Starwood Property Trust (STWD) 10-Q 2019 Q1 Quarterly report

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, 2019

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:

(203) 422-7700

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 ☒

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

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of May 2, 2019 was 280,296,261.

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, 2018 and this Quarterly Report on Form 10-Q, including those set forth under the captions “Risk Factors” and “Business”;

· 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 recently completed 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;

· 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

· 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.

2

TABLE OF CONTENTS

		Page
Part I	Financial Information
Item 1.	Financial Statements	4
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Operations	5
	Condensed Consolidated Statements of Comprehensive Income	6
	Condensed Consolidated Statements of Equity	7
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Condensed Consolidated Financial Statements	10
	Note 1 Business and Organization	10
	Note 2 Summary of Significant Accounting Policies	11
	Note 3 Acquisitions	16
	Note 4 Loans	17
	Note 5 Investment Securities	22
	Note 6 Properties	26
	Note 7 Investment in Unconsolidated Entities	28
	Note 8 Goodwill and Intangibles	29
	Note 9 Secured Financing Agreements	31
	Note 10 Unsecured Senior Notes	33
	Note 11 Loan Securitization/Sale Activities	35
	Note 12 Derivatives and Hedging Activity	36
	Note 13 Offsetting Assets and Liabilities	38
	Note 14 Variable Interest Entities	38
	Note 15 Related-Party Transactions	40
	Note 16 Stockholders’ Equity and Non-Controlling Interests	41
	Note 17 Earnings per Share	43
	Note 18 Accumulated Other Comprehensive Income	44
	Note 19 Fair Value	45
	Note 20 Income Taxes	48
	Note 21 Commitments and Contingencies	49
	Note 22 Segment Data	50
	Note 23 Subsequent Events	55
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	56
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	82
Item 4.	Controls and Procedures	85
Part II	Other Information
Item 1.	Legal Proceedings	86
Item 1A.	Risk Factors	86
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	86
Item 3.	Defaults Upon Senior Securities	86
Item 4.	Mine Safety Disclosures	86
Item 5.	Other Information	86
Item 6.	Exhibits	87

3

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, 2019		December 31, 2018
Assets:
Cash and cash equivalents	$	412,270	$	239,824
Restricted cash		133,714		248,041
Loans held-for-investment, net		8,964,725		8,532,356
Loans held-for-sale ($841,687 and $671,282 held at fair value)		1,144,490		1,187,552
Loans transferred as secured borrowings		—		74,346
Investment securities ($266,446 and $262,319 held at fair value)		910,233		906,468
Properties, net		2,769,374		2,784,890
Intangible assets ($19,790 and $20,557 held at fair value)		136,835		145,033
Investment in unconsolidated entities		124,360		171,765
Goodwill		259,846		259,846
Derivative assets		47,410		52,691
Accrued interest receivable		60,314		60,355
Other assets		227,153		152,922
Variable interest entity (“VIE”) assets, at fair value		56,974,864		53,446,364
Total Assets	$	72,165,588	$	68,262,453
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	193,143	$	217,663
Related-party payable		23,945		44,043
Dividends payable		135,889		133,466
Derivative liabilities		10,163		15,415
Secured financing agreements, net		9,234,910		8,683,565
Unsecured senior notes, net		1,922,795		1,998,831
Secured borrowings on transferred loans, net		—		74,239
VIE liabilities, at fair value		55,727,776		52,195,042
Total Liabilities		67,248,621		63,362,264
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, 285,481,485 issued and 280,301,345 outstanding as of March 31, 2019 and 280,839,692 issued and 275,659,552 outstanding as of December 31, 2018		2,855		2,808
Additional paid-in capital		5,080,173		4,995,156
Treasury stock (5,180,140 shares)		(104,194)		(104,194)
Accumulated other comprehensive income		55,798		58,660
Accumulated deficit		(413,553)		(348,998)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,621,079		4,603,432
Non-controlling interests in consolidated subsidiaries		295,888		296,757
Total Equity		4,916,967		4,900,189
Total Liabilities and Equity	$	72,165,588	$	68,262,453

See notes to condensed consolidated financial statements.

4

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,
	2019		2018
Revenues:
Interest income from loans	$	183,416	$	137,620
Interest income from investment securities		17,632		15,269
Servicing fees		24,433		26,067
Rental income		83,833		81,110
Other revenues		1,166		521
Total revenues		310,480		260,587
Costs and expenses:
Management fees		23,466		30,642
Interest expense		134,672		87,183
General and administrative		34,930		32,142
Acquisition and investment pursuit costs		342		377
Costs of rental operations		29,651		29,693
Depreciation and amortization		29,254		31,744
Loan loss provision, net		763		1,538
Other expense		211		104
Total costs and expenses		253,289		213,423
Other income (loss):
Change in net assets related to consolidated VIEs		47,836		52,653
Change in fair value of servicing rights		(767)		(5,814)
Change in fair value of investment securities, net		62		(149)
Change in fair value of mortgage loans held-for-sale, net		11,266		7,800
Loss from unconsolidated entities		(43,200)		(1,462)
Gain on sale of investments and other assets, net		4,485		10,660
Loss on derivative financial instruments, net		(2,207)		(16,859)
Foreign currency gain, net		5,547		13,549
Loss on extinguishment of debt		(3,298)		—
Other (loss) income, net		(73)		108
Total other income		19,651		60,486
Income before income taxes		76,842		107,650
Income tax provision		(334)		(2,856)
Net income		76,508		104,794
Net income attributable to non-controlling interests		(6,125)		(4,862)
Net income attributable to Starwood Property Trust, Inc.	$	70,383	$	99,932
Earnings per share data attributable to Starwood Property Trust, Inc.:
Basic	$	0.25	$	0.38
Diluted	$	0.25	$	0.38

See notes to condensed consolidated financial statements.

5

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(Unaudited, amounts in thousands)

	For the Three Months Ended
	March 31,
	2019		2018
Net income	$	76,508	$	104,794
Other comprehensive (loss) income (net change by component):
Cash flow hedges		—		5
Available-for-sale securities		(387)		1,163
Foreign currency translation		(2,475)		4,218
Other comprehensive (loss) income		(2,862)		5,386
Comprehensive income		73,646		110,180
Less: Comprehensive income attributable to non-controlling interests		(6,125)		(4,862)
Comprehensive income attributable to Starwood Property Trust, Inc.	$	67,521	$	105,318

See notes to condensed consolidated financial statements.

6

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

(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, January 1, 2019	280,839,692	$	2,808	$	4,995,156	5,180,140	$	(104,194)	$	(348,998)	$	58,660	$	4,603,432	$	296,757	$	4,900,189
Proceeds from DRIP Plan	7,825		—		167	—		—		—		—		167		—		167
Equity offering costs	—		—		(5)	—		—		—		—		(5)		—		(5)
Conversion of 2019 Convertible Notes	3,611,918		36		67,526	—		—		—		—		67,562		—		67,562
Share-based compensation	526,687		6		6,357	—		—		—		—		6,363		—		6,363
Manager incentive fee paid in stock	495,363		5		10,972	—		—		—		—		10,977		—		10,977
Net income	—		—		—	—		—		70,383		—		70,383		6,125		76,508
Dividends declared, $0.48 per share	—		—		—	—		—		(134,938)		—		(134,938)		—		(134,938)
Other comprehensive loss, net	—		—		—	—		—		—		(2,862)		(2,862)		—		(2,862)
VIE non-controlling interests	—		—		—	—		—		—		—		—		(137)		(137)
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		95		95
Distributions to non-controlling interests	—		—		—	—		—		—		—		—		(6,952)		(6,952)
Balance, March 31, 2019	285,481,485	$	2,855	$	5,080,173	5,180,140	$	(104,194)	$	(413,553)	$	55,798	$	4,621,079	$	295,888	$	4,916,967
Balance, January 1, 2018	265,983,309	$	2,660	$	4,715,246	4,606,885	$	(92,104)	$	(217,312)	$	69,924	$	4,478,414	$	100,787	$	4,579,201
Proceeds from DRIP Plan	7,651		—		159	—		—		—		—		159		—		159
Common stock repurchased	—		—		—	573,255		(12,090)		—		—		(12,090)		—		(12,090)
Share-based compensation	598,701		6		4,762	—		—		—		—		4,768		—		4,768
Manager incentive fee paid in stock	545,641		5		10,978	—		—		—		—		10,983		—		10,983
Net income	—		—		—	—		—		99,932		—		99,932		4,862		104,794
Dividends declared, $0.48 per share	—		—		—	—		—		(126,058)		—		(126,058)		—		(126,058)
Other comprehensive income, net	—		—		—	—		—		—		5,386		5,386		—		5,386
VIE non-controlling interests	—		—		—	—		—		—		—		—		569		569
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		366,691		366,691
Distributions to non-controlling interests	—		—		(2,962)	—		—		—		—		(2,962)		(226,435)		(229,397)
Sale of controlling interest in majority owned property asset	—		—		—	—		—		—		—		—		(319)		(319)
Balance, March 31, 2018	267,135,302	$	2,671	$	4,728,183	5,180,140	$	(104,194)	$	(243,438)	$	75,310	$	4,458,532	$	246,155	$	4,704,687

See notes to condensed consolidated financial statements.

7

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

	For the Three Months Ended
	March 31,
	2019		2018
Cash Flows from Operating Activities:
Net income	$	76,508	$	104,794
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization of deferred financing costs, premiums and discounts on secured financing agreements and secured borrowings on transferred loans		9,183		5,167
Amortization of discounts and deferred financing costs on senior notes		1,933		3,869
Accretion of net discount on investment securities		(2,755)		(6,841)
Accretion of net deferred loan fees and discounts		(7,526)		(12,052)
Share-based compensation		6,363		4,768
Share-based component of incentive fees		10,977		10,983
Change in fair value of investment securities		(62)		149
Change in fair value of consolidated VIEs		133		(11,241)
Change in fair value of servicing rights		767		5,814
Change in fair value of loans held-for-sale		(11,266)		(7,800)
Change in fair value of derivatives		3,396		18,069
Foreign currency gain, net		(5,547)		(13,540)
Gain on sale of investments and other assets		(4,485)		(10,660)
Impairment charges on properties and related intangibles		120		25
Loan loss provision, net		763		1,538
Depreciation and amortization		28,889		31,412
Loss from unconsolidated entities		43,200		1,462
Distributions of earnings from unconsolidated entities		3,661		2,675
Loss on extinguishment of debt		3,298		—
Origination and purchase of loans held-for-sale, net of principal collections		(719,589)		(245,027)
Proceeds from sale of loans held-for-sale		561,702		266,632
Changes in operating assets and liabilities:
Related-party payable, net		(20,098)		(10,588)
Accrued and capitalized interest receivable, less purchased interest		(22,536)		(9,412)
Other assets		(26,760)		(6,188)
Accounts payable, accrued expenses and other liabilities		(22,987)		(31,612)
Net cash (used in) provided by operating activities		(92,718)		92,396
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment		(1,287,001)		(900,937)
Proceeds from principal collections on loans		556,058		870,400
Proceeds from loans sold		500,271		145,273
Proceeds from sales of investment securities		3,228		—
Proceeds from principal collections on investment securities		7,754		219,230
Proceeds from sales and insurance recoveries on properties		1,463		51,093
Purchases and additions to properties and other assets		(8,526)		(7,056)
Investment in unconsolidated entities		(510)		—
Distribution of capital from unconsolidated entities		886		21,255
Payments for purchase or termination of derivatives		(3,896)		(15,604)
Proceeds from termination of derivatives		692		11,773
Net cash (used in) provided by investing activities		(229,581)		395,427

See notes to condensed consolidated financial statements.

8

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

	For the Three Months Ended
	March 31,
	2019		2018
Cash Flows from Financing Activities:
Proceeds from borrowings	$	2,310,902	$	1,515,241
Principal repayments on and repurchases of borrowings		(1,778,819)		(1,629,449)
Payment of deferred financing costs		(4,706)		(10,506)
Proceeds from common stock issuances		167		159
Payment of equity offering costs		(5)		—
Payment of dividends		(132,515)		(125,730)
Contributions from non-controlling interests		95		310
Distributions to non-controlling interests		(6,952)		(229,397)
Purchase of treasury stock		—		(12,090)
Issuance of debt of consolidated VIEs		33,678		7,948
Repayment of debt of consolidated VIEs		(52,856)		(57,289)
Distributions of cash from consolidated VIEs		11,683		13,730
Net cash provided by (used in) financing activities		380,672		(527,073)
Net increase (decrease) in cash, cash equivalents and restricted cash		58,373		(39,250)
Cash, cash equivalents and restricted cash, beginning of period		487,865		418,273
Effect of exchange rate changes on cash		(254)		398
Cash, cash equivalents and restricted cash, end of period	$	545,984	$	379,421
Supplemental disclosure of cash flow information:
Cash paid for interest	$	129,349	$	75,696
Income taxes paid		484		880
Supplemental disclosure of non-cash investing and financing activities:
Dividends declared, but not yet paid	$	134,953	$	126,058
Consolidation of VIEs (VIE asset/liability additions)		3,280,065		1,089,881
Deconsolidation of VIEs (VIE asset/liability reductions)		45,910		875,240
Settlement of 2019 Convertible Notes in shares		75,525		—
Settlement of loans transferred as secured borrowings		74,692		—
Unsettled infrastructure loan sales		68,564		—
Net assets acquired through foreclosure		8,963		—
Net assets acquired from consolidated VIEs		—		27,737
Contribution of Woodstar II Portfolio net assets from non-controlling interests		—		366,381
Loan principal collections temporarily held at master servicer		—		326,362

See notes to condensed consolidated financial statements.

9

Starwood Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of March 31, 2019

(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, 2019 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 and residential first mortgages, 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).

· 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.

10

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, an allocable 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, 2018 (our “Form 10-K”), as filed with the Securities and Exchange Commission (“SEC”). The results of operations for the three months ended March 31, 2019 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, 2018 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, certain other entities in which we hold interests are considered VIEs as the limited partners of these 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, an allocable portion of the identified servicing intangible asset associated with the servicing fee streams, and the corresponding allocable 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 nonperformance 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 2% of our consolidated securitization VIE assets, with the remaining 98% 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 eligible financial assets and liabilities of our consolidated securitization VIEs, 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 mortgage loans held-for-sale were made due to the expected short-term holding period of these instruments.

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

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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 are carried at cost, net of unamortized acquisition premiums or discounts, loan fees, and origination costs as applicable, unless the loans are deemed impaired.

Loan Impairment

We evaluate each loan classified as held-for-investment for impairment at least quarterly. Impairment 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. If a loan is considered to be impaired, we record an allowance through the provision for loan losses to reduce the carrying value of the loan to the present value of expected future cash flows discounted at the loan’s contractual effective rate or the fair value of the collateral, if repayment is expected solely from the collateral.

There may be circumstances where we modify a loan by granting the borrower a concession that we might not otherwise consider when a borrower is experiencing financial difficulty or is expected to experience financial difficulty in the foreseeable future. Such concessionary modifications are classified as troubled debt restructurings (“TDRs”) unless the modification solely results in a delay in payment that is insignificant. Loans classified as TDRs are considered impaired loans for reporting and measurement purposes.

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.

Leases

On January 1, 2019, ASC 842, Leases, became effective for the Company.  ASC 842 establishes a right-of-use model for lessee accounting which results in the recognition of most leased assets and lease liabilities on the balance sheet of the lessee.  Lessor accounting was not significantly affected by this ASC.  We elected to apply the provisions of ASC 842 as of January 1, 2019 and not to retrospectively adjust prior periods presented.  Such application did not result in any cumulative-effect adjustment as of January 1, 2019.  We elected the “package of practical expedients” for transition purposes, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs for leases that commenced prior to January 1, 2019.  We also elected not to apply the recognition provisions of ASC 842 to short-term leases, which have original lease terms of 12 months or less.  As a lessor, we elected not to separate nonlease components, such as reimbursements from tenants for common area maintenance (“CAM”), from lease components for all classes of underlying assets, and continue to recognize such nonlease components ratably in rental income.  We also elected to continue to exclude from rental income all sales, use and other similar taxes collected from lessees.  As required by ASC 842, we no longer record as revenues and expenses lessor costs (such as property taxes) paid directly by the lessees.  The application of ASC 842 has had no material effect on our consolidated financial statements, as all of our leases, as both lessor and lessee, are currently classified as operating leases, which are subject to essentially the same straight-line revenue and expense recognition as in the past.  As a lessee, our only significant long-term lease resulted in the recognition of a lease liability and corresponding right-of-use asset of $12.0 million as of January 1, 2019, which are classified within accounts payable, accrued expenses and other liabilities and other assets, respectively, in our condensed consolidated balance sheet as of March 31, 2019.

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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 outstanding convertible senior 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, 2019 and 2018, the two-class method resulted in the most dilutive EPS calculation.

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. Actual results could differ from those estimates. The most significant and subjective estimate that we make is the projection of cash flows we expect to receive on our loans, investment securities and intangible assets, which has a significant impact on the amounts of interest income, credit losses (if any) and fair values 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.

Recent Accounting Developments

On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326) – Measurement of Credit Losses on Financial Instruments, which mandates use of an “expected loss” credit model for estimating future credit losses of certain financial instruments instead of the “incurred loss” credit model that current GAAP requires.  The “expected loss” 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 in accordance with the current “incurred loss” methodology.  This ASU is effective for annual reporting periods, and interim periods therein, beginning after December 15, 2019. Though we have not completed our assessment of this ASU, we expect this ASU to result in our recognition of higher levels of allowances for loan losses.  Our assessment of the estimated amount of such increases remains in process.

On January 26, 2017, the FASB issued ASU 2017-04, Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment, which simplifies the method applied for measuring impairment in cases where goodwill is impaired.  This ASU specifies that goodwill impairment will be measured as the excess of the reporting unit’s carrying value (inclusive of goodwill) over its fair value, eliminating the requirement that all assets and liabilities of the reporting unit be remeasured individually in connection with measurement of goodwill impairment.  This ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2019 and is applied prospectively.  Early application is permitted.  We do not expect the application of this ASU to materially impact the Company.

On August 28, 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework, which adds new disclosure requirements and modifies or eliminates existing disclosure requirements of ASC 820. This ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2019. Early application is permitted. We do not expect the application of this ASU to materially impact the Company, as it only affects fair value disclosures.

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On October 31, 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810) – Targeted Improvements to Related Party Guidance for Variable Interest Entities, which requires reporting entities to consider indirect interests held through related parties under common control on a proportional basis rather than as the equivalent of a direct interest in its entirety for determining whether a decision-making fee is a variable interest. This ASU is effective for annual periods, and interim periods therein, beginning after December 15, 2019. Early application is permitted. We are in the process of assessing the impact this ASU will have on the Company, but do not expect it to be material.

3.  Acquisitions 

During the three months ended March 31, 2019, we had no significant acquisitions or divestitures of properties or businesses and no measurement period adjustments related to a prior year business combination.

