Starwood Property Trust (STWD) 10-Q 2019 Q3 Quarterly report

0001465128us-gaap:CommercialMortgageBackedSecuritiesMemberstwd:FairValueOptionSecuritiesMember2019-09-30

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 September 30, 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

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

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, $0.01 par value per share	STWD	New York Stock Exchange

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

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

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

Large accelerated filer ⌧	Accelerated filer ◻
Non-accelerated filer ◻	Smaller reporting company ☐
	Emerging growth company ☐

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

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

The number of shares of the issuer’s common stock, $0.01 par value, outstanding as of November 4, 2019 was 281,929,348.

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, our Quarterly Report on Form 10-Q for the quarters ended March 31, 2019 and June 30, 2019 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	9
	Notes to Condensed Consolidated Financial Statements	11
	Note 1 Business and Organization	11
	Note 2 Summary of Significant Accounting Policies	12
	Note 3 Acquisitions and Divestitures	17
	Note 4 Loans	18
	Note 5 Investment Securities	23
	Note 6 Properties	27
	Note 7 Investment in Unconsolidated Entities	29
	Note 8 Goodwill and Intangibles	30
	Note 9 Secured Borrowings	32
	Note 10 Unsecured Senior Notes	35
	Note 11 Loan Securitization/Sale Activities	36
	Note 12 Derivatives and Hedging Activity	38
	Note 13 Offsetting Assets and Liabilities	40
	Note 14 Variable Interest Entities	40
	Note 15 Related-Party Transactions	42
	Note 16 Stockholders’ Equity and Non-Controlling Interests	44
	Note 17 Earnings per Share	46
	Note 18 Accumulated Other Comprehensive Income	47
	Note 19 Fair Value	48
	Note 20 Income Taxes	56
	Note 21 Commitments and Contingencies	56
	Note 22 Segment Data	58
	Note 23 Subsequent Events	64
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	65
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	102
Item 4.	Controls and Procedures	105
Part II	Other Information
Item 1.	Legal Proceedings	106
Item 1A.	Risk Factors	106
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	107
Item 3.	Defaults Upon Senior Securities	107
Item 4.	Mine Safety Disclosures	107
Item 5.	Other Information	107
Item 6.	Exhibits	108

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
	September 30, 2019		December 31, 2018
Assets:
Cash and cash equivalents	$	284,117	$	239,824
Restricted cash		110,541		248,041
Loans held-for-investment, net ($479,169 and $0 held at fair value)		8,919,653		8,532,356
Loans held-for-sale ($1,170,193 and $671,282 held at fair value)		1,442,119		1,187,552
Loans transferred as secured borrowings		—		74,346
Investment securities ($252,882 and $262,319 held at fair value)		809,137		906,468
Properties, net		2,729,538		2,784,890
Intangible assets ($18,249 and $20,557 held at fair value)		119,947		145,033
Investment in unconsolidated entities		126,115		171,765
Goodwill		259,846		259,846
Derivative assets		81,483		52,691
Accrued interest receivable		51,777		60,355
Other assets		250,773		152,922
Variable interest entity (“VIE”) assets, at fair value		59,249,054		53,446,364
Total Assets	$	74,434,100	$	68,262,453
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	234,120	$	217,663
Related-party payable		24,486		44,043
Dividends payable		137,273		133,466
Derivative liabilities		4,781		15,415
Secured financing agreements, net		8,248,088		8,683,565
Collateralized loan obligations, net		927,436		—
Unsecured senior notes, net		1,926,693		1,998,831
Secured borrowings on transferred loans, net		—		74,239
VIE liabilities, at fair value		58,018,209		52,195,042
Total Liabilities		69,521,086		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, 0 shares issued and outstanding		—		—
Common stock, $0.01 per share, 500,000,000 shares authorized, 287,117,159 issued and 281,937,019 outstanding as of September 30, 2019 and 280,839,692 issued and 275,659,552 outstanding as of December 31, 2018		2,871		2,808
Additional paid-in capital		5,121,671		4,995,156
Treasury stock (5,180,140 shares)		(104,194)		(104,194)
Accumulated other comprehensive income		52,377		58,660
Accumulated deficit		(417,529)		(348,998)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,655,196		4,603,432
Non-controlling interests in consolidated subsidiaries		257,818		296,757
Total Equity		4,913,014		4,900,189
Total Liabilities and Equity	$	74,434,100	$	68,262,453

Note: In addition to the VIE assets and liabilities which are separately presented, our condensed consolidated balance sheet as of September 30, 2019 includes assets of $1.1 billion and liabilities of $0.9 billion related to a consolidated collateralized loan obligation (“CLO”), which is considered to be a VIE.  The CLO’s assets can only be used to settle obligations of the CLO, and the CLO’s liabilities do not have recourse to Starwood Property Trust, Inc. Refer to Note 14 for additional discussion of VIEs.

See notes to condensed consolidated financial statements.

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				For the Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Revenues:
Interest income from loans	$	172,030	$	154,501	$	546,912	$	443,825
Interest income from investment securities		16,676		11,508		56,853		37,567
Servicing fees		14,333		27,824		47,774		71,206
Rental income		84,654		91,132		255,784		261,133
Other revenues		637		754		2,668		2,131
Total revenues		288,330		285,719		909,991		815,862
Costs and expenses:
Management fees		30,238		26,519		76,227		84,655
Interest expense		123,156		102,658		387,954		281,433
General and administrative		39,766		31,203		112,274		98,873
Acquisition and investment pursuit costs		163		6,527		579		8,465
Costs of rental operations		31,568		30,191		91,874		92,781
Depreciation and amortization		28,269		34,293		86,075		103,187
Loan loss provision, net		(39)		929		3,242		27,726
Other expense		123		76		1,777		677
Total costs and expenses		253,244		232,396		760,002		697,797
Other income (loss):
Change in net assets related to consolidated VIEs		61,767		33,289		164,761		129,888
Change in fair value of servicing rights		(625)		(974)		(2,308)		(8,991)
Change in fair value of investment securities, net		266		301		995		7,854
Change in fair value of mortgage loans held-for-sale, net		32,521		3,940		65,678		26,573
Earnings (loss) from unconsolidated entities		2,747		2,625		(31,636)		6,633
Gain on sale of investments and other assets, net		21,157		1,462		28,157		25,559
Gain on derivative financial instruments, net		21,933		11,735		19,694		27,498
Foreign currency loss, net		(15,664)		(4,078)		(17,134)		(3,793)
Total other-than-temporary impairment (“OTTI”)		(267)		—		(267)		—
Noncredit portion of OTTI recognized in other comprehensive income		267		—		267		—
Net impairment losses recognized in earnings		—		—		—		—
Loss on extinguishment of debt		(4,624)		(2,540)		(10,738)		(2,726)
Other loss, net		(50)		(1,421)		(123)		(815)
Total other income		119,428		44,339		217,346		207,680
Income before income taxes		154,514		97,662		367,335		325,745
Income tax provision		(4,513)		(8,281)		(8,380)		(14,480)
Net income		150,001		89,381		358,955		311,265
Net income attributable to non-controlling interests		(9,605)		(4,845)		(21,160)		(17,567)
Net income attributable to Starwood Property Trust, Inc.	$	140,396	$	84,536	$	337,795	$	293,698
					��
Earnings per share data attributable to Starwood Property Trust, Inc.:
Basic	$	0.50	$	0.31	$	1.20	$	1.11
Diluted	$	0.49	$	0.31	$	1.19	$	1.09

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				For the Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Net income	$	150,001	$	89,381	$	358,955	$	311,265
Other comprehensive income (loss) (net change by component):
Cash flow hedges		—		(6)		—		(24)
Available-for-sale securities		(579)		737		(1,045)		2,923
Foreign currency translation		(4,168)		(945)		(5,238)		(4,903)
Other comprehensive loss		(4,747)		(214)		(6,283)		(2,004)
Comprehensive income		145,254		89,167		352,672		309,261
Less: Comprehensive income attributable to non-controlling interests		(9,605)		(4,845)		(21,160)		(17,567)
Comprehensive income attributable to Starwood Property Trust, Inc.	$	135,649	$	84,322	$	331,512	$	291,694

See notes to condensed consolidated financial statements.

6

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity

For the Three Months Ended September 30, 2019 and 2018

(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, July 1, 2019	286,451,361	$	2,864	$	5,103,771	5,180,140	$	(104,194)	$	(421,858)	$	57,124	$	4,637,707	$	265,544	$	4,903,251
Proceeds from DRIP Plan	10,751		—		253	—		—		—		—		253		—		253
Redemption of Class A Units for common stock	219,831		2		4,695	—		—		—		—		4,697		(4,697)		—
Equity offering costs	—		—		(19)	—		—		—		—		(19)		—		(19)
Share-based compensation	435,216		5		12,971	—		—		—		—		12,976		—		12,976
Net income	—		—		—	—		—		140,396		—		140,396		9,605		150,001
Dividends declared, $0.48 per share	—		—		—	—		—		(136,067)		—		(136,067)		—		(136,067)
Other comprehensive loss, net	—		—		—	—		—		—		(4,747)		(4,747)		—		(4,747)
VIE non-controlling interests	—		—		—	—		—		—		—		—		(2,615)		(2,615)
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		658		658
Distributions to non-controlling interests	—		—		—	—		—		—		—		—		(10,677)		(10,677)
Balance, September 30, 2019	287,117,159	$	2,871	$	5,121,671	5,180,140	$	(104,194)	$	(417,529)	$	52,377	$	4,655,196	$	257,818	$	4,913,014
Balance, July 1, 2018	267,541,825	$	2,675	$	4,738,969	5,180,140	$	(104,194)	$	(260,762)	$	68,134	$	4,444,822	$	254,869	$	4,699,691
Proceeds from DRIP Plan	6,530		—		145	—		—		—		—		145		—		145
Equity offering costs	—		—		(5)	—		—		—		—		(5)		—		(5)
Conversion of 2019 Convertible Notes	11,181,546		112		215,265	—		—		—		—		215,377		—		215,377
Share-based compensation	441,315		4		5,845	—		—		—		—		5,849		—		5,849
Manager incentive fee paid in stock	131,179		2		2,842	—		—		—		—		2,844		—		2,844
Net income	—		—		—	—		—		84,536		—		84,536		4,845		89,381
Dividends declared, $0.48 per share	—		—		—	—		—		(132,117)		—		(132,117)		—		(132,117)
Other comprehensive loss, net	—		—		—	—		—		—		(214)		(214)		—		(214)
VIE non-controlling interests	—		—		—	—		—		—		—		—		(1,267)		(1,267)
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		12,189		12,189
Distributions to non-controlling interests	—		—		—	—		—		—		—		—		(9,596)		(9,596)
Balance, September 30, 2018	279,302,395	$	2,793	$	4,963,061	5,180,140	$	(104,194)	$	(308,343)	$	67,920	$	4,621,237	$	261,040	$	4,882,277

See notes to condensed consolidated financial statements.

7

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Equity (Continued)

For the Nine Months Ended September 30, 2019 and 2018

(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	27,887		—		632	—		—		—		—		632		—		632
Redemption of Class A Units for common stock	974,176		10		21,060	—		—		—		—		21,070		(21,070)		—
Equity offering costs	—		—		(27)	—		—		—		—		(27)		—		(27)
Conversion of 2019 Convertible Notes	3,611,918		36		67,526	—		—		—		—		67,562		—		67,562
Share-based compensation	1,168,123		12		26,352	—		—		—		—		26,364		—		26,364
Manager incentive fee paid in stock	495,363		5		10,972	—		—		—		—		10,977		—		10,977
Net income	—		—		—	—		—		337,795		—		337,795		21,160		358,955
Dividends declared, $1.44 per share	—		—		—	—		—		(406,326)		—		(406,326)		—		(406,326)
Other comprehensive loss, net	—		—		—	—		—		—		(6,283)		(6,283)		—		(6,283)
VIE non-controlling interests	—		—		—	—		—		—		—		—		(2,792)		(2,792)
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		5,294		5,294
Distributions to non-controlling interests	—		—		—	—		—		—		—		—		(41,531)		(41,531)
Balance, September 30, 2019	287,117,159	$	2,871	$	5,121,671	5,180,140	$	(104,194)	$	(417,529)	$	52,377	$	4,655,196	$	257,818	$	4,913,014
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	21,512		—		459	—		—		—		—		459		—		459
Equity offering costs	—		—		(22)	—		—		—		—		(22)		—		(22)
Conversion of 2019 Convertible Notes	11,181,546		112		215,265	—		—		—		—		215,377		—		215,377
Common stock repurchased	—		—		—	573,255		(12,090)		—		—		(12,090)		—		(12,090)
Share-based compensation	1,215,137		12		16,442	—		—		—		—		16,454		—		16,454
Manager incentive fee paid in stock	900,891		9		18,633	—		—		—		—		18,642		—		18,642
Net income	—				—	—		—		293,698		—		293,698		17,567		311,265
Dividends declared, $1.44 per share	—		—		—	—		—		(384,729)		—		(384,729)		—		(384,729)
Other comprehensive loss, net	—		—		—	—		—		—		(2,004)		(2,004)		—		(2,004)
VIE non-controlling interests	—		—		—	—		—		—		—		—		(291)		(291)
Contributions from non-controlling interests	—		—		—	—		—		—		—		—		387,481		387,481
Distributions to non-controlling interests	—		—		(2,962)	—		—		—		—		(2,962)		(244,185)		(247,147)
Sale of controlling interest in majority owned property asset	—		—		—	—		—		—		—		—		(319)		(319)
Balance, September 30, 2018	279,302,395	$	2,793	$	4,963,061	5,180,140	$	(104,194)	$	(308,343)	$	67,920	$	4,621,237	$	261,040	$	4,882,277

See notes to condensed consolidated financial statements.

8

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited, amounts in thousands)

	For the Nine Months Ended
	September 30,
	2019		2018
Cash Flows from Operating Activities:
Net income	$	358,955	$	311,265
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Amortization of deferred financing costs, premiums and discounts on secured borrowings		25,942		18,156
Amortization of discounts and deferred financing costs on unsecured senior notes		5,830		9,674
Accretion of net discount on investment securities		(10,338)		(12,013)
Accretion of net deferred loan fees and discounts		(24,193)		(28,954)
Share-based compensation		26,364		16,454
Share-based component of incentive fees		10,977		18,642
Change in fair value of investment securities		(995)		(7,854)
Change in fair value of consolidated VIEs		(32,984)		(12,173)
Change in fair value of servicing rights		2,308		8,991
Change in fair value of loans held-for-sale		(65,678)		(26,573)
Change in fair value of derivatives		(16,043)		(24,339)
Foreign currency loss, net		17,134		3,734
Gain on sale of investments and other assets		(28,157)		(25,559)
Impairment charges on properties and related intangibles		1,392		1,864
Loan loss provision, net		3,242		27,726
Depreciation and amortization		86,172		101,760
Loss (earnings) from unconsolidated entities		31,636		(6,633)
Distributions of earnings from unconsolidated entities		9,730		5,001
Loss on extinguishment of debt		10,738		2,726
Origination and purchase of loans held-for-sale, net of principal collections		(2,549,697)		(1,386,609)
Proceeds from sale of loans held-for-sale		1,774,794		1,243,109
Changes in operating assets and liabilities:
Related-party payable, net		(19,557)		(17,083)
Accrued and capitalized interest receivable, less purchased interest		(71,906)		(37,314)
Other assets		(112,723)		(32,348)
Accounts payable, accrued expenses and other liabilities		(2,734)		22,997
Net cash (used in) provided by operating activities		(569,791)		174,647
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment		(2,987,685)		(3,495,080)
Proceeds from principal collections on loans		2,312,992		2,225,575
Proceeds from loans sold		945,066		742,496
Purchase of investment securities		(5,165)		(312,339)
Proceeds from sales of investment securities		3,978		6,016
Proceeds from principal collections on investment securities		118,892		355,757
Infrastructure lending business combination		—		(2,011,428)
Proceeds from sales and insurance recoveries on properties		52,336		105,548
Purchases and additions to properties and other assets		(22,977)		(44,741)
Investment in unconsolidated entities		(8,365)		(3,100)
Distribution of capital from unconsolidated entities		12,455		21,448
Payments for purchase or termination of derivatives		(36,360)		(18,210)
Proceeds from termination of derivatives		12,979		15,521
Net cash provided by (used in) investing activities		398,146		(2,412,537)

See notes to condensed consolidated financial statements.

9

Starwood Property Trust, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows (Continued)

(Unaudited, amounts in thousands)

	For the Nine Months Ended
	September 30,
	2019		2018
Cash Flows from Financing Activities:
Proceeds from borrowings	$	6,084,209	$	6,845,138
Principal repayments on and repurchases of borrowings		(5,549,756)		(3,880,450)
Payment of deferred financing costs		(45,403)		(63,219)
Proceeds from common stock issuances		632		459
Payment of equity offering costs		(27)		(22)
Payment of dividends		(402,519)		(378,096)
Contributions from non-controlling interests		5,294		9,066
Distributions to non-controlling interests		(41,531)		(247,147)
Purchase of treasury stock		—		(12,090)
Issuance of debt of consolidated VIEs		149,949		26,849
Repayment of debt of consolidated VIEs		(158,315)		(166,387)
Distributions of cash from consolidated VIEs		38,607		76,294
Net cash provided by financing activities		81,140		2,210,395
Net decrease in cash, cash equivalents and restricted cash		(90,505)		(27,495)
Cash, cash equivalents and restricted cash, beginning of period		487,865		418,273
Effect of exchange rate changes on cash		(2,702)		(757)
Cash, cash equivalents and restricted cash, end of period	$	394,658	$	390,021
Supplemental disclosure of cash flow information:
Cash paid for interest	$	367,291	$	241,173
Income taxes paid		8,848		8,223
Supplemental disclosure of non-cash investing and financing activities:
Dividends declared, but not yet paid	$	136,533	$	132,408
Consolidation of VIEs (VIE asset/liability additions)		6,103,915		3,438,933
Deconsolidation of VIEs (VIE asset/liability reductions)		341,186		1,395,168
Reclassification of residential loans held-for-sale to held-for-investment		340,948		—
Settlement of 2019 Convertible Notes in shares		75,525		245,172
Settlement of loans transferred as secured borrowings		74,692		—
Net assets acquired through foreclosure		27,416		—
Redemption of Class A Units for common stock		21,070		—
Lease liabilities arising from obtaining right-of-use assets		9,626		—
Net assets acquired from consolidated VIEs		8,613		27,737
Fair value of assets acquired, net of cash and restricted cash		—		2,020,037
Fair value of liabilities assumed		—		8,609
Contribution of Woodstar II Portfolio net assets from non-controlling interests		—		378,415

See notes to condensed consolidated financial statements.

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Starwood Property Trust, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

As of September 30, 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 4 reportable business segments as of September 30, 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.

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2. Summary of Significant Accounting Policies

Balance Sheet Presentation of Securitization Variable Interest Entities

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

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

The VIE liabilities initially represent investment securities on our balance sheet (pre-consolidation). Upon consolidation of these VIEs, our associated investment securities are eliminated, as is the interest income related to those securities. Similarly, the fees we earn in our roles as special servicer of the bonds issued by the consolidated VIEs or as collateral administrator of the consolidated VIEs are also eliminated. Finally, 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 and nine months ended September 30, 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, we have financed a pool of our loans through a collateralized loan obligation (“CLO”) which is considered a VIE. We also hold interests in certain other entities which are considered VIEs as the limited partners of those entities with equity at risk do not collectively possess (i) the right to remove the general partner or dissolve the partnership without cause or (ii) the right to participate in significant decisions made by the partnership.

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

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

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

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

For securitization VIEs in which we are determined to be the primary beneficiary, all of the underlying assets, liabilities and equity of the structures are recorded on our books, and the initial investment, along with any associated unrealized holding gains and losses, are eliminated in consolidation. Similarly, the interest income earned from these structures, as well as the fees paid by these trusts to us in our capacity as special servicer, are eliminated in consolidation. Further, 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 1% of our consolidated securitization VIE assets, with the remaining 99% representing loans. However, it is important to note that the fair value of our securitization VIE assets is determined by reference to our securitization VIE liabilities as permitted under ASU 2014-13, Consolidation (Topic 810): Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity. In other words, our VIE liabilities are more reliably measurable than the VIE assets, resulting in our current measurement methodology which utilizes this value to determine the fair value of our securitization VIE assets as a whole. As a result, these percentages are not necessarily indicative of the relative fair values of each of these asset categories if the assets were to be valued individually.

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

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

Fair Value Option

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

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

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Fair Value Measurements

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

As discussed above, we measure the assets and liabilities of consolidated securitization VIEs at fair value pursuant to our election of the fair value option. The securitization VIEs in which we invest are “static”; that is, 0 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 or we have elected to apply the fair value option at purchase.

Loan Impairment

We evaluate each loan classified as held-for-investment not under the fair value option 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 as of January 1, 2019 resulted in the

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recognition of a $12.0 million lease liability and corresponding right-of-use asset, which are classified within “Accounts payable, accrued expenses and other liabilities” and “Other assets”, respectively, in our condensed consolidated balance sheet as of September 30, 2019.

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 (the “Convertible Notes”) (see Notes 10 and 17) and (iv) non-controlling interests that are redeemable with our common stock (see Note 16). Potential dilutive shares are excluded from the calculation if they have an anti-dilutive effect in the period.

Nearly all of the Company’s unvested RSUs and RSAs contain rights to receive non-forfeitable dividends and thus are participating securities. In addition, the non-controlling interests that are redeemable with our common stock are considered participating securities because they earn a preferred return indexed to the dividend rate on our common stock (see Note 16). Due to the existence of these participating securities, the two-class method of computing EPS is required, unless another method is determined to be more dilutive. Under the two-class method, undistributed earnings are reallocated between shares of common stock and participating securities. For the three and nine months ended September 30, 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.

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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.

