pursuant to ASC 810.

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(3)CMBS held-to-maturity (“HTM”) and mandatorily redeemable preferred equity interests in commercial real estate entities.

As of March 31, 2021 and December 31, 2020, our Commercial and Residential Lending Segment’s investment portfolio, excluding residential loans, RMBS, properties and other investments, had the following characteristics based on carrying values:

Collateral Property Type

    

March 31, 2021

    

December 31, 2020

Office

 

32.1

%  

35.2

%

Hotel

 

19.6

%  

21.6

%

Multifamily

 

19.1

%  

16.1

%

Mixed Use

12.2

%  

8.2

%

Residential

 

5.7

%  

6.7

%

Retail

 

2.6

%  

2.8

%

Industrial

 

2.5

%  

3.0

%

Other

6.2

%  

6.4

 

100.0

%  

100.0

%

Geographic Location

    

March 31, 2021

    

December 31, 2020

U.S. Regions:

 

North East

 

20.5

%  

22.7

%

West

 

20.0

%  

19.0

%

South West

 

10.3

%  

11.1

%

Mid Atlantic

 

9.7

%  

9.5

%

South East

 

6.9

%  

7.3

%

Midwest

 

4.5

%  

4.4

%

International:

 

Europe/Australia

 

25.5

%  

23.3

%

Bahamas/Bermuda

 

2.6

%  

2.7

%

 

100.0

%  

100.0

%

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Infrastructure Lending Segment

The following table sets forth the amount of each category of investments we owned within our Infrastructure Lending Segment as of March 31, 2021 and December 31, 2020 (dollars in thousands):

Unlevered

  

Face

   

Carrying

   

Asset Specific

   

Net

   

Return on

Amount

Value

Financing

Investment

Asset

March 31, 2021

First priority infrastructure loans and HTM securities

$

1,664,665

$

1,633,491

$

1,186,526

$

446,965

 

4.8

%

Loans held-for-sale, infrastructure

89,601

 

89,368

 

73,287

 

16,081

 

3.2

%

Credit loss allowance

N/A

(11,732)

(11,732)

Investment in unconsolidated entities

N/A

24,840

24,840

$

1,754,266

$

1,735,967

$

1,259,813

$

476,154

December 31, 2020

First priority infrastructure loans and HTM securities

$

1,488,614

$

1,458,880

$

1,140,608

$

318,272

 

5.2

%

Loans held-for-sale, infrastructure

 

120,900

 

120,540

 

100,155

 

20,385

 

3.5

%

Credit loss allowance

N/A

(10,759)

(10,759)

Investment in unconsolidated entities

N/A

25,095

25,095

$

1,609,514

$

1,593,756

$

1,240,763

$

352,993

As of March 31, 2021 and December 31, 2020, our Infrastructure Lending Segment’s investment portfolio had the following characteristics based on carrying values:

Collateral Type

    

March 31, 2021

    

December 31, 2020

Natural gas power

 

62.7

%  

65.8

%

Midstream

 

20.8

%  

21.9

%

Renewable power

 

9.4

%  

9.0

%

Other thermal power

6.6

%  

3.3

%

Downstream

0.5

%  

%

 

100.0

%  

100.0

%

Geographic Location

March 31, 2021

December 31, 2020

U.S. Regions:

North East

 

41.4

%  

43.1

%

Midwest

 

22.5

%  

20.8

%

South West

 

14.5

%  

15.3

%

South East

9.5

%  

9.6

%

West

5.9

%  

4.3

%

Mid-Atlantic

2.8

%  

3.2

%

International:

 

Mexico

 

2.5

%  

2.7

%

Other

 

0.9

%  

1.0

%

 

100.0

%  

100.0

%

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Property Segment

The following table sets forth the amount of each category of investments held within our Property Segment as of March 31, 2021 and December 31, 2020 (amounts in thousands):

    

March 31, 2021

    

December 31, 2020

Properties, net

$

1,954,880

$

1,969,414

Lease intangibles, net

 

37,080

 

38,511

$

1,991,960

$

2,007,925

The following table sets forth our net investment and other information regarding the Property Segment’s properties and lease intangibles as of March 31, 2021 (dollars in thousands):

    

    

Asset

    

    

    

Weighted Average

Carrying

Specific

Net

Occupancy

Remaining

Value

Financing

Investment

Rate

Lease Term

Office—Medical Office Portfolio

$

760,266

$

592,853

$

167,413

93.6

%

5.8 years

Multifamily residential—Woodstar I Portfolio

636,740

572,784

63,956

98.8

%

0.5 years

Multifamily residential—Woodstar II Portfolio

610,558

512,588

97,970

99.1

%

0.5 years

Retail—Master Lease Portfolio

343,790

 