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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. The following tables summarize our investments in mortgages and loans by subordination class as of March 31, 2019 and December 31, 2018 (dollars in thousands):

							Weighted
					Weighted		Average Life
	Carrying		Face		Average		(“WAL”)
March 31, 2019	Value		Amount		Coupon		(years)(1)
First mortgages (2)	$	6,851,837	$	6,874,524	6.7	%	2.1
First priority infrastructure loans		1,450,097		1,460,758	5.8	%	5.1
Subordinated mortgages (3)		52,849		54,042	8.9	%	3.5
Mezzanine loans (2)		579,496		581,557	11.6	%	1.7
Other		61,234		64,916	8.2	%	2.2
Total loans held-for-investment		8,995,513		9,035,797
Loans held-for-sale, fair value option, residential		688,435		673,249	6.2	%	5.8
Loans held-for-sale, fair value option, commercial		153,252		149,428	4.7	%	10.0
Loans held-for-sale, infrastructure		303,577		312,551	4.1	%	1.1
Total gross loans		10,140,777		10,171,025
Loan loss allowance		(31,562)		—
Total net loans	$	10,109,215	$	10,171,025
December 31, 2018
First mortgages (2)	$	6,607,117	$	6,631,236	6.9	%	2.0
First priority infrastructure loans		1,456,779		1,465,828	5.7	%	4.5
Subordinated mortgages (3)		52,778		53,996	8.9	%	3.7
Mezzanine loans (2)		393,832		394,739	10.6	%	2.0
Other		61,001		64,658	8.2	%	2.5
Total loans held-for-investment		8,571,507		8,610,457
Loans held-for-sale, fair value option, residential		623,660		609,571	6.3	%	6.6
Loans held-for-sale, commercial ($47,622 under fair value option)		94,117		94,916	5.4	%	6.2
Loans held-for-sale, infrastructure		469,775		486,909	3.5	%	0.3
Loans transferred as secured borrowings		74,346		74,692	7.1	%	1.3
Total gross loans		9,833,405		9,876,545
Loan loss allowance		(39,151)		—
Total net loans	$	9,794,254	$	9,876,545

(1) 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.

(2) 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 $912.8 million and $1.0 billion being classified as first mortgages as of March 31, 2019 and December 31, 2018, respectively.

(3) 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.

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As of March 31, 2019, approximately $8.5 billion, or 94.3%, of our loans held-for-investment were variable rate and paid interest principally at LIBOR plus a weighted-average spread of 4.4%.

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 impairment analyses are completed and reviewed by asset management and finance personnel who utilize various data sources, including (i) periodic financial data such as property operating statements, occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections and (iii) current credit spreads and discussions with market participants.

Our evaluation process, as described above, produces an internal risk rating between 1 and 5, which is a weighted average of the numerical ratings in the following categories: (i) sponsor capability and financial condition, (ii) loan and collateral performance relative to underwriting, (iii) quality and stability of collateral cash flows and (iv) loan structure. We utilize the overall risk ratings as a concise means to monitor any credit migration on a loan as well as on the whole portfolio. While the overall risk rating is generally not the sole factor we use in determining whether a loan is impaired, a loan with a higher overall risk rating would tend to have more adverse indicators of impairment and therefore would be more likely to experience a credit loss.

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The rating categories for commercial real estate loans generally include the characteristics described below, but these are utilized as guidelines and therefore not every loan will have all of the characteristics described in each category:

Rating	Characteristics
1		Sponsor capability and financial condition—Sponsor is highly rated or investment grade or, if private, the equivalent thereof with significant management experience.
		Loan collateral and performance relative to underwriting—The collateral has surpassed underwritten expectations.
		Quality and stability of collateral cash flows—Occupancy is stabilized, the property has had a history of consistently high occupancy, and the property has a diverse and high quality tenant mix.
		Loan structure—Loan to collateral value ratio (“LTV”) does not exceed 65%. The loan has structural features that enhance the credit profile.
2		Sponsor capability and financial condition—Strong sponsorship with experienced management team and a responsibly leveraged portfolio.
		Loan collateral and performance relative to underwriting—Collateral performance equals or exceeds underwritten expectations and covenants and performance criteria are being met or exceeded.
		Quality and stability of collateral cash flows—Occupancy is stabilized with a diverse tenant mix.
		Loan structure—LTV does not exceed 70% and unique property risks are mitigated by structural features.
3		Sponsor capability and financial condition—Sponsor has historically met its credit obligations, routinely pays off loans at maturity, and has a capable management team.
		Loan collateral and performance relative to underwriting—Property performance is consistent with underwritten expectations.
		Quality and stability of collateral cash flows—Occupancy is stabilized, near stabilized, or is on track with underwriting.
		Loan structure—LTV does not exceed 80%.
4		Sponsor capability and financial condition—Sponsor credit history includes missed payments, past due payment, and maturity extensions. Management team is capable but thin.
		Loan collateral and performance relative to underwriting—Property performance lags behind underwritten expectations. Performance criteria and loan covenants have required occasional waivers. A sale of the property may be necessary in order for the borrower to pay off the loan at maturity.
		Quality and stability of collateral cash flows—Occupancy is not stabilized and the property has a large amount of rollover.
		Loan structure—LTV is 80% to 90%.
5		Sponsor capability and financial condition—Credit history includes defaults, deeds‑in‑lieu, foreclosures, and/or bankruptcies.
		Loan collateral and performance relative to underwriting—Property performance is significantly worse than underwritten expectations. The loan is not in compliance with loan covenants and performance criteria and may be in default. Sale proceeds would not be sufficient to pay off the loan at maturity.
		Quality and stability of collateral cash flows—The property has material vacancy and significant rollover of remaining tenants.
		Loan structure—LTV exceeds 90%.

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The risk ratings for loans subject to our rating system, which excludes loans held-for-sale, by class of loan were as follows as of March 31, 2019 and December 31, 2018 (dollars in thousands):

	Balance Sheet Classification
	Loans Held-For-Investment														Loans
				First Priority											Transferred				% of
Risk Rating	First			Infrastructure			Subordinated			Mezzanine					As Secured				Total
Category	Mortgages			Loans			Mortgages			Loans		Other			Borrowings		Total		Loans
March 31, 2019
1	$	2,723		$	—		$	—		$	—	$	23,515		$	—	$	26,238	0.3	%
2		3,329,423			—			7,354			275,415		—			—		3,612,192	35.6	%
3		3,289,028			—			33,518			304,081		31,069			—		3,657,696	36.1	%
4		62,381			—			—			—		—			—		62,381	0.6	%
5		—			—			—			—		—			—		—	—	%
N/A		168,282	(1)		1,450,097	(2)		11,977	(1)		—		6,650	(1)		—		1,637,006	16.1	%
	$	6,851,837		$	1,450,097		$	52,849		$	579,496	$	61,234		$	—		8,995,513
Loans held-for-sale																		1,145,264	11.3	%
Total gross loans																	$	10,140,777	100.0	%
December 31, 2018
1	$	6,538		$	—		$	—		$	—	$	23,767		$	—	$	30,305	0.3	%
2		3,356,342			—			7,392			111,466		—			74,346		3,549,546	36.1	%
3		2,987,296			—			33,410			282,366		31,039			—		3,334,111	33.9	%
4		63,094			—			—			—		—			—		63,094	0.6	%
5		—			—			—			—		—			—		—	—	%
N/A		193,847	(1)		1,456,779	(2)		11,976	(1)		—		6,195	(1)		—		1,668,797	17.0	%
	$	6,607,117		$	1,456,779		$	52,778		$	393,832	$	61,001		$	74,346		8,645,853
Loans held-for-sale																		1,187,552	12.1	%
Total gross loans																	$	9,833,405	100.0	%

(1) Represents loans individually evaluated for impairment in accordance with ASC 310-10.

(2) First priority infrastructure loans were not risk rated as the Company is in the process of developing a risk rating policy for these loans.  

After completing our impairment evaluation process as of March 31, 2019, we concluded that no additional impairment charges or releases thereof were required.  During the three months ended March 31, 2019, we charged-off an allowance for impaired loans of $8.3 million relating to a first mortgage loan on a grocery distribution facility located in Montgomery, Alabama that we foreclosed on in March 2019 and obtained physical possession of the underlying collateral property. As of the foreclosure date, our carrying value of the loan totaled $9.0 million ($20.9 million unpaid principal balance net of an $8.3 million allowance for impaired loan and $3.6 million of unamortized discount).

As of March 31, 2019, we had allowances for impaired loans of $29.9 million. Of this amount, $21.6 million relates to a residential conversion project located in New York City, for which our recorded investment was as follows as of March 31, 2019: (i) $149.9 million first mortgage and contiguous mezzanine loans ($118.8 million unpaid principal balance, which does not reflect $38.4 million of accrued interest and $21.6 million allowance for impaired loan) and (ii) $6.7 million unsecured promissory note ($7.1 million unpaid principal balance and no reserve for impaired loan).

Also included in the allowance for impaired loans is $8.3 million related to two subordinated mortgages on department stores located in the Greater Chicago area. Our recorded investment in these loans totaled $12.2 million ($12.0 million unpaid principal balance and $8.3 million allowance for impaired loans) as of March 31, 2019.

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We also have a first mortgage loan on a grocery distribution facility in Orlando, Florida that was leased to a single tenant who filed for bankruptcy. This lease was rejected by the bankruptcy court with the tenant vacating and ceasing debt service in 2018.  Because the liquidation value of the property exceeds our recorded investment, we determined that no impairment reserve was required.  Our recorded investment in the loan totaled $18.5 million ($21.9 million unpaid principal and interest balance, net of a $3.4 million unamortized discount) as of March 31, 2019. Subsequent to March 31, 2019, we foreclosed on the loan and obtained physical possession of the underlying collateral property.

We apply the cost recovery method of interest income recognition for these impaired loans. The average recorded investment in the impaired loans for the three months ended March 31, 2019 was $199.8 million.

As of March 31, 2019, we held TDRs with unfunded commitments of $4.9 million.  There were no TDRs for which interest income was recognized during the three months ended March 31, 2019.

As of March 31, 2019, the department store loans discussed above were 90 days or greater past due, as were $4.2 million of residential loans and a $36.2 million infrastructure loan with a carrying value of $29.2 million, net of a $7.0 million unamortized discount. In accordance with our interest income recognition policy, these loans were placed on non-accrual status.

In accordance with our policies, we record an allowance for loan losses equal to (i) 1.5% of the aggregate carrying amount of loans rated as a “4,” plus (ii) 5% of the aggregate carrying amount of loans rated as a “5,” plus (iii) allowance for infrastructure loans held-for-sale where amortized cost is in excess of fair value, plus (iv) impaired loan reserves, if any.  The following table presents the activity in our allowance for loan losses (amounts in thousands):

	For the Three Months Ended
	March 31,
	2019		2018
Allowance for loan losses at January 1	$	39,151	$	4,330
Loan loss provision, net		763		1,538
Charge-offs		(8,352)		—
Recoveries		—		—
Allowance for loan losses at March 31	$	31,562	$	5,868
Recorded investment in loans related to the allowance for loan loss	$	266,996	$	245,791

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

	For the Three Months Ended
	March 31,
	2019		2018
Balance at January 1	$	9,794,254	$	7,382,641
Acquisitions/originations/additional funding		2,027,669		1,178,560
Capitalized interest (1)		22,137		16,253
Basis of loans sold (2)		(1,127,201)		(411,625)
Loan maturities/principal repayments		(630,965)		(1,225,815)
Discount accretion/premium amortization		7,526		12,052
Changes in fair value		11,266		7,800
Unrealized foreign currency translation gain		14,208		22,552
Loan loss provision, net		(763)		(1,538)
Loan foreclosure		(8,963)		—
Transfer to/from other asset classifications		47		102
Balance at March 31	$	10,109,215	$	6,980,982

(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, 2019 and December 31, 2018 (amounts in thousands):

	Carrying Value as of
	March 31, 2019		December 31, 2018
RMBS, available-for-sale	$	204,835	$	209,079
RMBS, fair value option (1)		108,816		87,879
CMBS, fair value option (1)		1,143,416		1,157,508
Held-to-maturity (“HTM”) debt securities, amortized cost		643,787		644,149
Equity security, fair value		12,506		11,893
Subtotal—Investment securities		2,113,360		2,110,508
VIE eliminations (1)		(1,203,127)		(1,204,040)
Total investment securities	$	910,233	$	906,468

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

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

	RMBS,		RMBS, fair		CMBS, fair		HTM		Equity		Securitization
	available-for-sale		value option		value option		Securities		Security		VIEs (1)		Total
Three Months Ended March 31, 2019
Purchases	$	—	$	26,272	$	13,262	$	—	$	—	$	(39,534)	$	—
Sales		—		—		36,906		—		—		(33,678)		3,228
Principal collections		6,360		2,034		9,837		1,206		—		(11,683)		7,754
Three Months Ended March 31, 2018
Purchases	$	—	$	—	$	30,225	$	—	$	—	$	(30,225)	$	—
Sales		—		—		7,948		—		—		(7,948)		—
Principal collections		10,150		—		15,181		208,303		—		(14,404)		219,230

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

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RMBS, Available-for-Sale

The Company classified all of its RMBS not eliminated in consolidation as available-for-sale as of March 31, 2019 and December 31, 2018.  These RMBS are reported at fair value in the balance sheet with changes in fair value recorded in accumulated other comprehensive income (“AOCI”).

The tables below summarize various attributes of our investments in available-for-sale RMBS as of March 31, 2019 and December 31, 2018 (amounts in thousands):

							Unrealized Gains or (Losses)
							Recognized in AOCI
	Purchase				Recorded				Gross		Gross		Net
	Amortized		Credit		Amortized		Non-Credit		Unrealized		Unrealized		Fair Value
	Cost		OTTI		Cost		OTTI		Gains		Losses		Adjustment		Fair Value
March 31, 2019
RMBS	$	161,604	$	(9,897)	$	151,707	$	(35)	$	53,163	$	—	$	53,128	$	204,835
December 31, 2018
RMBS	$	165,461	$	(9,897)	$	155,564	$	(31)	$	53,546	$	—	$	53,515	$	209,079

	Weighted Average Coupon (1)		Weighted Average Rating	WAL  (Years) (2)
March 31, 2019
RMBS	3.7	%	CCC-	6.1
December 31, 2018
RMBS	3.7	%	CCC-	6.0

(1) Calculated using the March 31, 2019 and December 31, 2018 one-month LIBOR rate of 2.495% and 2.503%, respectively, for floating rate securities.

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

As of March 31, 2019, approximately $174.3 million, or 85.1%, of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.22%. As of December 31, 2018, approximately $177.4 million, or 84.9%, of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.22%. We purchased all of the RMBS at a discount, a portion of which will be accreted into income over the expected remaining life of the security. The majority of the income from this strategy is earned from the accretion of this accretable discount.

The following table contains a reconciliation of aggregate principal balance to amortized cost for our RMBS as of March 31, 2019 and December 31, 2018 (amounts in thousands):

	March 31, 2019		December 31, 2018
Principal balance	$	302,229	$	309,497
Accretable yield		(57,391)		(54,779)
Non-accretable difference		(93,131)		(99,154)
Total discount		(150,522)		(153,933)
Amortized cost	$	151,707	$	155,564

The principal balance of credit deteriorated RMBS was $284.3 million and $290.8 million as of March 31, 2019 and December 31, 2018, respectively. Accretable yield related to these securities totaled $52.4 million and $49.5 million as of March 31, 2019 and December 31, 2018, respectively.

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The following table discloses the changes to accretable yield and non-accretable difference for our RMBS during the three months ended March 31, 2019 (amounts in thousands):

			Non-Accretable
Three Months Ended March 31, 2019	Accretable Yield		Difference
Balance as of January 1, 2019	$	54,779	$	99,154
Accretion of discount		(2,503)		—
Principal write-downs, net		—		(908)
Transfer to/from non-accretable difference		5,115		(5,115)
Balance as of March 31, 2019	$	57,391	$	93,131

We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.4 million and $0.5 million for the three months ended March 31, 2019 and 2018, respectively, which has been recorded as management fees in the accompanying condensed consolidated statements of operations.

The following table presents the gross unrealized losses and estimated fair value of any available-for-sale securities that were in an unrealized loss position as of March 31, 2019 and December 31, 2018, and for which other-than-temporary impairments (“OTTI”) (full or partial) have not been recognized in earnings (amounts in thousands):

	Estimated Fair Value				Unrealized Losses
	Securities with a		Securities with a		Securities with a		Securities with a
	loss less than		loss greater than		loss less than		loss greater than
	12 months		12 months		12 months		12 months
As of March 31, 2019
RMBS	$	2,133	$	—	$	(35)	$	—
As of December 31, 2018
RMBS	$	2,148	$	—	$	(31)	$	—

As of both March 31, 2019 and December 31, 2018, there was one security with an unrealized loss reflected in the table above. After evaluating this security and recording adjustments for credit-related OTTI, we concluded that the remaining unrealized loss reflected above was noncredit-related and would be recovered from the security’s estimated future cash flows. We considered a number of factors in reaching this conclusion, including that we did not intend to sell the security, it was not considered more likely than not that we would be forced to sell the security prior to recovering our amortized cost, and there were no material credit events that would have caused us to otherwise conclude that we would not recover our cost. Credit losses, which represent most of the OTTI we record on securities, are calculated by comparing (i) the estimated future cash flows of each security discounted at the yield determined as of the initial acquisition date or, if since revised, as of the last date previously revised, to (ii) our amortized cost basis. Significant judgment is used in projecting cash flows for our non-agency RMBS. As a result, actual income and/or impairments could be materially different from what is currently projected and/or reported.

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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, 2019, 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 $1.1 billion and $3.0 billion, respectively. As of March 31, 2019, 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 $108.8 million and $72.3 million, respectively. The $1.3 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 $49.1 million at March 31, 2019) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option investment securities.

As of March 31, 2019, $150.7 million of our CMBS were variable rate and none of our RMBS were variable rate.

HTM Debt Securities, Amortized Cost

The table below summarizes unrealized gains and losses of our investments in HTM debt securities as of March 31, 2019 and December 31, 2018 (amounts in thousands):

	Net Carrying Amount		Gross Unrealized		Gross Unrealized
	(Amortized Cost)		Holding Gains		Holding Losses		Fair Value
March 31, 2019
CMBS	$	409,176	$	1,848	$	(2,470)	$	408,554
Preferred interests		175,001		756		—		175,757
Infrastructure bonds		59,610		88		(545)		59,153
Total	$	643,787	$	2,692	$	(3,015)	$	643,464
December 31, 2018
CMBS	$	408,556	$	2,435	$	(3,349)	$	407,642
Preferred interests		174,825		703		—		175,528
Infrastructure bonds		60,768		178		(168)		60,778
Total	$	644,149	$	3,316	$	(3,517)	$	643,948

The table below summarizes the maturities of our HTM debt securities by type as of March 31, 2019 (amounts in thousands):

			Preferred		Infrastructure
	CMBS		Interests		Bonds		Total
Less than one year	$	75,158	$	—	$	—	$	75,158
One to three years		305,885		—		12,769		318,654
Three to five years		28,133		175,001		—		203,134
Thereafter		—		—		46,841		46,841
Total	$	409,176	$	175,001	$	59,610	$	643,787

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 $12.5 million and $11.9 million as of March 31, 2019 and December 31, 2018, respectively. As of March 31, 2019, our shares represent an approximate 2% interest in SEREF.

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6. Properties

Our properties are held within the following portfolios:

Ireland Portfolio

The Ireland Portfolio is comprised of 11 net leased fully occupied office properties and one multifamily property all located in Dublin, Ireland, which we acquired during the year ended December 31, 2015.  The Ireland Portfolio, which collectively is comprised of approximately 600,000 square feet, includes total gross properties and lease intangibles of $512.0 million and debt of $353.3 million as of March 31, 2019.

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 $624.4 million and federal, state and county sponsored financing and other debt of $406.8 million as of March 31, 2019.

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.  During the year ended December 31, 2017, we acquired eight of the 27 affordable housing communities of the Woodstar II Portfolio 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 $599.4 million and debt of $437.5 million as of March 31, 2019.