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 and Divestitures

Investing and Servicing Segment Property Portfolio

During the three and nine months ended September 30, 2019, our Investing and Servicing Segment acquired $8.6 million in net assets of a commercial real estate property from a CMBS trust for a gross purchase price of $8.8 million. This property, aggregated with the controlling interests in 18 remaining commercial real estate properties acquired from CMBS trusts prior to December 31, 2018 for an aggregate acquisition price of $278.2 million, comprise the Investing and Servicing Segment Property Portfolio (the “REIS Equity Portfolio”). When the properties are acquired from CMBS trusts that are consolidated as VIEs on our balance sheet, the acquisitions are reflected as repayment of debt of consolidated VIEs in our condensed consolidated statements of cash flows.

During the three and nine months ended September 30, 2019, we sold a property within the Investing and Servicing Segment for $51.5 million. In connection with this sale, we recognized a gain of $20.7 million within gain on sale of investments and other assets in our condensed consolidated statements of operations, of which $4.0 million was attributable to non-controlling interests. During the three and nine months ended September 30, 2018, we sold 1 and 6 properties, respectively, within the Investing and Servicing Segment for $8.7 million and $48.7 million, respectively, recognizing a total gain on sale of $1.4 million and $18.2 million, respectively, within gain on sale of investments and other assets in our condensed consolidated statements 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 nine months ended September 30, 2018, $3.7 million of the gain on sale was attributable to non-controlling interests. NaN of the gain on sale was attributable to non-controlling interests during the three months ended September 30, 2018.

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4. Loans

Our loans held-for-investment are accounted for at amortized cost and our loans held-for-sale are accounted for at the lower of cost or fair value, unless we have elected the fair value option for either. The following tables summarize our investments in mortgages and loans by subordination class as of September 30, 2019 and December 31, 2018 (dollars in thousands):

							Weighted
					Weighted		Average Life
	Carrying		Face		Average		(“WAL”)
September 30, 2019	Value		Amount		Coupon (1)		(years)(2)
First mortgages (3)	$	6,532,017	$	6,557,131	6.2	%	2.0
First priority infrastructure loans		1,281,815		1,292,807	5.5	%	4.6
Subordinated mortgages (4)		53,008		54,143	8.6	%	3.0
Mezzanine loans (3)		545,494		546,434	11.2	%	1.8
Residential loans, fair value option (5)		479,169		465,344	6.1	%	3.6
Other		60,995		64,731	8.2	%	1.8
Total loans held-for-investment		8,952,498		8,980,590
Loans held-for-sale, fair value option, residential (5)		701,610		677,548	6.4	%	3.5
Loans held-for-sale, commercial ($468,583 under fair value option)		576,577		566,891	4.1	%	8.3
Loans held-for-sale, infrastructure		164,122		168,445	3.4	%	1.8
Total gross loans		10,394,807		10,393,474
Loan loss allowance		(33,035)		—
Total net loans	$	10,361,772	$	10,393,474
December 31, 2018
First mortgages (3)	$	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 (4)		52,778		53,996	8.9	%	3.7
Mezzanine loans (3)		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) Calculated using LIBOR or other applicable index rates as of September 30, 2019 and December 31, 2018 for variable rate loans

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

(3) First mortgages include first mortgage loans and any contiguous mezzanine loan components because as a whole, the expected credit quality of these loans is more similar to that of a first mortgage loan.  The application of this methodology resulted in mezzanine loans with carrying values of $809.5 million and $1.0 billion being classified as first mortgages as of September 30, 2019 and December 31, 2018, respectively.

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

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(5) During the three and nine months ended September 30, 2019, $340.9 million of residential loans held-for-sale were reclassified into residential loans held-for-investment.

During the three and nine months ended September 30, 2018, the Company received distributions totaling $2.8 million and $15.1 million, respectively, from a profit participation in a mortgage loan that was repaid in 2016. The loan was secured by a retail and hospitality property located in the Times Square area of New York City. The profit participation is accounted for as a loan in accordance with the acquisition, development and construction accounting guidance within ASC 310-10, which resulted in distributions in excess of basis being recognized within interest income in our consolidated statements of operations. There were 0 distributions from profit participations received during the three and nine months ended September 30, 2019.

As of September 30, 2019, our variable rate loans held-for-investment were as follows (dollars in thousands):

	Carrying		Weighted-average
September 30, 2019	Value		Spread Above Index
Commercial loans	$	6,716,670	4.4	%
First priority infrastructure loans		1,281,815	3.4	%
Total variable rate loans held-for-investment	$	7,998,485	4.3	%

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 September 30, 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
September 30, 2019
1	$	598		$	—		$	—		$	—	$	23,013		$	—	$	23,611	0.2	%
2		3,640,565			—			37,999			207,997		—			—		3,886,561	37.4	%
3		2,695,552			—			3,032			337,497		31,141			—		3,067,222	29.5	%
4		—			—			—			—		—			—		—	—	%
5		59,866			—			—			—		—			—		59,866	0.6	%
N/A		135,436	(1)		1,281,815	(2)		11,977	(1)		—		6,841	(1)		—		1,436,069	13.8	%
	$	6,532,017		$	1,281,815		$	53,008		$	545,494	$	60,995		$	—		8,473,329
Residential loans held-for-investment, fair value option																		479,169	4.6	%
Loans held-for-sale																		1,442,309	13.9	%
Total gross loans																	$	10,394,807	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) Principally 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 September 30, 2019, we concluded that no additional impairment charges or releases thereof were required. During the nine months ended September 30, 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). In April 2019, we foreclosed on a first mortgage loan on a grocery distribution facility located in Orlando, Florida and obtained physical possession of the underlying collateral property. As of the foreclosure date, the appraised value of the property exceeded the $18.5 million carrying value of the loan ($21.9 million unpaid principal and interest balance net of a $3.4 million unamortized discount, and 0 reserve for impaired loan).

As of September 30, 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 September 30, 2019: (i) $135.4 million first mortgage and contiguous mezzanine loans ($107.2 million unpaid principal balance, which does not reflect $38.4 million of accrued interest and $21.6 million allowance for impaired loan) and (ii) $6.8 million unsecured promissory note ($7.7 million unpaid principal balance and 0 reserve for impaired loan).

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Also included in the allowance for impaired loans is $8.3 million related to 2 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 September 30, 2019.

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 and nine months ended September 30, 2019 was $156.5 million and $178.1 million, respectively.

As of September 30, 2019, we held TDRs with unfunded commitments of $4.3 million. There were 0 TDRs for which interest income was recognized during the three and nine months ended September 30, 2019.

As of September 30, 2019, the department store loans discussed above were 90 days or greater past due, as were $5.2 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 non-accretable difference. 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 Nine Months Ended
	September 30,
	2019		2018
Allowance for loan losses at January 1	$	39,151	$	4,330
Provision for (reversal of) loan losses		3,242		(2,127)
Provision for impaired loans		—		29,853
Charge-offs		(9,358)		—
Recoveries		—		—
Allowance for loan losses at September 30	$	33,035	$	32,056
Recorded investment in loans related to the allowance for loan loss	$	254,070	$	287,242

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

	For the Nine Months Ended
	September 30,
	2019		2018
Balance at January 1	$	9,794,254	$	7,382,641
Acquisitions/originations/additional funding		5,607,829		5,006,725
Acquisition of Infrastructure Lending Portfolio		—		1,826,423
Capitalized interest (1)		79,869		44,293
Basis of loans sold (2)		(2,713,237)		(1,985,388)
Loan maturities/principal repayments		(2,429,078)		(2,383,658)
Discount accretion/premium amortization		24,193		28,954
Changes in fair value		65,678		26,573
Unrealized foreign currency translation loss		(37,191)		(17,095)
Loan loss provision, net		(3,242)		(27,726)
Loan foreclosure		(27,303)		—
Transfer to/from other asset classifications		—		50
Balance at September 30	$	10,361,772	$	9,901,792

(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 September 30, 2019 and December 31, 2018 (amounts in thousands):

	Carrying Value as of
	September 30, 2019		December 31, 2018
RMBS, available-for-sale	$	195,297	$	209,079
RMBS, fair value option (1)		111,122		87,879
CMBS, fair value option (1)		1,127,637		1,157,508
Held-to-maturity (“HTM”) debt securities, amortized cost		556,255		644,149
Equity security, fair value		11,286		11,893
Subtotal—Investment securities		2,001,597		2,110,508
VIE eliminations (1)		(1,192,460)		(1,204,040)
Total investment securities	$	809,137	$	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 September 30, 2019
Purchases	$	—	$	52,845	$	10,214	$	—	$	—	$	(57,894)	$	5,165
Sales		—		—		49,725		—		—		(49,725)		—
Principal collections		7,445		4,680		15,859		35,069		—		(17,196)		45,857
Three Months Ended September 30, 2018
Purchases	$	—	$	45,095	$	26,258	$	289,100	$	—	$	(68,579)	$	291,874
Acquisition of Infrastructure Lending Portfolio		—		—		—		65,060		—		—		65,060
Sales		2,046		—		22,065		—		—		(18,902)		5,209
Principal collections		9,246		119		22,031		20,577		—		(17,903)		34,070

	RMBS,		RMBS, fair		CMBS, fair		HTM		Equity		Securitization
	available-for-sale		value option		value option		Securities		Security		VIEs (1)		Total
Nine Months Ended September 30, 2019
Purchases	$	—	$	79,117	$	62,427	$	—	$	—	$	(136,379)	$	5,165
Sales		—		41,501		112,426		—		—		(149,949)		3,978
Principal collections		20,222		9,772		37,768		89,737		—		(38,607)		118,892
Nine Months Ended September 30, 2018
Purchases	$	—	$	45,095	$	118,166	$	289,100	$	—	$	(140,022)	$	312,339
Acquisition of Infrastructure Lending Portfolio		—		—		—		65,060		—		—		65,060
Sales		2,853		—		30,012		—		—		(26,849)		6,016
Principal collections		27,432		119		82,812		323,061		—		(77,667)		355,757

(1) Represents RMBS and CMBS, fair value option amounts eliminated due to 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 September 30, 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 September 30, 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
September 30, 2019
RMBS	$	152,632	$	(9,805)	$	142,827	$	(333)	$	52,803	$	—	$	52,470	$	195,297
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)
September 30, 2019
RMBS	3.3	%	BB-	5.8
December 31, 2018
RMBS	3.7	%	CCC-	6.0

(1) Calculated using the September 30, 2019 and December 31, 2018 one-month LIBOR rate of 2.016% 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 September 30, 2019, approximately $165.9 million, or 84.9%, of RMBS were variable rate and paid interest at LIBOR plus a weighted average spread of 1.24%. 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 September 30, 2019 and December 31, 2018 (amounts in thousands):

	September 30, 2019		December 31, 2018
Principal balance	$	286,717	$	309,497
Accretable yield		(56,148)		(54,779)
Non-accretable difference		(87,742)		(99,154)
Total discount		(143,890)		(153,933)
Amortized cost	$	142,827	$	155,564

The principal balance of credit deteriorated RMBS was $270.9 million and $290.8 million as of September 30, 2019 and December 31, 2018, respectively. Accretable yield related to these securities totaled $50.0 million and $49.5 million as of September 30, 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 and nine months ended September 30, 2019 (amounts in thousands):

			Non-Accretable
Three Months Ended September 30, 2019	Accretable Yield		Difference
Balance as of July 1, 2019	$	54,821	$	92,570
Accretion of discount		(2,446)		—
Principal write-downs, net		—		(1,055)
Transfer to/from non-accretable difference		3,773		(3,773)
Balance as of September 30, 2019	$	56,148	$	87,742
Nine Months Ended September 30, 2019
Balance as of January 1, 2019	$	54,779	$	99,154
Accretion of discount		(7,484)		—
Principal write-downs, net		—		(2,559)
Transfer to/from non-accretable difference		8,853		(8,853)
Balance as of September 30, 2019	$	56,148	$	87,742

We have engaged a third party manager who specializes in RMBS to execute the trading of RMBS, the cost of which was $0.3 million for both the three months ended September 30, 2019 and 2018, and $1.1 million and $1.3 million for the nine months ended September 30, 2019 and 2018, respectively, recorded as management fees in the accompanying condensed consolidated statements of operations.

The following table presents the gross unrealized losses and estimated fair value of any available-for-sale securities that were in an unrealized loss position as of September 30, 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 September 30, 2019
RMBS	$	1,520	$	—	$	(333)	$	—
As of December 31, 2018
RMBS	$	2,148	$	—	$	(31)	$	—

As of both September 30, 2019 and December 31, 2018, there was 1 security with unrealized losses reflected in the table above. After evaluating the security and recording adjustments for credit-related OTTI, we concluded that the remaining unrealized losses reflected above were noncredit-related and would be recovered from the 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 September 30, 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 $2.8 billion, respectively. As of September 30, 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 $111.1 million and $61.7 million, respectively. The $1.2 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 $46.3 million at September 30, 2019) is eliminated against VIE liabilities before arriving at our GAAP balance for fair value option investment securities.

As of September 30, 2019, $118.4 million of our CMBS were variable rate and NaN 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 September 30, 2019 and December 31, 2018 (amounts in thousands):

	Net Carrying Amount		Gross Unrealized		Gross Unrealized
	(Amortized Cost)		Holding Gains		Holding Losses		Fair Value
September 30, 2019
CMBS	$	360,640	$	1,008	$	(2,968)	$	358,680
Preferred interests		141,567		1,254		—		142,821
Infrastructure bonds		54,048		122		(1,369)		52,801
Total	$	556,255	$	2,384	$	(4,337)	$	554,302
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 September 30, 2019 (amounts in thousands):

			Preferred		Infrastructure
	CMBS		Interests		Bonds		Total
Less than one year	$	334,249	$	—	$	—	$	334,249
One to three years		26,391		—		9,013		35,404
Three to five years		—		141,567		—		141,567
Thereafter		—		—		45,035		45,035
Total	$	360,640	$	141,567	$	54,048	$	556,255

As of September 30, 2019 and December 31, 2018, $20.7 million and $21.2 million, respectively, of our infrastructure bonds with an aggregate principal balance of $33.7 million and $34.2 million, respectively, were originally acquired with deteriorated credit quality and had 0 accretable yield and an aggregate non-accretable difference of $13.0 million.

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 $11.3 million and $11.9 million as of September 30, 2019 and December 31, 2018, respectively. As of September 30, 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 1 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 $498.1 million and debt of $343.3 million as of September 30, 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 $627.9 million and federal, state and county sponsored financing and other debt of $405.8 million as of September 30, 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 8 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 $600.7 million and debt of $437.6 million as of September 30, 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 $759.5 million and debt of $489.4 million as of September 30, 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 $192.3 million as of September 30, 2019.

Investing and Servicing Segment Property Portfolio

The REIS Equity Portfolio is comprised of 19 commercial real estate properties and 1 equity interest in an unconsolidated commercial real estate property. The REIS Equity Portfolio includes total gross properties and lease intangibles of $337.5 million and debt of $225.4 million as of September 30, 2019. Refer to Note 3 for further discussion of the REIS Equity Portfolio.

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The table below summarizes our properties held as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	Depreciable Life	September 30, 2019		December 31, 2018
Property Segment
Land and land improvements	0 – 15 years	$	640,831	$	648,972
Buildings and building improvements	5 – 45 years		1,969,326		1,980,283
Furniture & fixtures	3 – 7 years		51,148		46,048
Investing and Servicing Segment
Land and land improvements	0 – 15 years		69,640		82,332
Buildings and building improvements	3 – 40 years		221,796		213,010
Furniture & fixtures	2 – 5 years		2,752		2,158
Commercial and Residential Lending Segment (1)
Land and land improvements	0 – 7 years		11,386		—
Buildings	20 – 23 years		16,067		—
Properties, cost			2,982,946		2,972,803
Less: accumulated depreciation			(253,408)		(187,913)
Properties, net		$	2,729,538	$	2,784,890

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

During the three and nine months ended September 30, 2019, we sold 1 operating property for $51.5 million. In connection with this sale, we recognized a gain of $20.7 million within gain on sale of investments and other assets in our condensed consolidated statements of operations, of which $4.0 million was attributable to non-controlling interests. During the three and nine months ended September 30, 2018, we sold 1 and 9 operating properties for $8.7 million and $104.3 million, respectively, recognizing a gain on sale of $1.4 million and $25.1 million, respectively, within gain on sale of investments and other assets in our condensed consolidated statements of operations. NaN of these properties was acquired by a third party which already held a $0.3 million non-controlling interest in the property. During the nine months ended September 30, 2018, $3.7 million of the gain on sale was attributable to non-controlling interests. NaN of the gain on sale was attributable to non-controlling interests during the three months ended September 30, 2018.

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)	$	67,051
2020		170,056
2021		117,115
2022		110,199
2023		94,699
Thereafter		818,876
Total	$	1,377,996

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7. Investment in Unconsolidated Entities

The table below summarizes our investments in unconsolidated entities as of September 30, 2019 and December 31, 2018 (dollars in thousands):

	Participation /	Carrying value as of
	Ownership % (1)	September 30, 2019		December 31, 2018
Equity method:
Retail Fund	33%	$	71,824	$	114,362
Investor entity which owns equity in an online real estate company	50%		9,441		9,372
Equity interests in commercial real estate	50%		2,165		6,294
Equity interest in and advances to a residential mortgage originator (2)	N/A		9,404		9,082
Various	25% - 50%		8,277		6,984
			101,111		146,094
Other:
Equity interest in a servicing and advisory business (3)	4%		—		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%		15,779		10,239
			25,004		25,671
		$	126,115	$	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.

(3) During the nine months ended September 30, 2019, we received a capital distribution of $8.4 million and our equity interest was reduced to 4%.

We own a 33% equity interest in a fund that owns 4 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 nine months ended September 30, 2019, the Retail Fund reported unrealized decreases in the fair value of its real estate properties, which resulted in a $46.0 million decrease to our investment. This amount was recognized within earnings (loss) from unconsolidated entities in our condensed consolidated statement of operations during the nine months ended September 30, 2019. Refer to Note 23 for further discussion.

As of September 30, 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 0 differences between the carrying value of our equity method investments and the underlying equity in the net assets of the investees as of September 30, 2019.

During the three and nine months ended September 30, 2019, we did not become aware of any observable price changes in our other investments accounted for under the fair value practicability exception (whereby we measure those investments at cost, less impairment, plus or minus observable price changes) 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 September 30, 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 September 30, 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 September 30, 2019 and December 31, 2018, the balance of the domestic servicing intangible was net of $24.8 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 September 30, 2019 and December 31, 2018, the domestic servicing intangible had a balance of $43.0 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 September 30, 2019 and December 31, 2018 (amounts in thousands):

	As of September 30, 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	$	18,249	$	—	$	18,249	$	20,557	$	—	$	20,557
In-place lease intangible assets		186,660		(109,145)		77,515		198,220		(100,873)		97,347
Favorable lease intangible assets		35,917		(11,734)		24,183		36,895		(9,766)		27,129
Total net intangible assets	$	240,826	$	(120,879)	$	119,947	$	255,672	$	(110,639)	$	145,033

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The following table summarizes the activity within intangible assets for the nine months ended September 30, 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
Acquisition of additional REIS Equity Portfolio property		—		277		—		277
Amortization		—		(15,284)		(2,519)		(17,803)
Sales		—		(2,612)		—		(2,612)
Foreign exchange loss		—		(1,160)		(321)		(1,481)
Impairment (1)		—		(1,053)		(106)		(1,159)
Changes in fair value due to changes in inputs and assumptions		(2,308)		—		—		(2,308)
Balance as of September 30, 2019	$	18,249	$	77,515	$	24,183	$	119,947

(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)	$	4,935
2020		16,502
2021		14,197
2022		11,727
2023		8,556
Thereafter		45,781
Total	$	101,698

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9. Secured Borrowings

Secured Financing Agreements

The following table is a summary of our secured financing agreements in place as of September 30, 2019 and December 31, 2018 (dollars in thousands):

												Outstanding Balance at
	Current		Extended		Weighted Average	Pledged Asset			Maximum			September 30,		December 31,
	Maturity		Maturity (a)		Pricing	Carrying Value			Facility Size			2019		2018
Repurchase Agreements:
Commercial Loans	Aug 2020 to Jan 2024	(b)	Aug 2021 to Apr 2028	(b)	(c)	$	4,458,046		$	7,879,032	(d)	$	2,945,331	$	3,598,311
Residential Loans	Feb 2021		N/A		LIBOR + 2.10%		16,332			400,000			13,190		—
Infrastructure Loans	Feb 2020 to Jul 2022		Feb 2021 to Jul 2027		LIBOR + 1.75%		316,759			1,000,000			263,664		—
Conduit Loans	Feb 2020 to Jun 2022		Feb 2021 to Jun 2023		LIBOR + 2.22%		358,405			363,225			234,025		35,034
CMBS/RMBS	Jun 2020 to Dec 2028	(e)	Sep 2020 to Oct 2029	(e)	(f)		1,069,948			778,025			676,648		656,405
Total Repurchase Agreements							6,219,490			10,420,282			4,132,858		4,289,750
Other Secured Financing:
Borrowing Base Facility	Apr 2022		Apr 2024		LIBOR + 2.25%		49,754			650,000	(g)		37,313		—
Infrastructure Acquisition Facility	Sep 2021		Sep 2022		(h)		1,062,553			1,086,201			883,173		1,551,148
Property Mortgages - Fixed rate	Nov 2024 to Aug 2052	(i)	N/A		3.41%		1,921,951			1,453,116			1,452,970		1,475,382
Property Mortgages - Variable rate	May 2020 to Apr 2025		N/A		LIBOR + 2.44%		831,275			694,351			643,261		645,344
Term Loan and Revolver	(j)		N/A		(j)		N/A	(j)		500,000			400,000		300,000
FHLB	Feb 2021		N/A		(k)		1,164,449			2,000,000			780,754		500,000
Total Other Secured Financing							5,029,982			6,383,668			4,197,471		4,471,874
						$	11,249,472		$	16,803,950			8,330,329		8,761,624
Unamortized net discount													(2,920)		(963)
Unamortized deferred financing costs													(79,321)		(77,096)
												$	8,248,088	$	8,683,565

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

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

(c) Certain facilities with an outstanding balance of $593.8 million as of September 30, 2019 are indexed to GBP LIBOR and EURIBOR. The remainder have a weighted average rate of LIBOR + 1.93%.