192,801

 

150,989

100.0

%

21.1 years

Subtotal—undepreciated carrying value

2,351,354

1,871,026

480,328

Accumulated depreciation and amortization

(359,394)

(359,394)

Net carrying value

$

1,991,960

$

1,871,026

$

120,934

As of March 31, 2021 and December 31, 2020, our Property Segment’s investment portfolio had the following geographic characteristics based on carrying values:

Geographic Location

March 31, 2021

December 31, 2020

South East

62.1

%  

62.1

%

South West

 

10.3

%  

10.3

%

Midwest

 

10.1

%  

10.1

%

North East

 

9.6

%  

9.6

%

West

 

7.9

%  

7.9

%

 

100.0

%  

100.0

%

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Investing and Servicing Segment

The following table sets forth the amount of each category of investments we owned within our Investing and Servicing Segment as of March 31, 2021 and December 31, 2020 (amounts in thousands):

    

    

    

Asset

    

 

Face

Carrying

Specific

Net

 

Amount

Value

Financing

Investment

 

March 31, 2021

CMBS, fair value option

$

2,632,996

$

1,106,000

(1)  

$

350,187

(2)  

$

755,813

Intangible assets - servicing rights

 

N/A

 

55,324

(3)  

 

 

55,324

Lease intangibles, net

N/A

14,583

14,583

Loans held-for-sale, fair value option, commercial

 

172,119

 

168,226

 

110,424

 

57,802

Loans held-for-investment

933

933

933

Investment in unconsolidated entities

N/A

44,435

(4)  

44,435

Properties, net

 

N/A

 

196,150

 

192,611

 

3,539

$

2,806,048

$

1,585,651

$

653,222

$

932,429

December 31, 2020

CMBS, fair value option

$

2,652,459

$

1,112,145

(1)  

$

360,221

(2)  

$

751,924

Intangible assets - servicing rights

 

N/A

 

54,578

(3)  

 

 

54,578

Lease intangibles, net

N/A

15,548

 

15,548

Loans held-for-sale, fair value option, commercial

 

90,789

 

90,332

 

53,040

 

37,292

Loans held-for-investment

1,008

1,008

1,008

Investment in unconsolidated entities

N/A

44,664

(4)  

44,664

Properties, net

 

N/A

 

197,843

 

192,839

 

5,004

$

2,744,256

$

1,516,118

$

606,100

$

910,018

(1)Includes $1.09 billion of CMBS eliminated in consolidation against VIE liabilities pursuant to ASC 810 as of both March 31, 2021 and December 31, 2020. Also includes $180.9 million and $179.5 million of non-controlling interests in the consolidated entities which hold certain of these CMBS as of March 31, 2021 and December 31, 2020, respectively.

(2)Includes $38.3 million and $41.3 million of non-controlling interests in the consolidated entities which hold certain debt balances as of March 31, 2021 and December 31, 2020, respectively.

(3)Includes $42.9 million and $41.4 million of servicing rights intangibles eliminated in consolidation against VIE assets pursuant to ASC 810 as of March 31, 2021 and December 31, 2020, respectively.

(4)Includes $15.9 million and $16.1 million of investment in unconsolidated entities eliminated in consolidation against VIE assets pursuant to ASC 810 as of March 31, 2021 and December 31, 2020, respectively.

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Our REIS Equity Portfolio, as described in Note 6 to the Condensed Consolidated Financial Statements, had the following characteristics based on carrying values of $195.6 million and $198.2 million as of March 31, 2021 and December 31, 2020, respectively:

Property Type

March 31, 2021

December 31, 2020

Office

50.5

%  

50.6

%

Retail

 

29.9

%  

29.9

%

Mixed Use

 

7.0

%  

6.9

%

Self-storage

 

6.2

%  

6.2

%

Multifamily

 

4.3

%  

4.2

%

Hotel

2.1

%  

2.2

%  

 

100.0

%  

100.0

%

Geographic Location

March 31, 2021

December 31, 2020

South West

 

24.9

%  

25.1

%

North East

 

25.4

%  

24.8

%

South East

 

15.2

%  

15.4

%

West

 

14.8

%  

14.8

%

Mid Atlantic

 

11.4

%  

11.5

%

Midwest

 

8.3

%  

8.4

%

 

100.0

%  

100.0

%

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New Credit Facilities and Amendments

Refer to Note 9 of our Condensed Consolidated Financial Statements for a detailed discussion of new credit facilities and amendments to existing credit facilities executed since December 31, 2020.