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 $760.4 million and debt of $486.8 million as of March 31, 2019.

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 $192.2 million as of March 31, 2019.

Investing and Servicing Segment Property Portfolio

The Investing and Servicing Segment Property Portfolio (the “REIS Equity Portfolio”) is comprised of 19 commercial real estate properties and one equity interest in an unconsolidated commercial real estate property. During the year ended December 31, 2018, we acquired three commercial real estate properties from CMBS trusts and the remaining 16 properties were acquired from CMBS trusts prior to December 31, 2017.  The REIS Equity Portfolio includes total gross properties and lease intangibles of $352.2 million and debt of $235.5 million as of March 31, 2019. 

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The table below summarizes our properties held as of March 31, 2019 and December 31, 2018 (dollars in thousands):

	Depreciable Life	March 31, 2019		December 31, 2018
Property Segment
Land and land improvements	0 – 15 years	$	645,349	$	648,972
Buildings and building improvements	5 – 45 years		1,976,121		1,980,283
Furniture & fixtures	3 – 7 years		47,218		46,048
Investing and Servicing Segment
Land and land improvements	0 – 15 years		82,362		82,332
Buildings and building improvements	3 – 40 years		217,086		213,010
Furniture & fixtures	2 – 5 years		2,374		2,158
Commercial and Residential Lending Segment (1)
Land and land improvements	0 – 2 years		2,508		—
Buildings	23 years		6,455		—
Properties, cost			2,979,473		2,972,803
Less: accumulated depreciation			(210,099)		(187,913)
Properties, net		$	2,769,374	$	2,784,890

(1) Represents properties acquired through loan foreclosure. Refer to Note 4 for further discussion.

During the three months ended March 31, 2018, we sold five operating properties for $52.3 million, recognizing a gain on sale of $10.3 million within gain on sale of investments and other assets in our condensed consolidated statement of operations.  One of these properties was acquired by a third party which already held a $0.3 million non-controlling interest in the property.  During the three months ended March 31, 2018, $1.3 million of the gain on sale was attributable to non-controlling interests.  No operating properties were sold during the three months ended March 31, 2019.

Future rental payments due to us from tenants under existing non-cancellable operating leases for each of the next five years and thereafter are as follows (in thousands):

2019 (remainder of)	$	169,273
2020		131,736
2021		121,826
2022		114,467
2023		98,211
Thereafter		837,401
Total	$	1,472,914

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7. Investment in Unconsolidated Entities

The table below summarizes our investments in unconsolidated entities as of March 31, 2019 and December 31, 2018 (dollars in thousands):

	Participation /	Carrying value as of
	Ownership % (1)	March 31, 2019		December 31, 2018
Equity method:
Retail Fund	33%	$	70,557	$	114,362
Investor entity which owns equity in an online real estate company	50%		9,380		9,372
Equity interests in commercial real estate	50%		2,654		6,294
Equity interest in and advances to a residential mortgage originator (2)	N/A		8,817		9,082
Various	25% - 50%		6,799		6,984
			98,207		146,094
Cost method:
Equity interest in a servicing and advisory business	6%		6,207		6,207
Investment funds which own equity in a loan servicer and other real estate assets	4% - 6%		9,225		9,225
Various	0% - 3%		10,721		10,239
			26,153		25,671
		$	124,360	$	171,765

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

(2) Includes a $2.0 million subordinated loan the Company funded in June 2018. 

We own a 33% equity interest in a fund that owns four regional shopping malls (the “Retail Fund”), an investment company that measures its assets at fair value on a recurring basis.  We report our interest in the Retail Fund on a three-month lag basis at its liquidation value.  During the period included in our three months ended March 31, 2019, the Retail Fund reported unrealized decreases in the fair value of its real estate properties, which resulted in a $44.9 million decrease to our investment. This amount was recognized within loss from unconsolidated entities in our condensed consolidated statement of operations during the three months ended March 31, 2019. 

As of March 31, 2019, 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, 2019. 

During the three months ended March 31, 2019, we did not become aware of any observable price changes in our cost method investments or any indicators of impairment.

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8. Goodwill and Intangibles

Goodwill

Infrastructure Lending Segment

The Infrastructure Lending Segment’s goodwill of $119.4 million at both March 31, 2019 and December 31, 2018 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, 2019 and December 31, 2018 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. At March 31, 2019 and December 31, 2018 the balance of the domestic servicing intangible was net of $24.3 million and $24.1 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, 2019 and December 31, 2018, the domestic servicing intangible had a balance of $44.1 million and $44.6 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, 2019 and December 31, 2018 (amounts in thousands):

	As of March 31, 2019						As of December 31, 2018
	Gross Carrying		Accumulated		Net Carrying		Gross Carrying		Accumulated		Net Carrying
	Value		Amortization		Value		Value		Amortization		Value
Domestic servicing rights, at fair value	$	19,790	$	—	$	19,790	$	20,557	$	—	$	20,557
In-place lease intangible assets		197,017		(106,076)		90,941		198,220		(100,873)		97,347
Favorable lease intangible assets		36,632		(10,528)		26,104		36,895		(9,766)		27,129
Total net intangible assets	$	253,439	$	(116,604)	$	136,835	$	255,672	$	(110,639)	$	145,033

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The following table summarizes the activity within intangible assets for the three months ended March 31, 2019 (amounts in thousands):

	Domestic		In-place Lease		Favorable Lease
	Servicing		Intangible		Intangible
	Rights		Assets		Assets		Total
Balance as of January 1, 2019	$	20,557	$	97,347	$	27,129	$	145,033
Amortization		—		(5,736)		(875)		(6,611)
Foreign exchange loss		—		(550)		(150)		(700)
Impairment (1)		—		(120)		—		(120)
Changes in fair value due to changes in inputs and assumptions		(767)		—		—		(767)
Balance as of March 31, 2019	$	19,790	$	90,941	$	26,104	$	136,835

(1) Impairment of intangible lease assets is recognized within other expense in our condensed consolidated statements of operations.

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):

2019 (remainder of)	$	16,406
2020		17,390
2021		14,950
2022		12,158
2023		8,946
Thereafter		47,195
Total	$	117,045

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9. Secured Financing Agreements

The following table is a summary of our secured financing agreements in place as of March 31, 2019 and December 31, 2018 (dollars in thousands):

										Carrying Value at
	Current	Extended			Pledged Asset		Maximum			March 31,		December 31,
	Maturity	Maturity (a)	Pricing		Carrying Value		Facility Size			2019		2018
Lender 1 Repo 1	(b)	(b)	LIBOR + 1.60% to 5.75%		$	1,723,488	$	2,000,000		$	1,341,314	$	1,279,979
Lender 2 Repo 1	Apr 2020	Apr 2023	LIBOR + 1.50% to 2.50%			645,636		900,000	(c)		467,390		384,791
Lender 4 Repo 2	May 2021	May 2023	LIBOR + 1.70% to 3.25%			1,073,533		1,000,000			664,637		552,345
Lender 6 Repo 1	Aug 2021	N/A	LIBOR + 1.50% to 2.50%			451,409		600,000			361,291		507,545
Lender 6 Repo 2	Jan 2024	N/A	GBP LIBOR + 2.45% to 2.75%, EURIBOR + 2.25%			714,538		559,524			545,880		312,437
Lender 7 Repo 1	Sep 2021	Sep 2023	LIBOR + 1.50% to 2.25%			123,071		250,000			99,064		71,720
Lender 10 Repo 1	May 2021	May 2023	LIBOR + 1.50% to 2.75%			200,455		164,840			160,480		160,480
Lender 11 Repo 1	Feb 2021	N/A	LIBOR + 2.10%			—		400,000			—		—
Lender 11 Repo 2	Sep 2019	Sep 2023	LIBOR + 2.00% to 2.50%			354,912		500,000			220,690		270,690
Lender 12 Repo 1	Jun 2021	Jun 2024	LIBOR + 2.10% to 2.45%			233,971		250,000			176,250		43,500
Lender 13 Repo 1	(d)	(d)	LIBOR + 1.50%			137,420		200,000			106,124		14,824
Lender 7 Secured Financing	Feb 2021	Feb 2023	LIBOR + 2.25%	(e)		—		650,000	(f)		—		—
Lender 8 Secured Financing	Aug 2019	N/A	LIBOR + 4.00%			—		—			—		—
Conduit Repo 2	Nov 2019	Nov 2020	LIBOR + 2.25%			116,967		200,000			91,280		35,034
Conduit Repo 3	Feb 2020	Feb 2021	LIBOR + 2.10%			26,158		150,000			18,884		—
MBS Repo 1	(g)	(g)	N/A			—		—			—		—
MBS Repo 2	Dec 2020	N/A	LIBOR + 1.55% to 1.75%			222,303		159,202			159,202		159,202
MBS Repo 3	(h)	(h)	LIBOR + 1.30% to 1.85%			714,884		428,414			428,414		427,942
MBS Repo 4	(i)	N/A	LIBOR + 1.25%			151,613		100,000			60,000		13,824
MBS Repo 5	Dec 2028	Jun 2029	4.22%			57,618		150,000			55,389		55,437
Investing and Servicing Segment Property Mortgages	May 2020 to Jun 2026	N/A	Various			264,146		242,499			223,465		219,237
Ireland Mortgage	Oct 2025	N/A	1.93%			448,324		354,875			354,875		362,854
Woodstar I Mortgages	Nov 2025 to Oct 2026	N/A	3.72% to 3.97%			343,540		276,748			276,748		276,748
Woodstar I Government Financing	Mar 2026 to Jun 2049	N/A	1.00% to 5.00%			197,385		130,607			130,607		131,179
Woodstar II Mortgages	Jan 2028 to Apr 2028	N/A	3.81% to 3.85%			526,736		417,669			417,669		417,669
Woodstar II Government Financing	Jun 2030 to Aug 2052	N/A	1.00% to 3.19%			38,680		25,229			25,229		25,311
Medical Office Mortgages	Dec 2021	Dec 2023	LIBOR + 2.50%			672,442		524,499			492,828		492,828
Master Lease Mortgages	Oct 2027	N/A	4.38%			330,998		194,900			194,900		194,900
Infrastructure Acquisition Facility	Sep 2021	Sep 2022	Various	(j)		1,455,572		1,528,327			1,175,677		1,551,148
Infrastructure Repo	Feb 2020	Feb 2021	LIBOR + 1.75%			307,636		500,000			257,318		—
Term Loan A	Dec 2020	Dec 2021	LIBOR + 2.25%	(e)		931,519		300,000			300,000		300,000
Revolving Secured Financing	Dec 2020	Dec 2021	LIBOR + 2.25%	(e)		—		100,000			—		—
FHLB	Feb 2021	N/A	Various			676,836		2,000,000			500,000		500,000
					$	13,141,790	$	15,257,333			9,305,605		8,761,624
Unamortized net discount											(911)		(963)
Unamortized deferred financing costs											(69,784)		(77,096)
										$	9,234,910	$	8,683,565

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

(b) Maturity date for borrowings collateralized by loans is September 2019 with an additional extension option to September 2021.  Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions and not to exceed September 2025.

(c) The initial maximum facility size of $600.0 million may be increased to $900.0 million at our options, subject to certain conditions.

(d) Maturity date for borrowings collateralized by loans is May 2020 with an additional extension option to August 2021.  Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions.

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(e) Subject to borrower’s option to choose alternative benchmark based rates pursuant to the terms of the credit agreement.

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

(g) Facility carries a rolling 11-month term which may reset monthly with the lender’s consent. This facility carries no maximum facility size. 

(h) Facility carries a rolling 12-month term which may reset monthly with the lender’s consent. Current maturity is March 2020. This facility carries no maximum facility size. Amounts reflect the outstanding balance as of March 31, 2019.

(i) The date that is 270 days after the buyer delivers notice to seller, subject to a maximum date of May 2020.

(j) Consists of an annual interest rate of the applicable currency benchmark index + 1.50%. The spread increases 25 bps in each of the second and third years of the facility which was entered into in September 2018.

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

In January 2019, we amended the Lender 6 Repo 2 facility to increase available borrowings from £330.9 million to £429.2 million to finance a loan held-for-investment.  In connection therewith, the current maturity was extended from October 2022 to January 2024.

In February 2019, we amended the Lender 11 Repo 1 facility to increase available borrowings from $200.0 million to $400.0 million to finance residential loans held-for-sale.  In connection therewith, the current maturity was extended from June 2019 to February 2021.

In February 2019, we amended the MBS Repo 4 facility to decrease available borrowings from $110.0 million to $100.0 million and decrease pricing from LIBOR + 1.70% to LIBOR + 1.25%.

In February 2019, we entered into a $500.0 million repurchase facility (“Infrastructure Repo”) to finance loans within the Infrastructure Lending Segment.  The facility carries a one-year initial term with a one-year extension option and an annual interest rate of LIBOR + 1.75%.

In March 2019, we amended the FHLB facility to increase available borrowings from $500.0 million to $2.0 billion, subject to scheduled reductions to available capacity from September 2020 through maturity in February 2021. 

Our secured financing agreements contain certain financial tests and covenants. As of March 31, 2019, we were in compliance with all such covenants.

The following table sets forth our five‑year principal repayments schedule for secured financings assuming no defaults and excluding loans transferred as secured borrowings. 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 amount reflected in each period includes principal repayments on our credit facilities that would be required if (i) we received the repayments that we expect to receive on the investments that have been pledged as collateral under the credit facilities, as applicable, and (ii) the credit facilities that are expected to have amounts outstanding at their current maturity dates are extended where extension options are available to us (amounts in thousands):

	Repurchase		Other Secured
	Agreements		Financing		Total
2019 (remainder of)	$	210,054	$	205,791	$	415,845
2020		970,169		540,453		1,510,622
2021		982,706		864,893		1,847,599
2022		817,007		800,876		1,617,883
2023		1,706,392		565,357		2,271,749
Thereafter		527,279		1,114,628		1,641,907
Total	$	5,213,607	$	4,091,998	$	9,305,605

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For the three months ended March 31, 2019 and 2018, approximately $8.7 million and $5.1 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations.

The following table sets forth our outstanding balance of repurchase agreements related to the following asset collateral classes as of March 31, 2019 and December 31, 2018 (amounts in thousands):

Class of Collateral	March 31, 2019		December 31, 2018
Loans held-for-investment	$	4,400,438	$	3,567,786
Loans held-for-sale		110,164		65,559
Investment securities		703,005		656,405
	$	5,213,607	$	4,289,750

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 73% 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 repurchase agreements containing margin call provisions for general capital markets activity, approximately 26% 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 agreements.

10. Unsecured Senior Notes

The following table is a summary of our unsecured senior notes outstanding as of March 31, 2019 and December 31, 2018 (dollars in thousands):

						Remaining
	Coupon		Effective		Maturity	Period of		Carrying Value at
	Rate		Rate (1)		Date	Amortization		March 31, 2019		December 31, 2018
2019 Convertible Notes	N/A		N/A		N/A	N/A		$	—	$	77,969
2021 Senior Notes (February)	3.63	%	3.89	%	2/1/2021	1.8	years		500,000		500,000
2021 Senior Notes (December)	5.00	%	5.32	%	12/15/2021	2.7	years		700,000		700,000
2023 Convertible Notes	4.38	%	4.86	%	4/1/2023	4.0	years		250,000		250,000
2025 Senior Notes	4.75	%	5.04	%	3/15/2025	6.0	years		500,000		500,000
Total principal amount									1,950,000		2,027,969
Unamortized discount—Convertible Notes									(4,367)		(4,644)
Unamortized discount—Senior Notes									(15,365)		(16,416)
Unamortized deferred financing costs									(7,473)		(8,078)
Carrying amount of debt components								$	1,922,795	$	1,998,831
Carrying amount of conversion option equity components recorded in additional paid-in capital for outstanding convertible notes								$	3,775	$	3,755

(1) Effective rate includes the effects of underwriter purchase discount and the adjustment for the conversion option on our convertible senior notes, the value of which reduced the initial liability and was recorded in additional paid‑in capital.

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Convertible Senior Notes

During the three months ended March 31, 2019, we settled the remaining $78.0 million principal amount of the 4.00% Convertible Senior Notes due 2019 (the “2019 Notes”) through the issuance of 3.6 million shares of common stock and cash payments of $12.0 million.

We recognized interest expense of $3.2 million and $11.3 million during the three months ended March 31, 2019 and 2018, respectively, from our unsecured convertible senior notes.

The following table details the conversion attributes of our Convertible Notes outstanding as of March 31, 2019 (amounts in thousands, except rates):

	March 31, 2019			Conversion Spread Value - Shares (3)
	Conversion	Conversion		For the Three Months Ended March 31,
	Rate (1)	Price (2)		2019	2018
2019 Notes	N/A		N/A	—	1,209
2023 Notes	38.5959	$	25.91	—	—
				—	1,209

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

(2) As of March 31, 2019 and 2018, the market price of the Company’s common stock was $22.35 and $20.95 per share, respectively.

(3) The conversion spread value represents the portion of the Convertible Notes that are “in-the-money”, representing the value that would be delivered to investors in shares upon an assumed conversion.

The if‑converted value of the 2023 Notes was less than their principal amount by $34.3 million at March 31, 2019 as the closing market priceof the Company’s common stock of $22.35 was less than the implicit conversion price of $25.91 per share.

Effective June 30, 2018, the Company no longer asserts its intent to fully settle the principal amount of the Convertible Notes in cash upon conversion. The if-converted value of the principal amount of the 2023 Notes was $215.7 million as of March 31, 2019.

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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.

Conduit 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. In certain instances, we retain an interest in the VIE and/or serve as special servicer for the VIE. In these circumstances, we generally consolidate the VIE into which the loans were sold. The following summarizes the fair value and par value of loans sold from our conduit platform, as well as the amount of sale proceeds used in part to repay the outstanding balance of the repurchase agreements associated with these loans for the three months ended March 31, 2019 and 2018 (amounts in thousands):

					Repayment of
					repurchase
	Face Amount		Proceeds		agreements
For the Three Months Ended March 31,
2019	$	179,411	$	186,841	$	136,133
2018		256,818		266,632		193,844

Securitization Financing Arrangements and Sales

Within the Commercial and Residential Lending Segment, we originate or acquire residential and 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. These loans may be sold directly or through a securitization. In certain instances, we retain an interest in the VIE and continue to act as servicer, special servicer or servicing administrator for the loan following its sale. In these circumstances, similar to the case of our Investing and Servicing Segment described above, we generally consolidate the VIE into which the loans were sold.  During the three months ended March 31, 2019, we consolidated the securitization VIE into which our residential loans were sold.  In this instance, we retained an interest in the VIE. The following table summarizes our loans sold and loans transferred as secured borrowings by the Commercial and Residential Lending Segment net of expenses (amounts in thousands):

											Loan Transfers
	Loan Transfers Accounted for as Sales									Accounted for as Secured
	Commercial				Residential					Borrowings
	Face Amount		Proceeds			Face Amount		Proceeds			Face Amount		Proceeds
For the Three Months Ended March 31,
2019	$	398,741	$	396,310		$	362,418	$	374,861		$	—	$	—
2018		146,400		145,273			—		—			—		—

During the three months ended March 31, 2019, a gain of $0.3 million was recognized within change in fair value of mortgage loans held-for-sale, net in our condensed consolidated statement of operations in connection with the residential mortgage loan securitization. During the three months ended March 31, 2019 and 2018, gains recognized by the Commercial and Residential Lending Segment on sales of commercial loans were $2.8 million and $0.3 million, respectively. 