(d) The aggregate initial maximum facility size of $6.8 billion may be increased at our option, subject to certain conditions. This amount includes such upsizes.

(e) Certain facilities with an outstanding balance of $393.8 million as of September 30, 2019 carry a rolling 11-month or 12-month term which may reset monthly with the lender's consent. These facilities carry 0 maximum facility size.

(f) A facility with an outstanding balance of $78.6 million as of September 30, 2019 has a fixed annual interest rate of 4.09%. All other facilities are variable rate with a weighted average rate of LIBOR + 1.55%.

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

(h) 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.

(i) The weighted average maturity is 9.3 years as of September 30, 2019.

(j) Consists of: (i) a $400.0 million term loan facility that matures in July 2026 with an annual interest rate of LIBOR + 2.50%; and (ii) a $100.0 million revolving credit facility that matures in July 2024 with an annual interest rate of LIBOR + 3.00%. These facilities are secured by the equity interests in certain of our subsidiaries which totaled $3.5 billion as of September 30, 2019.

(k) FHLB financing with an outstanding balance of $312.0 million as of September 30, 2019 has a weighted average fixed annual interest rate of 2.08%. The remainder is variable rate with a weighted average rate of LIBOR + 0.28%.

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.

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In February 2019, we entered into a $500.0 million Infrastructure Loans repurchase facility. The facility carries a one-year initial term with a one-year extension option and an annual interest rate of LIBOR + 1.75%.

In February 2019, we amended a Residential Loans repurchase facility to increase available borrowings by $200.0 million and extend the current maturity from June 2019 to February 2021.

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.

In April 2019, we amended the Borrowing Base Facility to extend the current maturity from February 2021 to April 2022 with 2 one-year extension options.

In July 2019, we entered into the following credit agreements: (i) a $400.0 million term loan facility that carries a seven-year term and an annual interest rate of LIBOR + 2.50%; and (ii) a $100.0 million revolving credit facility that carries a five-year term and an annual interest rate of LIBOR + 3.00%. A portion of the net proceeds from the term loan was used to repay the amount outstanding under our previous term loan. We recognized a loss on extinguishment of debt of $1.5 million in our condensed consolidated statements of operations in connection with the repayment of our previous term loan.

In July 2019, we entered into a $500.0 million Infrastructure Loans repurchase facility to finance loans within the Infrastructure Lending Segment. The facility carries a three-year revolving period with 2 one-year extension options, 1 of which is at our discretion. The facility also carries a term-match to the respective collateral for an additional five-year term after the last day of the revolving period, with such term-match not to exceed the eight-year life of the facility. The facility has an annual interest rate of 2.00% over the applicable currency benchmark index rate, plus fees associated with the facility as well as each advance.

During the three and nine months ended September 30, 2019, we entered into and amended several Commercial Loans repurchase facilities resulting in an aggregate upsize of $550.0 million and $1.6 billion, respectively, with weighted average spreads over the applicable index rates of index + 2.33% and index + 2.21%, respectively.

Our secured financing agreements contain certain financial tests and covenants. As of September 30, 2019, we were in compliance with all such covenants.

We seek to mitigate risks associated with our repurchase agreements by managing risk related to the credit quality of our assets, interest rates, liquidity, prepayment speeds and market value. The margin call provisions under the majority of our repurchase facilities, consisting of 77% 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 23% of these pertain to our loans held-for-sale, for which we manage credit risk through the purchase of credit index instruments. We further seek to manage risks associated with our repurchase agreements by matching the maturities and interest rate characteristics of our loans with the related repurchase agreement.

For the three and nine months ended September 30, 2019, approximately $8.1 million and $24.9 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations. For the three and nine months ended September 30, 2018, approximately $6.6 million and $17.5 million, respectively, of amortization of deferred financing costs from secured financing agreements was included in interest expense on our condensed consolidated statements of operations.

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Collateralized Loan Obligations

In August 2019, we refinanced a pool of our commercial loans held-for-investment through a CLO, STWD 2019-FL1. On the closing date, the CLO issued $1.1 billion principal amount of notes, of which $936.4 million was purchased by third party investors. We retained $86.6 million of notes, along with preferred shares with a liquidation preference of $77.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash. For the three months ended September 30, 2019, we utilized the reinvestment feature, contributing $1.8 million of additional interests into the CLO.

The following table is a summary of our CLO as of September 30, 2019 (amounts in thousands):

		Face		Carrying		Weighted
	Count	Amount		Value		Average Spread		Maturity
Collateral assets	21	$	1,098,817	$	1,098,817	LIBOR + 3.23%	(a)	Aug 2023	(b)
Financing	1		936,375		927,436	LIBOR + 1.65%	(c)	July 2038	(d)

(a) Represents the weighted-average coupon earned on variable rate loans during the three months ended September 30, 2019. Of the loans financed by the CLO, 9% earned fixed weighted average interest of 6.84%.

(b) Represents the weighted-average maturity, assuming the extended contractual maturity of the collateral assets.

(c) Represents the weighted-average cost of financing incurred during the three months ended September 30, 2019, inclusive of deferred issuance costs.

(d) Repayments of the CLO are tied to timing of the related collateral asset repayments. The term of the CLO financing obligation represents the legal final maturity date.

We incurred $9.2 million of issuance costs in connection with the CLO, which are amortized on an effective yield basis over the estimated life of the CLO. As of September 30, 2019, our unamortized issuance costs were $8.9 million.

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

Maturities

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

	Repurchase		Other Secured
	Agreements		Financing		CLO			Total
2019 (remainder of)	$	53,273	$	405,283	$	—		$	458,556
2020		474,502		198,376		—			672,878
2021		1,123,670		823,199		—			1,946,869
2022		681,928		685,635		—			1,367,563
2023		1,106,086		582,157		—			1,688,243
Thereafter		693,399		1,502,821		936,375	(a)		3,132,595
Total	$	4,132,858	$	4,197,471	$	936,375		$	9,266,704

(a) Assumes utilization of the reinvestment feature.

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10. Unsecured Senior Notes

The following table is a summary of our unsecured senior notes outstanding as of September 30, 2019 and December 31, 2018 (dollars in thousands):

						Remaining
	Coupon		Effective		Maturity	Period of		Carrying Value at
	Rate		Rate (1)		Date	Amortization		September 30, 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	1.3	years		500,000		500,000
2021 Senior Notes (December)	5.00	%	5.32	%	12/15/2021	2.2	years		700,000		700,000
2023 Convertible Notes	4.38	%	4.86	%	4/1/2023	3.5	years		250,000		250,000
2025 Senior Notes	4.75	%	5.04	%	3/15/2025	5.5	years		500,000		500,000
Total principal amount									1,950,000		2,027,969
Unamortized discount—Convertible Notes									(3,865)		(4,644)
Unamortized discount—Senior Notes									(13,216)		(16,416)
Unamortized deferred financing costs									(6,226)		(8,078)
Carrying amount of debt components								$	1,926,693	$	1,998,831
Carrying amount of conversion option equity components recorded in additional paid-in capital for outstanding convertible notes								$	3,755	$	3,755

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

Convertible Senior Notes

During the nine months ended September 30, 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. During the three and nine months ended September 30, 2018, we received redemption notices related to the 2019 Notes with a par amount totaling $263.4 million, of which $235.5 million were settled during the three months ended September 30, 2018 for total consideration of $266.0 million, which was paid via the issuance of 11.2 million shares and cash payments of $20.8 million. The $236.2 million of settlement consideration attributable to the liability component of the 2019 Notes exceeded the proportionate net carrying amount of the liability component by $1.8 million, which was recognized as a loss on extinguishment of debt in our condensed consolidated statements of operations for the three and nine months ended September 30, 2018. The $29.8 million of settlement consideration attributable to the equity component of the 2019 Notes was recognized as a reduction of additional paid-in capital in our condensed consolidated statements of equity for the three and nine months ended September 30, 2018, partially offsetting the $245.2 million fair value of the shares issued.

We recognized interest expense of $3.1 million and $9.3 million during the three and nine months ended September 30, 2019, respectively, from our unsecured Convertible Notes. We recognized interest expense of $5.9 million and $24.8 million during the three and nine months ended September 30, 2018, respectively, from our unsecured Convertible Notes.

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The following table details the conversion attributes of our Convertible Notes outstanding as of September 30, 2019 (amounts in thousands, except rates):

	September 30, 2019			Conversion Spread Value - Shares (3)
	Conversion	Conversion		For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	Rate (1)	Price (2)		2019	2018	2019	2018
2019 Notes	N/A		N/A	—	542	—	559
2023 Notes	38.5959	$	25.91	—	—	—	—
				—	542	—	559

(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 September 30, 2019 and 2018, the market price of the Company’s common stock was $24.22 and $21.52 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 $16.3 million at September 30, 2019 as the closing market price of the Company’s common stock of $24.22 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 $233.7 million as of September 30, 2019.

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 and nine months ended September 30, 2019 and 2018 (amounts in thousands):

					Repayment of
					repurchase
	Face Amount		Proceeds		agreements
For the Three Months Ended September 30,
2019	$	262,528	$	274,714	$	201,363
2018		360,651		372,300		272,156
For the Nine Months Ended September 30,
2019	$	787,160	$	826,932	$	608,348
2018		825,610		854,065		623,538

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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 and nine months ended September 30, 2019, we consolidated the securitization VIEs into which our residential loans were sold. In these instances, we retained interests in the VIEs. 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 September 30,
2019	$	53,288	$	53,249	$	547,660	$	571,333	$	—	$	—
2018		550,000		547,776		374,071		389,044		—		—
For the Nine Months Ended September 30,
2019	$	554,710	$	551,700	$	911,713	$	947,862	$	—	$	—
2018		746,400		742,496		374,071		389,044		—		—

During the three and nine months ended September 30, 2019, we recognized a $6.4 million and $6.7 million, respectively, change in fair value of mortgage loans held-for-sale, net in our condensed consolidated statements of operations in connection with residential mortgage loan securitizations. During the three and nine months ended September 30, 2018, we recognized a $2.4 million change in fair value of mortgage loans held-for-sale, net in our condensed consolidated statements of operations in connection with a residential mortgage loan securitization. During the three and nine months ended September 30, 2019, gains recognized by the Commercial and Residential Lending Segment on sales of commercial loans were $0.5 million and $3.5 million, respectively. During the three and nine months ended September 30, 2018, gains (losses) recognized by the Commercial and Residential Lending Segment on sales of loans were not material.

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 and nine months ended September 30, 2019, the Infrastructure Lending Segment sold loans held-for-sale with an aggregate face amount of $47.3 million and $404.1 million, respectively, for proceeds of $47.0 million and $393.3 million, respectively. A gain of $3.1 million was recognized during the nine months ended September 30, 2019. There was 0 gain recognized during the three months ended September 30, 2019. In connection with these sales, we sold an interest rate swap guarantee for cash payment of $3.1 million and recognized a decrease in fair value of $2.7 million within gain on derivative financial instruments, net in our condensed consolidated statement of operations during the nine months ended September 30, 2019. Refer to Note 12 for further discussion of our interest rate swap guarantees. There were 0 sales of loans by the Infrastructure Lending Segment during the nine months ended September 30, 2018.

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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 September 30, 2019 and December 31, 2018, the Company did not have any designated hedges. As of September 30, 2018, the Company had 1 interest rate swap that had been designated as a cash flow hedge of the interest rate risk associated with forecasted interest payments. During the three and nine months ended September 30, 2018, the impact of this cash flow hedge 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;

● Forward loan purchase commitments whereby we agree to buy a specified amount of residential mortgage loans at a future date for a specified price and the counterparty is contractually obligated to deliver such mortgage loans (see Note 21); and

● Interest rate swap guarantees whereby we guarantee the interest rate swap obligations of certain Infrastructure Lending borrowers. Our interest rate swap guarantees were assumed in connection with the acquisition of the Infrastructure Lending Segment.

The following table summarizes our non-designated derivatives as of September 30, 2019 (notional amounts in thousands):

Type of Derivative	Number of Contracts	Aggregate Notional Amount	Notional Currency	Maturity
Fx contracts – Sell Euros ("EUR")	114	307,452	EUR	November 2019 – November 2022
Fx contracts – Sell Pounds Sterling ("GBP")	97	322,315	GBP	October 2019 – April 2022
Fx contracts – Sell Australian dollar ("AUD")	2	12,307	AUD	October 2019 – November 2021
Fx contracts – Buy GBP	1	921	GBP	October 2019
Interest rate swaps – Paying fixed rates	54	1,292,709	USD	July 2022 – October 2029
Interest rate swaps – Receiving fixed rates	2	970,000	USD	January 2021 – March 2025
Interest rate caps	9	127,528	USD	January 2020 – August 2023
Credit index instruments	5	89,000	USD	November 2054 – August 2061
Forward loan purchase commitments	1	46,486	USD	October 2019
Interest rate swap guarantees	6	390,970	USD	March 2022 – June 2025
Interest rate swap guarantees	1	10,263	GBP	December 2024
Total	292

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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 September 30, 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
	September 30,		December 31,		September 30,		December 31,
	2019		2018		2019		2018
Interest rate contracts	$	24,664	$	30,791	$	3,587	$	14,457
Interest rate swap guarantees		—		—		904		396
Foreign exchange contracts		56,611		21,346		156		562
Credit index instruments		208		554		134		—
Total derivatives	$	81,483	$	52,691	$	4,781	$	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 and nine months ended September 30, 2019 and 2018 (amounts in thousands):

		Amount of Gain (Loss)				Amount of Gain (Loss)
		Recognized in Income for the				Recognized in Income for the
Derivatives Not Designated	Location of Gain (Loss)	Three Months Ended September 30,				Nine Months Ended September 30,
as Hedging Instruments	Recognized in Income	2019		2018		2019		2018
Interest rate contracts	Gain on derivative financial instruments	$	(7,898)	$	4,444	$	(21,733)	$	10,553
Interest rate swap guarantees	Gain on derivative financial instruments		(468)		—		(3,640)		—
Foreign exchange contracts	Gain on derivative financial instruments		30,426		8,073		46,116		17,748
Credit index instruments	Gain on derivative financial instruments		(127)		(782)		(1,049)		(803)
		$	21,933	$	11,735	$	19,694	$	27,498

			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 September 30,	(effective portion)		(effective portion)		(ineffective portion)		Recognized in Income
2019	$	—	$	—	$	—	Interest expense
2018	$	—	$	6	$	—	Interest expense
For the Nine Months Ended September 30,
2019	$	—	$	—	$	—	Interest expense
2018	$	8	$	32	$	—	Interest expense

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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 September 30, 2019
Derivative assets	$	81,483	$	—	$	81,483	$	679	$	20,727	$	60,077
Derivative liabilities	$	4,781	$	—	$	4,781	$	679	$	3,198	$	904
Repurchase agreements		4,132,858		—		4,132,858		4,132,858		—		—
	$	4,137,639	$	—	$	4,137,639	$	4,133,537	$	3,198	$	904
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.

During the three months ended September 30, 2019, we refinanced a pool of our commercial loans held-for-investment through a CLO, which is considered to be a VIE. We are the primary beneficiary of, and therefore consolidate, the CLO in our financial statements as we have both (i) the power to direct the activities in our role as collateral manager that most significantly impact the CLO’s economic performance, and (ii) the obligation to absorb losses and the right to receive benefits from the CLO that could be potentially significant through the subordinate interests we own.

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The following table details the assets and liabilities of our consolidated CLO (amounts in thousands):

	As of
	September 30, 2019
Assets:
Loans held-for-investment	$	1,098,817
Accrued interest receivable		2,384
Other assets		1,183
Total Assets	$	1,102,384
Liabilities
Accounts payable, accrued expenses and other liabilities	$	1,402
Collateralized loan obligations, net		927,436
Total Liabilities	$	928,838

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

We also hold controlling interests in other non-securitization entities that are considered VIEs, 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 $685.2 million and liabilities of $446.2 million as of September 30, 2019. In total, our other consolidated non-securitization VIEs, including SPT Dolphin described above, had net assets of $766.5 million and liabilities of $506.9 million as of September 30, 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 September 30, 2019, 4 of our collateralized debt obligation (“CDO”) structures within our Investing and Servicing Segment were in default or imminent default, which, pursuant to the underlying indentures, changes the rights of the variable interest holders. 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 September 30, 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 September 30, 2019, our maximum risk of loss related to securitization VIEs in which we were not the primary beneficiary was $46.3 million on a fair value basis.

As of September 30, 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 $7.1 billion. The corresponding assets are comprised primarily of commercial mortgage loans with unpaid principal balances corresponding to the amounts of the outstanding debt obligations.

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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 $90.5 million as of September 30, 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.

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 September 30, 2019 and 2018, approximately $19.2 million and $18.4 million, respectively, was incurred for base management fees. For the nine months ended September 30, 2019 and 2018, approximately $57.7 million and $53.9 million, respectively, was incurred for base management fees. As of both September 30, 2019 and December 31, 2018, there were $19.2 million of unpaid base management fees included in related-party payable in our condensed consolidated balance sheets.

Incentive Fee. For the three months ended September 30, 2019 and 2018, approximately $1.8 million and $4.3 million, respectively, was incurred for incentive fees. For the nine months ended September 30, 2019 and 2018, approximately $2.0 million and $19.6 million, respectively, was incurred for incentive fees. As of September 30, 2019 and December 31, 2018, there were $1.8 million and $21.8 million, respectively, of unpaid incentive fees included in related-party payable in our condensed consolidated balance sheets.

Expense Reimbursement. For both the three months ended September 30, 2019 and 2018, approximately $1.9 million was incurred for executive compensation and other reimbursable expenses and recognized within general and administrative expenses in our condensed consolidated statements of operations. For the nine months ended September 30, 2019 and 2018, approximately $5.8 million and $5.9 million, respectively, was incurred for executive compensation and other reimbursable expenses. As of September 30, 2019 and December 31, 2018, approximately $3.4 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 September 30, 2019 and 2018, there were no RSAs granted. Expenses related to the vesting of awards to employees of affiliates of our Manager were $1.2 million and $0.8 million during the three months ended September 30, 2019 and 2018, respectively, and are reflected in general and administrative expenses in our condensed consolidated statements of operations. During the nine months ended September 30, 2019 and 2018, we granted 182,861 and 189,813 RSAs, respectively, at grant date fair values of $4.1 million and $4.0 million, respectively. Expenses related to the vesting of awards to employees of affiliates of our Manager were $3.0 million and $2.1 million during the nine months ended September 30, 2019 and 2018, respectively. These shares generally vest over a three-year period.

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Manager Equity Plan

In May 2017, the Company’s shareholders approved the Starwood Property Trust, Inc. 2017 Manager Equity Plan (the “2017 Manager Equity Plan”), which replaced the Starwood Property Trust, Inc. Manager Equity Plan (“Manager Equity Plan”). In September 2019, we granted 1,200,000 RSUs to our Manager under the 2017 Manager Equity Plan. In April 2018, we granted 775,000 RSUs to our Manager under the 2017 Manager Equity Plan. In March 2017, we granted 1,000,000 RSUs to our Manager under the Manager Equity Plan. In 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 $8.8 million and $3.2 million within management fees in our condensed consolidated statements of operations for the three months ended September 30, 2019 and 2018, respectively. For the nine months ended September 30, 2019 and 2018, we recognized $15.2 million and $9.4 million, respectively, related to these awards. Refer to Note 16 for further discussion of these grants.

Investments in Loans

In September 2019, the Company co-originated a €73.6 million first mortgage loan with SEREF, an affiliate of our Manager. The loan was to a third party borrower for the development of a Grade A office building and convention center in Dublin, Ireland. The Company originated €58.9 million of the loan and SEREF originated €14.7 million. The loan matures in May 2022.

In February 2019, the Company acquired a $60.0 million participation in a $1.0 billion first priority infrastructure term loan which bears interest at LIBOR plus 3.75%. In April 2019 and July 2019, the Company acquired participations of $5.0 million and $16.0 million, respectively, in a $0.3 billion upsize to the term loan. The loan is secured by 2 domestic natural gas power plants. An affiliate of our Manager, Starwood Energy Group, is the borrower under the term loan.

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 and nine months ended September 30, 2019, the Company acquired $97.4 million and $273.5 million, respectively, of loans from a residential mortgage originator in which it holds an equity interest. Also in September 2019, the Company amended a $2.0 million subordinated loan to this residential mortgage originator to extend the maturity from September 2019 to September 2020. Refer to Note 7 for further discussion.

Other Related-Party Arrangements

During the nine months ended September 30, 2019, we engaged Highmark Residential (“Highmark”) (formerly known as Milestone Management), an affiliate of our Manager, to provide property management services for 11 additional properties within our Woodstar I Portfolio, bringing the total number of our properties managed by Highmark to 21. Fees paid to Highmark are calculated as a percentage of gross receipts and are at market terms. During the three and nine months ended September 30, 2019, property management fees paid to Highmark were $0.4 million and $1.1 million, respectively.

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. During the three and nine months ended September 30, 2019, we acquired $8.6 million of net real estate assets from a consolidated CMBS trust for a gross purchase price of $8.8 million. Refer to Note 3 for further discussion of this acquisition. During the nine months ended September 30, 2018, we acquired $27.7 million of net real estate assets from consolidated CMBS trusts for a gross purchase price of $28.0 million. NaN real estate assets were acquired from consolidated CMBS trusts during the three months ended September 30, 2018.

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

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16. Stockholders’ Equity and Non-Controlling Interests

During the nine months ended September 30, 2019, our board of directors declared the following dividends:

Declaration Date	Record Date	Ex-Dividend Date	Payment Date	Amount		Frequency
8/7/19	9/30/19	9/27/19	10/15/19	$	0.48	Quarterly
5/8/19	6/28/19	6/27/19	7/15/19		0.48	Quarterly
2/28/19	3/29/19	3/28/19	4/15/19		0.48	Quarterly

During the nine months ended September 30, 2019, we issued 3.6 million shares of common stock in connection with the settlement of $78.0 million of our 2019 Notes. There were 0 shares of common stock issued in connection with the settlement of our 2019 Notes during the three months ended September 30, 2019. During the three and nine months ended September 30, 2018, we issued 11.2 million shares in connection with the settlement of $235.5 million of our 2019 Notes. Refer to Note 10 for further discussion.