Secured Borrowings

The following table is a summary of our secured borrowings as of March 31, 2021 (dollars in thousands):

Pledged

Approved

Weighted

Asset

Maximum

but

Unallocated

Current

Extended

Average

Carrying

Facility

Outstanding

Undrawn

Financing

   

Maturity

   

Maturity (a)

   

Pricing

   

Value

   

Size

   

Balance

   

Capacity (b)

   

Amount (c)

Repurchase Agreements:

Commercial Loans

May 2021 to Aug 2025

(d)

May 2023 to Mar 2029

(d)

(e)

$

8,088,081

$

9,164,525

(f)

$

5,592,652

$

144,018

$

3,427,855

Residential Loans

Jan 2022 to Oct 2023

N/A

LIBOR + 2.09%

428,877

1,750,000

328,620

1,421,380

Infrastructure Loans

Feb 2022

N/A

LIBOR + 2.00%

295,516

500,000

246,136

253,864

Conduit Loans

Feb 2022 to Jun 2023

Feb 2023 to Jun 2024

LIBOR + 2.15%

147,523

350,000

111,087

238,913

CMBS/RMBS

Dec 2021 to Oct 2030

(g)

Mar 2022 to Apr 2031

(g)

(h)

1,112,819

823,365

668,993

(i)

154,372

Total Repurchase Agreements

10,072,816

12,587,890

6,947,488

144,018

5,496,384

Other Secured Financing:

Borrowing Base Facility

Apr 2022

Apr 2024

LIBOR + 2.25%

304,076

650,000

(j)

223,302

426,698

Commercial Financing Facility

Mar 2022

Mar 2029

GBP LIBOR + 1.75%

101,559

81,847

81,847

Residential Financing Facility

Sep 2022

Sep 2025

3.50%

163,545

250,000

1,515

120,129

128,356

Infrastructure Acquisition Facility

Sep 2021

Sep 2022

(k)

525,611

517,498

414,503

102,995

Infrastructure Financing Facilities

Jul 2022 to Oct 2022

Oct 2024 to Jul 2027

LIBOR + 2.04%

699,684

1,250,000

548,956

701,044

Property Mortgages - Fixed rate

Nov 2024 to Aug 2052

(l)

N/A

4.03%

1,271,385

1,155,306

1,155,306

Property Mortgages - Variable rate

Nov 2021 to Jul 2030

N/A

(m)

929,800

985,453

960,901

24,552

Term Loan and Revolver

(n)

N/A

(n)

N/A

(n)

763,375

643,375

120,000

Collateralized Loan Obligation

Jul 2038

N/A

LIBOR + 1.34%

1,099,639

936,375

936,375

Total Other Secured Financing

5,095,299

6,589,854

4,966,080

240,129

1,383,645

$

15,168,115

$

19,177,744

$

11,913,568

$

384,147

$

6,880,029

Unamortized net discount

(13,149)

Unamortized deferred financing costs

(73,309)

$

11,827,110

(a)Subject to certain conditions as defined in the respective facility agreement.

(b)Approved but undrawn capacity represents the total draw amount that has been approved by the lenders related to those assets that have been pledged as collateral, less the drawn amount.

(c)Unallocated financing amount represents the maximum facility size less the total draw capacity that has been approved by the lenders.

(d)For certain facilities, borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions.

(e)Certain facilities with an outstanding balance of $1.9 billion as of March 31, 2021 are indexed to GBP LIBOR and EURIBOR. The remainder have a weighted average rate of LIBOR + 2.01%.

(f)The aggregate initial maximum facility size may be increased at our option, subject to certain conditions. The $9.2 billion amount includes such upsizes.

(g)Certain facilities with an outstanding balance of $280.3 million as of March 31, 2021 carry a rolling 11-month or 12-month term which may reset monthly or quarterly with the lender's consent. These facilities carry no maximum facility size.

(h)A facility with an outstanding balance of $212.0 million as of March 31, 2021 has a weighted average fixed annual interest rate of 3.29%. All other facilities are variable rate with a weighted average rate of LIBOR + 1.92%.

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(i)Includes: (i) $212.0 million outstanding on a repurchase facility that is not subject to margin calls; and (ii) $38.3 million outstanding on one of our repurchase facilities that represents the 49% pro rata share owed by a non-controlling partner in a consolidated joint venture (see Note 14 to the Condensed Consolidated Financial Statements).

(j)The initial maximum facility size of $300.0 million may be increased to $650.0 million, subject to certain conditions.

(k)Consists of an annual interest rate of the applicable currency benchmark index + 2.00%.

(l)The weighted average maturity is 6.5 years as of March 31, 2021.