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.

Infrastructure Loan Sales

During the three months ended March 31, 2019, the Infrastructure Lending Segment sold loans held-for-sale with an aggregate face amount of $180.3 million for proceeds of $172.7 million, recognizing gain on sales of $0.8 million.

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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, 2019 and December 31, 2018, the Company did not have any designated hedges. As of March 31, 2018, the Company had two interest rate swaps that had been designated as cash flow hedges of the interest rate risk associated with forecasted interest payments.  During the three months ended March 31, 2018, the impact of these cash flow hedges on our net income was not material and we did not recognize any hedge ineffectiveness in earnings.

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;

· 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.

The following table summarizes our non-designated derivatives as of March 31, 2019 (notional amounts in thousands):

Type of Derivative	Number of Contracts	Aggregate Notional Amount	Notional Currency	Maturity
Fx contracts – Sell Euros ("EUR")	56	281,609	EUR	April 2019 – October 2022
Fx contracts – Sell Pounds Sterling ("GBP")	142	320,633	GBP	April 2019 – January 2022
Fx contracts – Sell Canadian dollar ("CAD")	15	8,597	CAD	April 2019 – October 2022
Fx contracts – Sell Australian dollar ("AUD")	3	7,521	AUD	April  2019 – October 2019
Interest rate swaps – Paying fixed rates	30	1,132,992	USD	April 2019 – April 2029
Interest rate swaps – Receiving fixed rates	2	970,000	USD	January 2021 – March 2025
Interest rate caps	8	109,584	USD	January 2020 – December 2021
Credit index instruments	4	39,000	USD	November 2054 – August 2061
Interest rate swap guarantees	9	658,493	USD	December 2020 – June 2025
Interest rate swap guarantees	1	11,091	GBP	December 2024
Interest rate swap guarantees	1	91,374	CAD	June 2045
Total	271

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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, 2019 and December 31, 2018 (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,
	2019		2018		2019		2018
Derivatives not designated as hedging instruments:
Interest rate contracts	$	21,412	$	30,791	$	6,973	$	14,457
Interest rate swap guarantees		—		—		577		396
Foreign exchange contracts		25,978		21,346		2,613		562
Credit index instruments		20		554		—		—
Total derivatives not designated as hedging instruments		47,410		52,691		10,163		15,415
Total derivatives	$	47,410	$	52,691	$	10,163	$	15,415

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

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

The tables below present the effect of our derivative financial instruments on the condensed consolidated statements of operations and of comprehensive income for the three months ended March 31, 2019 and 2018 (amounts in thousands):

			Gain (Loss)
	Gain (Loss)		Reclassified		Gain (Loss)
	Recognized		from AOCI		Recognized
Derivatives Designated as Hedging Instruments	in OCI		into Income		in Income		Location of Gain (Loss)
For the Three Months Ended March 31,	(effective portion)		(effective portion)		(ineffective portion)		Recognized in Income
2019	$	—	$	—	$	—	Interest expense
2018	$	9	$	4	$	—	Interest expense

		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	2019		2018
Interest rate contracts	Loss on derivative financial instruments	$	(3,757)	$	6,237
Interest rate swap guarantees	Loss on derivative financial instruments		(182)		—
Foreign exchange contracts	Loss on derivative financial instruments		2,444		(23,143)
Credit index instruments	Loss on derivative financial instruments		(712)		47
		$	(2,207)	$	(16,859)

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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, 2019
Derivative assets	$	47,410	$	—	$	47,410	$	4,449	$	—	$	42,961
Derivative liabilities	$	10,163	$	—	$	10,163	$	4,449	$	3,285	$	2,429
Repurchase agreements		5,213,607		—		5,213,607		5,213,607		—		—
	$	5,223,770	$	—	$	5,223,770	$	5,218,056	$	3,285	$	2,429
As of December 31, 2018
Derivative assets	$	52,691	$	—	$	52,691	$	1,408	$	—	$	51,283
Derivative liabilities	$	15,415	$	—	$	15,415	$	1,408	$	8,658	$	5,349
Repurchase agreements		4,289,750		—		4,289,750		4,289,750		—		—
	$	4,305,165	$	—	$	4,305,165	$	4,291,158	$	8,658	$	5,349

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, an allocable 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.

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We also hold controlling interests in non-securitization entities that are considered VIEs, most of which were established to facilitate the acquisition of certain properties.  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 net assets of $692.4 million and liabilities of $445.0 million as of March 31, 2019.  In total, our consolidated non-securitization VIEs had net assets of $799.1 million and liabilities of $531.2 million as of March 31, 2019.

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, 2019, four of our collateralized debt obligation (“CDO”) structures were in default or imminent default, which, pursuant to the underlying indentures, changes the rights of the variable interest holders. 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, 2019, none of these CDO structures were consolidated.

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, 2019, our maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $49.1 million on a fair value basis.

As of March 31, 2019, 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 $6.5 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 $88.6 million as of March 31, 2019, 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.

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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, 2019 and 2018, approximately $19.6 million and $17.5 million, respectively, was incurred for base management fees. As of March 31, 2019 and December 31, 2018, there were $19.6 million and $19.2 million, respectively, 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, 2019 and 2018, approximately $0.2 million and $9.6 million, respectively, was incurred for incentive fees. As of March 31, 2019, there were no unpaid incentive fees.  As of December 31, 2018, approximately $21.8 million of unpaid incentive fees were included in related-party payable in our condensed consolidated balance sheet.

Expense Reimbursement.  For the three months ended March 31, 2019 and 2018, approximately $2.2 million and $2.1 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, 2019 and December 31, 2018, approximately $4.4 million and $3.0 million, respectively, of unpaid reimbursable executive compensation and other expenses were 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, 2019 and 2018, we granted 114,216 and 189,813 RSAs, respectively, at grant date fair values of $2.6 million and $4.0 million, respectively. Expenses related to the vesting of awards to employees of affiliates of our Manager were $0.8 million and $0.5 million during the three months ended March 31, 2019 and 2018, 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.

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 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 May 2015, we granted 675,000 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 $3.2 million and $2.9 million within management fees in our condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018, respectively. Refer to Note 16 for further discussion of these grants.

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Investments in Loans 

In February 2019, the Company acquired a $60.0 million first priority infrastructure term loan participation which bears interest at LIBOR plus 3.75%.  The loan is secured by two domestic natural gas power plants.  An affiliate of our Manager, Starwood Energy Group, is the loan sponsor.

In March 2019, the Company originated a $22.5 million loan to refinance the debt of a commercial real estate partnership in which we hold a 50% equity interest. 

During the three months ended March 31, 2019, the Company acquired $71.9 million of loans held-for-sale from a residential mortgage originator in which it holds an equity interest. Refer to Note 7 for further discussion.

Other Related-Party Arrangements

In March 2019, we engaged Highmark Residential (“Highmark”) (formerly known as Milestone Management), an affiliate of our Manager, to provide property management services for nine additional properties within our Woodstar I Portfolio, bringing the total number of our properties managed by Highmark to 19.  Fees paid to Highmark are calculated as a percentage of gross receipts and are at market terms.  During the three months ended March 31, 2019, property management fees paid to Highmark were $0.3 million.

Acquisitions from Consolidated CMBS Trusts

Our Investing and Servicing Segment acquires interests in properties for its REIS Equity Portfolio from CMBS trusts, some of which are consolidated as VIEs on our balance sheet.  Acquisitions from consolidated VIEs are reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows.  No real estate assets were acquired from consolidated CMBS trusts during the three months ended March 31, 2019. During the three months ended March 31, 2018, we acquired $27.7 million of net real estate assets from consolidated CMBS trusts for a gross purchase price of $28.0 million.

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

16. Stockholders’ Equity and Non-Controlling Interests

During the three months ended March 31, 2019, our board of directors declared the following dividends:

Declaration Date	Record Date	Ex-Dividend Date	Payment Date	Amount		Frequency
2/28/19	3/29/19	3/28/19	4/15/19	$	0.48	Quarterly

During the three months ended March 31, 2019, we issued 3.6 million shares of common stock in connection with the settlement of $78.0 million of our 2019 Notes.  Refer to Note 10 for further discussion.

During the three months ended March 31, 2019 and 2018, there were no shares issued under our At-The-Market Equity Offering Sales Agreement.  During the three months ended March 31, 2019 and 2018, shares issued under the Starwood Property Trust, Inc. Dividend Reinvestment and Direct Stock Purchase Plan (the “DRIP Plan”) were not material.

In February 2017, our board of directors extended the term of our $500.0 million common stock and Convertible Note repurchase program through January 2019.  Refer to Note 17 to the consolidated financial statements included in our Form 10-K for further information regarding the repurchase program. There were no share or Convertible Notes repurchases under the repurchase program during the three months ended March 31, 2019.  During the three months ended March 31, 2018, we repurchased 573,255 shares of common stock for $12.1 million and no Convertible Notes under our repurchase program.

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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, 2019 and 2018 (dollar amounts in thousands):

Grant Date	Type	Amount Granted	Grant Date Fair Value		Vesting Period
April 2018	RSU	775,000	$	16,329	3 years
March 2017	RSU	1,000,000		22,240	3 years
May 2015	RSU	675,000		16,511	3 years

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, 2019	1,436,445	997,920	2,434,365	$	21.52
Granted	383,190	—	383,190		22.58
Vested	(402,541)	(147,916)	(550,457)		21.41
Forfeited	(4,419)	—	(4,419)		22.67
Balance as of March 31, 2019	1,412,675	850,004	2,262,679		21.72

As of March 31, 2019, there were 8.8 million shares of common stock available for future grants under the 2017 Manager Equity Plan and the 2017 Equity Plan.

Non-Controlling Interests in Consolidated Subsidiaries

In connection with our Woodstar II Portfolio acquisitions, we issued 11.9 million Class A Units in SPT Dolphin and have an obligation to issue an additional 0.2 million Class A Units if certain contingent events occur.  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.  In consolidation, the issued Class A Units are reflected as non-controlling interests in consolidated subsidiaries on our condensed consolidated balance sheets.

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 the three months ended March 31, 2019 and 2018, we recognized net income attributable to non-controlling interests of $5.7 million and $2.5 million, respectively, associated with these Class A Units.

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17. Earnings per Share

The following table provides a reconciliation of net income 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,
	2019		2018
Basic Earnings
Income attributable to STWD common stockholders	$	70,383	$	99,932
Less: Income attributable to participating shares not already deducted as non-controlling interests		(824)		(721)
Basic earnings	$	69,559	$	99,211
Diluted Earnings
Income attributable to STWD common stockholders	$	70,383	$	99,932
Less: Income attributable to participating shares not already deducted as non-controlling interests		(824)		(721)
Add: Interest expense on Convertible Notes (1)		*		—
Add: Loss on extinguishment of Convertible Notes (1)		*		—
Diluted earnings	$	69,559	$	99,211
Number of Shares:
Basic — Average shares outstanding		277,544		260,664
Effect of dilutive securities — Convertible Notes (1)		*		1,209
Effect of dilutive securities — Contingently issuable shares		—		229
Effect of dilutive securities — Unvested non-participating shares		154		22
Diluted — Average shares outstanding		277,698		262,124
Earnings Per Share Attributable to STWD Common Stockholders:
Basic	$	0.25	$	0.38
Diluted	$	0.25	$	0.38

(1) Prior to June 30, 2018, the Company had asserted its intent and ability to settle the principal amount of the Convertible Notes in cash.  Accordingly, under GAAP, the dilutive effect to EPS for the prior year period was determined using the treasury stock method by dividing only the “conversion spread value” of the “in-the-money” Convertible Notes by the Company’s average share price and including the resulting share amount in the diluted EPS denominator.  The conversion value of the principal amount of the Convertible Notes was not included.  Effective June 30, 2018, the Company no longer asserts its intent to fully settle the principal amount of the Convertible Notes in cash upon conversion.  Accordingly, under GAAP, the dilutive effect to EPS for the current year period is determined using the “if-converted” method whereby interest expense or any loss on extinguishment of our Convertible Notes is added back to the diluted EPS numerator and the full number of potential shares contingently issuable upon their conversion is included in the diluted EPS denominator, if dilutive.Refer to Note 10 for further discussion.

*Our Convertible Notes were not dilutive for the three months ended March 31, 2019.

As of March 31, 2019 and 2018, participating shares of 13.6 million and 11.3 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 March 31, 2019 and 2018 included 11.9 million and 9.8 million potential shares, respectively, 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
	Effective Portion of		(Loss) on		Foreign
	Cumulative Loss on		Available-for-		Currency
	Cash Flow Hedges		Sale Securities		Translation		Total
Three Months Ended March 31, 2019
Balance at January 1, 2019	$	—	$	53,515	$	5,145	$	58,660
OCI before reclassifications		—		(387)		(2,475)		(2,862)
Amounts reclassified from AOCI		—		—		—		—
Net period OCI		—		(387)		(2,475)		(2,862)
Balance at March 31, 2019	$	—	$	53,128	$	2,670	$	55,798
Three Months Ended March 31, 2018
Balance at January 1, 2018	$	25	$	57,889	$	12,010	$	69,924
OCI before reclassifications		9		1,209		4,218		5,436
Amounts reclassified from AOCI		(4)		(46)		—		(50)
Net period OCI		5		1,163		4,218		5,386
Balance at March 31, 2018	$	30	$	59,052	$	16,228	$	75,310

The reclassifications out of AOCI impacted the condensed consolidated statements of operations for the three months ended March 31, 2019 and 2018 as follows (amounts in thousands):

	Amounts Reclassified from
	AOCI during the Three Months				Affected Line Item
	Ended March 31,				in the Statements
Details about AOCI Components	2019		2018		of Operations
Gain (loss) on cash flow hedges:
Interest rate contracts	$	—	$	4	Interest expense
Unrealized gains (losses) on available-for-sale securities:
Interest realized upon collection		—		46	Interest income from investment securities
Total reclassifications for the period	$	—	$	50

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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.  Refer to Note 20 to the consolidated financial statements included in our Form 10-K for further discussion of our valuation process.

We determine the fair value of our assets and liabilities measured at fair value on a recurring and nonrecurring basis in accordance with the methodology described in our Form 10-K.

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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, 2019 and December 31, 2018 (amounts in thousands):

	March 31, 2019
	Total		Level I		Level II		Level III
Financial Assets:
Loans held-for-sale, fair value option	$	841,687	$	—	$	—	$	841,687
RMBS		204,835		—		—		204,835
CMBS		49,105		—		10,770		38,335
Equity security		12,506		12,506		—		—
Domestic servicing rights		19,790		—		—		19,790
Derivative assets		47,410		—		47,410		—
VIE assets		56,974,864		—		—		56,974,864
Total	$	58,150,197	$	12,506	$	58,180	$	58,079,511
Financial Liabilities:
Derivative liabilities	$	10,163	$	—	$	10,163	$	—
VIE liabilities		55,727,776		—		53,681,217		2,046,559
Total	$	55,737,939	$	—	$	53,691,380	$	2,046,559

	December 31, 2018
	Total		Level I		Level II		Level III
Financial Assets:
Loans held-for-sale, fair value option	$	671,282	$	—	$	—	$	671,282
RMBS		209,079		—		—		209,079
CMBS		41,347		—		16,119		25,228
Equity security		11,893		11,893		—		—
Domestic servicing rights		20,557		—		—		20,557
Derivative assets		52,691		—		52,691		—
VIE assets		53,446,364		—		—		53,446,364
Total	$	54,453,213	$	11,893	$	68,810	$	54,372,510
Financial Liabilities:
Derivative liabilities	$	15,415	$	—	$	15,415	$	—
VIE liabilities		52,195,042		—		50,753,596		1,441,446
Total	$	52,210,457	$	—	$	50,769,011	$	1,441,446

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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, 2019 and 2018 (amounts in thousands):

							Domestic
	Loans						Servicing				VIE
Three Months Ended March 31, 2019	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
January 1, 2019 balance	$	671,282	$	209,079	$	25,228	$	20,557	$	53,446,364	$	(1,441,446)	$	52,931,064
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		11,266		—		(295)		(767)		294,345		33,957		338,506
Net accretion		—		2,503		—		—		—		—		2,503
Included in OCI		—		(387)		—		—		—		—		(387)
Purchases / Originations		740,296		—		—		—		—		—		740,296
Sales		(561,702)		—		(3,228)		—		—		—		(564,930)
Issuances		—		—		—		—		—		(33,678)		(33,678)
Cash repayments / receipts		(19,455)		(6,360)		(188)		—		—		(389)		(26,392)
Transfers into Level III		—		—		5,350		—		—		(670,742)		(665,392)
Transfers out of Level III		—		—		—		—		—		136,592		136,592
Consolidation of VIEs		—		—		—		—		3,280,065		(103,309)		3,176,756
Deconsolidation of VIEs		—		—		11,468		—		(45,910)		32,456		(1,986)
March 31, 2019 balance	$	841,687	$	204,835	$	38,335	$	19,790	$	56,974,864	$	(2,046,559)	$	56,032,952
Amount of total gains (losses) included in earnings attributable to assets still held at March 31, 2019	$	3,169	$	2,503	$	(567)	$	(767)	$	294,345	$	33,957	$	332,640

							Domestic
	Loans						Servicing				VIE
Three Months Ended March 31, 2018	Held‑for‑sale		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
January 1, 2018 balance	$	745,743	$	247,021	$	24,191	$	30,759	$	51,045,874	$	(2,188,937)	$	49,904,651
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		7,800		—		555		(5,814)		(2,027,208)		237,090		(1,787,577)
Net accretion		—		2,819		—		—		—		—		2,819
Included in OCI		—		1,163		—		—		—		—		1,163
Purchases / Originations		277,259		—		—		—		—		—		277,259
Sales		(266,632)		—		—		—		—		—		(266,632)
Issuances		—		—		—		—		—		(7,948)		(7,948)
Cash repayments / receipts		(40,437)		(10,150)		(777)		—		—		(12,633)		(63,997)
Transfers into Level III		—		—		—		—		—		(530,888)		(530,888)
Transfers out of Level III		—		—		—		—		—		208,258		208,258
Consolidation of VIEs		—		—		—		—		1,089,881		—		1,089,881
Deconsolidation of VIEs		—		—		—		—		(875,240)		89,324		(785,916)
March 31, 2018 balance	$	723,733	$	240,853	$	23,969	$	24,945	$	49,233,307	$	(2,205,734)	$	48,041,073
Amount of total (losses) gains included in earnings attributable to assets still held at March 31, 2018	$	(640)	$	2,772	$	555	$	(5,814)	$	(2,027,208)	$	237,090	$	(1,793,245)

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, all of which are classified in Level III of the fair value hierarchy, of our financial instruments not carried at fair value on the condensed consolidated balance sheets (amounts in thousands):

	March 31, 2019				December 31, 2018
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets not carried at fair value:
Loans held-for-investment, loans held-for-sale and loans transferred as secured borrowings	$	9,267,528	$	9,315,914	$	9,122,972	$	9,178,709
HTM debt securities		643,787		643,464		644,149		643,948
Financial liabilities not carried at fair value:
Secured financing agreements and secured borrowings on transferred loans	$	9,234,910	$	9,139,056	$	8,757,804	$	8,662,548
Unsecured senior notes		1,922,795		1,962,208		1,998,831		1,945,160

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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 as of (1)
	March 31, 2019		Technique	Input	March 31, 2019	December 31, 2018
Loans held-for-sale, fair value option	$	841,687	Discounted cash flow	Yield (b)	4.2% - 6.0%	4.6% - 6.1%
				Duration (c)	2.4 - 13.6 years	2.5 - 14.4 years
RMBS		204,835	Discounted cash flow	Constant prepayment rate (a)	2.0% - 22.2%	3.2% - 25.2%
				Constant default rate (b)	1.0% - 4.6%	1.1% - 5.5%
				Loss severity (b)	0% - 76% (e)	0% - 73% (e)
				Delinquency rate (c)	6% - 31%	4% - 31%
				Servicer advances (a)	21% - 85%	21% - 83%
				Annual coupon deterioration (b)	0% - 1.8%	0% - 1.4%
				Putback amount per projected total collateral loss (d)	0% - 7%	0% - 7%
CMBS		38,335	Discounted cash flow	Yield (b)	0% - 166.3%	0% - 473.5%
				Duration (c)	0 - 9.7 years	0 - 9.7 years
Domestic servicing rights		19,790	Discounted cash flow	Debt yield (a)	7.75%	7.75%
				Discount rate (b)	15%	15%
				Control migration (b)	0% - 80%	0% - 80%
VIE assets		56,974,864	Discounted cash flow	Yield (b)	0% - 401.4%	0% - 290.9%
				Duration (c)	0 - 13.4 years	0 - 20.4 years
VIE liabilities		(2,046,559)	Discounted cash flow	Yield (b)	0% - 401.4%	0% - 290.9%
				Duration (c)	0 - 13.4 years	0 - 13.7 years

(1) The ranges of significant unobservable inputs are represented in percentages and years.