During the nine months ended September 30, 2019 and 2018, there were 0 shares issued under our At-The-Market Equity Offering Sales Agreement. During the nine months ended September 30, 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 0 share or Convertible Notes repurchases under the repurchase program during the nine months ended September 30, 2019. During the nine months ended September 30, 2018, we repurchased 573,255 shares of common stock for $12.1 million and 0 Convertible Notes under our repurchase program.

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 nine months ended September 30, 2019 and 2018 (dollar amounts in thousands):

Grant Date	Type	Amount Granted	Grant Date Fair Value		Vesting Period
September 2019	RSU	1,200,000	$	29,484	(1)
April 2018	RSU	775,000		16,329	3 years
March 2017	RSU	1,000,000		22,240	3 years
May 2015	RSU	675,000		16,511	3 years

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

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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	520,236	1,200,000	1,720,236		24.01
Vested	(499,735)	(662,648)	(1,162,383)		22.10
Forfeited	(14,761)	—	(14,761)		22.07
Balance as of September 30, 2019	1,442,185	1,535,272	2,977,457		22.72

As of September 30, 2019, there were 7.5 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 1-for-one basis, with the consideration paid in either cash or the Company’s common stock, at the determination of the Company. During the three and nine months ended September 30, 2019, redemptions of 0.2 million and 1.0 million of the Class A Units, respectively, were received and settled in common stock. 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 and nine months ended September 30, 2019, we recognized net income attributable to non-controlling interests of $5.2 million and $16.3 million, respectively, associated with these Class A Units. During the three and nine months ended September 30, 2018, we recognized net income attributable to non-controlling interests of $4.8 million and $11.9 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				For the Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Basic Earnings
Income attributable to STWD common stockholders	$	140,396	$	84,536	$	337,795	$	293,698
Less: Income attributable to participating shares not already deducted as non-controlling interests		(1,205)		(970)		(2,779)		(2,725)
Basic earnings	$	139,191	$	83,566	$	335,016	$	290,973
Diluted Earnings
Income attributable to STWD common stockholders	$	140,396	$	84,536	$	337,795	$	293,698
Less: Income attributable to participating shares not already deducted as non-controlling interests		(1,205)		(970)		(2,779)		(2,725)
Add: Interest expense on Convertible Notes (1)		3,071		*		9,306		21,102
Add: Loss on extinguishment of Convertible Notes (1)		—		*		—		1,810
Add: Undistributed earnings to participating shares		188		—		—		—
Less: Undistributed earnings reallocated to participating shares		(182)		—		—		—
Diluted earnings	$	142,268	$	83,566	$	344,322	$	313,885
Number of Shares:
Basic — Average shares outstanding		279,992		265,355		278,934		262,356
Effect of dilutive securities — Convertible Notes (1)		9,649		*		9,857		25,675
Effect of dilutive securities — Contingently issuable shares		38		99		38		99
Effect of dilutive securities — Unvested non-participating shares		233		2		192		—
Diluted — Average shares outstanding		289,912		265,456		289,021		288,130
Earnings Per Share Attributable to STWD Common Stockholders:
Basic	$	0.50	$	0.31	$	1.20	$	1.11
Diluted	$	0.49	$	0.31	$	1.19	$	1.09

(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 was previously 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 periods presented above 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 September 30, 2018.

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As of September 30, 2019 and 2018, participating shares of 13.4 million and 12.2 million, respectively, were excluded from the computation of diluted shares as their effect was already considered under the more dilutive two-class method used above. Such participating shares at September 30, 2019 and 2018 included 10.9 million and 10.2 million potential shares, respectively, of our common stock issuable upon redemption of the Class A Units in SPT Dolphin, as discussed in Note 16.

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 September 30, 2019
Balance at July 1, 2019	$	—	$	53,049	$	4,075	$	57,124
OCI before reclassifications		—		(520)		(4,168)		(4,688)
Amounts reclassified from AOCI		—		(59)		—		(59)
Net period OCI		—		(579)		(4,168)		(4,747)
Balance at September 30, 2019	$	—	$	52,470	$	(93)	$	52,377
Three Months Ended September 30, 2018
Balance at July 1, 2018	$	7	$	60,075	$	8,052	$	68,134
OCI before reclassifications		—		715		(945)		(230)
Amounts reclassified from AOCI		(6)		22		—		16
Net period OCI		(6)		737		(945)		(214)
Balance at September 30, 2018	$	1	$	60,812	$	7,107	$	67,920
Nine Months Ended September 30, 2019
Balance at January 1, 2019	$	—	$	53,515	$	5,145	$	58,660
OCI before reclassifications		—		(986)		(5,238)		(6,224)
Amounts reclassified from AOCI		—		(59)		—		(59)
Net period OCI		—		(1,045)		(5,238)		(6,283)
Balance at September 30, 2019	$	—	$	52,470	$	(93)	$	52,377
Nine Months Ended September 30, 2018
Balance at January 1, 2018	$	25	$	57,889	$	12,010	$	69,924
OCI before reclassifications		8		2,977		(4,903)		(1,918)
Amounts reclassified from AOCI		(32)		(54)		—		(86)
Net period OCI		(24)		2,923		(4,903)		(2,004)
Balance at September 30, 2018	$	1	$	60,812	$	7,107	$	67,920

The reclassifications out of AOCI impacted the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 as follows (amounts in thousands):

	Amounts Reclassified from				Amounts Reclassified from
	AOCI during the Three Months				AOCI during the Nine Months				Affected Line Item
	Ended September 30,				Ended September 30,				in the Statements
Details about AOCI Components	2019		2018		2019		2018		of Operations
Gain (loss) on cash flow hedges:
Interest rate contracts	$	—	$	6	$	—	$	32	Interest expense
Unrealized gains (losses) on available-for-sale securities:
Interest realized upon collection		59		—		59		46	Interest income from investment securities
Net realized (loss) gain on sale of investment		—		(22)		—		8	Gain on sale of investments and other assets, net
Total		59		(22)		59		54
Total reclassifications for the period	$	59	$	(16)	$	59	$	86

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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. In the event that observable inputs are not available, the control processes are designed to assure that the valuation approach utilized is appropriate and consistently applied and the assumptions are reasonable.

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

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

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

Fair Value on a Recurring Basis

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

Loans held-for-sale, commercial

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

48

valued using securitized pricing should be classified in Level II of the fair value hierarchy. Mortgage loans classified in Level III are transferred to Level II if securitized pricing becomes available.

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

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

RMBS

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

CMBS

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

Equity security

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

Domestic servicing rights

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

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Derivatives

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

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

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

Although we have determined that the majority of the inputs used to value our derivatives fall within Level II of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level III inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of September 30, 2019 and December 31, 2018, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level II of the fair value hierarchy.

Liabilities of consolidated VIEs

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

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

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Assets of consolidated VIEs

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

Fair Value on a Nonrecurring Basis

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

Loans held-for-sale, infrastructure

We measure the fair value of infrastructure loans held-for-sale, which are carried at the lower of amortized cost or fair value, utilizing bids periodically received from third parties to acquire these assets. As these bids represent observable market data, we have determined that the fair value of these assets would be classified in Level II of the fair value hierarchy.

Fair Value Only Disclosed

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

Loans held-for-investment, loans held-for-sale and loans transferred as secured borrowings

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

HTM debt securities

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

Secured financing agreements, CLO, unsecured senior notes not convertible and secured borrowings on transferred loans

The fair value of the secured financing agreements, CLO, unsecured senior notes not convertible and secured borrowings on transferred loans are determined by discounting the contractual cash flows at the interest rate we estimate such arrangements would bear if executed in the current market. We have determined that our valuation of these instruments should be classified in Level III of the fair value hierarchy.

Convertible Notes

The fair value of the debt component of our Convertible Notes is estimated by discounting the contractual cash flows at the interest rate we estimate such notes would bear if sold in the current market without the embedded conversion option which, in accordance with ASC 470, is reflected as a component of equity. We have determined that our valuation of our Convertible Notes should be classified in Level III of the fair value hierarchy.

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Fair Value Disclosures

The following tables present our financial assets and liabilities carried at fair value on a recurring basis in the condensed consolidated balance sheets by their level in the fair value hierarchy as of September 30, 2019 and December 31, 2018 (amounts in thousands):

	September 30, 2019
	Total		Level I		Level II		Level III
Financial Assets:
Loans under fair value option	$	1,649,362	$	—	$	225,813	$	1,423,549
RMBS		195,297		—		—		195,297
CMBS		46,299		—		10,419		35,880
Equity security		11,286		11,286		—		—
Domestic servicing rights		18,249		—		—		18,249
Derivative assets		81,483		—		81,483		—
VIE assets		59,249,054		—		—		59,249,054
Total	$	61,251,030	$	11,286	$	317,715	$	60,922,029
Financial Liabilities:
Derivative liabilities	$	4,781	$	—	$	4,781	$	—
VIE liabilities		58,018,209		—		55,748,104		2,270,105
Total	$	58,022,990	$	—	$	55,752,885	$	2,270,105

	December 31, 2018
	Total		Level I		Level II		Level III
Financial Assets:
Loans under 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 and nine months ended September 30, 2019 and 2018 (amounts in thousands):

							Domestic
	Loans at						Servicing				VIE
Three Months Ended September 30, 2019	Fair Value		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
July 1, 2019 balance	$	1,372,398	$	200,874	$	34,283	$	18,874	$	57,667,606	$	(2,374,002)	$	56,920,033
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		32,512		—		432		(625)		(380,973)		28,005		(320,649)
Net accretion		—		2,446		—		—		—		—		2,446
Included in OCI		—		(578)		—		—		—		—		(578)
Purchases / Originations		1,123,553		—		5,165		—		—		—		1,128,718
Sales		(846,047)		—		—		—		—		—		(846,047)
Issuances		—		—		—		—		—		(22,958)		(22,958)
Cash repayments / receipts		(33,054)		(7,445)		(3,343)		—		—		(12,516)		(56,358)
Transfers into Level III		—		—		—		—		—		(122,911)		(122,911)
Transfers out of Level III		(225,813)		—		—		—		—		319,727		93,914
Consolidation of VIEs		—		—		—		—		1,999,780		(85,450)		1,914,330
Deconsolidation of VIEs		—		—		(657)		—		(37,359)		—		(38,016)
September 30, 2019 balance	$	1,423,549	$	195,297	$	35,880	$	18,249	$	59,249,054	$	(2,270,105)	$	58,651,924
Amount of total gains (losses) included in earnings attributable to assets still held at September 30, 2019	$	4,537	$	2,390	$	434	$	(625)	$	(380,973)	$	28,005	$	(346,232)

							Domestic
	Loans at						Servicing				VIE
Three Months Ended September 30, 2018	Fair Value		RMBS		CMBS		Rights		VIE Assets		Liabilities		Total
July 1, 2018 balance	$	897,259	$	235,796	$	24,650	$	22,742	$	48,044,873	$	(2,002,115)	$	47,223,205
Total realized and unrealized gains (losses):
Included in earnings:
Change in fair value / gain on sale		4,036		100		63		(974)		(1,261,314)		371,310		(886,779)
Net accretion		—		2,526		—		—		—		—		2,526
Included in OCI		—		737		—		—		—		—		737
Purchases / Originations		597,318		—		—		—		—		—		597,318
Sales		(565,990)		(2,046)		(3,163)		—		—		—		(571,199)
Issuances		—		—		—		—		—		(18,901)		(18,901)
Cash repayments / receipts		(19,118)		(9,246)		(6,815)		—		—		(17,268)		(52,447)
Transfers into Level III		—		—		27,776		—		—		(259,701)		(231,925)
Transfers out of Level III		—		—		—		—		—		108,123		108,123
Consolidation of VIEs		—		—		3,304		—		1,623,863		(23,095)		1,604,072
Deconsolidation of VIEs		—		—		—		—		(372,812)		48,442		(324,370)
September 30, 2018 balance	$	913,505	$	227,867	$	45,815	$	21,768	$	48,034,610	$	(1,793,205)	$	47,450,360
Amount of total (losses) gains included in earnings attributable to assets still held at September 30, 2018	$	(2,501)	$	2,526	$	(884)	$	(974)	$	(1,261,314)	$	371,310	$	(891,837)

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							Domestic
	Loans at						Servicing				VIE
Nine Months Ended September 30, 2019	Fair Value		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		65,669		—		1,153		(2,308)		39,961		51,907		156,382
Net accretion		—		7,484		—		—		—		—		7,484
Included in OCI		—		(1,044)		—		—		—		—		(1,044)
Purchases / Originations		2,775,787		—		5,165		—		—		—		2,780,952
Sales		(1,774,794)		—		(3,978)		—		—		—		(1,778,772)
Issuances		—		—		—		—		—		(81,681)		(81,681)
Cash repayments / receipts		(88,582)		(20,222)		(8,933)		—		—		(15,786)		(133,523)
Transfers into Level III		—		—		5,350		—		—		(1,374,505)		(1,369,155)
Transfers out of Level III		(225,813)		—		—		—		—		750,546		524,733
Consolidation of VIEs		—		—		—		—		6,103,915		(193,300)		5,910,615
Deconsolidation of VIEs		—		—		11,895		—		(341,186)		34,160		(295,131)
September 30, 2019 balance	$	1,423,549	$	195,297	$	35,880	$	18,249	$	59,249,054	$	(2,270,105)	$	58,651,924
Amount of total gains (losses) included in earnings attributable to assets still held at September 30, 2019	$	6,775	$	7,397	$	101	$	(2,308)	$	39,961	$	51,907	$	103,833

							Domestic
	Loans at						Servicing				VIE
Nine Months Ended September 30, 2018	Fair Value		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		26,669		241		76		(8,991)		(5,055,029)		906,360		(4,130,674)
Net accretion		—		7,967		—		—		—		—		7,967
Included in OCI		—		2,923		—		—		—		—		2,923
Purchases / Originations		1,508,010		—		1,463		—		—		—		1,509,473
Sales		(1,047,755)		(2,853)		(3,163)		—		—		—		(1,053,771)
Issuances		—		—		—		—		—		(26,849)		(26,849)
Cash repayments / receipts		(123,652)		(27,432)		(7,832)		—		—		(75,078)		(233,994)
Transfers into Level III		—		—		27,776		—		—		(950,660)		(922,884)
Transfers out of Level III		(195,510)		—		—		—		—		425,973		230,463
Consolidation of VIEs		—		—		3,304		—		3,438,933		(23,095)		3,419,142
Deconsolidation of VIEs		—		—		—		—		(1,395,168)		139,081		(1,256,087)
September 30, 2018 balance	$	913,505	$	227,867	$	45,815	$	21,768	$	48,034,610	$	(1,793,205)	$	47,450,360
Amount of total (losses) gains included in earnings attributable to assets still held at September 30, 2018	$	(2,023)	$	7,913	$	(1,252)	$	(8,991)	$	(5,055,029)	$	906,360	$	(4,153,022)

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):

	September 30, 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	$	8,712,410	$	8,772,670	$	9,122,972	$	9,178,709
HTM debt securities		556,255		554,302		644,149		643,948
Financial liabilities not carried at fair value:
Secured financing agreements, CLO and secured borrowings on transferred loans	$	9,175,524	$	9,155,331	$	8,757,804	$	8,662,548
Unsecured senior notes		1,926,693		2,027,863		1,998,831		1,945,160

54

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)
	September 30, 2019		Technique	Input	September 30, 2019	December 31, 2018
Loans under fair value option	$	1,423,549	Discounted cash flow	Yield (b)	3.4% - 6.1%	4.6% - 6.1%
				Duration (c)	1.3 - 10.7 years	2.5 - 14.4 years
RMBS		195,297	Discounted cash flow	Constant prepayment rate (a)	3.3% - 19.9%	3.2% - 25.2%
				Constant default rate (b)	1.1% - 4.5%	1.1% - 5.5%
				Loss severity (b)	0% - 96% (e)	0% - 73% (e)
				Delinquency rate (c)	4% - 31%	4% - 31%
				Servicer advances (a)	22% - 84%	21% - 83%
				Annual coupon deterioration (b)	0% - 1.8%	0% - 1.4%
				Putback amount per projected total collateral loss (d)	0% - 28%	0% - 7%
CMBS		35,880	Discounted cash flow	Yield (b)	0% - 715.4%	0% - 473.5%
				Duration (c)	0 - 9.7 years	0 - 9.7 years
Domestic servicing rights		18,249	Discounted cash flow	Debt yield (a)	7.50%	7.75%
				Discount rate (b)	15%	15%
				Control migration (b)	0% - 80%	0% - 80%
VIE assets		59,249,054	Discounted cash flow	Yield (b)	0% - 823.6%	0% - 290.9%
				Duration (c)	0 – 19.3 years	0 - 20.4 years
VIE liabilities		(2,270,105)	Discounted cash flow	Yield (b)	0% - 823.6%	0% - 290.9%
				Duration (c)	0 - 11.5 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) 25% and 55% of the portfolio falls within a range of 45%-80% as of September 30, 2019 and December 31, 2018, respectively.

55

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 September 30, 2019 and December 31, 2018, approximately $2.1 billion 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.

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 and nine months ended September 30, 2019 and 2018 (dollars in thousands):

	For the Three Months Ended September 30,								For the Nine Months Ended September 30,
	2019				2018				2019				2018
Federal statutory tax rate	$	32,448	21.0	%	$	20,509	21.0	%	$	77,140	21.0	%	$	68,406	21.0	%
REIT and other non-taxable income		(28,870)	(18.7)	%		(13,628)	(13.9)	%		(71,042)	(19.3)	%		(57,128)	(17.6)	%
State income taxes		937	0.6	%		1,803	1.8	%		1,597	0.4	%		2,954	0.9	%
Federal benefit of state tax deduction		(196)	(0.1)	%		(378)	(0.4)	%		(335)	(0.1)	%		(620)	(0.2)	%
Other		194	0.1	%		(25)	—	%		1,020	0.3	%		868	0.3	%
Effective tax rate	$	4,513	2.9	%	$	8,281	8.5	%	$	8,380	2.3	%	$	14,480	4.4	%

21. Commitments and Contingencies

As of September 30, 2019, our Commercial and Residential Lending Segment had future commercial loan funding commitments totaling $2.7 billion, of which we expect to fund $2.5 billion. These future funding commitments primarily relate to construction projects, capital improvements, tenant improvements and leasing commissions. Additionally, as of September 30, 2019, our Commercial and Residential Lending Segment had outstanding residential mortgage loan purchase commitments of $46.5 million to a third party residential mortgage originator.

As of September 30, 2019, our Infrastructure Lending Segment had future infrastructure loan funding commitments totaling $189.8 million, including $155.0 million under revolvers and letters of credit (“LCs”), and $34.8 million under delayed draw term loans. As of September 30, 2019, $18.4 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 September 30, 2019, we had 7 outstanding guarantees on interest rate swaps maturing between March 2022 and June 2025. Refer to Note 12 for further discussion.