(m)Includes a $600.0 million first mortgage and mezzanine loan secured by our Medical Office Portfolio. This debt has a weighted average interest rate of LIBOR + 2.07% that we swapped to a fixed rate of 3.34%. The remainder have a weighted average rate of LIBOR + 2.59%.

(n)Consists of: (i) a $643.4 million term loan facility that matures in July 2026, of which $394.0 million has an annual interest rate of LIBOR + 2.50% and $249.4 million has an annual interest rate of LIBOR + 3.50%, subject to a 75 bps LIBOR floor, and (ii) a $120.0 million revolving credit facility that matures in July 2024 with an annual interest rate of LIBOR + 3.00%. These facilities are secured by the equity interests in certain of our subsidiaries which totaled $4.2 billion as of March 31, 2021.

Refer to Note 9 of the Condensed Consolidated Financial Statements for further disclosure regarding the terms of our secured financing arrangements.

Variance between Average and Quarter-End Credit Facility Borrowings Outstanding

The following table compares the average amount outstanding under our secured financing agreements during each quarter and the amount outstanding as of the end of each quarter, together with an explanation of significant variances (amounts in thousands):

Weighted-Average

Explanations

Quarter-End

Balance During

for Significant

Quarter Ended

    

Balance

    

Quarter

    

Variance

    

Variances

December 31, 2020

11,169,964

10,945,199

224,765

(a)

March 31, 2021

11,913,568

11,274,970

638,598

(b)

(a)Variance primarily due to the following: (i) late quarter timing of fundings on commercial loan facilities and (ii) borrowings on the Residential Financing Facility.

(b)Variance primarily due to late quarter timing of fundings on commercial loan facilities and the Borrowing Base Facility.

Borrowings under Unsecured Senior Notes

During the three months ended March 31, 2021 and 2020, the weighted average effective borrowing rate on our unsecured senior notes was 5.4% and 5.0%, respectively. The effective borrowing rate includes the effects of underwriter purchase discount and, during the 2020 period, the adjustment for the conversion option on the Convertible Notes, the initial value of which reduced the balance of the notes.

Refer to Note 10 of our Condensed Consolidated Financial Statements for further disclosure regarding the terms of our unsecured senior notes.

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Scheduled Principal Repayments on Investments and Overhang on Financing Facilities

The following scheduled and/or projected principal repayments on our investments were based on amounts outstanding and extended contractual maturities of those investments as of March 31, 2021. The projected and/or required repayments of financing were based on the earlier of (i) the extended contractual maturity of each credit facility or (ii) the extended contractual maturity of each of the investments that have been pledged as collateral under the respective credit facility (amounts in thousands):

    

Scheduled Principal

    

Scheduled/Projected

    

Projected/Required

    

Scheduled Principal

 

Repayments on Loans

Principal Repayments

Repayments of

Inflows Net of

 

and HTM Securities

on RMBS and CMBS

Financing

Financing Outflows

 

Second Quarter 2021

 

$

731,009

 

$

10,927

 

$

(91,314)

$

650,622

Third Quarter 2021

 

55,560

 

9,598

 

(15,264)

49,894

Fourth Quarter 2021

295,918

7,085

(954,390)

(651,386)

(1)

First Quarter 2022

631,041

5,965

(1,000,898)

(363,892)

(2)

Total

$

1,713,528

$

33,575

$

(2,061,866)

$

(314,762)

(1)Shortfall primarily relates to $700.0 million on the maturity of our Senior Notes due December 2021, which we expect to fund using a combination of available cash on hand, approved but undrawn capacity under our secured financing agreements and/or other potential sources of financing, as discussed below.

(2)Shortfall primarily relates to: (i) $275.6 million of repayments under a Residential Loans repurchase facility that carries a one-year term which we can extend every three months, the current balance of which will be repaid with securitization proceeds; and (ii)  $277.5 million of repayments under a securities facility which carries a rolling 12-month term that we have historically extended, and intend to continue to extend with lender’s consent.

In the normal course of business, the Company is in discussions with its lenders to extend, amend or replace any financing facilities which contain near term expirations.

Issuances of Equity Securities

We may raise funds through capital market transactions by issuing capital stock. There can be no assurance, however, that we will be able to access the capital markets at any particular time or on any particular terms. We have authorized 100,000,000 shares of preferred stock and 500,000,000 shares of common stock. At March 31, 2021, we had 100,000,000 shares of preferred stock available for issuance and 213,148,440 shares of common stock available for issuance.

Other Potential Sources of Financing

In the future, we may also use other sources of financing to fund the acquisition of our target assets and maturities of our unsecured senior notes, including other secured as well as unsecured forms of borrowing and sale of senior loan interests and other assets.