Sensitivity of the Fair Value to Changes in the Unobservable Inputs

(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) Any delay in the putback recovery date leads to a decrease in fair value for the majority of securities in our RMBS portfolio.

(e) 41% and 55% of the portfolio falls within a range of 45%-80% as of March 31, 2019 and December 31, 2018, respectively.

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 commercial mortgage loans, and investing in entities which engage in real estate related operations. As of March 31, 2019 and December 31, 2018, approximately $980.5 million and $553.5 million, 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.

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The following table is a reconciliation of our U.S. federal income tax determined using our statutory federal tax rate to our reported income tax provision for the three months ended March 31, 2019 and 2018 (dollars in thousands):

	For the Three Months Ended March 31,
	2019				2018
Federal statutory tax rate	$	16,137	21.0	%	$	22,606	21.0	%
REIT and other non-taxable income		(16,160)	(21.0)	%		(20,343)	(18.9)	%
State income taxes		(6)	—	%		593	0.6	%
Federal benefit of state tax deduction		1	—	%		(124)	(0.1)	%
Other		362	0.4	%		124	0.1	%
Effective tax rate	$	334	0.4	%	$	2,856	2.7	%

21. Commitments and Contingencies

As of March 31, 2019, our Commercial and Residential Lending Segment had future commercial loan funding commitments totaling $1.9 billion, of which we expect to fund $1.7 billion. These future funding commitments primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions. Additionally, as of March 31, 2019, our Commercial and Residential Lending Segment had nooutstanding residential mortgage loan purchase commitments under an agreement to purchase up to $600.0 million of residential mortgage loans that meet our investment criteria from a third party residential mortgage originator. 

As of March 31, 2019, our Infrastructure Lending Segment had future infrastructure loan funding commitments totaling $341.8 million, including $221.0 million under revolvers and letters of credit (“LCs”), and $120.8 million under delayed draw term loans.  As of March 31, 2019, $20.9 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, 2019, we had 11 outstanding guarantees on interest rate swaps maturing between December 2020 and June 2045. 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.

49

Lease Commitment Disclosures

Our lease commitments consist of corporate office leases and ground leases for investment properties, all of which are classified as operating leases.  We sublease some of the space within our corporate offices to third parties.  Our lease costs and sublease income were as follows (in thousands):

	For the Three Months Ended
	March 31,
	2019		2018
Operating lease costs	$	1,238	$	1,253
Short-term lease costs		24		30
Sublease income		(399)		(439)
Total lease cost	$	863	$	844

Information concerning our operating lease liabilities, which are classified within accounts payable, accrued expenses and other liabilities in our condensed consolidated balance sheet as of March 31, 2019, is as follows (dollars in thousands):

	For the Three Months Ended
	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities—operating	$	1,291

	March 31, 2019
Weighted-average remaining lease term	2.25	years
Weighted-average discount rate	5.0	%

Future maturity of operating lease liabilities:
2019 (remainder of)	$	3,924
2020		5,292
2021		2,216
2022		—
2023		—
Thereafter		—
Total		11,432
Less interest component		(621)
Operating lease liability	$	10,811

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.

50

The table below presents our results of operations for the three months ended March 31, 2019 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	$	154,595	$	26,915	$	—	$	1,906	$	—	$	183,416	$	—	$	183,416
Interest income from investment securities		19,908		885		—		24,293		—		45,086		(27,454)		17,632
Servicing fees		123		—		—		27,243		—		27,366		(2,933)		24,433
Rental income		—		—		70,521		13,312		—		83,833		—		83,833
Other revenues		204		686		78		196		20		1,184		(18)		1,166
Total revenues		174,830		28,486		70,599		66,950		20		340,885		(30,405)		310,480
Costs and expenses:
Management fees		411		—		—		18		22,988		23,417		49		23,466
Interest expense		61,604		18,577		18,990		7,746		27,915		134,832		(160)		134,672
General and administrative		6,768		4,479		1,518		18,851		3,226		34,842		88		34,930
Acquisition and investment pursuit costs		249		16		—		77		—		342		—		342
Costs of rental operations		19		—		22,937		6,695		—		29,651		—		29,651
Depreciation and amortization		71		—		23,896		5,287		—		29,254		—		29,254
Loan loss provision, net		(11)		774		—		—		—		763		—		763
Other expense		77		—		134		—		—		211		—		211
Total costs and expenses		69,188		23,846		67,475		38,674		54,129		253,312		(23)		253,289
Other income (loss):
Change in net assets related to consolidated VIEs		—		—		—		—		—		—		47,836		47,836
Change in fair value of servicing rights		—		—		—		(515)		—		(515)		(252)		(767)
Change in fair value of investment securities, net		(1,694)		—		—		18,140		—		16,446		(16,384)		62
Change in fair value of mortgage loans held-for-sale, net		1,386		—		—		9,880		—		11,266		—		11,266
Earnings (loss) from unconsolidated entities		577		—		(43,805)		594		—		(42,634)		(566)		(43,200)
Gain on sale of investments and other assets, net		2,755		790		—		940		—		4,485		—		4,485
(Loss) gain on derivative financial instruments, net		(9,297)		(395)		1,290		(3,432)		9,627		(2,207)		—		(2,207)
Foreign currency gain (loss), net		5,239		300		9		(1)		—		5,547		—		5,547
(Loss) gain on extinguishment of debt		—		(3,304)		—		—		6		(3,298)		—		(3,298)
Other loss, net		—		—		—		—		(73)		(73)		—		(73)
Total other income (loss)		(1,034)		(2,609)		(42,506)		25,606		9,560		(10,983)		30,634		19,651
Income (loss) before income taxes		104,608		2,031		(39,382)		53,882		(44,549)		76,590		252		76,842
Income tax benefit (provision)		248		85		(258)		(409)		—		(334)		—		(334)
Net income (loss)		104,856		2,116		(39,640)		53,473		(44,549)		76,256		252		76,508
Net (income) loss attributable to non-controlling interests		(371)		—		(5,717)		215		—		(5,873)		(252)		(6,125)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	104,485	$	2,116	$	(45,357)	$	53,688	$	(44,549)	$	70,383	$	—	$	70,383

51

The table below presents our results of operations for the three months ended March 31, 2018 by business segment (amounts in thousands):

	Commercial and
	Residential				Investing
	Lending		Property		and Servicing						Securitization
	Segment		Segment		Segment		Corporate		Subtotal		VIEs		Total
Revenues:
Interest income from loans	$	134,972	$	—	$	2,648	$	—	$	137,620	$	—	$	137,620
Interest income from investment securities		14,439		—		34,399		—		48,838		(33,569)		15,269
Servicing fees		165		—		33,434		—		33,599		(7,532)		26,067
Rental income		—		66,710		14,400		—		81,110		—		81,110
Other revenues		194		101		228		52		575		(54)		521
Total revenues		149,770		66,811		85,109		52		301,742		(41,155)		260,587
Costs and expenses:
Management fees		480		—		18		30,051		30,549		93		30,642
Interest expense		32,021		16,534		5,095		33,803		87,453		(270)		87,183
General and administrative		6,695		1,859		21,020		2,482		32,056		86		32,142
Acquisition and investment pursuit costs		220		6		151		—		377		—		377
Costs of rental operations		—		23,488		6,205		—		29,693		—		29,693
Depreciation and amortization		17		26,469		5,258		—		31,744		—		31,744
Loan loss provision, net		1,538		—		—		—		1,538		—		1,538
Other expense		77		—		27		—		104		—		104
Total costs and expenses		41,048		68,356		37,774		66,336		213,514		(91)		213,423
Other income (loss):
Change in net assets related to consolidated VIEs		—		—		—		—		—		52,653		52,653
Change in fair value of servicing rights		—		—		(9,168)		—		(9,168)		3,354		(5,814)
Change in fair value of investment securities, net		(704)		—		13,979		—		13,275		(13,424)		(149)
Change in fair value of mortgage loans held-for-sale, net		(1,692)		—		9,492		—		7,800		—		7,800
Earnings (loss) from unconsolidated entities		1,444		(3,515)		1,596		—		(475)		(987)		(1,462)
Gain on sale of investments and other assets, net		279		3,942		6,439		—		10,660		—		10,660
(Loss) gain on derivative financial instruments, net		(10,818)		1,919		5,042		(13,002)		(16,859)		—		(16,859)
Foreign currency gain (loss), net		13,550		2		(3)		—		13,549		—		13,549
Other income, net		43		17		48		—		108		—		108
Total other income (loss)		2,102		2,365		27,425		(13,002)		18,890		41,596		60,486
Income (loss) before income taxes		110,824		820		74,760		(79,286)		107,118		532		107,650
Income tax provision		(947)		(1,261)		(648)		—		(2,856)		—		(2,856)
Net income (loss)		109,877		(441)		74,112		(79,286)		104,262		532		104,794
Net income attributable to non-controlling interests		(361)		(2,453)		(1,516)		—		(4,330)		(532)		(4,862)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	109,516	$	(2,894)	$	72,596	$	(79,286)	$	99,932	$	—	$	99,932

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The table below presents our condensed consolidated balance sheet as of March 31, 2019 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	$	13,206	$	58	$	36,107	$	47,225	$	295,463	$	392,059	$	20,211	$	412,270
Restricted cash		32,156		68,057		19,671		13,295		535		133,714		—		133,714
Loans held-for-investment, net		7,513,130		1,450,097		—		1,498		—		8,964,725		—		8,964,725
Loans held-for-sale		688,435		302,803		—		153,252		—		1,144,490		—		1,144,490
Investment securities		1,061,011		59,610		—		992,739		—		2,113,360		(1,203,127)		910,233
Properties, net		8,937		—		2,487,285		273,152		—		2,769,374		—		2,769,374
Intangible assets		—		—		85,356		75,806		—		161,162		(24,327)		136,835
Investment in unconsolidated entities		35,351		—		70,557		54,251		—		160,159		(35,799)		124,360
Goodwill		—		119,409		—		140,437		—		259,846		—		259,846
Derivative assets		14,247		1,029		32,093		41		—		47,410		—		47,410
Accrued interest receivable		50,269		7,135		392		296		3,079		61,171		(857)		60,314
Other assets		11,259		72,720		65,898		75,348		1,944		227,169		(16)		227,153
VIE assets, at fair value		—		—		—		—		—		—		56,974,864		56,974,864
Total Assets	$	9,428,001	$	2,080,918	$	2,797,359	$	1,827,340	$	301,021	$	16,434,639	$	55,730,949	$	72,165,588
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	29,302	$	6,788	$	63,644	$	71,675	$	21,628	$	193,037	$	106	$	193,143
Related-party payable		1		—		—		9		23,935		23,945		—		23,945
Dividends payable		—		—		—		—		135,889		135,889		—		135,889
Derivative liabilities		4,608		772		—		2,739		2,044		10,163		—		10,163
Secured financing agreements, net		5,010,958		1,410,124		1,876,514		653,078		298,186		9,248,860		(13,950)		9,234,910
Unsecured senior notes, net		—		—		—		—		1,922,795		1,922,795		—		1,922,795
VIE liabilities, at fair value		—		—		—		—		—		—		55,727,776		55,727,776
Total Liabilities		5,044,869		1,417,684		1,940,158		727,501		2,404,477		11,534,689		55,713,932		67,248,621
Equity:
Starwood Property Trust, Inc. Stockholders’ Equity:
Common stock		—		—		—		—		2,855		2,855		—		2,855
Additional paid-in capital		1,199,646		663,692		631,392		118,760		2,466,683		5,080,173		—		5,080,173
Treasury stock		—		—		—		—		(104,194)		(104,194)		—		(104,194)
Accumulated other comprehensive income (loss)		53,128		—		2,734		(64)		—		55,798		—		55,798
Retained earnings (accumulated deficit)		3,120,166		(458)		(31,787)		967,326		(4,468,800)		(413,553)		—		(413,553)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,372,940		663,234		602,339		1,086,022		(2,103,456)		4,621,079		—		4,621,079
Non-controlling interests in consolidated subsidiaries		10,192		—		254,862		13,817		—		278,871		17,017		295,888
Total Equity		4,383,132		663,234		857,201		1,099,839		(2,103,456)		4,899,950		17,017		4,916,967
Total Liabilities and Equity	$	9,428,001	$	2,080,918	$	2,797,359	$	1,827,340	$	301,021	$	16,434,639	$	55,730,949	$	72,165,588

53

The table below presents our condensed consolidated balance sheet as of December 31, 2018 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	$	14,385	13	$	27,408	$	31,449	$	164,015	$	237,270	$	2,554	$	239,824
Restricted cash		28,324	175,659		25,144		11,679		7,235		248,041		—		248,041
Loans held-for-investment, net		7,072,220	1,456,779		—		3,357		—		8,532,356		—		8,532,356
Loans held-for-sale		670,155	469,775		—		47,622		—		1,187,552		—		1,187,552
Loans transferred as secured borrowings		74,346	—		—		—		—		74,346		—		74,346
Investment securities		1,050,920	60,768		—		998,820		—		2,110,508		(1,204,040)		906,468
Properties, net		—	—		2,512,847		272,043		—		2,784,890		—		2,784,890
Intangible assets		—	—		90,889		78,219		—		169,108		(24,075)		145,033
Investment in unconsolidated entities		35,274	—		114,362		44,129		—		193,765		(22,000)		171,765
Goodwill		—	119,409		—		140,437		—		259,846		—		259,846
Derivative assets		18,174	1,066		32,733		718		—		52,691		—		52,691
Accrued interest receivable		39,862	6,982		359		616		13,177		60,996		(641)		60,355
Other assets		13,958	20,472		67,098		49,363		2,057		152,948		(26)		152,922
VIE assets, at fair value		—	—		—		—		—		—		53,446,364		53,446,364
Total Assets	$	9,017,618	2,310,923	$	2,870,840	$	1,678,452	$	186,484	$	16,064,317	$	52,198,136	$	68,262,453
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	26,508	26,476	$	67,415	$	75,655	$	21,467	$	217,521	$	142	$	217,663
Related-party payable		—	—		—		53		43,990		44,043		—		44,043
Dividends payable		—	—		—		—		133,466		133,466		—		133,466
Derivative liabilities		1,290	477		37		1,423		12,188		15,415		—		15,415
Secured financing agreements, net		4,405,599	1,524,551		1,884,187		585,258		297,920		8,697,515		(13,950)		8,683,565
Unsecured senior notes, net		—	—		—		—		1,998,831		1,998,831		—		1,998,831
Secured borrowings on transferred loans		74,239	—		—		—		—		74,239		—		74,239
VIE liabilities, at fair value		—	—		—		—		—		—		52,195,042		52,195,042
Total Liabilities		4,507,636	1,551,504		1,951,639		662,389		2,507,862		11,181,030		52,181,234		63,362,264
Equity:
Starwood Property Trust, Inc. Stockholders’ Equity:
Common stock		—	—		—		—		2,808		2,808		—		2,808
Additional paid-in capital		1,430,503	761,992		645,561		87,779		2,069,321		4,995,156		—		4,995,156
Treasury stock		—	—		—		—		(104,194)		(104,194)		—		(104,194)
Accumulated other comprehensive income (loss)		53,516	—		5,208		(64)		—		58,660		—		58,660
Retained earnings (accumulated deficit)		3,015,676	(2,573)		13,570		913,642		(4,289,313)		(348,998)		—		(348,998)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,499,695	759,419		664,339		1,001,357		(2,321,378)		4,603,432		—		4,603,432
Non-controlling interests in consolidated subsidiaries		10,287	—		254,862		14,706		—		279,855		16,902		296,757
Total Equity		4,509,982	759,419		919,201		1,016,063		(2,321,378)		4,883,287		16,902		4,900,189
Total Liabilities and Equity	$	9,017,618	2,310,923	$	2,870,840	$	1,678,452	$	186,484	$	16,064,317	$	52,198,136	$	68,262,453

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23. Subsequent Events

Our significant events subsequent to March 31, 2019 were as follows:

Dividend Declaration

On May 8, 2019, our board of directors declared a dividend of $0.48 per share for the second quarter of 2019, which is payable on July 15, 2019 to common stockholders of record as of June 28, 2019.

55

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, 2018 (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, 2019 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 and residential first mortgages, 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). 

· 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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Developments During the First Quarter of 2019

· The Commercial and Residential Lending Segment originated $1.0 billion of commercial loans during the quarter, including the following:

o $379.0 million first mortgage and mezzanine loan for the acquisition and redevelopment of two office buildings located in Manhattan, New York, of which the Company funded $236.0 million.

o ₤249.9 million first mortgage loan to the owner of the United Kingdom’s market leading convention and exhibition center business.  The loan is secured by five large conference facilities totaling over two million square feet and was fully funded.

o $145.0 million first mortgage and mezzanine loan for the acquisition of a newly constructed, full-service hotel located in New York, New York, which the Company fully funded.

o $97.2 million first mortgage and mezzanine loan for the refinancing of three Class A office buildings located in Herndon, Virginia, of which the Company funded $73.3 million.

· Funded $218.9 million of previously originated commercial loan commitments.

· Received gross proceeds of $655.8 million (net proceeds of $183.4 million) from sales, maturities and principal repayments on our commercial loans, of which $396.3 million related to loan sales.

· Acquired $237.5 million of infrastructure loans and funded $46.3 million of existing infrastructure loan commitments.

· Received proceeds of $172.7 million from sales of infrastructure loans and $285.2 million from repayments and maturities.

· Received proceeds of $352.0 million, including retained RMBS of $26.3 million, from the securitization of $340.2 million of residential mortgage loans.

· Originated commercial conduit loans of $282.8 million. Separately, received proceeds of $186.8 million from sales of previously originated commercial conduit loans.

· Obtained four new special servicing assignments for CMBS trusts with a total unpaid principal balance of $3.2 billion.

· Sold CMBS held by our Investing and Servicing Segment for total gross proceeds of $36.9 million and acquired CMBS for a purchase price of $13.3 million.

· Settled the remaining $78.0 million of our 4.00% Convertible Senior Notes due 2019 (the “2019 Notes”) through the issuance of 3.6 million shares of common stock and cash payments of $12.0 million.