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

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

56

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				For the Nine Months Ended
	September 30,				September 30,
	2019		2018		2019		2018
Operating lease costs	$	1,667	$	1,245	$	4,177	$	3,721
Short-term lease costs		29		40		92		116
Sublease income		(405)		(396)		(1,209)		(1,231)
Total lease cost	$	1,291	$	889	$	3,060	$	2,606

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 September 30, 2019, is as follows (dollars in thousands):

	For the Three Months Ended		For the Nine Months Ended
	September 30, 2019		September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities—operating	$	1,310	$	3,904

	September 30, 2019
Weighted-average remaining lease term	6.0	years
Weighted-average discount rate	4.4	%

Future maturity of operating lease liabilities:
2019 (remainder of)	$	1,310
2020		6,163
2021		3,480
2022		1,272
2023		1,281
Thereafter		7,208
Total		20,714
Less interest component		(2,513)
Operating lease liability	$	18,201

57

22. Segment Data

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

The table below presents our results of operations for the three months ended September 30, 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	$	145,290	$	22,763	$	—	$	3,977	$	—	$	172,030	$	—	$	172,030
Interest income from investment securities		18,163		810		—		32,556		—		51,529		(34,853)		16,676
Servicing fees		97		—		—		18,243		—		18,340		(4,007)		14,333
Rental income		—		—		72,251		12,403		—		84,654		—		84,654
Other revenues		258		39		125		218		—		640		(3)		637
Total revenues		163,808		23,612		72,376		67,397		—		327,193		(38,863)		288,330
Costs and expenses:
Management fees		363		—		—		18		29,829		30,210		28		30,238
Interest expense		51,844		14,422		19,020		8,891		29,142		123,319		(163)		123,156
General and administrative		7,104		4,315		2,170		22,915		3,184		39,688		78		39,766
Acquisition and investment pursuit costs		506		21		—		(364)		—		163		—		163
Costs of rental operations		765		—		24,784		6,019		—		31,568		—		31,568
Depreciation and amortization		339		15		23,106		4,809		—		28,269		—		28,269
Loan loss provision, net		(39)		—		—		—		—		(39)		—		(39)
Other expense		77		—		46		—		—		123		—		123
Total costs and expenses		60,959		18,773		69,126		42,288		62,155		253,301		(57)		253,244
Other income (loss):
Change in net assets related to consolidated VIEs		—		—		—		—		—		—		61,767		61,767
Change in fair value of servicing rights		—		—		—		57		—		57		(682)		(625)
Change in fair value of investment securities, net		(303)		—		—		22,476		—		22,173		(21,907)		266
Change in fair value of mortgage loans held-for-sale, net		10,088		—		—		22,433		—		32,521		—		32,521
Earnings from unconsolidated entities		2,507		—		223		253		—		2,983		(236)		2,747
Gain (loss) on sale of investments and other assets, net		482		(25)		—		20,700		—		21,157		—		21,157
Gain (loss) on derivative financial instruments, net		15,729		(109)		5,900		(6,376)		6,789		21,933		—		21,933
Foreign currency loss, net		(15,337)		(319)		(8)		—		—		(15,664)		—		(15,664)
Loss on extinguishment of debt		(857)		(2,101)		—		(194)		(1,472)		(4,624)		—		(4,624)
Other loss, net		—		(50)		—		—		—		(50)		—		(50)
Total other income (loss)		12,309		(2,604)		6,115		59,349		5,317		80,486		38,942		119,428
Income (loss) before income taxes		115,158		2,235		9,365		84,458		(56,838)		154,378		136		154,514
Income tax (provision) benefit		(3,194)		475		—		(1,794)		—		(4,513)		—		(4,513)
Net income (loss)		111,964		2,710		9,365		82,664		(56,838)		149,865		136		150,001
Net income attributable to non-controlling interests		—		—		(5,250)		(4,219)		—		(9,469)		(136)		(9,605)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	111,964	$	2,710	$	4,115	$	78,445	$	(56,838)	$	140,396	$	—	$	140,396

58

The table below presents our results of operations for the three months ended September 30, 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
Revenues:
Interest income from loans	$	147,913		3,053	$	—	$	3,535	$	—	$	154,501	$	—	$	154,501
Interest income from investment securities		10,320		107		—		34,477		—		44,904		(33,396)		11,508
Servicing fees		98		—		—		34,100		—		34,198		(6,374)		27,824
Rental income		—		—		76,067		15,065		—		91,132		—		91,132
Other revenues		265		44		169		229		89		796		(42)		754
Total revenues		158,596		3,204		76,236		87,406		89		325,531		(39,812)		285,719
Costs and expenses:
Management fees		453		—		—		18		25,937		26,408		111		26,519
Interest expense		43,322		2,258		19,483		7,396		30,475		102,934		(276)		102,658
General and administrative		7,016		537		1,680		19,131		2,753		31,117		86		31,203
Acquisition and investment pursuit costs		341		6,725		—		(539)		—		6,527		—		6,527
Costs of rental operations		—		—		23,052		7,139		—		30,191		—		30,191
Depreciation and amortization		17		—		28,448		5,828		—		34,293		—		34,293
Loan loss provision, net		929		—		—		—		—		929		—		929
Other expense		76		—		—		—		—		76		—		76
Total costs and expenses		52,154		9,520		72,663		38,973		59,165		232,475		(79)		232,396
Other income (loss):
Change in net assets related to consolidated VIEs		—		—		—		—		—		—		33,289		33,289
Change in fair value of servicing rights		—		—		—		(1,994)		—		(1,994)		1,020		(974)
Change in fair value of investment securities, net		238		—		—		(4,966)		—		(4,728)		5,029		301
Change in fair value of mortgage loans held-for-sale, net		1,343		—		—		2,597		—		3,940		—		3,940
Earnings (loss) from unconsolidated entities		514		—		1,988		(134)		—		2,368		257		2,625
Gain on sale of investments and other assets, net		47		—		—		1,415		—		1,462		—		1,462
Gain (loss) on derivative financial instruments, net		7,278		455		5,895		3,076		(4,969)		11,735		—		11,735
Foreign currency loss, net		(3,546)		(531)		(1)		—		—		(4,078)		—		(4,078)
Loss on extinguishment of debt		(730)		—		—		—		(1,810)		(2,540)		—		(2,540)
Other (loss) income, net		(1)		—		2		(1,422)		—		(1,421)		—		(1,421)
Total other income (loss)		5,143		(76)		7,884		(1,428)		(6,779)		4,744		39,595		44,339
Income (loss) before income taxes		111,585		(6,392)		11,457		47,005		(65,855)		97,800		(138)		97,662
Income tax provision		(314)		—		(125)		(7,842)		—		(8,281)		—		(8,281)
Net income (loss)		111,271		(6,392)		11,332		39,163		(65,855)		89,519		(138)		89,381
Net (income) loss attributable to non-controlling interests		(365)		—		(4,769)		151		—		(4,983)		138		(4,845)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	110,906		(6,392)	$	6,563	$	39,314	$	(65,855)	$	84,536	$	—	$	84,536

59

The table below presents our results of operations for the nine months ended September 30, 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	$	462,956	$	74,969	$	—	$	8,987	$	—	$	546,912	$	—	$	546,912
Interest income from investment securities		62,438		2,563		—		88,012		—		153,013		(96,160)		56,853
Servicing fees		310		—		—		61,366		—		61,676		(13,902)		47,774
Rental income		—		—		215,098		40,686		—		255,784		—		255,784
Other revenues		714		732		291		929		26		2,692		(24)		2,668
Total revenues		526,418		78,264		215,389		199,980		26		1,020,077		(110,086)		909,991
Costs and expenses:
Management fees		1,127		—		—		54		74,924		76,105		122		76,227
Interest expense		172,012		49,257		57,142		25,152		84,878		388,441		(487)		387,954
General and administrative		20,626		13,624		5,394		61,943		10,429		112,016		258		112,274
Acquisition and investment pursuit costs		915		51		—		(387)		—		579		—		579
Costs of rental operations		1,525		—		70,846		19,503		—		91,874		—		91,874
Depreciation and amortization		695		15		70,078		15,287		—		86,075		—		86,075
Loan loss provision, net		2,046		1,196		—		—		—		3,242		—		3,242
Other expense		230		—		1,353		194		—		1,777		—		1,777
Total costs and expenses		199,176		64,143		204,813		121,746		170,231		760,109		(107)		760,002
Other income (loss):
Change in net assets related to consolidated VIEs		—		—		—		—		—		—		164,761		164,761
Change in fair value of servicing rights		—		—		—		(1,617)		—		(1,617)		(691)		(2,308)
Change in fair value of investment securities, net		(2,945)		—		—		56,431		—		53,486		(52,491)		995
Change in fair value of mortgage loans held-for-sale, net		16,837		—		—		48,841		—		65,678		—		65,678
Earnings (loss) from unconsolidated entities		8,576		—		(42,538)		3,601		—		(30,361)		(1,275)		(31,636)
Gain on sale of investments and other assets, net		3,476		3,041		—		21,640		—		28,157		—		28,157
Gain (loss) on derivative financial instruments, net		12,024		(3,337)		(3,957)		(16,761)		31,725		19,694		—		19,694
Foreign currency loss, net		(17,025)		(102)		(7)		—		—		(17,134)		—		(17,134)
Loss on extinguishment of debt		(857)		(8,221)		—		(194)		(1,466)		(10,738)		—		(10,738)
Other loss, net		—		(50)		—		—		(73)		(123)		—		(123)
Total other income (loss)		20,086		(8,669)		(46,502)		111,941		30,186		107,042		110,304		217,346
Income (loss) before income taxes		347,328		5,452		(35,926)		190,175		(140,019)		367,010		325		367,335
Income tax (provision) benefit		(4,778)		746		(258)		(4,090)		—		(8,380)		—		(8,380)
Net income (loss)		342,550		6,198		(36,184)		186,085		(140,019)		358,630		325		358,955
Net income attributable to non-controlling interests		(392)		—		(16,322)		(4,121)		—		(20,835)		(325)		(21,160)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	342,158	$	6,198	$	(52,506)	$	181,964	$	(140,019)	$	337,795	$	—	$	337,795

60

The table below presents our results of operations for the nine months ended September 30, 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
Revenues:
Interest income from loans	$	431,153		3,053	$	—	$	9,619	$	—	$	443,825	$	—	$	443,825
Interest income from investment securities		33,689		107		—		99,348		—		133,144		(95,577)		37,567
Servicing fees		313		—		—		92,221		—		92,534		(21,328)		71,206
Rental income		—		—		217,178		43,955		—		261,133		—		261,133
Other revenues		683		44		351		973		227		2,278		(147)		2,131
Total revenues		465,838		3,204		217,529		246,116		227		932,914		(117,052)		815,862
Costs and expenses:
Management fees		1,396		—		—		54		82,895		84,345		310		84,655
Interest expense		110,169		2,258		55,397		18,298		96,132		282,254		(821)		281,433
General and administrative		19,962		537		5,510		64,006		8,602		98,617		256		98,873
Acquisition and investment pursuit costs		2,253		6,725		(46)		(467)		—		8,465		—		8,465
Costs of rental operations		—		—		72,531		20,250		—		92,781		—		92,781
Depreciation and amortization		50		—		86,655		16,482		—		103,187		—		103,187
Loan loss provision, net		27,726		—		—		—		—		27,726		—		27,726
Other expense		230		—		—		447		—		677		—		677
Total costs and expenses		161,786		9,520		220,047		119,070		187,629		698,052		(255)		697,797
Other income (loss):
Change in net assets related to consolidated VIEs		—		—		—		—		—		—		129,888		129,888
Change in fair value of servicing rights		—		—		—		(14,417)		—		(14,417)		5,426		(8,991)
Change in fair value of investment securities, net		16		—		—		24,123		—		24,139		(16,285)		7,854
Change in fair value of mortgage loans held-for-sale, net		(165)		—		—		26,738		—		26,573		—		26,573
Earnings from unconsolidated entities		3,761		—		1,406		2,916		—		8,083		(1,450)		6,633
Gain on sale of investments and other assets, net		461		—		6,883		18,215		—		25,559		—		25,559
Gain (loss) on derivative financial instruments, net		15,927		455		27,734		7,720		(24,338)		27,498		—		27,498
Foreign currency loss, net		(3,260)		(531)		—		(2)		—		(3,793)		—		(3,793)
Loss on extinguishment of debt		(730)		—		—		(186)		(1,810)		(2,726)		—		(2,726)
Other income (loss), net		42		—		508		(1,365)		—		(815)		—		(815)
Total other income (loss)		16,052		(76)		36,531		63,742		(26,148)		90,101		117,579		207,680
Income (loss) before income taxes		320,104		(6,392)		34,013		190,788		(213,550)		324,963		782		325,745
Income tax provision		(2,981)		—		(1,997)		(9,502)		—		(14,480)		—		(14,480)
Net income (loss)		317,123		(6,392)		32,016		181,286		(213,550)		310,483		782		311,265
Net income attributable to non-controlling interests		(1,087)		—		(11,906)		(3,792)		—		(16,785)		(782)		(17,567)
Net income (loss) attributable to Starwood Property Trust, Inc.	$	316,036		(6,392)	$	20,110	$	177,494	$	(213,550)	$	293,698	$	—	$	293,698

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The table below presents our condensed consolidated balance sheet as of September 30, 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	$	64,343	$	6,404	$	35,940	$	46,872	$	129,369	$	282,928	$	1,189	$	284,117
Restricted cash		36,771		33,366		21,186		19,218		—		110,541		—		110,541
Loans held-for-investment, net		7,636,475		1,281,815		—		1,363		—		8,919,653		—		8,919,653
Loans held-for-sale		809,604		163,932		—		468,583		—		1,442,119		—		1,442,119
Investment securities		938,300		54,048		—		1,009,249		—		2,001,597		(1,192,460)		809,137
Properties, net		26,902		—		2,441,480		261,156		—		2,729,538		—		2,729,538
Intangible assets		—		—		75,965		68,748		—		144,713		(24,766)		119,947
Investment in unconsolidated entities		42,518		—		71,824		33,246		—		147,588		(21,473)		126,115
Goodwill		—		119,409		—		140,437		—		259,846		—		259,846
Derivative assets		37,507		652		21,994		603		20,727		81,483		—		81,483
Accrued interest receivable		43,747		4,015		245		1,321		3,125		52,453		(676)		51,777
Other assets		98,664		5,978		72,932		64,068		9,129		250,771		2		250,773
VIE assets, at fair value		—		—		—		—		—		—		59,249,054		59,249,054
Total Assets	$	9,734,831	$	1,669,619	$	2,741,566	$	2,114,864	$	162,350	$	16,423,230	$	58,010,870	$	74,434,100
Liabilities and Equity
Liabilities:
Accounts payable, accrued expenses and other liabilities	$	25,836	$	15,719	$	69,550	$	72,055	$	50,868	$	234,028	$	92	$	234,120
Related-party payable		—		—		—		44		24,442		24,486		—		24,486
Dividends payable		—		—		—		—		137,273		137,273		—		137,273
Derivative liabilities		2,336		904		—		1,541		—		4,781		—		4,781
Secured financing agreements, net		4,061,849		1,168,166		1,868,416		771,618		391,989		8,262,038		(13,950)		8,248,088
Collateralized loan obligations, net		927,436		—		—		—		—		927,436		—		927,436
Unsecured senior notes, net		—		—		—		—		1,926,693		1,926,693		—		1,926,693
VIE liabilities, at fair value		—		—		—		—		—		—		58,018,209		58,018,209
Total Liabilities		5,017,457		1,184,789		1,937,966		845,258		2,531,265		11,516,735		58,004,351		69,521,086
Equity:
Starwood Property Trust, Inc. Stockholders’ Equity:
Common stock		—		—		—		—		2,871		2,871		—		2,871
Additional paid-in capital		1,307,064		481,206		609,241		156,094		2,568,066		5,121,671		—		5,121,671
Treasury stock		—		—		—		—		(104,194)		(104,194)		—		(104,194)
Accumulated other comprehensive income (loss)		52,471		—		(30)		(64)		—		52,377		—		52,377
Retained earnings (accumulated deficit)		3,357,839		3,624		(38,936)		1,095,602		(4,835,658)		(417,529)		—		(417,529)
Total Starwood Property Trust, Inc. Stockholders’ Equity		4,717,374		484,830		570,275		1,251,632		(2,368,915)		4,655,196		—		4,655,196
Non-controlling interests in consolidated subsidiaries		—		—		233,325		17,974		—		251,299		6,519		257,818
Total Equity		4,717,374		484,830		803,600		1,269,606		(2,368,915)		4,906,495		6,519		4,913,014
Total Liabilities and Equity	$	9,734,831	$	1,669,619	$	2,741,566	$	2,114,864	$	162,350	$	16,423,230	$	58,010,870	$	74,434,100

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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 September 30, 2019 were as follows:

Secured Financing Agreements

In October 2019, we entered into a $500.0 million credit agreement to finance loans within the Infrastructure Lending Segment. The facility carries a three-year revolving term with 2 one-year revolving extension options and an annual interest rate of LIBOR + 1.75%.

In October 2019, we entered into a $600.0 million first mortgage and mezzanine loan to refinance our existing Medical Office Portfolio debt of $494.3 million.  The facility carries a two-year term with 3 one-year extension options and a weighted average floating rate of interest of LIBOR + 2.07%, which we have swapped to fixed rate.

Residential Mortgage Loan Securitization

In October 2019, we securitized residential mortgage loans held-for-sale with a principal balance of $370.3 million.

The Retail Fund

On November 8, 2019, the secured financing of the Retail Fund, an investment in which we own a 33% equity interest (see Note 7), reached its maturity date. We believe the Retail Fund will not have the ability to repay the financing at maturity and such inability to repay may constitute an event of default under its financing facilities. 

Dividend Declaration

On November 8, 2019, our board of directors declared a dividend of $0.48 per share for the fourth quarter of 2019, which is payable on January 15, 2020 to common stockholders of record as of December 31, 2019.

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

This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the information included elsewhere in this Quarterly Report on Form 10-Q and in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 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 September 30, 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 Third Quarter of 2019

Commercial and Residential Lending Segment

● In August 2019, we refinanced a pool of our commercial loans held-for-investment through a collateralized loan obligation (“CLO”), STWD 2019-FL1. The CLO has a contractual maturity of July 2038 and a weighted average cost of financing of LIBOR + 1.65%, inclusive of the amortization of deferred issuance costs. On the closing date, the CLO issued $1.1 billion principal amount of notes, of which $936.4 million was purchased by third party investors. We retained $86.6 million of notes, along with preferred shares with a liquidation preference of $77.0 million. The CLO contains a reinvestment feature that, subject to certain eligibility criteria, allows us to contribute new loans or participation interests in loans to the CLO in exchange for cash.

● Originated or acquired $1.2 billion of commercial loans during the quarter, including the following:

o $300.0 million first mortgage loan for the construction of the final phase of a 3.4 million square foot mixed use, waterfront property located in Washington D.C., of which the Company funded $5.3 million.

o £203.1 million ($249.6 million) first mortgage loan for the construction of 79 residential units and a 50-key five star hotel located in London, England, which was unfunded as of September 30, 2019.

o £185.0 million ($230.8 million) first mortgage loan for the acquisition and refurbishment of an office building located in London, England, which was unfunded as of September 30, 2019.

o $112.0 million first mortgage and mezzanine loan for the refinancing of a nine-story, 355-key hotel located in Washington D.C., of which the Company funded $86.1 million.

o $110.3 million first mortgage loan for the refinancing of 13 Class A and B office properties located in Long Island, New York, of which the Company funded $101.3 million.

● Funded $276.1 million of previously originated commercial loan commitments.

● Received gross proceeds of $825.2 million (net proceeds of $405.5 million) from sales, maturities and principal repayments on our commercial loans, preferred equity interests and single-borrower CMBS, of which $53.3 million related to loan sales.

● Acquired $618.2 million of residential mortgage loans.

● Received proceeds of $569.6 million, including retained RMBS of $52.8 million, from the securitization of $546.0 million of residential mortgage loans.

Infrastructure Lending Segment

● Acquired $124.7 million of infrastructure loans and funded $30.3 million of pre-existing infrastructure loan commitments.

● Received proceeds of $47.0 million from sales of infrastructure loans and $237.4 million from maturities and principal repayments on our infrastructure loans and bonds.

Investing and Servicing Segment

● Originated commercial conduit loans of $505.4 million. Separately, received proceeds of $274.7 million from sales of previously originated commercial conduit loans.

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

● Acquired CMBS for a purchase price of $10.2 million, net of non-controlling interests, and sold CMBS for total gross proceeds of $23.0 million.

● Acquired commercial real estate from a CMBS trust for a gross purchase price of $8.8 million.

● Sold commercial real estate for gross proceeds of $51.5 million and recognized a net gain of $16.7 million.

Corporate Financing

● Entered into the following credit agreements: (i) a $400.0 million term loan facility that carries a seven-year term and an annual interest rate of LIBOR + 2.50%; and (ii) a $100.0 million revolving credit facility that carries a five-year term and an annual interest rate of LIBOR + 3.00%. A portion of the net proceeds from the term loan was used to repay the amount outstanding under our previous term loan.

Developments During the Nine Months Ended September 30, 2019

Commercial and Residential Lending Segment

● Executed a $1.1 billion CLO as discussed above under “Developments During the Third Quarter of 2019”

● Originated or acquired $3.3 billion of commercial loans during the period, including the following:

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

o £249.9 million ($319.7 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 $300.0 million first mortgage loan for the construction of the final phase of a 3.4 million square foot mixed use, waterfront property located in Washington D.C., of which the Company funded $5.3 million.

o $257.5 million first mortgage loan for the construction of an 800,000 square foot office campus on 18.1 acres located in California that is pre-leased to an investment grade tenant, of which the Company funded $114.1 million.

o £203.1 million ($249.6 million) first mortgage loan for the construction of 79 residential units and a 50-key five star hotel located in London, England, which was unfunded as of September 30, 2019.

● Funded $665.9 million of previously originated commercial loan commitments.

● Received gross proceeds of $2.3 billion (net proceeds of $1.2 billion) from sales, maturities and principal repayments on our commercial loans, preferred equity interests and single-borrower CMBS, of which $552.4 million related to loan sales.

● Acquired $1.6 billion of residential mortgage loans.

● Received proceeds of $921.6 million, including retained RMBS of $79.1 million, from the securitization of $886.2 million of residential mortgage loans.

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Infrastructure Lending Segment

● Acquired $387.2 million of infrastructure loans and funded $115.2 million of pre-existing infrastructure loan commitments.

● Received proceeds of $393.3 million from sales of infrastructure loans and $600.8 million from maturities and principal repayments on our infrastructure loans and bonds.

Investing and Servicing Segment

● Originated commercial conduit loans of $1.1 billion. Separately, received proceeds of $826.9 million from sales of previously originated commercial conduit loans.

● Obtained 14 new special servicing assignments for CMBS trusts with a total unpaid principal balance of $10.6 billion.

● Acquired CMBS for a purchase price of $58.7 million, net of non-controlling interests, and sold CMBS for total gross proceeds of $85.7 million.

● Acquired commercial real estate from a CMBS trust for a gross purchase price of $8.8 million.

● Sold commercial real estate for gross proceeds of $51.5 million and recognized a net gain of $16.7 million.

Corporate Financing

● 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.

● Entered into the following credit agreements: (i) a $400.0 million term loan facility that carries a seven-year term and an annual interest rate of LIBOR + 2.50%; and (ii) a $100.0 million revolving credit facility that carries a five-year term and an annual interest rate of LIBOR + 3.00%. A portion of the net proceeds from the term loan was used to repay the amount outstanding under our previous term loan.

Subsequent Events

Refer to Note 23 to the Condensed Consolidated Financial Statements for disclosure regarding significant transactions that occurred subsequent to September 30, 2019.