Leverage Policies

Our strategies with regards to use of leverage have not changed significantly since December 31, 2020. Refer to our Form 10-K for a description of our strategies regarding use of leverage.

Cash Requirements

Dividends

U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular

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corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We generally intend to distribute substantially all of our taxable income (which does not necessarily equal our GAAP net income) to our stockholders each year, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating and debt service requirements. If our cash available for distribution is less than our net taxable income, we could be required to sell assets or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities. Refer to our Form 10-K for a detailed dividend history.

The Company’s board of directors declared the following dividends during the three months ended March 31, 2021:

Declare Date

    

Record Date

    

Payment Date

    

Amount

    

Frequency

3/11/21

3/31/21

4/15/21

$

0.48

Quarterly

Contractual Obligations and Commitments

Our material contractual obligations and commitments as of March 31, 2021 are as follows (amounts in thousands):

    

    

Less than

    

    

    

More than

 

Total

1 year

1 to 3 years

3 to 5 years

5 years

 

Secured financings (a)

$

10,977,193

$

675,327

$

1,960,570

$

5,355,964

$

2,985,332

Collateralized loan obligations

936,375

936,375

Unsecured senior notes

 

1,750,000

 

700,000

 

550,000

 

500,000

 

Future loan funding commitments:

Commercial Lending (b)

 

1,291,304

 

928,429

 

336,975

 

25,900

 

Infrastructure Lending (c)

192,515

163,211

29,304

(a)Represents the contractual maturity of the respective credit facility, inclusive of available extension options.  If investments that have been pledged as collateral repay earlier than the contractual maturity of the debt, the related portion of the debt would likewise require earlier repayment. Refer to Note 9 to the Condensed Consolidated Financial Statements for the expected maturities by year.

(b)Excludes $201.7 million of loan funding commitments in which management projects the Company will not be obligated to fund in the future due to repayments made by the borrower earlier than, or in excess of, expectations.

(c)Represents contractual commitments of $126.7 million under revolvers and letters of credit and $65.8 million under delayed draw term loans.

The table above does not include interest payable, amounts due under our management agreement, amounts due under our derivative agreements or amounts due under guarantees as those contracts do not have fixed and determinable payments.

Our secured financings and collateralized loan obligations consist primarily of matched-term funding for our loans and investment securities and long-term mortgages on our owned properties. Repayments of such facilities are generally made from proceeds from maturities, prepayments or sales of such investments and operating cash flows from owned properties. In the normal course of business, the Company is in discussions with its lenders to extend, amend or replace any financing facilities which contain near term expirations.

Our unsecured senior notes are expected to be repaid from a combination of available cash on hand, approved but undrawn capacity under our secured financing agreements, and/or equity issuances or other potential sources of financing, as discussed above.

Our future funding commitments are expected to be primarily matched-term funded under secured financing agreements with any difference funded from available cash on hand or other potential sources of financing discussed above.

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Critical Accounting Estimates

Our financial statements are prepared in accordance with GAAP, which requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We believe that all of the decisions and assessments upon which our financial statements are based were reasonable at the time made, based upon information available to us at that time. The following discussion describes the critical accounting estimates that apply to our operations and require complex management judgment. This summary should be read in conjunction with a more complete discussion of our accounting policies included in Note 2 to the Condensed Consolidated Financial Statements.

Credit Losses

Loans and Debt Securities Measured at Amortized Cost

As discussed in Note 2 to the Condensed Consolidated Financial Statements, ASC 326, Financial Instruments – Credit Losses, became effective for the Company on January 1, 2020. ASC 326 mandates the use of a current expected credit loss model (“CECL”) for estimating future credit losses of certain financial instruments measured at amortized cost, instead of the “incurred loss” credit model previously required under GAAP. The CECL model requires the consideration of possible credit losses over the life of an instrument as opposed to only estimating credit losses upon the occurrence of a discrete loss event under the previous “incurred loss” methodology. The CECL model applies to our loans held-for-investment (“HFI”) and our held-to-maturity (“HTM”) debt securities which are carried at amortized cost, including future funding commitments and accrued interest receivable related to those loans and securities.

As we do not have a history of realized credit losses on our HFI loans and HTM securities, we have subscribed to third party database services to provide us with historical industry losses for both commercial real estate and infrastructure loans. Using these losses as a benchmark, we determine expected credit losses for our loans and securities on a collective basis within our commercial real estate and infrastructure portfolios. Such determination also incorporates significant assumptions and estimates regarding, among other things, prepayments, future fundings and economic forecasts. See Note 4 to the Condensed Consolidated Financial Statements for further discussion of our methodologies.