Subsequent Events

Refer to Note 23 to the Condensed Consolidated Financial Statements for disclosure regarding significant transactions that occurred subsequent to March 31, 2019.

57

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”.

The following table compares our summarized results of operations for the three months ended March 31, 2019 and 2018 by business segment (amounts in thousands):

	For the Three Months Ended
	March 31,
	2019		2018		$ Change
Revenues:
Commercial and Residential Lending Segment	$	174,830	$	149,770	$	25,060
Infrastructure Lending Segment		28,486		—		28,486
Property Segment		70,599		66,811		3,788
Investing and Servicing Segment		66,950		85,109		(18,159)
Corporate		20		52		(32)
Securitization VIE eliminations		(30,405)		(41,155)		10,750
		310,480		260,587		49,893
Costs and expenses:
Commercial and Residential Lending Segment		69,188		41,048		28,140
Infrastructure Lending Segment		23,846		—		23,846
Property Segment		67,475		68,356		(881)
Investing and Servicing Segment		38,674		37,774		900
Corporate		54,129		66,336		(12,207)
Securitization VIE eliminations		(23)		(91)		68
		253,289		213,423		39,866
Other income (loss):
Commercial and Residential Lending Segment		(1,034)		2,102		(3,136)
Infrastructure Lending Segment		(2,609)		—		(2,609)
Property Segment		(42,506)		2,365		(44,871)
Investing and Servicing Segment		25,606		27,425		(1,819)
Corporate		9,560		(13,002)		22,562
Securitization VIE eliminations		30,634		41,596		(10,962)
		19,651		60,486		(40,835)
Income (loss) before income taxes:
Commercial and Residential Lending Segment		104,608		110,824		(6,216)
Infrastructure Lending Segment		2,031		—		2,031
Property Segment		(39,382)		820		(40,202)
Investing and Servicing Segment		53,882		74,760		(20,878)
Corporate		(44,549)		(79,286)		34,737
Securitization VIE eliminations		252		532		(280)
		76,842		107,650		(30,808)
Income tax provision		(334)		(2,856)		2,522
Net income attributable to non-controlling interests		(6,125)		(4,862)		(1,263)
Net income attributable to Starwood Property Trust, Inc.	$	70,383	$	99,932	$	(29,549)

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Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018

Commercial and Residential Lending Segment

Revenues

For the three months ended March 31, 2019, revenues of our Commercial and Residential Lending Segment increased $25.0 million to $174.8 million, compared to $149.8 million for the three months ended March 31, 2018. This increase was primarily due to increases in interest income from loans of $19.6 million and investment securities of $5.4 million.  The increase in interest income from loans was principally due to (i) increased LIBOR rates and (ii) higher average balances of both commercial loans and residential loans held-for-sale, partially offset by (iii) lower levels of prepayment related income and (iv) the compression of interest rate spreads in credit markets.  The increase in interest income from investment securities was primarily due to higher average investment balances partially offset by lower levels of prepayment related income.

Costs and Expenses

For the three months ended March 31, 2019, costs and expenses of our Commercial and Residential Lending Segment increased $28.2 million to $69.2 million, compared to $41.0 million for the three months ended March 31, 2018. This increase was primarily due to a $29.6 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio.  

Net Interest Income (amounts in thousands)

	For the Three Months Ended
	March 31,
	2019		2018		Change
Interest income from loans	$	154,595	$	134,972	$	19,623
Interest income from investment securities		19,908		14,439		5,469
Interest expense		(61,604)		(32,021)		(29,583)
Net interest income	$	112,899	$	117,390	$	(4,491)

For the three months ended March 31, 2019, net interest income of our Commercial and Residential Lending Segment decreased $4.5 million to $112.9 million, compared to $117.4 million for the three months ended March 31, 2018.  This decrease reflects the net increase in interest income explained in the Revenues discussion above, which was more than offset by the increase in interest expense on our secured financing facilities primarily due to increased utilization of our available borrowing capacity and lower prepayment related income.

During the three months ended March 31, 2019 and 2018, 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,
	2019		2018
Commercial	7.4	%	7.5	%
Residential	6.6	%	6.8	%
Overall	7.3	%	7.4	%

The overall weighted average unlevered yield was slightly lower as increases in LIBOR were more than offset by lower levels of prepayment related income and the compression of interest rate spreads in credit markets.

During the three months ended March 31, 2019 and 2018, 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 4.6% and 4.1%, respectively, and 4.6% and 4.0%, respectively, excluding the impact of bridge financing. The increases in borrowing rates primarily reflect increases in LIBOR, partially offset by the compression of interest rate spreads in credit markets.

59

Other Income (Loss)

For the three months ended March 31, 2019, other income (loss) of our Commercial and Residential Lending Segment decreased $3.1 million to a loss of $1.0 million, compared to income of $2.1 million for the three months ended March 31, 2018.  The decrease was primarily due to an $8.3 million decrease in foreign currency gain, partially offset by a $3.1 million favorable change in fair value of residential mortgage loans held-for-sale and a $1.5 million lower loss on derivatives.  The lower loss on derivatives reflects a $10.7 million lower loss on foreign currency hedges, partially offset by a $9.2 million unfavorable change in 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 CMBS investments.  The lower loss on the foreign currency hedges and the decrease in foreign currency gain reflect the overall weakening of the U.S. dollar against the pound sterling (“GBP”) in the first quarter of 2019 versus a greater weakening of the U.S. dollar in the first quarter of 2018.  The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments. 

Infrastructure Lending Segment

The Infrastructure Lending Segment was acquired on September 19, 2018.  Accordingly, the following discussion reflects its results for the three months ended March 31, 2019 and includes no comparison to the three months ended March 31, 2018.

Revenues

Revenues of our Infrastructure Lending Segment were $28.5 million, including interest income of $26.9 million from loans and $0.9 million from investment securities.

Costs and Expenses

Costs and expenses of our Infrastructure Lending Segment were $23.8 million, consisting primarily of $18.6 million of interest expense on secured debt facilities used to finance this segment’s investment portfolio and $4.5 million of general and administrative expenses. 

Net Interest Income (amounts in thousands)

	For the Three Months Ended
	March 31, 2019
Interest income from loans	$	26,915
Interest income from investment securities		885
Interest expense		(18,577)
Net interest income	$	9,223

Interest income from infrastructure loans and investment securities and interest expense on the secured financing facilities reflect primarily variable LIBOR based rates.  During the three months ended March 31, 2019, the weighted average unlevered yield on the Infrastructure Lending Segment’s loans and investment securities held-for-investment was 6.1% while the weighted average unlevered yield on its loans held-for-sale was 3.6%.  The weighted average secured borrowing rate on its debt facilities, including amortization of deferred financing fees, was 5.0%.

Other Loss

Other loss of our Infrastructure Lending Segment was $2.6 million, primarily reflecting a $3.3 million loss on extinguishment of debt resulting from the write-off of deferred financing fees relating to partial debt prepayments from proceeds of loan repayments and sales.

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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	$	(5,433)	$	(3,912)	$	—	$	(3,941)	$	(5,462)
Medical Office Portfolio		(391)		(22)		(15,728)		—		(16,097)
Ireland Portfolio		(270)		(416)		15,098		7		15,251
Woodstar I Portfolio		785		(1,226)		—		—		2,011
Woodstar II Portfolio		9,097		4,959		—		(17)		4,121
Investment in unconsolidated entities		—		—		—		(40,290)		(40,290)
Other/Corporate		—		(264)		—		—		264
Total	$	3,788	$	(881)	$	(630)	$	(44,241)	$	(40,202)

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, 2019, revenues of our Property Segment increased $3.8 million to $70.6 million, compared to $66.8 million for the three months ended March 31, 2018.  The increase in revenues in the first quarter of 2019 was primarily due to the full period inclusion of rental income from the Woodstar II Portfolio, which was acquired over a period between December 2017 and September 2018, partially offset by a decrease in rental income from the Master Lease Portfolio due to (i) no longer recording as revenues and offsetting expenses property taxes paid directly by lessees, in accordance with the new lease accounting standard effective January 1, 2019 (see Note 2 to the Consolidated Financial Statements) and (ii) the sale of seven properties within the Master Lease portfolio during 2018.

Costs and Expenses

For the three months ended March 31, 2019, costs and expenses of our Property Segment decreased $0.9 million to $67.5 million, compared to $68.4 million for the three months ended March 31, 2018. The decrease in costs and expenses reflects decreases in each of the portfolios except for the Woodstar II Portfolio, which reflects an increase due to its full period inclusion.  The $3.9 million decrease in costs and expenses of the Master Lease Portfolio was primarily due to the effects of no longer recording property taxes paid directly by lessees and the sale of seven properties in 2018, both as discussed above.

Other Income (Loss)

For the three months ended March 31, 2019, other income (loss) of our Property Segment decreased $44.9 million to a loss of $42.5 million, compared to income of $2.4 million for the three months ended March 31, 2018. The decrease in other income was primarily due to (i) a $40.3 million increased loss from an unconsolidated entity, (ii) the non-recurrence of a $3.9 million net gain on sale of two properties in the Master Lease Portfolio during the first quarter of 2018 and (iii) a $0.6 million decreased net gain on derivatives.  The $40.3 million increased loss from an unconsolidated entity principally reflects the recognition of decreases in fair value of properties held by our equity investee that owns four regional shopping malls (the “Retail Fund”), which is an investment company that measures its assets at fair value (see Note 7 to the Consolidated Financial Statements).  The decreased net gain on derivatives consists of a $15.7 million unfavorable change in interest rate swaps which primarily hedge the variable interest rate risk on borrowings secured by our Medical Office Portfolio, partially offset by a $15.1 million favorable change in foreign exchange contracts which economically hedge our Euro currency exposure with respect to the Ireland Portfolio.

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Investing and Servicing Segment

Revenues

For the three months ended March 31, 2019, revenues of our Investing and Servicing Segment decreased $18.2 million to $66.9 million, compared to $85.1 million for the three months ended March 31, 2018. The decrease in revenues in the first quarter of 2019 was primarily due to (i) a $10.1 million decrease in CMBS interest income principally due to lower interest recoveries, (ii) a $6.2 million decrease in servicing fees and (iii) a $1.1 million decrease in rental income on our REIS Equity Portfolio (described in Note 6 to the Condensed Consolidated Financial Statements) primarily due to sales of nine operating properties during 2018.

Costs and Expenses

For the three months ended March 31, 2019, costs and expenses of our Investing and Servicing Segment increased by $0.9 million to $38.7 million, compared to $37.8 million for the three months ended March 31, 2018.

Other Income

For the three months ended March 31, 2019, other income of our Investing and Servicing Segment decreased $1.8 million to $25.6 million, from $27.4 million for the three months ended March 31, 2018.  The decrease in other income was primarily due to (i) an $8.5 million unfavorable change in gain (loss) on derivatives which primarily hedge our interest rate risk on conduit loans and (ii) a $5.5 million decrease in gains on sales of operating properties, partially offset by (iii) an $8.6 million lesser decrease in fair value of servicing rights primarily reflecting the expected reduction in amortization of this deteriorating asset net of increases in fair value due to the attainment of new servicing contracts and (iv) a $4.1 million greater increase in fair value of CMBS securities. 

Corporate and Other Items

Corporate Costs and Expenses

For the three months ended March 31, 2019, corporate expenses decreased $12.2 million to $54.1 million, compared to $66.3 million for the three months ended March 31, 2018. The decrease was primarily due to a $7.1 million decrease in management fees and a $5.9 million decrease in interest expense principally on lower average outstanding balances of our unsecured senior notes.

Corporate Other Income (Loss)

For the three months ended March 31, 2019, corporate other income (loss) increased $22.6 million to income of $9.6 million, compared to a loss of $13.0 million for the three months ended March 31, 2018. The increase in corporate other income was due to a favorable change in gain (loss) on interest rate swaps used to hedge a portion of our unsecured senior notes used to repay variable-rate secured financing.

Securitization VIE Eliminations

Securitization VIE eliminations primarily reclassify interest income and servicing fee revenues to other income for the CMBS and RMBS VIEs that we consolidate as primary beneficiary.  Such eliminations have no overall effect on net income 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 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

Historically, our consolidated income tax provision principally relates to the taxable nature of the Investing and Servicing Segment’s loan servicing and loan conduit businesses which are housed in TRSs. For the three months ended March 31, 2019, we had a tax provision of $0.3 million compared to $2.8 million in the three months ended March 31, 2018. The $2.5 million decrease primarily reflects a decrease in the taxable income of our TRSs.

Net Income Attributable to Non-controlling Interests

During the three months ended March 31, 2019, net income attributable to non-controlling interests increased $1.2 million to $6.1 million, compared to $4.9 million during the three months ended March 31, 2018.  The increase was primarily due to the effect of non-controlling interests in our Woodstar II Portfolio, which consists of properties acquired in and after December 2017.

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Non-GAAP Financial Measures

Core Earnings is a non-GAAP financial measure. We calculate Core 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 for the period, regardless of whether such items are included in other comprehensive income or loss, or in net income; and

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

We believe that Core Earnings provides an additional measure of our core operating performance by eliminating the impact of certain non-cash expenses and facilitating a comparison of our financial results to those of other comparable REITs with fewer or no non-cash adjustments and comparison of our own operating results from period to period. Our management uses Core Earnings in this way, and also uses Core Earnings to compute the incentive fee due under our management agreement. The Company believes that its investors also use Core Earnings or a comparable supplemental performance measure to evaluate and compare the performance of the Company and its peers, and as such, the Company believes that the disclosure of Core Earnings is useful to (and expected by) its investors.

However, the Company cautions that Core Earnings does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income (determined in accordance with GAAP), or an indication of our cash flows from operating activities (determined in accordance with GAAP), a measure of our liquidity, or an indication of funds available to fund our cash needs, including our ability to make cash distributions. In addition, our methodology for calculating Core Earnings may differ from the methodologies employed by other REITs to calculate the same or similar supplemental performance measures, and accordingly, our reported Core Earnings may not be comparable to the Core Earnings reported by other REITs.

The weighted average diluted share count applied to Core Earnings for purposes of determining Core 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 Core Earnings.  In order to effectuate dilution from these awards in the Core 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 Core 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.

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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 Core EPS calculation (amounts in thousands):

	For the Three Months Ended
	March 31,
	2019	2018
Diluted weighted average shares - GAAP	277,698	262,124
Add: Unvested stock awards	2,255	1,634
Add: Woodstar II Class A Units	11,911	5,143
Less: Convertible Notes dilution	—	(1,209)
Diluted weighted average shares - Core	291,864	267,692

The definition of Core 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 Core Earnings to be calculated in a manner consistent with its definition and objective. No adjustments to the definition of Core Earnings became effective during the three months ended March 31, 2019. 

As a reminder, in 2015, we adjusted the calculation of Core Earnings related to the equity component of our convertible notes.  We previously amortized the equity component of these instruments through interest expense for Core Earnings purposes, consistent with our GAAP treatment.  However, for Core Earnings purposes, the amount is not considered realized until the earlier of (a) the entire issuance of the notes has been extinguished; or (b) the equity portion has been fully amortized via repurchases of the notes. 

In January 2019, our 2019 Notes were fully repaid in shares of common stock and cash.  The equity portion of the 2019 Notes had been fully amortized. In March 2018, our 4.55% Convertible Senior Notes due 2018 (the “2018 Notes”) matured and were fully repaid in cash.  The equity portion of the 2018 Notes had not been fully amortized.  As a result, we reflected $10.0 million as a positive adjustment to Core Earnings, representing the $28.1 million equity balance recognized upon issuance of the 2018 Notes, net of $18.1 million in adjustments related to cumulative repurchases through the maturity date.

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Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018

The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended March 31, 2019, 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	$	174,830	$	28,486	$	70,599	$	66,950	$	20	$	340,885
Costs and expenses		(69,188)		(23,846)		(67,475)		(38,674)		(54,129)		(253,312)
Other income (loss)		(1,034)		(2,609)		(42,506)		25,606		9,560		(10,983)
Income (loss) before income taxes		104,608		2,031		(39,382)		53,882		(44,549)		76,590
Income tax benefit (provision)		248		85		(258)		(409)		—		(334)
(Income) loss attributable to non-controlling interests		(371)		—		(5,717)		215		—		(5,873)
Net income (loss) attributable to Starwood Property Trust, Inc.		104,485		2,116		(45,357)		53,688		(44,549)		70,383
Add / (Deduct):
Non-controlling interests attributable to Woodstar II Class A Units		—		—		5,717		—		—		5,717
Non-cash equity compensation expense		706		551		69		1,350		3,687		6,363
Management incentive fee		—		—		—		—		173		173
Acquisition and investment pursuit costs		(38)		2		(89)		—		—		(125)
Depreciation and amortization		71		—		24,211		4,915		—		29,197
Loan loss provision, net		(11)		774		—		—		—		763
Interest income adjustment for securities		(197)		—		—		5,972		—		5,775
Extinguishment of debt, net		—		—		—		—		(1,211)		(1,211)
Other non-cash items		—		—		(434)		137		168		(129)
Reversal of GAAP unrealized (gains) / losses on:
Loans held-for-sale		(1,386)		—		—		(9,880)		—		(11,266)
Securities		1,694		—		—		(18,140)		—		(16,446)
Derivatives		9,505		395		316		3,324		(10,144)		3,396
Foreign currency		(5,239)		(300)		(9)		1		—		(5,547)
(Earnings) loss from unconsolidated entities		(577)		—		43,805		(594)		—		42,634
Recognition of Core realized gains / (losses) on:
Loans held-for-sale		(653)		—		—		7,430		—		6,777
Securities		—		—		—		7,532		—		7,532
Derivatives		87		768		367		(1,625)		—		(403)
Foreign currency		391		(891)		9		8		—		(483)
Earnings (loss) from unconsolidated entities		98		—		(68,905)		8,733		—		(60,074)
Sales of properties		—		—		—		(76)		—		(76)
Core Earnings (Loss)	$	108,936	$	3,415	$	(40,300)	$	62,775	$	(51,876)	$	82,950
Core Earnings (Loss) per Weighted Average Diluted Share	$	0.37	$	0.01	$	(0.14)	$	0.22	$	(0.18)	$	0.28

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The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended March 31, 2018, by business segment (amounts in thousands, except per share data):

	Commercial
	and
	Residential				Investing
	Lending		Property		and Servicing
	Segment		Segment		Segment		Corporate		Total
Revenues	$	149,770	$	66,811	$	85,109	$	52	$	301,742
Costs and expenses		(41,048)		(68,356)		(37,774)		(66,336)		(213,514)
Other income (loss)		2,102		2,365		27,425		(13,002)		18,890
Income (loss) before income taxes		110,824		820		74,760		(79,286)		107,118
Income tax provision		(947)		(1,261)		(648)		—		(2,856)
Income attributable to non-controlling interests		(361)		(2,453)		(1,516)		—		(4,330)
Net income (loss) attributable to Starwood Property Trust, Inc.		109,516		(2,894)		72,596		(79,286)		99,932
Add / (Deduct):
Non-controlling interests attributable to Woodstar II Class A Units		—		2,453		—		—		2,453
Non-cash equity compensation expense		563		43		975		3,199		4,780
Management incentive fee		—		—		—		9,634		9,634
Acquisition and investment pursuit costs		119		(93)		(29)		—		(3)
Depreciation and amortization		17		26,805		4,912		—		31,734
Loan loss provision, net		1,538		—		—		—		1,538
Interest income adjustment for securities		(197)		—		(1,062)		—		(1,259)
Extinguishment of debt, net		—		—		—		9,755		9,755
Other non-cash items		—		(562)		124		881		443
Reversal of GAAP unrealized (gains) / losses on:
Loans held-for-sale		1,692		—		(9,492)		—		(7,800)
Securities		704		—		(13,979)		—		(13,275)
Derivatives		10,529		(1,436)		(5,422)		14,398		18,069
Foreign currency		(13,550)		(2)		3		—		(13,549)
(Earnings) loss from unconsolidated entities		(1,444)		3,515		(1,596)		—		475
Purchases and sales of properties		—		—		—		—		—
Recognition of Core realized gains / (losses) on:
Loans held-for-sale		(875)		—		9,643		—		8,768
Securities		—		—		(4,114)		—		(4,114)
Derivatives		(5,725)		(479)		5,531		—		(673)
Foreign currency		8,051		2		(41)		—		8,012
Earnings from unconsolidated entities		1,847		—		1,044		—		2,891
Purchases and sales of properties		—		(210)		(1,765)		—		(1,975)
Core Earnings (Loss)	$	112,785	$	27,142	$	57,328	$	(41,419)	$	155,836
Core Earnings (Loss) per Weighted Average Diluted Share	$	0.42	$	0.10	$	0.21	$	(0.15)	$	0.58

Commercial and Residential Lending Segment

The Commercial and Residential Lending Segment’s Core Earnings decreased by $3.9 million, from $112.8 million during the first quarter of 2018 to $108.9 million in the first quarter of 2019. After making adjustments for the calculation of Core Earnings, revenues were $174.6 million, costs and expenses were $68.5 million and other income was $2.9 million.