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Results of Operations

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

The following table compares our summarized results of operations for the three and nine months ended September 30, 2019 and 2018 by business segment (amounts in thousands):

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2019		2018		$ Change		2019		2018		$ Change
Revenues:
Commercial and Residential Lending Segment	$	163,808	$	158,596	$	5,212	$	526,418	$	465,838	$	60,580
Infrastructure Lending Segment		23,612		3,204		20,408		78,264		3,204		75,060
Property Segment		72,376		76,236		(3,860)		215,389		217,529		(2,140)
Investing and Servicing Segment		67,397		87,406		(20,009)		199,980		246,116		(46,136)
Corporate		—		89		(89)		26		227		(201)
Securitization VIE eliminations		(38,863)		(39,812)		949		(110,086)		(117,052)		6,966
		288,330		285,719		2,611		909,991		815,862		94,129
Costs and expenses:
Commercial and Residential Lending Segment		60,959		52,154		8,805		199,176		161,786		37,390
Infrastructure Lending Segment		18,773		9,520		9,253		64,143		9,520		54,623
Property Segment		69,126		72,663		(3,537)		204,813		220,047		(15,234)
Investing and Servicing Segment		42,288		38,973		3,315		121,746		119,070		2,676
Corporate		62,155		59,165		2,990		170,231		187,629		(17,398)
Securitization VIE eliminations		(57)		(79)		22		(107)		(255)		148
		253,244		232,396		20,848		760,002		697,797		62,205
Other income (loss):
Commercial and Residential Lending Segment		12,309		5,143		7,166		20,086		16,052		4,034
Infrastructure Lending Segment		(2,604)		(76)		(2,528)		(8,669)		(76)		(8,593)
Property Segment		6,115		7,884		(1,769)		(46,502)		36,531		(83,033)
Investing and Servicing Segment		59,349		(1,428)		60,777		111,941		63,742		48,199
Corporate		5,317		(6,779)		12,096		30,186		(26,148)		56,334
Securitization VIE eliminations		38,942		39,595		(653)		110,304		117,579		(7,275)
		119,428		44,339		75,089		217,346		207,680		9,666
Income (loss) before income taxes:
Commercial and Residential Lending Segment		115,158		111,585		3,573		347,328		320,104		27,224
Infrastructure Lending Segment		2,235		(6,392)		8,627		5,452		(6,392)		11,844
Property Segment		9,365		11,457		(2,092)		(35,926)		34,013		(69,939)
Investing and Servicing Segment		84,458		47,005		37,453		190,175		190,788		(613)
Corporate		(56,838)		(65,855)		9,017		(140,019)		(213,550)		73,531
Securitization VIE eliminations		136		(138)		274		325		782		(457)
		154,514		97,662		56,852		367,335		325,745		41,590
Income tax provision		(4,513)		(8,281)		3,768		(8,380)		(14,480)		6,100
Net income attributable to non-controlling interests		(9,605)		(4,845)		(4,760)		(21,160)		(17,567)		(3,593)
Net income attributable to Starwood Property Trust, Inc.	$	140,396	$	84,536	$	55,860	$	337,795	$	293,698	$	44,097

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Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018

Commercial and Residential Lending Segment

Revenues

For the three months ended September 30, 2019, revenues of our Commercial and Residential Lending Segment increased $5.2 million to $163.8 million, compared to $158.6 million for the three months ended September 30, 2018. This increase was primarily due to an increase in interest income from investment securities of $7.8 million, partially offset by a decrease in interest income from loans of $2.6 million. The increase in interest income from investment securities was primarily due to higher average investment balances. The decrease in interest income from loans was principally due to (i) the recognition in the 2018 quarter of a $2.8 million profit participation in a mortgage loan that was repaid in 2016 and (ii) the compression of interest rate spreads in credit markets, partially offset by (iii) higher average balances of both commercial and residential loans.

Costs and Expenses

For the three months ended September 30, 2019, costs and expenses of our Commercial and Residential Lending Segment increased $8.8 million to $60.9 million, compared to $52.1 million for the three months ended September 30, 2018. This increase was primarily due to an $8.5 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
	September 30,
	2019		2018		Change
Interest income from loans	$	145,290	$	147,913	$	(2,623)
Interest income from investment securities		18,163		10,320		7,843
Interest expense		(51,844)		(43,322)		(8,522)
Net interest income	$	111,609	$	114,911	$	(3,302)

For the three months ended September 30, 2019, net interest income of our Commercial and Residential Lending Segment decreased $3.3 million to $111.6 million, compared to $114.9 million for the three months ended September 30, 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.

During the three months ended September 30, 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
	September 30,
	2019		2018
Commercial	7.1	%	7.3	%
Residential	6.5	%	6.7	%
Overall	7.0	%	7.3	%

The overall weighted average unlevered yield was slightly lower due to (i) the recognition in the 2018 quarter of a $2.8 million profit participation in a mortgage loan and (ii) the compression of interest rate spreads in credit markets.

During the three months ended September 30, 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 4.2% and 4.4%, respectively, and 4.2% and 4.3%, respectively, excluding the impact of bridge financing. The decreases in borrowing rates primarily reflect the compression of interest rate spreads in credit markets.

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Other Income

For the three months ended September 30, 2019, other income of our Commercial and Residential Lending Segment increased $7.2 million to $12.3 million compared to $5.1 million for the three months ended September 30, 2018. This increase was primarily due to (i) an $8.7 million favorable change in fair value of residential mortgage loans, (ii) an $8.4 million increased gain on derivatives and (iii) a $2.0 million increase in earnings from unconsolidated entities, all partially offset by (iv) an $11.8 million increase in foreign currency loss. The increased gain on derivatives reflects a $15.2 million higher gain on foreign currency hedges, partially offset by a $6.8 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 investments. The higher gain on the foreign currency hedges and the increase in foreign currency loss reflect the overall strengthening of the U.S. dollar against the pound sterling (“GBP”) in the third quarter of 2019 versus a lesser strengthening of the U.S. dollar in the third 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. Therefore, its results for the quarter and nine months ended September 30, 2018 reflect only the last 12 days of those periods and are not comparable to its results for the three and nine months ended September 30, 2019. Accordingly, the following discussion attempts no comparison to the prior year results.

Revenues

For the three months ended September 30, 2019 and 2018, revenues of our Infrastructure Lending Segment were $23.6 million and $3.2 million, respectively, which includes interest income from loans of $22.8 million and $3.1 million, respectively, and $0.8 million and $0.1 million, respectively, from investment securities.

Costs and Expenses

For the three months ended September 30, 2019 and 2018, costs and expenses of our Infrastructure Lending Segment were $18.8 million and $9.5 million, respectively, which includes interest expense on secured debt facilities used to finance this segment’s investment portfolio of $14.4 million and $2.3 million, respectively, and $4.3 million and $0.5 million, respectively, of general and administrative expenses. Also included in the three months ended September 2018 were $6.7 million of acquisition costs.

Net Interest Income (amounts in thousands)

	For the Three Months Ended
	September 30,
	2019		2018
Interest income from loans	$	22,763	$	3,053
Interest income from investment securities		810		107
Interest expense		(14,422)		(2,258)
Net interest income	$	9,151	$	902

Interest income from infrastructure loans and investment securities and interest expense on the secured financing facilities reflect primarily variable LIBOR based rates.

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  During the three months ended September 30, 2019 and 2018, the weighted average unlevered yields on the Infrastructure Lending Segment’s investments were as follows:

	For the Three Months Ended
	September 30,
	2019		2018
Loans and investment securities held-for-investment	6.1	%	5.3	%
Loans held-for-sale	4.2	%	3.5	%

During both the three months ended September 30, 2019 and 2018, the Infrastructure Lending Segment’s weighted average secured borrowing rate, inclusive of the amortization of deferred financing fees, was 4.7%.

Other Loss

For the three months ended September 30, 2019 and 2018, other loss of our Infrastructure Lending Segment was $2.6 million and $0.1 million, respectively. Other loss for the three months ended September 30, 2019 primarily reflects a $2.1 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

Change in Results by Portfolio (amounts in thousands)

	$ Change from prior period
			Costs and		Gain (loss) on derivative				Income (loss) before
	Revenues		expenses		financial instruments		Other income (loss)		income taxes
Master Lease Portfolio	$	(4,842)	$	(3,910)	$	—	$	(1)	$	(933)
Medical Office Portfolio		(1,161)		(1,314)		(7,258)		—		(7,105)
Ireland Portfolio		(828)		463		7,263		(7)		5,965
Woodstar I Portfolio		1,285		2,902		—		—		(1,617)
Woodstar II Portfolio		1,686		(1,449)		—		(1)		3,134
Investment in unconsolidated entities		—		—		—		(1,765)		(1,765)
Other/Corporate		—		(229)		—		—		229
Total	$	(3,860)	$	(3,537)	$	5	$	(1,774)	$	(2,092)

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 September 30, 2019, revenues of our Property Segment decreased $3.8 million to $72.4 million, compared to $76.2 million for the three months ended September 30, 2018. The decrease in revenues in the third quarter of 2019 was primarily due to (i) the sale of four properties within the Master Lease portfolio during the fourth quarter of 2018 and (ii) 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) in both the Master Lease and Medical Office Portfolios, partially offset by (iii) increased rental income in the Woodstar Portfolios due to rental rate increases.

Costs and Expenses

For the three months ended September 30, 2019, costs and expenses of our Property Segment decreased $3.5 million to $69.1 million, compared to $72.6 million for the three months ended September 30, 2018. The decrease in costs and expenses primarily reflects (i) the sale of four properties within the Master Lease portfolio during the fourth quarter of 2018, (ii) no longer recording as revenues and offsetting expenses property taxes paid directly by lessees, as discussed above, and (iii) decreased expenses in the Woodstar II Portfolio primarily due to in-place lease intangibles becoming fully amortized.

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Other Income

For the three months ended September 30, 2019, other income of our Property Segment decreased $1.8 million to $6.1 million, compared to $7.9 million for the three months ended September 30, 2018. The decrease in other income was primarily due to lower earnings from our equity investee that owns four regional shopping malls (the “Retail Fund”), which is an investment company that measures its assets at fair value. There was also a $7.3 million unfavorable change in interest rate swaps which primarily hedge the variable interest rate risk on borrowings secured by our Medical Office Portfolio, offset by a $7.3 million increased gain on foreign exchange contracts which economically hedge our Euro currency exposure with respect to the Ireland Portfolio.

Investing and Servicing Segment

Revenues

For the three months ended September 30, 2019, revenues of our Investing and Servicing Segment decreased $20.0 million to $67.4 million, compared to $87.4 million for the three months ended September 30, 2018. The decrease in revenues in the third quarter of 2019 was primarily due to decreases of (i) $15.9 million in servicing fees, (ii) $2.7 million in rental income from our REIS Equity Portfolio (see Note 3 to the Condensed Consolidated Financial Statements) due to the sale of four properties since September 30, 2018 and (iii) $1.9 million in CMBS interest income.

Costs and Expenses

For the three months ended September 30, 2019, costs and expenses of our Investing and Servicing Segment increased by $3.3 million to $42.3 million, compared to $39.0 million for the three months ended September 30, 2018, primarily due to variable expenses related to conduit loan securitizations.

Other Income (Loss)

For the three months ended September 30, 2019, other income (loss) of our Investing and Servicing Segment improved $60.7 million to income of $59.3 million, from a loss of $1.4 million for the three months ended September 30, 2018. The increase in other income was primarily due to (i) a $27.4 million greater increase in fair value of our CMBS investments, (ii) a $19.8 million greater increase in fair value of conduit loans, (iii) a $19.3 million increase in gains on sales of operating properties, (iv) a $2.0 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, all partially offset by (v) a $9.5 million unfavorable change in gain (loss) on derivatives which primarily hedge our interest rate risk on conduit loans.

Corporate and Other Items

Corporate Costs and Expenses

For the three months ended September 30, 2019, corporate expenses increased $3.0 million to $62.2 million, compared to $59.2 million for the three months ended September 30, 2018. The increase was primarily due to a $3.9 million increase in management fees, partially offset by a $1.3 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 September 30, 2019, corporate other income (loss) improved $12.1 million to income of $5.3 million, compared to a loss of $6.8 million for the three months ended September 30, 2018. The increase in corporate other income was primarily due to an $11.8 million 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.

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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.

Income Tax Provision

Our consolidated income tax provision principally relates to the taxable nature of our loan servicing and loan conduit businesses and certain other real estate related investing activities which are housed in taxable REIT subsidiaries (“TRSs”). For the three months ended September 30, 2019, we had a tax provision of $4.5 million compared to $8.3 million in the three months ended September 30, 2018. The $3.8 million decrease primarily reflects lower taxable income of our TRSs.

Net Income Attributable to Non-controlling Interests

During the three months ended September 30, 2019, net income attributable to non-controlling interests increased $4.8 million to $9.6 million, compared to $4.8 million during the three months ended September 30, 2018. The increase was primarily due to the minority interests on the gain from an Investing and Servicing Segment operating property sold during the third quarter of 2019.

Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018

Commercial and Residential Lending Segment

Revenues

For the nine months ended September 30, 2019, revenues of our Commercial and Residential Lending Segment increased $60.6 million to $526.4 million, compared to $465.8 million for the nine months ended September 30, 2018. This increase was primarily due to increases in interest income from loans of $31.8 million and investment securities of $28.7 million. The increase in interest income from loans was principally due to (i) higher average LIBOR rates, (ii) higher average balances of both commercial and residential loans and (iii) higher levels of prepayment related income, partially offset by (iv) the compression of interest rate spreads in credit markets and (v) the recognition in the 2018 period of a $15.1 million profit participation in a mortgage loan that was repaid in 2016. The increase in interest income from investment securities was primarily due to higher average investment balances.

Costs and Expenses

For the nine months ended September 30, 2019, costs and expenses of our Commercial and Residential Lending Segment increased $37.4 million to $199.2 million, compared to $161.8 million for the nine months ended September 30, 2018. This increase was primarily due to a $61.8 million increase in interest expense associated with the various secured financing facilities used to fund a portion of this segment’s investment portfolio, partially offset by a $25.7 million decrease in loan loss provision principally relating to impairment charges on certain commercial loans in the 2018 second quarter.

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Net Interest Income (amounts in thousands)

	For the Nine Months Ended
	September 30,
	2019		2018		Change
Interest income from loans	$	462,956	$	431,153	$	31,803
Interest income from investment securities		62,438		33,689		28,749
Interest expense		(172,012)		(110,169)		(61,843)
Net interest income	$	353,382	$	354,673	$	(1,291)

For the nine months ended September 30, 2019, net interest income of our Commercial and Residential Lending Segment decreased $1.3 million to $353.4 million, compared to $354.7 million for the nine months ended September 30, 2018. This decrease reflects the net increase in interest income explained in the Revenues discussion above, which was slightly more than offset by the increase in interest expense on our secured financing facilities primarily due to increased utilization of our available borrowing capacity.

During the nine months ended September 30, 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 Nine Months Ended
	September 30,
	2019		2018
Commercial	7.5	%	7.7	%
Residential	6.9	%	6.8	%
Overall	7.4	%	7.6	%

The overall weighted average unlevered yield was slightly lower as higher average LIBOR rates and higher levels of prepayment related income were more than offset by the compression of interest rate spreads in credit markets and the recognition in the 2018 period of a $15.1 million profit participation in a mortgage loan.

During the nine months ended September 30, 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 4.4% and 4.3%, respectively, and 4.4% and 4.2%, respectively, excluding the impact of bridge financing. The increases in borrowing rates primarily reflect higher average LIBOR rates, partially offset by the compression of interest rate spreads in credit markets.

Other Income

For the nine months ended September 30, 2019, other income of our Commercial and Residential Lending Segment increased $4.0 million to $20.1 million, compared to $16.1 million for the nine months ended September 30, 2018. The increase was primarily due to (i) a $14.0 million net favorable change in fair value of residential mortgage loans and investment securities, (ii) a $4.8 million increase in earnings from unconsolidated entities and (iii) a $3.0 million increase in gain on sale of investments, all partially offset by (iv) a $13.8 million increase in foreign currency loss and (v) a $3.9 million decrease in net gains on derivatives. The decrease in net gains on derivatives reflects a $26.8 million unfavorable change in interest rate swaps, partially offset by a $22.9 million higher gain on foreign currency hedges. The interest rate swaps are used primarily to fix our interest rate payments on certain variable rate borrowings which fund fixed rate investments. The foreign currency hedges are used to fix the U.S. dollar amounts of cash flows (both interest and principal payments) we expect to receive from our foreign currency denominated loans and investments. The higher gain on the foreign currency hedges and the increase in foreign currency loss reflect the overall strengthening of the U.S. dollar against the pound sterling (“GBP”) in the first nine months of 2019 versus a lesser strengthening of the U.S. dollar in the first nine months of 2018.

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Infrastructure Lending Segment

The Infrastructure Lending Segment was acquired on September 19, 2018. Therefore, its results for the quarter and nine months ended September 30, 2018 reflect only the last 12 days of those periods and are not comparable to its results for the three and nine months ended September 30, 2019. Accordingly, the following discussion attempts no comparison to the prior year results.

Revenues

For the nine months ended September 30, 2019 and 2018, revenues of our Infrastructure Lending Segment were $78.3 million and $3.2 million, respectively, which includes interest income from loans of $75.0 million and $3.1 million, respectively, and $2.6 million and $0.1 million, respectively, from investment securities.

Costs and Expenses

For the nine months ended September 30, 2019 and 2018, costs and expenses of our Infrastructure Lending Segment were $64.1 million and $9.5 million, respectively, which includes interest expense on secured debt facilities used to finance this segment’s investment portfolio of $49.3 million and $2.3 million, respectively, and $13.6 million and $0.5 million, respectively, of general and administrative expenses. Also included in the three months ended September 2018 were $6.7 million of acquisition costs.

Net Interest Income (amounts in thousands)

	For the Nine Months Ended
	September 30, 2019
	2019		2018
Interest income from loans	$	74,969	$	3,053
Interest income from investment securities		2,563		107
Interest expense		(49,257)		(2,258)
Net interest income	$	28,275	$	902

Interest income from infrastructure loans and investment securities and interest expense on the secured financing facilities reflect primarily variable LIBOR based rates.

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During the nine months ended September 30, 2019 and 2018, the weighted average unlevered yields on the Infrastructure Lending Segment’s investments were as follows:

	For the Nine Months Ended
	September 30,
	2019		2018
Loans and investment securities held-for-investment	6.2	%	5.3	%
Loans held-for-sale	4.0	%	3.5	%

During both the nine months ended September 30, 2019 and 2018, the Infrastructure Lending Segment’s weighted average secured borrowing rate, inclusive of the amortization of deferred financing fees, was 4.7%.

Other Loss

For the nine months ended September 30, 2019 and 2018, other loss of our Infrastructure Lending Segment was $8.7 million and $0.1 million, respectively. Other loss for the nine months ended September 30, 2019 primarily reflects an $8.2 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

Change in Results by Portfolio (amounts in thousands)

	$ Change from prior year
			Costs and		Gain (loss) on derivative				Income (loss) before
	Revenues		expenses		financial instruments		Other income (loss)		income taxes
Master Lease Portfolio	$	(15,249)	$	(11,669)	$	—	$	(6,883)	$	(10,463)
Medical Office Portfolio		(993)		(1,244)		(37,431)		(490)		(37,670)
Ireland Portfolio		(1,193)		261		5,740		(7)		4,279
Woodstar I Portfolio		2,955		895		—		—		2,060
Woodstar II Portfolio		12,340		(2,615)		—		(18)		14,937
Investment in unconsolidated entities		—		—		—		(43,944)		(43,944)
Other/Corporate		—		(862)		—		—		862
Total	$	(2,140)	$	(15,234)	$	(31,691)	$	(51,342)	$	(69,939)

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

Revenues

For the nine months ended September 30, 2019, revenues of our Property Segment decreased $2.1 million to $215.4 million, compared to $217.5 million for the nine months ended September 30, 2018. The decrease in revenues in the nine months of 2019 was primarily due to a decrease in rental income from the Master Lease Portfolio due to (i) the sale of seven properties within the Master Lease portfolio during 2018 and (ii) 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) in both the Master Lease and Medical Office Portfolios, partially offset by (iii) the full period inclusion of rental income from the Woodstar II Portfolio, which was acquired over a period between December 2017 and September 2018, and (iv) rental rate increases in both Woodstar Portfolios.

Costs and Expenses

For the nine months ended September 30, 2019, costs and expenses of our Property Segment decreased $15.2 million to $204.8 million, compared to $220.0 million for the nine months ended September 30, 2018. The decrease in costs and expenses primarily reflects (i) the sale of seven properties within the Master Lease portfolio during 2018, (ii) no longer recording as revenues and offsetting expenses property taxes paid directly by lessees, as discussed above, and

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(iii) decreased expenses in the Woodstar II Portfolio primarily due to in-place lease intangibles becoming fully amortized, partially offset by (iv) the full period inclusion of the properties acquired in the Woodstar II Portfolio since January 2018.

Other Income (Loss)

For the nine months ended September 30, 2019, other income (loss) of our Property Segment decreased $83.0 million to a loss of $46.5 million, compared to income of $36.5 million for the nine months ended September 30, 2018. The decrease in other income was primarily due to (i) a $43.9 million unfavorable change in earnings (loss) from an unconsolidated entity, (ii) a $31.7 million unfavorable change in gain (loss) on derivatives and (iii) the non-recurrence of a $6.9 million net gain on sale of three properties in the Master Lease Portfolio during the nine months of 2018. The $43.9 million unfavorable change in earnings (loss) from an unconsolidated entity principally reflects the recognition in the 2019 first quarter of decreases in fair value of properties held by the Retail Fund (see Note 7 to the Consolidated Financial Statements). The $31.7 million unfavorable change in gain (loss) on derivatives consists of (i) a $37.4 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 (ii) a $5.7 million increased gain on foreign exchange contracts which economically hedge our Euro currency exposure with respect to the Ireland Portfolio.

Investing and Servicing Segment

Revenues

For the nine months ended September 30, 2019, revenues of our Investing and Servicing Segment decreased $46.1 million to $200.0 million, compared to $246.1 million for the nine months ended September 30, 2018. The decrease in revenues in the nine months of 2019 was primarily due to decreases of (i) $30.9 million in servicing fees, (ii) $11.3 million in CMBS interest income principally due to lower interest recoveries and (iii) $3.3 million in rental income from our REIS Equity Portfolio due to the sale of four properties since September 30, 2018.

Costs and Expenses

For the nine months ended September 30, 2019, costs and expenses of our Investing and Servicing Segment increased by $2.6 million to $121.7 million, compared to $119.1 million for the nine months ended September 30, 2018. The increase in costs and expenses was primarily due to a $6.9 million increase in interest expense principally related to the financing of our CMBS portfolio, partially offset by decreases of $2.1 million in general and administrative expenses primarily related to our special servicing business and $1.2 million in depreciation and amortization related to our REIS Equity Portfolio.