We also evaluate each loan and security measured at amortized cost for credit deterioration at least quarterly. Credit deterioration occurs when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan or security. If a loan or security is considered to be credit deteriorated, we depart from the industry loss rate approach described above and determine the credit loss allowance as any excess of the amortized cost basis of the loan or security over (i) the present value of expected future cash flows discounted at the contractual effective interest rate or (ii) the fair value of the collateral, if repayment is expected solely from the collateral.

Significant judgment is required when estimating future credit losses; therefore, actual results over time could be materially different. As of March 31, 2021, we held $12.7 billion of loans and HTM securities measured at amortized cost with expected future funding commitments of $1.4 billion. During the three months ended March 31, 2021, we recognized an immaterial credit loss provision and the related credit loss allowance was $81.5 million as of March 31, 2021. During the year ended December 31, 2020, we recognized a credit loss provision of $43.2 million and the related credit loss allowance was $89.2 million as of December 31, 2020.

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Available-for-Sale Debt Securities

Separate provisions of ASC 326 apply to our available-for-sale (“AFS”) debt securities which are carried at fair value with unrealized gains and losses reported as a component of accumulated other comprehensive income (“AOCI”). We are required to establish an initial credit loss allowance for those securities that are purchased with credit deterioration by grossing up the amortized cost basis of each security and providing an offsetting credit loss allowance for the difference between expected cash flows and contractual cash flows, both on a present value basis.

Subsequently, cumulative adverse changes in expected cash flows on our available-for-sale debt securities are recognized currently as an increase to the credit loss allowance. However, the allowance is limited to the amount by which the AFS debt security’s amortized cost exceeds its fair value. Favorable changes in expected cash flows are first recognized as a decrease to the allowance for credit losses (recognized currently in earnings). Such changes would be recognized as a prospective yield adjustment only when the allowance for credit losses is reduced to zero. A change in expected cash flows that is attributable solely to a change in a variable interest reference rate does not result in a credit loss and is accounted for as a prospective yield adjustment.

Significant judgment is required when estimating expected cash flows used in determining the credit loss allowance for AFS debt securities; therefore, actual results over time could be materially different. As of March 31, 2021, we held $160.3 million of AFS debt securities. We did not recognize any provision for credit losses with respect to our AFS debt securities during the three months ended March 31, 2021 or during the year ended December 31, 2020. There was no related credit loss allowance as of March 31, 2021 and December 31, 2020.

Valuation of Financial Assets and Liabilities Carried at Fair Value

We measure our VIE assets and liabilities, mortgage-backed securities, derivative assets and liabilities, domestic servicing rights intangible asset and any assets or liabilities where we have elected the fair value option at fair value. When actively quoted observable prices are not available, we either use implied pricing from similar assets and liabilities or valuation models based on net present values of estimated future cash flows, adjusted as appropriate for liquidity, credit, market and/or other risk factors. See Note 19 to the Condensed Consolidated Financial Statements for details regarding the various methods and inputs we use in measuring the fair value of our financial assets and liabilities. As of March 31, 2021, we had $63.4 billion and $60.9 billion of financial assets and liabilities, respectively, that are measured at fair value, including $62.4 billion of VIE assets and $60.9 billion of VIE liabilities we consolidate pursuant to ASC 810.

We measure the assets and liabilities of consolidated securitization VIEs at fair value pursuant to our election of the fair value option. The securitization VIEs in which we invest are “static”; that is, no reinvestment is permitted, and there is no active management of the underlying assets. In determining the fair value of the assets and liabilities of the VIE, we maximize the use of observable inputs over unobservable inputs. As a result, the methods and inputs we use in measuring the fair value of the assets and liabilities of our VIEs affect our earnings only to the extent of their impact on our direct investment in the VIEs.

Goodwill Impairment

Our goodwill at March 31, 2021 of $259.8 million represents the excess of consideration transferred over the fair value of net assets acquired in connection with the acquisitions of LNR in April 2013 and the Infrastructure Lending Segment in September 2018 and October 2018. In testing goodwill for impairment, we follow ASC 350, Intangibles—Goodwill and Other, which permits a qualitative assessment of whether it is more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill. If the qualitative assessment determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying value including goodwill, then no impairment is determined to exist for the reporting unit. However, if the qualitative assessment determines that it is more likely than not that the fair value of the reporting unit is less than its carrying value including goodwill, or we choose not to perform the qualitative assessment, then we compare the fair value of that reporting unit with its carrying value, including goodwill, in a quantitative assessment. If the carrying value of a reporting unit exceeds its fair value, goodwill is considered impaired with the impairment loss measured as the excess of the reporting unit’s carrying value (inclusive of goodwill) over its fair value.