Core revenues, consisting principally of interest income on loans, increased by $25.0 million in the first quarter of 2019, primarily due to increases in interest income from loans of $19.6 million and investment securities of $5.4 million.  The increase in interest income from loans was principally due to (i) increased LIBOR rates and (ii) higher average balances of both commercial loans and residential loans held-for-sale, partially offset by (iii) lower levels of

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prepayment related income and (iv) the compression of interest rate spreads in credit markets.  The increase in interest income from investment securities was primarily due to higher average investment balances partially offset by lower levels of prepayment related income.

Core costs and expenses increased by $29.7 million in the first quarter of 2019, primarily due to a $29.6 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio.

Core other income decreased by $0.4 million primarily due to a decrease in foreign currency gains partially offset by a decrease in related derivative losses.  

Infrastructure Lending Segment

The Infrastructure Lending Segment had core earnings of $3.4 million for the first quarter of 2019.  After making adjustments for the calculation of Core Earnings, revenues were $28.5 million, costs and expenses were $22.5 million and other loss was $2.6 million.

Revenues of $28.5 million primarily consisted of interest income of $26.9 million from loans and $0.9 million from investment securities.

Costs and expenses of $22.5 million consisted of $18.6 million of interest expense on the secured debt facilities used to finance this segment’s investment portfolio and $3.9 million of general and administrative expenses.

Other loss of $2.6 million principally reflects a $3.3 million loss on extinguishment of debt resulting from the write-off of deferred financing fees relating to partial debt prepayments from proceeds of loan repayments and sales.

Property Segment

Core Earnings by Portfolio (amounts in thousands)

	For the Three Months Ended
	March 31,
	2019		2018		Change
Master Lease Portfolio	$	4,052	$	9,578	$	(5,526)
Medical Office Portfolio		6,692		6,205		487
Ireland Portfolio		6,041		5,401		640
Woodstar I Portfolio		7,410		5,124		2,286
Woodstar II Portfolio		5,413		2,127		3,286
Investment in unconsolidated entities		(68,905)		—		(68,905)
Other/Corporate		(1,003)		(1,293)		290
Core Earnings	$	(40,300)	$	27,142	$	(67,442)

The Property Segment’s Core Earnings decreased by $67.4 million, from earnings of $27.1 million during the first quarter of 2018 to a loss of $40.3 million in the first quarter of 2019. After making adjustments for the calculation of Core Earnings, revenues were $70.3 million, costs and expenses were $43.5 million and other loss was $66.9 million.

Core revenues increased by $3.8 million in the first quarter of 2019, primarily due to the full period inclusion of rental income from the Woodstar II Portfolio, which was acquired over a period between December 2017 and September 2018, partially offset by a decrease in rental income from the Master Lease Portfolio due to (i) no longer recording as revenues and offsetting expenses property taxes paid directly by lessees, in accordance with the new lease accounting standard effective January 1, 2019, and (ii) the sale of seven properties within the Master Lease portfolio during 2018.

Core costs and expenses increased by $1.4 million in the first quarter of 2019, primarily due to the full period inclusion of the Woodstar II Portfolio, partially offset by no longer recording property taxes paid directly by lessees and the sale of seven properties from the Master Lease Portfolio in 2018, both as discussed above.

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Core other income decreased by $70.8 million in the first quarter of 2019, primarily due to a $68.9 million loss on our investment in the Retail Fund.  This loss reflects the recognition of decreases in fair value of properties held by the Retail Fund which management determined to be other than temporary.  Additionally, the decrease in Core other income was due to the non-recurrence of a $3.7 million realized gain on sale of two properties in the Master Lease Portfolio during the first quarter of 2018, partially offset by a $1.8 million increase in realized gains on derivatives principally attributable to interest rate swaps which hedge the variable interest rate risk on borrowings secured by our Medical Office Portfolio.

Investing and Servicing Segment

The Investing and Servicing Segment’s Core Earnings increased by $5.5 million, from $57.3 million during the first quarter of 2018 to $62.8 million in the first quarter of 2019.  After making adjustments for the calculation of Core Earnings, revenues were $73.1 million, costs and expenses were $32.4 million, other income was $22.3 million, income tax provision was $0.4 million and the add-back of loss attributable to non-controlling interests was $0.2 million.

Core revenues decreased by $11.2 million in the first quarter of 2019, primarily due to decreases of $6.2 million in servicing fees, $3.1 million in interest income from our CMBS portfolio and $1.1 million in rental income from our REIS Equity Portfolio. 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 core 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.

Core costs and expenses increased by $0.4 million in the first quarter of 2019.

Core 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 Core Earnings outlined above are also applied to the GAAP earnings of our unconsolidated entities. Core other income increased by $15.1 million principally due to (i) an $8.6 million lesser decrease in fair value of servicing rights, (ii) a $7.7 million increase in earnings from unconsolidated entities and (iii) a $6.7 million increase in net gains on investments reflecting increased net gains on CMBS partially offset by decreased gains on sales of operating properties, all partially offset by (iv) a $6.8 million unfavorable change in realized gains (losses) on derivatives and (v) a $2.2 million decrease in realized gains on conduit loans. 

Income taxes, which principally relate to the operating results of our servicing and conduit businesses which are held in TRSs, decreased $0.3 million due to a decrease in the taxable income of our TRSs.

Income (loss) attributable to non-controlling interests decreased $1.7 million, primarily reflecting the non-recurrence of minority investors’ share of gains from three operating properties sold during the first quarter of 2018.

Corporate

Core corporate costs and expenses increased by $10.5 million, from $41.4 million in the first quarter of 2018 to $51.9 million in the first quarter of 2019, primarily due to (i) an $11.0 million unfavorable change in gain (loss) on extinguishment of debt primarily due to the $10.0 million positive adjustment to Core Earnings during the first quarter of 2018 upon the repayment at maturity of the 2018 Notes, as described above, (ii) a $2.1 million increase in base management fees and (iii) a $1.9 million unfavorable change in gain (loss) on interest rate swaps, all partially offset by (iv) a $5.2 million decrease in interest expense principally on lower average outstanding balances of our unsecured senior notes.

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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, 2018.  Refer to our Form 10-K for a description of these strategies. Our primary sources of liquidity are as follows:

Cash Flows for the Three Months Ended March 31, 2019 (amounts in thousands)

			VIE		Excluding Investing
	GAAP		Adjustments		and Servicing VIEs
Net cash used in operating activities	$	(92,718)	$	(17,657)	$	(110,375)
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment		(1,287,001)		—		(1,287,001)
Proceeds from principal collections and sale of loans		1,056,329		—		1,056,329
Purchase of investment securities		—		(39,534)		(39,534)
Proceeds from sales and collections of investment securities		10,982		45,361		56,343
Proceeds from sales and insurance recoveries on properties		1,463		—		1,463
Purchases and additions to properties and other assets		(8,526)		—		(8,526)
Investment in unconsolidated entities		(510)		(13,322)		(13,832)
Net cash flows from other investments and assets		(2,318)		—		(2,318)
Net cash used in investing activities		(229,581)		(7,495)		(237,076)
Cash Flows from Financing Activities:
Proceeds from borrowings		2,310,902		—		2,310,902
Principal repayments on and repurchases of borrowings		(1,778,819)		—		(1,778,819)
Payment of deferred financing costs		(4,706)		—		(4,706)
Proceeds from common stock issuances, net of offering costs		162		—		162
Payment of dividends		(132,515)		—		(132,515)
Contributions from non-controlling interests		95		—		95
Distributions to non-controlling interests		(6,952)		—		(6,952)
Issuance of debt of consolidated VIEs		33,678		(33,678)		—
Repayment of debt of consolidated VIEs		(52,856)		52,856		—
Distributions of cash from consolidated VIEs		11,683		(11,683)		—
Net cash provided by financing activities		380,672		7,495		388,167
Net increase in cash, cash equivalents and restricted cash		58,373		(17,657)		40,716
Cash, cash equivalents and restricted cash, beginning of period		487,865		(2,554)		485,311
Effect of exchange rate changes on cash		(254)		—		(254)
Cash, cash equivalents and restricted cash, end of period	$	545,984	$	(20,211)	$	525,773

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) 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) 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 cash flows from operations or to overall cash resulting from these consolidations. Refer to Note 2 to the Condensed Consolidated Financial Statements for further discussion.

Cash and cash equivalents increased by $40.7 million during the three months ended March 31, 2019, reflecting net cash provided by financing activities of $388.2 million, partially offset by net cash used in operating activities of $110.4 million and net cash used in investing activities of $237.1 million.

Net cash used in operating activities of $110.4 million during the three months ended March 31, 2019 related primarily to $157.9 million in originations and purchases of loans held-for-sale, net of principal collections and sales,

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cash interest expense of $129.3 million, general and administrative expenses of $29.4 million, management fees of $30.0 million and a net change in operating assets and liabilities used cash of $41.4 million.  Offsetting these cash outflows was cash interest income of $151.8 million from our loan origination and conduit programs and cash interest income on investment securities of $42.6 million. Net rental income provided cash of $52.1 million and servicing fees provided cash of $25.8 million.

Net cash used in investing activities of $237.1 million during the three months ended March 31, 2019 related primarily to the origination and acquisition of new loans held-for-investment of $1.3 billion, the purchase of investment securities of $39.5 million, investments in unconsolidated entities of $13.8 million and net additions to properties and other assets of $7.1 million, partially offset by the proceeds received from principal collections and sales of loans of $1.1 billion and proceeds received from principal collections and sales of investment securities of $56.3 million.

Net cash provided by financing activities of $388.2 million for the three months ended March 31, 2019 related primarily to borrowings on our secured debt, net of repayments and deferred loan costs, of $537.8 million, partially offset by dividend distributions of $132.5 million, the settlement of the 2019 Notes of $10.4 million and net distributions to non-controlling interests of $6.9 million. 

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Our Investment Portfolio

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, 2019 and December 31, 2018 (dollars in thousands):

											Unlevered
	Face		Carrying			Asset Specific		Net			Return on
	Amount		Value			Financing		Investment		Vintage	Asset
March 31, 2019
First mortgages (1)	$	6,873,026	$	6,850,339		$	4,119,304	$	2,731,035	1997-2019	6.9	%
Subordinated mortgages		54,042		52,849			—		52,849	1998-2018	9.4	%
Mezzanine loans (1)		581,557		579,496			—		579,496	2005-2018	12.8	%
Other loans		64,916		61,234			—		61,234	1999-2018	9.0	%
Loans held-for-sale, fair value option, residential		673,249		688,435			499,850		188,585	2013-2019	6.0	%
Loan loss allowance		—		(30,788)			—		(30,788)	N/A
RMBS, available-for-sale		302,229		204,835			89,092		115,743	2003-2007	11.8	%
RMBS, fair value option		72,339		108,816	(2)		33,192		75,624	2018-2019	8.4	%
CMBS, fair value option		150,938		150,677	(3)		80,391		70,286	2018	6.1	%
HTM debt securities (4)		585,613		584,177			189,129		395,048	2014-2018	7.5	%
Equity security		11,910		12,506			—		12,506	N/A
Investment in unconsolidated entities		N/A		35,351			—		35,351	N/A
Properties, net		N/A		8,937			—		8,937	N/A
	$	9,369,819	$	9,306,864		$	5,010,958	$	4,295,906
December 31, 2018
First mortgages (1)	$	6,627,879	$	6,603,760		$	3,542,214	$	3,061,546	1997-2018	7.0	%
Subordinated mortgages		53,996		52,778			—		52,778	1998-2018	9.4	%
Mezzanine loans (1)		394,739		393,832			—		393,832	2005-2018	11.6	%
Other loans		64,658		61,001			—		61,001	1999-2018	9.1	%
Loans held-for-sale, fair value option, residential		609,571		623,660			499,756		123,904	2013-2018	6.1	%
Loans held-for-sale, commercial		48,667		46,495			30,525		15,970	2018	6.3	%
Loans transferred as secured borrowings		74,692		74,346			74,239		107	N/A
Loan loss allowance		—		(39,151)			—		(39,151)	N/A
RMBS, available-for-sale		309,497		209,079			44,070		165,009	2003-2007	11.7	%
RMBS, fair value option		62,397		87,879	(2)		13,179		74,700	2018	8.0	%
CMBS, fair value option		160,198		158,688	(3)		83,864		74,824	2018	6.7	%
HTM debt securities (4)		585,017		583,381			191,991		391,390	2014-2018	7.5	%
Equity security		11,660		11,893			—		11,893	N/A
Investment in unconsolidated entities		N/A		35,274			—		35,274	N/A
	$	9,002,971	$	8,902,915		$	4,479,838	$	4,423,077

(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 $912.8 million and $1.0 billion being classified as first mortgages as of March 31, 2019 and December 31, 2018, respectively.

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(2) Includes $108.8 million and $87.9 million of RMBS eliminated in consolidation against VIE liabilities pursuant to ASC 810 as of March 31, 2019 and December 31, 2018, respectively.

(3) Includes $150.7 million and $158.7 million of CMBS eliminated in consolidation against VIE liabilities pursuant to ASC 810 as of March 31, 2019 and December 31, 2018, respectively.

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

As of March 31, 2019 and December 31, 2018, our Commercial and Residential Lending Segment’s investment portfolio, excluding loans held-for-sale, RMBS, properties and other investments, had the following characteristics based on carrying values:

Collateral Property Type	March 31, 2019		December 31, 2018
Office	37.1	%	35.0	%
Hotel	21.7	%	23.5	%
Mixed Use	14.9	%	11.9	%
Multifamily	12.8	%	15.4	%
Residential	5.2	%	4.9	%
Retail	2.5	%	2.4	%
Industrial	1.5	%	1.7	%
Other	4.3	%	5.2	%
	100.0	%	100.0	%

Geographic Location	March 31, 2019		December 31, 2018
North East	27.8	%	28.7	%
West	21.3	%	22.7	%
International	14.7	%	11.0	%
South West	13.9	%	14.0	%
South East	9.4	%	9.9	%
Mid Atlantic	6.5	%	6.8	%
Midwest	6.4	%	6.9	%
	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, 2019 and December 31, 2018 (dollars in thousands):

									Unlevered
	Face		Carrying		Asset Specific		Net		Return on
	Amount		Value		Financing		Investment		Asset
March 31, 2019
First priority infrastructure loans and HTM securities	$	1,531,376	$	1,509,707	$	1,117,472	$	392,235	6.1	%
Loans held-for-sale, infrastructure		312,551		303,577		292,652		10,925	3.6	%
Loan loss allowance		N/A		(774)		—		(774)
	$	1,843,927	$	1,812,510	$	1,410,124	$	402,386
December 31, 2018
First priority infrastructure loans and HTM securities	$	1,537,412	$	1,517,547	$	1,130,567	$	386,980	5.9	%
Loans held-for-sale, infrastructure		486,909		469,775		393,984		75,791	3.6	%
	$	2,024,321	$	1,987,322	$	1,524,551	$	462,771

As of March 31, 2019 and December 31, 2018, our Infrastructure Lending Segment’s investment portfolio had the following characteristics based on carrying values:

Collateral Type	March 31, 2019		December 31, 2018
Natural gas power	69.2	%	54.3	%
Renewable power	16.3	%	30.8	%
Midstream/downstream oil & gas	8.7	%	9.3	%
Other thermal power	5.6	%	5.1	%
Upstream oil & gas	0.2	%	0.5	%
	100.0	%	100.0	%

Geographic Location	March 31, 2019		December 31, 2018
U.S. Regions:
North East	43.8	%	32.8	%
Midwest	19.3	%	15.9	%
South West	7.6	%	12.9	%
Mid-Atlantic	3.9	%	4.6	%
South East	3.6	%	3.4	%
West	3.3	%	4.7	%
International:
Mexico	12.1	%	12.5	%
United Kingdom	2.1	%	4.7	%
Ireland	0.1	%	2.4	%
Other	4.2	%	6.1	%
	100.0	%	100.0	%

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Property Segment

The following table sets forth the amount of each category of investments, which are comprised of properties, intangible lease assets and liabilities and our equity investment in the Retail Fund held within our Property Segment as of March 31, 2019 and December 31, 2018 (amounts in thousands):

	March 31, 2019		December 31, 2018
Properties, net	$	2,487,285	$	2,512,847
Lease intangibles, net		82,469		87,729
Investment in unconsolidated entities		70,557		114,362
	$	2,640,311	$	2,714,938

The following table sets forth our net investment and other information regarding the Property Segment’s properties and intangible lease assets and liabilities as of March 31, 2019 (dollars in thousands):

			Asset						Weighted Average
	Carrying		Specific		Net		Occupancy		Remaining
	Value		Financing		Investment		Rate		Lease Term
Office—Medical Office Portfolio	$	760,366	$	486,831	$	273,535	93.3	%	6.3 years
Office—Ireland Portfolio		494,086		341,626		152,460	99.0	%	9.3 years
Multifamily residential—Ireland Portfolio		17,908		11,626		6,282	96.0	%	0.4 years
Multifamily residential—Woodstar I Portfolio		624,427		406,783		217,644	98.3	%	0.5 years
Multifamily residential—Woodstar II Portfolio		599,361		437,494		161,867	99.5	%	0.5 years
Retail—Master Lease Portfolio		343,790		192,154		151,636	100.0	%	23.1 years
Subtotal—undepreciated carrying value		2,839,938		1,876,514		963,424
Accumulated depreciation and amortization		(270,184)		—		(270,184)
Net carrying value	$	2,569,754	$	1,876,514	$	693,240

As of March 31, 2019 and December 31, 2018, our Property Segment’s investment portfolio had the following geographic characteristics based on carrying values:

Geographic Location	March 31, 2019		December 31, 2018
Ireland	17.4	%	17.7	%
U.S. Regions:
South East	51.0	%	50.8	%
South West	8.6	%	8.6	%
Midwest	8.4	%	8.3	%
North East	8.1	%	8.1	%
West	6.5	%	6.5	%
	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, 2019 and December 31, 2018 (amounts in thousands):

						Asset
	Face		Carrying			Specific		Net
	Amount		Value			Financing		Investment
March 31, 2019
CMBS, fair value option	$	2,821,996	$	992,739	(1)	$	308,137	$	684,602
Intangible assets - servicing rights		N/A		44,117	(2)		—		44,117
Lease intangibles, net		N/A		27,621			—		27,621
Loans held-for-sale, fair value option, commercial		149,428		153,252			109,442		43,810
Loans held-for-investment		1,498		1,498			—		1,498
Investment in unconsolidated entities		N/A		54,251	(3)		—		54,251
Properties, net		N/A		273,152			235,499		37,653
	$	2,972,922	$	1,546,630		$	653,078	$	893,552
December 31, 2018
CMBS, fair value option	$	2,872,381	$	998,820	(1)	$	320,158	$	678,662
Intangible assets - servicing rights		N/A		44,632	(2)		—		44,632
Lease intangibles, net		N/A		29,327			—		29,327
Loans held-for-sale, fair value option, commercial		46,249		47,622			34,105		13,517
Loans held-for-investment		3,357		3,357			—		3,357
Investment in unconsolidated entities		N/A		44,129	(3)		—		44,129
Properties, net		N/A		272,043			230,995		41,048
	$	2,921,987	$	1,439,930		$	585,258	$	854,672

(1) Includes $943.6 million and $957.5 million of CMBS eliminated in consolidation against VIE liabilities pursuant to ASC 810 as of March 31, 2019 and December 31, 2018, respectively.