Other Income

For the nine months ended September 30, 2019, other income of our Investing and Servicing Segment increased $48.2 million to $111.9 million, from $63.7 million for the nine months ended September 30, 2018. The increase in other income was primarily due to (i) a $32.3 million greater increase in fair value of our CMBS investments, (ii) a $22.1 million greater increase in fair value of conduit loans, (iii) a $12.8 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 $3.4 million increase in gains on sales of operating properties, all partially offset by (v) a $24.5 million unfavorable change in gain (loss) on derivatives which primarily hedge our interest rate risk on conduit loans.

Corporate and Other Items

Corporate Costs and Expenses

For the nine months ended September 30, 2019, corporate expenses decreased $17.4 million to $170.2 million, compared to $187.6 million for the nine months ended September 30, 2018. The decrease was primarily due to an $11.3 million decrease in interest expense principally on lower average outstanding balances of our unsecured senior notes and an $8.0 million decrease in management fees.

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Corporate Other Income (Loss)

For the nine months ended September 30, 2019, corporate other income (loss) improved $56.3 million to income of $30.2 million, compared to a loss of $26.1 million for the nine months ended September 30, 2018. The increase in corporate other income was primarily due to a $56.1 million 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

Refer to the preceding comparison of the three months ended September 30, 2019 to the three months ended September 30, 2018 for a discussion of the nature of securitization VIE eliminations.

Income Tax Provision

Our consolidated income tax provision principally relates to the taxable nature of our loan servicing and loan conduit businesses and certain other real estate related investing activities which are housed in TRSs. For the nine months ended September 30, 2019, we had a tax provision of $8.4 million compared to $14.5 million in the nine months ended September 30, 2018. The $6.1 million decrease primarily reflects a decrease in the taxable income of our TRSs.

Net Income Attributable to Non-controlling Interests

During the nine months ended September 30, 2019, net income attributable to non-controlling interests increased $3.6 million to $21.2 million, compared to $17.6 million during the nine months ended September 30, 2018. The increase was primarily due to increased non-controlling interests in our Woodstar II Portfolio, which consists of properties acquired in and after December 2017.

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.

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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.

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		For the Nine Months Ended
	September 30,		September 30,
	2019	2018	2019	2018
Diluted weighted average shares - GAAP	289,912	265,456	289,021	288,130
Add: Unvested stock awards	2,043	2,447	2,128	2,210
Add: Woodstar II Class A Units	11,001	9,939	11,491	8,298
Less: Convertible Notes dilution	(9,649)	—	(9,857)	(25,675)
Diluted weighted average shares - Core	293,307	277,842	292,783	272,963

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 nine months ended September 30, 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

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balance recognized upon issuance of the 2018 Notes, net of $18.1 million in adjustments related to cumulative repurchases through the maturity date.

The following table summarizes our quarterly Core Earnings per weighted average diluted share for the nine months ended September 30, 2019 and 2018:

	Core Earnings For the Three-Month Periods Ended
	March 31		June 30		September 30
2019	$	0.28	$	0.52	$	0.52
2018		0.58		0.54		0.53

Core Earnings per weighted average diluted share for the nine months ended September 30, 2019 and 2018 does not equal the sum of the individual quarters due to rounding and other computational factors.

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Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018

The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended September 30, 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	$	163,808	$	23,612	$	72,376	$	67,397	$	—	$	327,193
Costs and expenses		(60,959)		(18,773)		(69,126)		(42,288)		(62,155)		(253,301)
Other income (loss)		12,309		(2,604)		6,115		59,349		5,317		80,486
Income (loss) before income taxes		115,158		2,235		9,365		84,458		(56,838)		154,378
Income tax (provision) benefit		(3,194)		475		—		(1,794)		—		(4,513)
Income attributable to non-controlling interests		—		—		(5,250)		(4,219)		—		(9,469)
Net income (loss) attributable to Starwood Property Trust, Inc.		111,964		2,710		4,115		78,445		(56,838)		140,396
Add / (Deduct):
Non-controlling interests attributable to Woodstar II Class A Units		—		—		5,250		—		—		5,250
Non-cash equity compensation expense		1,140		577		83		1,765		9,411		12,976
Management incentive fee		—		—		—		—		1,875		1,875
Acquisition and investment pursuit costs		6		—		(89)		(146)		—		(229)
Depreciation and amortization		339		15		23,440		4,444		—		28,238
Loan loss provision, net		(39)		—		—		—		—		(39)
Interest income adjustment for securities		(194)		—		—		5,345		—		5,151
Extinguishment of debt, net		—		—		—		—		(247)		(247)
Other non-cash items		—		—		321		191		152		664
Reversal of GAAP unrealized (gains) / losses on:
Loans held-for-sale		(10,088)		—		—		(22,433)		—		(32,521)
Securities		303		—		—		(22,476)		—		(22,173)
Derivatives		(15,749)		109		(4,576)		6,590		(6,913)		(20,539)
Foreign currency		15,337		319		8		—		—		15,664
Earnings from unconsolidated entities		(2,507)		—		(223)		(253)		—		(2,983)
Recognition of Core realized gains / (losses) on:
Loans held-for-sale		8,383		(230)		—		22,134		—	���	30,287
Securities		373		—		—		4,593		—		4,966
Derivatives		977		64		406		(7,875)		—		(6,428)
Foreign currency		(3,911)		(171)		(8)		—		—		(4,090)
Earnings from unconsolidated entities		2,298		—		—		1,324		—		3,622
Sales of properties		—		—		—		(7,221)		—		(7,221)
Core Earnings (Loss)	$	108,632	$	3,393	$	28,727	$	64,427	$	(52,560)	$	152,619
Core Earnings (Loss) per Weighted Average Diluted Share	$	0.37	$	0.01	$	0.10	$	0.22	$	(0.18)	$	0.52

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The following table presents our summarized results of operations and reconciliation to Core Earnings for the three months ended September 30, 2018, 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	$	158,596	$	3,204	$	76,236	$	87,406	$	89	$	325,531
Costs and expenses		(52,154)		(9,520)		(72,663)		(38,973)		(59,165)		(232,475)
Other income (loss)		5,143		(76)		7,884		(1,428)		(6,779)		4,744
Income (loss) before income taxes		111,585		(6,392)		11,457		47,005		(65,855)		97,800
Income tax provision		(314)		—		(125)		(7,842)		—		(8,281)
(Income) loss attributable to non-controlling interests		(365)		—		(4,769)		151		—		(4,983)
Net income (loss) attributable to Starwood Property Trust, Inc.		110,906		(6,392)		6,563		39,314		(65,855)		84,536
Add / (Deduct):
Non-controlling interests attributable to Woodstar II Class A Units		—		—		4,769		—		—		4,769
Non-cash equity compensation expense		750		13		98		1,321		3,769		5,951
Management incentive fee		—		—		—		—		4,299		4,299
Acquisition and investment pursuit costs		45		3,770		(89)		(129)		—		3,597
Depreciation and amortization		17		—		28,780		5,456		—		34,253
Loan loss provision, net		929		—		—		—		—		929
Interest income adjustment for securities		(137)		—		—		6,573		—		6,436
Extinguishment of debt, net		—		—		—		—		(922)		(922)
Other non-cash items		—		—		(632)		1,622		986		1,976
Reversal of GAAP unrealized (gains) / losses on:
Loans held-for-sale		(1,343)		—		—		(2,597)		—		(3,940)
Securities		(338)		—		—		4,966		—		4,628
Derivatives		(7,497)		(455)		(4,779)		(3,424)		5,248		(10,907)
Foreign currency		3,546		531		1		—		—		4,078
(Earnings) loss from unconsolidated entities		(514)		—		(1,988)		134		—		(2,368)
Recognition of Core realized gains / (losses) on:
Loans held-for-sale		3,558		—		—		4,415		—		7,973
Securities		100		—		—		1,673		—		1,773
Derivatives		6		—		(230)		1,048		—		824
Foreign currency		225		(8)		—		—		—		217
Earnings from unconsolidated entities		581		—		—		613		—		1,194
Sales of properties		—		—		—		(928)		—		(928)
Core Earnings (Loss)	$	110,834	$	(2,541)	$	32,493	$	60,057	$	(52,475)	$	148,368
Core Earnings (Loss) per Weighted Average Diluted Share	$	0.40	$	(0.01)	$	0.12	$	0.21	$	(0.19)	$	0.53

Commercial and Residential Lending Segment

The Commercial and Residential Lending Segment’s Core Earnings decreased by $2.2 million, from $110.8 million during the third quarter of 2018 to $108.6 million in the third quarter of 2019. After making adjustments for the

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calculation of Core Earnings, revenues were $163.6 million, costs and expenses were $59.5 million and other income was $7.7 million.

Core revenues, consisting principally of interest income on loans, increased by $5.2 million in the third quarter of 2019, primarily due to an increase in interest income from investment securities of $7.8 million, partially offset by a decrease in interest income from loans of $2.6 million. The increase in interest income from investment securities was primarily due to higher average investment balances. The decrease in interest income from loans was principally due to (i) the recognition in the 2018 quarter of a $2.8 million profit participation in a mortgage loan that was repaid in 2016 and (ii) the compression of interest rate spreads in credit markets, partially offset by (iii) higher average balances of both commercial and residential loans.

Core costs and expenses increased by $9.1 million in the third quarter of 2019, primarily due to an $8.5 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 increased by $4.2 million primarily due to a $2.4 million favorable change in net gains (losses) resulting from prepayments and sales of commercial loans and a $1.7 million increase in earnings from unconsolidated entities.

Infrastructure Lending Segment

The Infrastructure Lending Segment had Core Earnings of $3.4 million in the third quarter of 2019 compared to a loss of $2.5 million during the 12-day post-acquisition period included in our third quarter of 2018. After making adjustments for the calculation of Core Earnings, revenues were $23.6 million, costs and expenses were $18.2 million and other loss was $2.5 million.

Revenues of $23.6 million primarily consisted of interest income of $22.8 million from loans and $0.8 million from investment securities.

Costs and expenses of $18.2 million consisted of $14.4 million of interest expense on the secured debt facilities used to finance this segment’s investment portfolio and $3.8 million of general and administrative expenses.

Other loss of $2.5 million principally reflects a $2.1 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
	September 30,
	2019		2018		Change
Master Lease Portfolio	$	4,311	$	6,334	$	(2,023)
Medical Office Portfolio		5,994		6,452		(458)
Ireland Portfolio		5,798		5,949		(151)
Woodstar I Portfolio		7,333		8,679		(1,346)
Woodstar II Portfolio		6,245		6,247		(2)
Other/Corporate		(954)		(1,168)		214
Core Earnings	$	28,727	$	32,493	$	(3,766)

The Property Segment’s Core Earnings decreased by $3.8 million, from $32.5 million during the third quarter of 2018 to $28.7 million in the third quarter of 2019. After making adjustments for the calculation of Core Earnings, revenues were $72.3 million, costs and expenses were $45.3 million and other income was $1.7 million.

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Core revenues decreased by $3.6 million in the third quarter of 2019, primarily due to (i) the sale of four properties within the Master Lease portfolio during the fourth quarter of 2018 and (ii) 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 in both the Master Lease and Medical Office Portfolios, partially offset by (iii) increased rental income in the Woodstar Portfolios due to rental rate increases.

Core costs and expenses increased by $0.8 million in the third quarter of 2019.

Core other income increased by $0.6 million in the third quarter of 2019 due to higher realized gains on derivatives which hedge the variable interest rate risk on borrowings secured by the Medical Office Portfolio and our Euro currency exposure with respect to the Ireland Portfolio.

Investing and Servicing Segment

The Investing and Servicing Segment’s Core Earnings increased by $4.3 million, from $60.1 million during the third quarter of 2018 to $64.4 million in the third quarter of 2019. After making adjustments for the calculation of Core Earnings, revenues were $73.0 million, costs and expenses were $36.3 million, other income was $32.9 million, income tax provision was $1.8 million and the deduction of income attributable to non-controlling interests was $3.4 million.

Core revenues decreased by $21.2 million in the third quarter of 2019, primarily due to decreases of $15.9 million in servicing fees, $3.1 million in interest income from our CMBS portfolio and $2.6 million in rental income from our REIS Equity Portfolio due to the sale of four properties since September 30, 2018. 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 $3.9 million in the third quarter of 2019 primarily due to higher variable expenses related to conduit loan securitizations.

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 $27.0 million principally due to (i) a $17.7 million increase in realized gains on conduit loans, (ii) a $12.2 million increase in gains on sales of operating properties and (iii) a $2.0 million lesser decrease in fair value of servicing rights, all partially offset by (iv) an $8.4 million unfavorable change in realized gains (losses) on derivatives.

Income taxes, which principally relate to the taxable nature of our loan servicing and loan conduit businesses and certain other real estate related investing activities which are housed in TRSs, decreased $6.0 million due to a decrease in the taxable income of our TRSs.

Income attributable to non-controlling interests increased $3.6 million primarily due to minority interests on the gain from an operating property sold during the third quarter of 2019.

Corporate

Core corporate costs and expenses remained level at $52.5 million in the third quarters of 2019 and 2018.

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Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018

The following table presents our summarized results of operations and reconciliation to Core Earnings for the nine months ended September 30, 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	$	526,418	$	78,264	$	215,389	$	199,980	$	26	$	1,020,077
Costs and expenses		(199,176)		(64,143)		(204,813)		(121,746)		(170,231)		(760,109)
Other income (loss)		20,086		(8,669)		(46,502)		111,941		30,186		107,042
Income (loss) before income taxes		347,328		5,452		(35,926)		190,175		(140,019)		367,010
Income tax (provision) benefit		(4,778)		746		(258)		(4,090)		—		(8,380)
Income attributable to non-controlling interests		(392)		—		(16,322)		(4,121)		—		(20,835)
Net income (loss) attributable to Starwood Property Trust, Inc.		342,158		6,198		(52,506)		181,964		(140,019)		337,795
Add / (Deduct):
Non-controlling interests attributable to Woodstar II Class A Units		—		—		16,322		—		—		16,322
Non-cash equity compensation expense		2,757		1,691		229		4,817		16,909		26,403
Management incentive fee		—		—		—		—		2,048		2,048
Acquisition and investment pursuit costs		(56)		2		(266)		(451)		(356)		(1,127)
Depreciation and amortization		695		15		71,067		14,181		—		85,958
Loan loss provision, net		2,046		1,196		—		—		—		3,242
Interest income adjustment for securities		(585)		—		—		14,698		—		14,113
Extinguishment of debt, net		—		—		—		—		(1,704)		(1,704)
Other non-cash items		—		—		(565)		699		470		604
Reversal of GAAP unrealized (gains) / losses on:
Loans held-for-sale		(16,837)		—		—		(48,841)		—		(65,678)
Securities		2,945		—		—		(56,431)		—		(53,486)
Derivatives		(11,763)		3,337		8,457		16,841		(32,915)		(16,043)
Foreign currency		17,025		102		7		—		—		17,134
(Earnings) loss from unconsolidated entities		(8,576)		—		42,538		(3,601)		—		30,361
Recognition of Core realized gains / (losses) on:
Loans held-for-sale		7,180		(985)		—		49,719		—		55,914
Securities		970		—		—		11,702		—		12,672
Derivatives		1,800		(1,396)		2,257		(17,114)		—		(14,453)
Foreign currency		(4,725)		(998)		(7)		9		—		(5,721)
Earnings (loss) from unconsolidated entities		7,078		—		(68,905)		14,194		—		(47,633)
Sales of properties		—		—		—		(7,297)		—		(7,297)
Core Earnings (Loss)	$	342,112	$	9,162	$	18,628	$	175,089	$	(155,567)	$	389,424
Core Earnings (Loss) per Weighted Average Diluted Share	$	1.17	$	0.03	$	0.06	$	0.60	$	(0.53)	$	1.33

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The following table presents our summarized results of operations and reconciliation to Core Earnings for the nine months ended September 30, 2018, 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	$	465,838	$	3,204	$	217,529	$	246,116	$	227	$	932,914
Costs and expenses		(161,786)		(9,520)		(220,047)		(119,070)		(187,629)		(698,052)
Other income (loss)		16,052		(76)		36,531		63,742		(26,148)		90,101
Income (loss) before income taxes		320,104		(6,392)		34,013		190,788		(213,550)		324,963
Income tax provision		(2,981)		—		(1,997)		(9,502)		—		(14,480)
Income attributable to non-controlling interests		(1,087)		—		(11,906)		(3,792)		—		(16,785)
Net income (loss) attributable to Starwood Property Trust, Inc.		316,036		(6,392)		20,110		177,494		(213,550)		293,698
Add / (Deduct):
Non-controlling interests attributable to Woodstar II Class A Units		—		—		11,906		—		—		11,906
Non-cash equity compensation expense		2,079		13		228		3,613		10,635		16,568
Management incentive fee		—		—		—		—		19,620		19,620
Acquisition and investment pursuit costs		1,430		3,770		(249)		(215)		—		4,736
Depreciation and amortization		50		—		87,648		15,253		—		102,951
Loan loss provision, net		27,726		—		—		—		—		27,726
Interest income adjustment for securities		(531)		—		—		8,206		—		7,675
Extinguishment of debt, net		—		—		—		—		8,586		8,586
Other non-cash items		—		—		(2,406)		2,194		2,762		2,550
Reversal of GAAP unrealized (gains) / losses on:
Loans held-for-sale		165		—		—		(26,738)		—		(26,573)
Securities		(259)		—		—		(24,123)		—		(24,382)
Derivatives		(16,665)		(455)		(25,228)		(8,788)		26,797		(24,339)
Foreign currency		3,260		531		—		2		—		3,793
Earnings from unconsolidated entities		(3,761)		—		(1,406)		(2,916)		—		(8,083)
Recognition of Core realized gains / (losses) on:
Loans held-for-sale		1,487		—		—		28,285		—		29,772
Securities		242		—		—		(4,419)		—		(4,177)
Derivatives		(5,848)		—		(938)		7,197		—		411
Foreign currency		8,136		(8)		—		(42)		—		8,086
Earnings from unconsolidated entities		3,986		—		—		2,875		—		6,861
Sales of properties		—		—		(365)		(4,374)		—		(4,739)
Core Earnings (Loss)	$	337,533	$	(2,541)	$	89,300	$	173,504	$	(145,150)	$	452,646
Core Earnings (Loss) per Weighted Average Diluted Share	$	1.24	$	(0.01)	$	0.33	$	0.63	$	(0.53)	$	1.66

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Commercial and Residential Lending Segment

The Commercial and Residential Lending Segment’s Core Earnings increased by $4.6 million, from $337.5 million during the nine months of 2018 to $342.1 million in the nine months of 2019. After making adjustments for the calculation of Core Earnings, revenues were $525.8 million, costs and expenses were $193.7 million and other income was $15.2 million.

Core revenues, consisting principally of interest income on loans, increased by $60.5 million in the nine months of 2019, primarily due to increases in interest income from loans of $31.8 million and investment securities of $28.7 million. The increase in interest income from loans was principally due to (i) higher average LIBOR rates, (ii) higher average balances of both commercial and residential loans and (iii) higher levels of prepayment related income, partially offset by (iv) the compression of interest rate spreads in credit markets and (v) the recognition in the 2018 period of a $15.1 million profit participation in a mortgage loan that was repaid in 2016. The increase in interest income from investment securities was primarily due to higher average investment balances.

Core costs and expenses increased by $63.2 million in the nine months of 2019, primarily due to a $61.8 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 increased by $8.4 million primarily due to a $5.3 million increase in net gains resulting from prepayments and sales of commercial and residential loans and a $3.1 million increase in earnings from unconsolidated entities.

Infrastructure Lending Segment

The Infrastructure Lending Segment had Core Earnings of $9.2 million during the nine months of 2019 compared to a loss of $2.5 million during the 12-day post-acquisition period included in the nine months of 2018. After making adjustments for the calculation of Core Earnings, revenues were $78.3 million, costs and expenses were $61.2 million and other loss was $8.6 million.

Revenues of $78.3 million primarily consisted of interest income of $75.0 million from loans and $2.6 million from investment securities.

Costs and expenses of $61.2 million consisted of $49.3 million of interest expense on the secured debt facilities used to finance this segment’s investment portfolio and $11.9 million of general and administrative expenses.

Other loss of $8.6 million principally reflects an $8.2 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 Nine Months Ended
	September 30,
	2019		2018		Change
Master Lease Portfolio	$	12,663	$	24,732	$	(12,069)
Medical Office Portfolio		19,329		19,120		209
Ireland Portfolio		18,801		17,208		1,593
Woodstar I Portfolio		22,489		19,639		2,850
Woodstar II Portfolio		17,208		12,420		4,788
Investment in unconsolidated entities		(68,905)		—		(68,905)
Other/Corporate		(2,957)		(3,819)		862
Core Earnings	$	18,628	$	89,300	$	(70,672)

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The Property Segment’s Core Earnings decreased by $70.7 million, from $89.3 million during the nine months of 2018 to $18.6 million in the nine months of 2019. After making adjustments for the calculation of Core Earnings, revenues were $214.9 million, costs and expenses were $133.9 million and other loss was $62.1 million.

Core revenues decreased by $1.6 million in the nine months of 2019, primarily due to a decrease in rental income from the Master Lease Portfolio due to (i) the sale of seven properties within the Master Lease portfolio during 2018 and (ii) 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 in both the Master Lease and Medical Office Portfolios, partially offset by (iii) the full period inclusion of rental income from the Woodstar II Portfolio, which was acquired over a period between December 2017 and September 2018, and (iv) rental rate increases in both Woodstar Portfolios.

Core costs and expenses decreased by $0.1 million in the nine months of 2019, primarily due to the sale of seven properties from the Master Lease Portfolio in 2018 and no longer recording property taxes paid directly by lessees, both as discussed above, mostly offset by the full period inclusion of the Woodstar II Portfolio.

Core other income (loss) decreased by $70.9 million in the nine months of 2019, primarily due to a $68.9 million loss on our investment in the Retail Fund.  This loss reflects the recognition in the 2019 first quarter 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 $6.6 million net realized gain on sale of three properties in the Master Lease Portfolio during the nine months of 2018, partially offset by a $4.6 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 and foreign exchange contracts which economically hedge our Euro currency exposure with respect to the Ireland Portfolio.