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Based on our qualitative assessment during the fourth quarter of 2020, we believe that the Investing and Servicing Segment reporting unit to which the LNR acquisition goodwill was attributed is not currently at risk of failing a quantitative assessment. This qualitative assessment required judgment to be applied in evaluating the effects of multiple factors, including actual and projected financial performance of the reporting unit, macroeconomic conditions, industry and market conditions, and relevant entity specific events in determining whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount, including goodwill.

Based on our quantitative assessment during the fourth quarter of 2020, we determined that the fair value of the Infrastructure Lending Segment reporting unit to which goodwill is attributed exceeded its carrying value including goodwill. This quantitative assessment required judgment to be applied in determining the fair value of our equity in the Infrastructure Lending Segment, which included estimates of future cash flows, terminal equity multiple and market discount rate.

Recent Accounting Developments

Refer to Note 2 to the Condensed Consolidated Financial Statements for a discussion of recent accounting developments and the expected impact to the Company.

Item 3.   Quantitative and Qualitative Disclosures About Market Risk

We seek to manage our risks related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value while, at the same time, seeking to provide an opportunity to stockholders to realize attractive risk-adjusted returns through ownership of our capital stock. While we do not seek to avoid risk completely, we believe the risk can be quantified from historical experience and seek to actively manage that risk, to earn sufficient compensation to justify taking those risks and to maintain capital levels consistent with the risks we undertake. Our strategies for managing risk and our exposure to such risks, as described in Item 7A of our Form 10-K, have not changed materially since December 31, 2020 except as described below.

Credit Risk

Our loans and investments are subject to credit risk. The performance and value of our loans and investments depend upon the owners’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. To monitor this risk, our asset management team reviews our investment portfolios and is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

We seek to further manage credit risk associated with our Investing and Servicing Segment loans held-for-sale through the purchase of credit index instruments. The following table presents our credit index instruments as of March 31, 2021 and December 31, 2020 (dollars in thousands):

    

Face Value of

    

Aggregate Notional Value of

    

Number of

Loans Held-for-Sale

Credit Index Instruments

Credit Index Instruments

March 31, 2021

$

172,119

$

49,000

 

3

December 31, 2020

$

90,789

$

69,000

 

4

Interest Rate Risk

Interest rates are highly sensitive to many factors, including fiscal and monetary policies and domestic and international economic and political considerations, as well as other factors beyond our control. We are subject to interest rate risk in connection with our investments and the related financing obligations. In general, we seek to match the interest rate characteristics of our investments with the interest rate characteristics of any related financing obligations such as repurchase agreements, bank credit facilities, term loans, revolving facilities and securitizations. In instances where the interest rate characteristics of an investment and the related financing obligation are not matched, we mitigate such interest rate risk through the utilization of interest rate derivatives of the same duration. The following

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table presents financial instruments where we have utilized interest rate derivatives to hedge interest rate risk and the related interest rate derivatives as of March 31, 2021 and December 31, 2020 (dollars in thousands):

    

    

Aggregate Notional

    

 

Face Value of

Value of Interest

Number of Interest

 

Hedged Instruments

Rate Derivatives

Rate Derivatives

 

Instrument hedged as of March 31, 2021

Loans held-for-sale

$

607,144

$

977,600

 

39

RMBS, available-for-sale

 

245,472

 

85,000

 

2

CMBS, fair value option

115,867

71,000

2

HTM debt securities

16,015

16,015

1

Secured financing agreements

 

992,927

1,627,352

 

24

Unsecured senior notes

 

500,000

470,000

 

1

$

2,477,425

$

3,246,967

 

69

Instrument hedged as of December 31, 2020

Loans held-for-sale

$

911,596

$

557,000

 

25

RMBS, available-for-sale

 

252,738

 

421,000

 

4

CMBS, fair value option

125,985

71,000

2

HTM debt securities

16,554

16,554

1

Secured financing agreements

 

1,008,909

1,633,357

 

24

Unsecured senior notes

 

500,000

470,000

 

1

$

2,815,782

$

3,168,911

 

57

The following table summarizes the estimated annual change in net investment income for our variable rate investments and our variable rate debt assuming increases or decreases in LIBOR or other applicable index rates and adjusted for the effects of our interest rate hedging activities (amounts in thousands, except per share data):

 

Variable rate

    

    

    

    

investments and

1.0%

0.5%

0.5%

1.0%

Income (Expense) Subject to Interest Rate Sensitivity

indebtedness (1)

Increase

Increase

Decrease

Decrease

Investment income from variable rate investments

$

11,974,667

$

57,992

$

24,502

$

(4,237)

$

(4,364)

Interest expense from variable rate debt, net of interest rate derivatives

 

(8,276,358)

 

(86,390)

 

(41,759)

 

6,817

 

5,184

Net investment income from variable rate instruments

$

3,698,309

$

(28,398)

$

(17,257)

$

2,580

$

820

Impact per diluted shares outstanding

$

(0.10)

$

(0.06)

$

0.01

$

0.00

(1)Includes the notional value of interest rate derivatives.