(2) Includes $24.3 million and $24.1 million of servicing rights intangibles eliminated in consolidation against VIE assets pursuant to ASC 810 as of March 31, 2019 and December 31, 2018, respectively.

(3) Includes $35.8 million and $22.0 million of investment in unconsolidated entities eliminated in consolidation against VIE assets pursuant to ASC 810 as of March 31, 2019 and December 31, 2018, 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 $284.7 million as of both March 31, 2019 and December 31, 2018:

Property Type	March 31, 2019		December 31, 2018
Office	56.7	%	56.5	%
Retail	24.1	%	24.1	%
Multifamily	7.7	%	7.8	%
Mixed Use	5.0	%	5.1	%
Self-storage	4.5	%	4.5	%
Hotel	2.0	%	2.0	%
	100.0	%	100.0	%

Geographic Location	March 31, 2019		December 31, 2018
South East	37.9	%	37.9	%
North East	22.4	%	22.4	%
South West	17.8	%	18.0	%
West	9.8	%	9.8	%
Midwest	6.8	%	6.8	%
Mid Atlantic	5.3	%	5.1	%
	100.0	%	100.0	%

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New Credit Facilities and Amendments

Refer to Notes 9 and 10 of our Condensed Consolidated Financial Statements for a detailed discussion of new credit facilities and amendments to existing credit facilities executed since December 31, 2018.

Borrowings under Various Secured Financing Arrangements

The following table is a summary of our secured financing facilities as of March 31, 2019 (dollars in thousands):

					Pledged							Approved
					Asset		Maximum					but		Unallocated
	Current	Extended			Carrying		Facility			Outstanding		Undrawn		Financing
	Maturity	Maturity (a)	Pricing		Value		Size			Balance		Capacity (b)		Amount (c)
Lender 1 Repo 1	(d)	(d)	LIBOR + 1.60% to 5.75%		$	1,723,488	$	2,000,000		$	1,341,314	$	—	$	658,686
Lender 2 Repo 1	Apr 2020	Apr 2023	LIBOR + 1.50% to 2.50%			645,636		900,000	(e)		467,390		37,362		395,248
Lender 4 Repo 2	May 2021	May 2023	LIBOR + 1.70% to 3.25%			1,073,533		1,000,000			664,637		50,200		285,163
Lender 6 Repo 1	Aug 2021	N/A	LIBOR + 1.50% to 2.50%			451,409		600,000			361,291		—		238,709
Lender 6 Repo 2	Jan 2024	N/A	GBP LIBOR + 2.45% to 2.75%, EURIBOR + 2.25%			714,538		559,524			545,880		—		13,644
Lender 7 Repo 1	Sep 2021	Sep 2023	LIBOR + 1.50% to 2.25%			123,071		250,000			99,064		—		150,936
Lender 10 Repo 1	May 2021	May 2023	LIBOR + 1.50% to 2.75%			200,455		164,840			160,480		—		4,360
Lender 11 Repo 1	Feb 2021	N/A	LIBOR + 2.10%			—		400,000			—		—		400,000
Lender 11 Repo 2	Sep 2019	Sep 2023	LIBOR + 2.00% to 2.50%			354,912		500,000			220,690		50,000		229,310
Lender 12 Repo 1	Jun 2021	Jun 2024	LIBOR + 2.10% to 2.45%			233,971		250,000			176,250		—		73,750
Lender 13 Repo 1	(f)	(f)	LIBOR + 1.50%			137,420		200,000			106,124		—		93,876
Lender 7 Secured Financing	Feb 2021	Feb 2023	LIBOR + 2.25%	(g)		—		650,000	(h)		—		—		650,000
Lender 8 Secured Financing	Aug 2019	N/A	LIBOR + 4.00%			—		—			—		—		—
Conduit Repo 2	Nov 2019	Nov 2020	LIBOR + 2.25%			116,967		200,000			91,280		—		108,720
Conduit Repo 3	Feb 2020	Feb 2021	LIBOR + 2.10%			26,158		150,000			18,884		—		131,116
MBS Repo 1	(i)	(i)	N/A			—		—			—		—		—
MBS Repo 2	Dec 2020	N/A	LIBOR + 1.55% to 1.75%			222,303		159,202			159,202		—		—
MBS Repo 3	(j)	(j)	LIBOR + 1.30% to 1.85%			714,884		428,414			428,414		—		—
MBS Repo 4	(k)	N/A	LIBOR + 1.25%			151,613		100,000			60,000		32,917		7,083
MBS Repo 5	Dec 2028	Jun 2029	4.22%			57,618		150,000			55,389		—		94,611
Investing and Servicing Segment Property Mortgages	May 2020 to Jun 2026	N/A	Various			264,146		242,499			223,465		—		19,034
Ireland Mortgage	Oct 2025	N/A	1.93%			448,324		354,875			354,875		—		—
Woodstar I Mortgages	Nov 2025 to Oct 2026	N/A	3.72% to 3.97%			343,540		276,748			276,748		—		—
Woodstar I Government Financing	Mar 2026 to Jun 2049	N/A	1.00% to 5.00%			197,385		130,607			130,607		—		—
Woodstar II Mortgages	Jan 2028 to Apr 2028	N/A	3.81% to 3.85%			526,736		417,669			417,669		—		—
Woodstar II Government Financing	Jun 2030 to Aug 2052	N/A	1.00% to 3.19%			38,680		25,229			25,229		—		—
Medical Office Mortgages	Dec 2021	Dec 2023	LIBOR + 2.50%			672,442		524,499			492,828		—		31,671
Master Lease Mortgages	Oct 2027	N/A	4.38%			330,998		194,900			194,900		—		—
Infrastructure Acquisition Facility	Sep 2021	Sep 2022	Various	(l)		1,455,572		1,528,327			1,175,677		—		352,650
Infrastructure Repo	Feb 2020	Feb 2021	LIBOR + 1.75%			307,636		500,000			257,318		—		242,682
Term Loan A	Dec 2020	Dec 2021	LIBOR + 2.25%	(g)		931,519		300,000			300,000		—		—
Revolving Secured Financing	Dec 2020	Dec 2021	LIBOR + 2.25%	(g)		—		100,000			—		100,000		—
FHLB	Feb 2021	N/A	Various			676,836		2,000,000			500,000		—		1,500,000
					$	13,141,790	$	15,257,333			9,305,605	$	270,479	$	5,681,249
Unamortized net discount											(911)
Unamortized deferred financing costs											(69,784)
										$	9,234,910

(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 lender 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 lender.

(d) Maturity date for borrowings collateralized by loans is September 2019 with an additional extension option to September 2021.  Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions and not to exceed September 2025.   

(e) The initial maximum facility size of $600.0 million may be increased to $900.0 million at our option, subject to certain conditions.

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(f) Maturity date for borrowings collateralized by loans is May 2020 with an additional extension option to August 2021.  Borrowings collateralized by loans existing at maturity may remain outstanding until such loan collateral matures, subject to certain specified conditions.

(g) Subject to borrower’s option to choose alternative benchmark based rates pursuant to the terms of the credit agreement.

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

(i) Facility carries a rolling 11-month term which may reset monthly with the lender’s consent. This facility carries no maximum facility size. 

(j) Facility carries a rolling 12-month term which may reset monthly with the lender’s consent. Current maturity is March 2020. This facility carries no maximum facility size. Amounts reflect the outstanding balance as of March 31, 2019.

(k) The date that is 270 days after the buyer delivers notice to seller, subject to a maximum date of May 2020.

(l) Consists of an annual interest rate of the applicable currency benchmark index + 1.50%. The spread increases 25 bps in each of the second and third years of the facility which was entered into in September 2018.

As of March 31, 2019, Wells Fargo Bank, N.A. is our largest repurchase facility creditor through the Lender 1 Repo 1 facility and the MBS Repo 4 facility.

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, 2018	$	8,761,624	$	8,885,381	$	(123,757)	(a)
March 31, 2019		9,305,605		9,766,206		(460,601)	(b)

(a) Variance primarily due to the following: (i) $83.0 million repaid on the Lender 4 Repo 2 facility in December 2018; and (ii) $37.0 million repaid on the Lender 2 Repo 1 facility in December 2018.

(b) Variance primarily due to the late quarter timing of commercial loan sales and loan repayments, all of which resulted in paydowns of the corresponding credit facilities which financed these assets.

Borrowings under Unsecured Senior Notes

During the three months ended March 31, 2019 and 2018, the weighted average effective borrowing rate on our unsecured senior notes was 5.0% and 4.9%, respectively. The effective borrowing rate includes the effects of underwriter purchase discount and 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 upon the amounts outstanding and contractual terms of the financing facilities in effect as of March 31, 2019 (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 2019	$	648,639	$	10,088	$	(163,600)		$	495,127
Third Quarter 2019		436,540		35,626		(60,162)			412,004
Fourth Quarter 2019		682,021		14,261		(192,083)			504,199
First Quarter 2020		867,912		16,346		(599,438)	(1)		284,820
Total	$	2,635,112	$	76,321	$	(1,015,283)		$	1,696,150

(1) Includes $428.4 million of repayments associated with a secured financing facility that carries a rolling 12-month term which may reset monthly with the lender’s consent.

In the normal course of business, the Company is in discussions with its lenders to extend or amend 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, 2019, we had 100,000,000 shares of preferred stock available for issuance and 219,698,655 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, including other secured as well as unsecured forms of borrowing and sale of certain investment securities which no longer meet our return requirements.

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Off-Balance Sheet Arrangements

We have relationships with unconsolidated entities and financial partnerships, such as entities often referred to as VIEs. Our maximum risk of loss associated with our involvement in VIEs is limited to the carrying value of our investment in the entity and any unfunded capital commitments. Refer to Note 14 of the Condensed Consolidated Financial Statements for further discussion.

Dividends

We intend to continue to make regular quarterly distributions to holders of our common stock. 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 corporate rates to the extent that it annually distributes less than 100% of its net taxable income. We intend to continue to pay regular quarterly dividends to our stockholders in an amount approximating our net taxable income, 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, 2019:

Declare Date	Record Date	Payment Date	Amount		Frequency
2/28/19	3/29/19	4/15/19	$	0.48	Quarterly

On May 8, 2019, our board of directors declared a dividend of $0.48 per share for the second quarter of 2019, which is payable on July 15, 2019 to common stockholders of record as of June 28, 2019.

Leverage Policies

Our strategies with regards to use of leverage have not changed significantly since December 31, 2018.  Refer to our Form 10-K for a description of our strategies regarding use of leverage.

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Contractual Obligations and Commitments

Contractual obligations as of March 31, 2019 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)	$	9,305,605	$	770,161	$	2,465,563	$	3,397,756	$	2,672,125
Unsecured senior notes		1,950,000		—		1,200,000		250,000		500,000
Loan funding commitments (b)		1,727,378		1,080,081		586,184		61,113		—
Infrastructure Lending Segment commitments (c)		341,803		338,962		2,841		—		—
Future lease commitments		26,509		6,519		7,840		656		11,494
Total	$	13,351,295	$	2,195,723	$	4,262,428	$	3,709,525	$	3,183,619

(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 $212.4 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 $221.0 million under revolvers and letters of credit and $120.8 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.

Critical Accounting Estimates

Refer to the section of our Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates” for a full discussion of our critical accounting estimates.  Our critical accounting estimates have not materially changed since December 31, 2018.

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 have not changed materially since December 31, 2018.  Refer to our Form 10-K, Item 7A for further discussion.

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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 Manager’s 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, 2019 and December 31, 2018 (dollars in thousands):

	Face Value of		Aggregate Notional Value of		Number of
	Loans Held-for-Sale		Credit Index Instruments		Credit Index Instruments
March 31, 2019	$	149,428	$	39,000	4
December 31, 2018	$	46,249	$	24,000	3

Capital Market Risk

We are exposed to risks related to the equity capital markets and our related ability to raise capital through the issuance of our common stock or other equity instruments. We are also exposed to risks related to the debt capital markets, and our related ability to finance our business through borrowings under repurchase obligations or other debt instruments. As a REIT, we are required to distribute a significant portion of our taxable income annually, which constrains our ability to accumulate operating cash flow and therefore requires us to utilize debt or equity capital to finance our business. We seek to mitigate these risks by monitoring the debt and equity capital markets to inform our decisions on the amount, timing and terms of capital we raise.

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 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, 2019 and December 31, 2018 (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, 2019
Loans held-for-sale	$	449,428	$	443,400	23
RMBS, available-for-sale		302,229		109,000	3
Secured financing agreements		726,625		690,176	12
Unsecured senior notes		1,000,000		970,000	2
	$	2,478,282	$	2,212,576	40
Instrument hedged as of December 31, 2018
Loans held-for-sale	$	346,300	$	337,700	10
RMBS, available-for-sale		309,497		109,000	3
Secured financing agreements		1,085,717		1,029,376	16
Unsecured senior notes		1,000,000		970,000	2
	$	2,741,514	$	2,446,076	31

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

	Variable rate
	investments and		3.0%		2.0%		1.0%		1.0%
Income (Expense) Subject to Interest Rate Sensitivity	indebtedness (1)		Increase		Increase		Increase		Decrease (2)
Investment income from variable rate investments	$	9,397,840	$	277,030	$	184,255	$	91,480	$	(74,185)
Interest expense from variable rate debt, net of interest rate derivatives		(7,275,650)		(219,952)		(146,921)		(73,786)		74,082
Net investment income from variable rate instruments	$	2,122,190	$	57,078	$	37,334	$	17,694	$	(103)
Impact per diluted shares outstanding			$	0.20	$	0.13	$	0.06	$	—

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

(2) Assumes LIBOR does not go below 0%.

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, 2019 GBP closing rate of 1.3031, Euro (“EUR”) closing rate of 1.1219, Canadian Dollar (“CAD”) closing rate of 0.7494, and Australian Dollar (“AUD”) closing rate of 0.7094.

Carrying Value of Net Investment		Local Currency	Number of Foreign Exchange Contracts		Aggregate Notional Value of Hedges Applied		Expiration Range of Contracts
$	3,605	GBP	1		$	4,206	April 2019
	74,789	GBP	41			73,272	April 2019 – June 2020
	7,827	EUR	3			11,028	April 2019
	26,531	GBP	20			33,548	April 2019 – July 2021
	31,587	EUR	8			36,926	May 2020 – March 2022
	18,927	EUR	14			29,477	May 2019 – August 2022
	3,005	GBP	1			4,117	April 2019
	92,995	GBP	18			116,946	April 2019 – January 2022
	23,829	GBP	5			59,573	April 2021
	3,621	AUD	3			5,335	April 2019 – October 2019
	5,350	CAD	15			6,443	April 2019 – October 2022
	2,252	EUR	16			5,948	July 2019 – October 2022
	157,119	EUR	15	(1)		232,574	June 2019 – June 2020
	28,133	GBP	11			36,352	June 2019 – December 2021
	56,736	GBP	44			77,893	May 2019 – November 2021
	12,506	GBP	1			11,910	April 2020
	1,613	EUR	—			—	N/A
$	550,425		216		$	745,548

(1) These foreign exchange contracts hedge our EUR currency exposure created by our acquisition of the Ireland Portfolio. 

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, 2019 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, 2019.

Issuer Purchases of Equity Securities

There were no purchases of common stock during the three months ended March 31, 2019.

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
10.1		Master Repurchase and Securities Contract, dated as of February 6, 2019, among SPT Infrastructure Finance Sub-4, LLC, SPT Infrastructure Finance Sub-4 (DT), LLC, SPT Infrastructure Finance Sub-4 (OT), Ltd. and MUFG Bank, Ltd.
10.2		Amended and Restated Advances, Collateral Pledge and Security Agreement, dated as of July 7, 2017, between the Federal Home Loan Bank of Chicago (“FHLB”) and Prospect Mortgage Insurance, LLC (“PMI”) (the “Amended and Restated Advances, Collateral Pledge and Security Agreement”)
10.3		Supplement to Amended and Restated Advances, Collateral Pledge and Security Agreement, dated as of July 7, 2017, among PMI, SMRF Trust III (the “SMRF Trust III”), SMRF Trust III-A (“SMRF Trust III-A”, and together with SMRF Trust III, the “Trusts”), Wilmington Trust, National Association, solely as Delaware Trustee of the Trusts, and the FHLB (the “Supplement to Amended and Restated Advances, Collateral Pledge and Security Agreement”)
10.4		Letter agreement, dated March 15, 2019, between PMI and FHLB supplementing the Amended and Restated Advances, Collateral Pledge and Security Agreement dated July 7, 2017 and the Supplement to Amended and Restated Advances, Collateral Pledge and Security Agreement dated July 7, 2017, between PMI and the FHLB
10.5		Sixth Amended and Restated Master Repurchase and Securities Contract, dated as of April 10, 2019, among Starwood Property Mortgage Sub-2, L.L.C., Starwood Property Mortgage Sub-2-A, L.L.C. and SPT CA Fundings 2, LLC, as sellers, and Wells Fargo, National Association, as buyer
10.6		Second Amendment, dated as of April 11, 2019, to the Third Amended and Restated Credit Agreement, dated as of February 28, 2018, among Starwood Property Mortgage Sub-10, L.L.C. and Starwood Property Mortgage Sub-10-A, L.L.C., as borrowers, Starwood Property Trust, Inc. and certain subsidiaries of thereof as guarantors, the lenders from time to time party thereto and Bank of America, N.A., as administrative agent thereunder
10.7	*	Form of Restricted Stock Award Agreement
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
101.SCH		XBRL Taxonomy Extension Schema Document
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document
101.LAB		XBRL Taxonomy Extension Label Linkbase Document
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

*Indicates management contract or compensatory plan or arrangement.

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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 8, 2019	By:	/s/ BARRY S. STERNLICHT
		Barry S. Sternlicht Chief Executive Officer Principal Executive Officer
Date: May 8, 2019	By:	/s/ RINA PANIRY
		Rina Paniry Chief Financial Officer, Treasurer, Chief Accounting Officer and Principal Financial Officer

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