Foreign Currency Risk

We intend to hedge our currency exposures in a prudent manner. However, our currency hedging strategies may not eliminate all of our currency risk due to, among other things, uncertainties in the timing and/or amount of payments received on the related investments, and/or unequal, inaccurate, or unavailable hedges to perfectly offset changes in future exchange rates. Additionally, we may be required under certain circumstances to collateralize our currency hedges for the benefit of the hedge counterparty, which could adversely affect our liquidity.

Consistent with our strategy of hedging foreign currency exposure on certain investments, we typically enter into a series of forwards to fix the U.S. dollar amount of foreign currency denominated cash flows (interest income, rental income and principal payments) we expect to receive from our foreign currency denominated investments. Accordingly, the notional values and expiration dates of our foreign currency hedges approximate the amounts and timing of future payments we expect to receive on the related investments.

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The following table represents our current currency hedge exposure as it relates to our investments denominated in foreign currencies, along with the aggregate notional amount of the hedges in place (amounts in thousands except for number of contracts) using the March 31, 2021 GBP closing rate of 1.3779, EUR closing rate of 1.1732 and AUD closing rate of 0.7596.

Carrying Value of Net Investment

Local Currency

Number of
Foreign Exchange Contracts

Aggregate Notional Value of Hedges Applied

Expiration Range of Contracts

$

19,711

GBP

7

$

27,815

April 2021 – December 2023

92,555

GBP

21

90,654

April 2021 – August 2022

28,028

EUR

60

23,894

April 2021 – April 2022

33,842

GBP

1

39,181

July 2023

63,112

EUR

38

66,784

May 2021 – March 2023

52,105

GBP

21

66,054

May 2021 – May 2024

29,268

GBP

12

39,214

April 2021 – January 2024

3,742

GBP

5

7,991

April 2021 – October 2021

28,394

EUR

36

29,689

May 2021 – August 2022

117,487

GBP

39

163,832

April 2021 – January 2024

60,286

GBP

19

84,765

April 2021 – August 2021

5,249

EUR

6

6,836

May 2021 – July 2022

4,126

GBP

12

23,430

May 2021 – July 2022

119,154

GBP

10

165,834

August 2021 – November 2023

3,981

AUD

1

4,301

August 2021

24,876

EUR

20

30,283

May 2021 – June 2023

34,983

EUR

10

60,459

May 2021 – November 2022

40,898

EUR

22

49,445

June 2021 – November 2025

11,633

EUR

5

14,745

May 2021 – November 2023

62,708

GBP

12

68,007

May 2021 – November 2021

131,211

AUD

18

138,925

November 2021 – June 2022

17,218

EUR

13

19,097

June 2022 – April 2023

10,655

GBP

5

13,413

June 2021 – April 2022

$

995,222

393

$

1,234,648

Item 4.    Controls and Procedures.

Disclosure Controls and Procedures. We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer, as appropriate, to allow timely decisions regarding required disclosures.

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control Over Financial Reporting. No change in internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) occurred during the quarter ended March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.    Legal Proceedings.

Currently, no material legal proceedings are pending or, to our knowledge, threatened or contemplated against us, that could have a material adverse effect on our business, financial position or results of operations.

Item 1A.    Risk Factors.

There have been no material changes to the risk factors previously disclosed in our Form 10-K.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds.

There were no unregistered sales of securities during the three months ended March 31, 2021.

Issuer Purchases of Equity Securities

There were no purchases of common stock during the three months ended March 31, 2021.

Item 3.    Defaults Upon Senior Securities.

None.

Item 4.    Mine Safety Disclosures.

Not applicable.

Item 5.    Other Information.

None.

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Item 6.  Exhibits.

(a)

Index to Exhibits

INDEX TO EXHIBITS

Exhibit No.

Description

31.1

Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

31.2

Certification pursuant to Section 302(a) of the Sarbanes-Oxley Act of 2002

32.1

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2

Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema Document

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

STARWOOD PROPERTY TRUST, INC.

Date: May 6, 2021

By:

/s/ BARRY S. STERNLICHT

Barry S. Sternlicht
Chief Executive Officer
Principal Executive Officer

Date: May 6, 2021

By:

/s/ RINA PANIRY

Rina Paniry
Chief Financial Officer, Treasurer, Chief Accounting Officer and Principal Financial Officer

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