Investing and Servicing Segment

The Investing and Servicing Segment’s Core Earnings increased by $1.6 million, from $173.5 million during the nine months of 2018 to $175.1 million in the nine months of 2019. After making adjustments for the calculation of Core Earnings, revenues were $215.5 million, costs and expenses were $103.3 million, other income was $70.3 million, income tax provision was $4.1 million and the deduction of income attributable to non-controlling interests was $3.3 million.

Core revenues decreased by $39.3 million in the nine months of 2019, primarily due to decreases of $30.9 million in servicing fees, $4.8 million in interest income from our CMBS portfolio and $2.9 million in rental income from our REIS Equity Portfolio due to the sale of four properties since September 30, 2018.

Core costs and expenses increased by $3.2 million in the nine months of 2019 primarily due to a $6.9 million increase in interest expense principally related to the financing of our CMBS portfolio, partially offset by a $3.3 million decrease in general and administrative expenses primarily related to our special servicing business.

Core other income increased by $38.2 million principally due to (i) a $21.4 million increase in realized gains on conduit loans, (ii) a $13.4 million increase in net recognized gains on CMBS investments, (iii) a $12.8 million lesser decrease in fair value of servicing rights and (iv) an $11.3 million increase in earnings from unconsolidated entities, all partially offset by (v) a $23.2 million unfavorable change in realized gains (losses) on derivatives.

Income taxes, which principally relate to the taxable nature of our loan servicing and loan conduit businesses and certain other real estate related investing activities which are housed in TRSs, decreased $5.4 million due to a decrease in the taxable income of our TRSs.

Income attributable to non-controlling interests decreased $0.5 million, primarily with respect to minority investors’ share of gains from operating properties sold during the nine months of 2019 compared with 2018.

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Corporate

Core corporate costs and expenses increased by $10.4 million, from $145.2 million in the nine months of 2018 to $155.6 million in the nine months of 2019, primarily due to (i) a $9.9 million unfavorable change in gain (loss) on extinguishment of debt primarily due to the $10.0 million positive adjustment to Core Earnings during the nine months of 2018 upon the repayment at maturity of the 2018 Notes, as described above, (ii) a $3.8 million increase in base management fees and (iii) a $3.6 million unfavorable change in gain (loss) on interest rate swaps, all partially offset by (iv) a $9.0 million decrease in interest expense principally on lower average outstanding balances of our unsecured senior notes.

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 Nine Months Ended September 30, 2019 (amounts in thousands)

			VIE		Excluding Investing
	GAAP		Adjustments		and Servicing VIEs
Net cash used in operating activities	$	(569,791)	$	(6,551)	$	(576,342)
Cash Flows from Investing Activities:
Origination and purchase of loans held-for-investment		(2,987,685)		—		(2,987,685)
Proceeds from principal collections and sale of loans		3,258,058		—		3,258,058
Purchase of investment securities		(5,165)		(136,379)		(141,544)
Proceeds from sales and collections of investment securities		122,870		188,556		311,426
Proceeds from sales and insurance recoveries on properties		52,336		—		52,336
Purchases and additions to properties and other assets		(22,977)		(8,613)		(31,590)
Investment in unconsolidated entities		(8,365)		(13,323)		(21,688)
Net cash flows from other investments and assets		(10,926)		—		(10,926)
Net cash provided by investing activities		398,146		30,241		428,387
Cash Flows from Financing Activities:
Proceeds from borrowings		6,084,209		—		6,084,209
Principal repayments on and repurchases of borrowings		(5,549,756)		—		(5,549,756)
Payment of deferred financing costs	��	(45,403)		—		(45,403)
Proceeds from common stock issuances, net of offering costs		605		—		605
Payment of dividends		(402,519)		—		(402,519)
Contributions from non-controlling interests		5,294		—		5,294
Distributions to non-controlling interests		(41,531)		7,916		(33,615)
Issuance of debt of consolidated VIEs		149,949		(149,949)		—
Repayment of debt of consolidated VIEs		(158,315)		158,315		—
Distributions of cash from consolidated VIEs		38,607		(38,607)		—
Net cash provided by financing activities		81,140		(22,325)		58,815
Net decrease in cash, cash equivalents and restricted cash		(90,505)		1,365		(89,140)
Cash, cash equivalents and restricted cash, beginning of period		487,865		(2,554)		485,311
Effect of exchange rate changes on cash		(2,702)		—		(2,702)
Cash, cash equivalents and restricted cash, end of period	$	394,658	$	(1,189)	$	393,469

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

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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 decreased by $89.1 million during the nine months ended September 30, 2019, reflecting net cash used in operating activities of $576.3 million, partially offset by net cash provided by investing activities of $428.4 million and net cash provided by financing activities of $58.8 million.

Net cash used in operating activities of $576.3 million during the nine months ended September 30, 2019 related primarily to $774.9 million in originations and purchases of loans held-for-sale, net of sales and principal collections, cash interest expense of $367.3 million, general and administrative expenses of $111.7 million, a net change in operating assets and liabilities of $95.6 million and management fees of $69.5 million. Offsetting these cash outflows was cash interest income of $450.2 million from our loan origination and conduit programs and cash interest income on investment securities of $142.3 million. Net rental income provided cash of $161.3 million, servicing fees provided cash of $66.4 million and distributions of earnings from unconsolidated entities provided $24.9 million.

Net cash provided by investing activities of $428.4 million during the nine months ended September 30, 2019 related primarily to proceeds received from principal collections and sales of loans of $3.3 billion and investment securities of $311.4 million and proceeds from sales and insurance recoveries of properties of $52.3 million, partially offset by the origination and acquisition of new loans held-for-investment of $3.0 billion, the purchase of investment securities of $141.5 million, net additions to properties and other assets of $31.6 million and investments in unconsolidated entities of $21.7 million.

Net cash provided by financing activities of $58.8 million during the nine months ended September 30, 2019 related primarily to borrowings on our secured debt, net of repayments and deferred loan costs, of $499.4 million, partially offset by dividend distributions of $402.5 million, net distributions to non-controlling interests of $28.3 million and the settlement of the 2019 Notes of $10.4 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 September 30, 2019 and December 31, 2018 (dollars in thousands):

											Unlevered
	Face		Carrying			Asset Specific		Net			Return on
	Amount		Value			Financing		Investment		Vintage	Asset
September 30, 2019
First mortgages (1)	$	6,555,768	$	6,530,654		$	3,835,922	$	2,694,732	1997-2019	6.7	%
Subordinated mortgages		54,143		53,008			—		53,008	1998-2018	9.2	%
Mezzanine loans (1)		546,434		545,494			—		545,494	2013-2019	12.3	%
Residential loans, fair value option		465,344		479,169			324,712		154,457	2013-2019	5.9	%
Other loans		64,731		60,995			—		60,995	1999-2018	8.9	%
Loans held-for-sale, fair value option, residential		677,548		701,610			469,160		232,450	2015-2019	6.2	%
Loans held-for-sale, commercial		108,750		107,994			—		107,994	2018-2019	5.2	%
Loan loss allowance		—		(32,845)			—		(32,845)	N/A
RMBS, available-for-sale		286,717		195,297			113,524		81,773	2003-2007	11.6	%
RMBS, fair value option		61,661		111,122	(2)		19,588		91,534	2019	10.5	%
CMBS, fair value option		118,249		118,388	(2)		58,801		59,587	2018	5.7	%
HTM debt securities (3)		504,022		502,207			167,578		334,629	2014-2018	7.2	%
Equity security		11,230		11,286			—		11,286	N/A
Investment in unconsolidated entities		N/A		42,518			—		42,518	N/A
Properties, net		N/A		26,902			—		26,902	N/A
	$	9,454,597	$	9,453,799		$	4,989,285	$	4,464,514
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	(2)		83,864		74,824	2018	6.7	%
HTM debt securities (3)		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 $809.5 million and $1.0 billion being classified as first mortgages as of September 30, 2019 and December 31, 2018, respectively.

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

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

As of September 30, 2019 and December 31, 2018, our Commercial and Residential Lending Segment’s investment portfolio, excluding residential loans, RMBS, properties and other investments, had the following characteristics based on carrying values:

Collateral Property Type	September 30, 2019		December 31, 2018
Office	34.2	%	35.0	%
Hotel	23.0	%	23.5	%
Mixed Use	13.7	%	11.9	%
Multifamily	13.6	%	15.4	%
Residential	7.1	%	4.9	%
Retail	3.6	%	2.4	%
Industrial	0.8	%	1.7	%
Other	4.0	%	5.2	%
	100.0	%	100.0	%

Geographic Location	September 30, 2019		December 31, 2018
North East	28.6	%	28.7	%
West	19.5	%	22.7	%
International	15.4	%	11.0	%
South West	13.6	%	14.0	%
South East	9.6	%	9.9	%
Mid Atlantic	7.2	%	6.8	%
Midwest	6.1	%	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 September 30, 2019 and December 31, 2018 (dollars in thousands):

									Unlevered
	Face		Carrying		Asset Specific		Net		Return on
	Amount		Value		Financing		Investment		Asset
September 30, 2019
First priority infrastructure loans and HTM securities	$	1,358,206	$	1,335,863	$	1,033,716	$	302,147	6.1	%
Loans held-for-sale, infrastructure		168,445		164,122		134,450		29,672	4.2	%
Loan loss allowance		N/A		(190)		—		(190)
	$	1,526,651	$	1,499,795	$	1,168,166	$	331,629
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 September 30, 2019 and December 31, 2018, our Infrastructure Lending Segment’s investment portfolio had the following characteristics based on carrying values:

Collateral Type	September 30, 2019		December 31, 2018
Natural gas power	74.7	%	54.3	%
Renewable power	15.4	%	30.8	%
Other thermal power	6.2	%	5.1	%
Midstream/downstream oil & gas	3.7	%	9.3	%
Upstream oil & gas	—	%	0.5	%
	100.0	%	100.0	%

Geographic Location	September 30, 2019		December 31, 2018
U.S. Regions:
North East	46.6	%	32.8	%
Midwest	25.0	%	15.9	%
South West	6.8	%	12.9	%
Mid-Atlantic	4.5	%	4.6	%
South East	3.9	%	3.4	%
West	3.8	%	4.7	%
International:
Mexico	7.1	%	12.5	%
United Kingdom	0.9	%	4.7	%
Ireland	—	%	2.4	%
Other	1.4	%	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 September 30, 2019 and December 31, 2018 (amounts in thousands):

	September 30, 2019		December 31, 2018
Properties, net	$	2,441,480	$	2,512,847
Lease intangibles, net		73,478		87,729
Investment in unconsolidated entities		71,824		114,362
	$	2,586,782	$	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 September 30, 2019 (dollars in thousands):

			Asset						Weighted Average
	Carrying		Specific		Net		Occupancy		Remaining
	Value		Financing		Investment		Rate		Lease Term
Office—Medical Office Portfolio	$	759,468	$	489,404	$	270,064	92.2	%	6.3 years
Office—Ireland Portfolio		479,724		331,992		147,732	98.8	%	8.9 years
Multifamily residential—Ireland Portfolio		18,407		11,296		7,111	81.0	%	0.2 years
Multifamily residential—Woodstar I Portfolio		627,926		405,808		222,118	98.3	%	0.5 years
Multifamily residential—Woodstar II Portfolio		600,676		437,600		163,076	99.3	%	0.5 years
Retail—Master Lease Portfolio		343,790		192,316		151,474	100.0	%	22.6 years
Subtotal—undepreciated carrying value		2,829,991		1,868,416		961,575
Accumulated depreciation and amortization		(315,033)		—		(315,033)
Net carrying value	$	2,514,958	$	1,868,416	$	646,542

As of September 30, 2019 and December 31, 2018, our Property Segment’s investment portfolio had the following geographic characteristics based on carrying values:

Geographic Location	September 30, 2019		December 31, 2018
Ireland	17.0	%	17.7	%
U.S. Regions:
South East	51.3	%	50.8	%
South West	8.6	%	8.6	%
Midwest	8.4	%	8.3	%
North East	8.1	%	8.1	%
West	6.6	%	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 September 30, 2019 and December 31, 2018 (amounts in thousands):

						Asset
	Face		Carrying			Specific		Net
	Amount		Value			Financing		Investment
September 30, 2019
CMBS, fair value option	$	2,697,712	$	1,009,249	(1)	$	313,114	$	696,135
Intangible assets - servicing rights		N/A		43,015	(2)		—		43,015
Lease intangibles, net		N/A		23,265			—		23,265
Loans held-for-sale, fair value option, commercial		458,141		468,583			233,142		235,441
Loans held-for-investment		1,363		1,363			—		1,363
Investment in unconsolidated entities		N/A		33,246	(3)		—		33,246
Properties, net		N/A		261,156			225,362		35,794
	$	3,157,216	$	1,839,877		$	771,618	$	1,068,259
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 $962.9 million and $957.5 million of CMBS eliminated in consolidation against VIE liabilities pursuant to ASC 810 as of September 30, 2019 and December 31, 2018, respectively.

(2) Includes $24.8 million and $24.1 million of servicing rights intangibles eliminated in consolidation against VIE assets pursuant to ASC 810 as of September 30, 2019 and December 31, 2018, respectively.

(3) Includes $21.5 million and $22.0 million of investment in unconsolidated entities eliminated in consolidation against VIE assets pursuant to ASC 810 as of September 30, 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 $268.6 million and $284.7 million as of September 30, 2019 and December 31, 2018, respectively:

Property Type	September 30, 2019		December 31, 2018
Office	49.3	%	56.5	%
Retail	27.8	%	24.1	%
Multifamily	11.1	%	7.8	%
Mixed Use	5.2	%	5.1	%
Self-storage	4.7	%	4.5	%
Hotel	1.9	%	2.0	%
	100.0	%	100.0	%

Geographic Location	September 30, 2019		December 31, 2018
South East	32.6	%	37.9	%
North East	23.4	%	22.4	%
South West	18.3	%	18.0	%
West	10.5	%	9.8	%
Midwest	8.3	%	6.8	%
Mid Atlantic	6.9	%	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.

Secured Borrowings

The following table is a summary of our secured borrowings as of September 30, 2019 (dollars in thousands):

						Pledged								Approved
					Weighted	Asset			Maximum					but		Unallocated
	Current		Extended		Average	Carrying			Facility			Outstanding		Undrawn		Financing
	Maturity		Maturity (a)		Pricing	Value			Size			Balance		Capacity (b)		Amount (c)
Repurchase Agreements:
Commercial Loans	Aug 2020 to Jan 2024	(d)	Aug 2021 to Apr 2028	(d)	(e)	$	4,458,046		$	7,879,032	(f)	$	2,945,331	$	220,384	$	4,713,317
Residential Loans	Feb 2021		N/A		LIBOR + 2.10%		16,332			400,000			13,190		—		386,810
Infrastructure Loans	Feb 2020 to Jul 2022		Feb 2021 to Jul 2027		LIBOR + 1.75%		316,759			1,000,000			263,664		—		736,336
Conduit Loans	Feb 2020 to Jun 2022		Feb 2021 to Jun 2023		LIBOR + 2.22%		358,405			363,225			234,025		32,000		97,200
CMBS/RMBS	Jun 2020 to Dec 2028	(g)	Sep 2020 to Oct 2029	(g)	(h)		1,069,948			778,025			676,648		15,785		85,592
Total Repurchase Agreements							6,219,490			10,420,282			4,132,858		268,169		6,019,255
Other Secured Financing:
Borrowing Base Facility	Apr 2022		Apr 2024		LIBOR + 2.25%		49,754			650,000	(i)		37,313		—		612,687
Infrastructure Acquisition Facility	Sep 2021		Sep 2022		(j)		1,062,553			1,086,201			883,173		—		203,028
Property Mortgages - Fixed rate	Mar 2021 to Aug 2052	(k)	N/A		3.41%		1,921,951			1,453,116			1,452,970		—		146
Property Mortgages - Variable rate	May 2020 to Apr 2025		N/A		LIBOR + 2.44%		831,275			694,351			643,261		—		51,090
Term Loan and Revolver	(l)		N/A		(l)		N/A	(l)		500,000			400,000		100,000		—
FHLB	Feb 2021		N/A		(m)		1,164,449			2,000,000			780,754		—		1,219,246
Collateralized Loan Obligation	Jul 2038		N/A		LIBOR + 1.34%		1,098,817			936,375			936,375		—		—
Total Other Secured Financing							6,128,799			7,320,043			5,133,846		100,000		2,086,197
						$	12,348,289		$	17,740,325		$	9,266,704	$	368,169	$	8,105,452
Unamortized net discount													(2,920)
Unamortized deferred financing costs													(88,260)
												$	9,175,524

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

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

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

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

(e) Certain facilities with an outstanding balance of $593.8 million as of September 30, 2019 are indexed to GBP LIBOR and EURIBOR. The remainder have a weighted average rate of LIBOR + 1.93%.

(f) The aggregate initial maximum facility size of $6.8 billion may be increased at our option, subject to certain conditions. This amount includes such upsizes.

(g) Certain facilities with an outstanding balance of $393.8 million as of September 30, 2019 carry a rolling 11-month or 12-month term which may reset monthly with the lender's consent. These facilities carry no maximum facility size.

(h) A facility with an outstanding balance of $78.6 million as of September 30, 2019 has a fixed annual interest rate of 4.09%. All other facilities are variable rate with a weighted average rate of LIBOR + 1.55%.

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

(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.

(k) The weighted average maturity is 9.3 years as of September 30, 2019.

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(l) Consists of: (i) a $400.0 million term loan facility that matures in July 2026 with an annual interest rate of LIBOR + 2.50%; and (ii) a $100.0 million revolving credit facility that matures in July 2024 with an annual interest rate of LIBOR + 3.00%. These facilities are secured by the equity interests in certain of our subsidiaries which totaled $3.5 billion as of September 30, 2019.

(m) FHLB financing with an outstanding balance of $312.0 million as of September 30, 2019 has a weighted average fixed annual interest rate of 2.08%. The remainder is variable rate with a weighted average rate of LIBOR + 0.28%.

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)
June 30, 2019		9,359,610		9,503,479		(143,869)	(c)
September 30, 2019		9,266,704		9,116,755		149,949	(d)

(a) Variance primarily due to $120.0 million repaid on Commercial Loans repurchase facilities 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.

(c) Variance primarily due to loan repayments on the Infrastructure Acquisition Facility and Commercial Loans repurchase facilities.

(d) Variance primarily due to the net increase in debt related to the CLO issuance in August 2019.

Borrowings under Unsecured Senior Notes

During both the three months ended September 30, 2019 and 2018, the weighted average effective borrowing rate on our unsecured senior notes was 4.9%. During the nine months ended September 30, 2019 and 2018, the weighted average effective borrowing rate on our unsecured senior notes was 4.9% and 5.0%, 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 on amounts outstanding and extended contractual maturities of those investments as of September 30, 2019. The projected and/or required repayments of financing were based on the earlier of (i) the extended contractual maturity of each credit facility or (ii) the extended contractual maturity of each of the investments that have been pledged as collateral under the respective credit facility (amounts in thousands):

	Scheduled Principal		Scheduled/Projected		Projected/Required			Scheduled Principal
	Repayments on Loans		Principal Repayments		Repayments of			Inflows Net of
	and HTM Securities		on RMBS and CMBS		Financing			Financing Outflows
Fourth Quarter 2019		364,723		13,434		(458,556)	(1)		(80,399)
First Quarter 2020		177,647		10,109		(44,947)			142,809
Second Quarter 2020		353,336		22,992		(86,414)			289,914
Third Quarter 2020		258,271		9,381		(467,925)	(2)		(200,273)
Total	$	1,153,977	$	55,916	$	(1,057,842)		$	152,051

(1) Includes $380.0 million of maturities associated with the financing of residential loans held-for-sale under the FHLB facility. Expected proceeds from sales of loans are not reflected in this table.

(2) Includes $393.8 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 September 30, 2019, we had 100,000,000 shares of preferred stock available for issuance and 218,062,981 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 senior loan interests and other assets.

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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 nine months ended September 30, 2019:

Declare Date	Record Date	Payment Date	Amount		Frequency
8/7/19	9/30/19	10/15/19	$	0.48	Quarterly
5/8/19	6/28/19	7/15/19	$	0.48	Quarterly
2/28/19	3/29/19	4/15/19	$	0.48	Quarterly

On November 8, 2019, our board of directors declared a dividend of $0.48 per share for the fourth quarter of 2019, which is payable on January 15, 2020 to common stockholders of record as of December 31, 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 September 30, 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)	$	8,330,329	$	897,211	$	2,256,616	$	2,505,566	$	2,670,936
Collateralized loan obligations		936,375		—		—		—		936,375
Unsecured senior notes		1,950,000		—		1,200,000		250,000		500,000
Loan funding commitments (b)		2,479,728		1,697,817		698,765		83,146		—
Infrastructure Lending Segment commitments (c)		189,776		189,776		—		—		—
Loan purchase commitments (d)		46,486		46,486		—		—		—
Future lease commitments		34,862		6,399		7,418		3,223		17,822
Total	$	13,967,556	$	2,837,689	$	4,162,799	$	2,841,935	$	4,125,133

(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 $223.3 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 $155.0 million under revolvers and letters of credit and $34.8 million under delayed draw term loans.

(d) Represents the Company’s contractual commitments to purchase residential mortgage loans from a third party residential mortgage originator.

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 September 30, 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
September 30, 2019	$	242,275	$	89,000	5
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 September 30, 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 September 30, 2019
Loans held-for-investment, residential	$	465,344	$	94,400	6
Loans held-for-sale		784,753		533,630	42
RMBS, available-for-sale		286,717		85,000	2
Secured financing agreements		640,242		707,207	13
Unsecured senior notes		1,000,000		970,000	2
	$	3,177,056	$	2,390,237	65
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 variable rate investments and our variable rate debt assuming increases or decreases in LIBOR or other applicable index rates and adjusted for the effects of our interest rate hedging activities (amounts in thousands, except per share data):

	Variable rate
	investments and		2.0%		1.0%		1.0%		2.0%
Income (Expense) Subject to Interest Rate Sensitivity	indebtedness (1)		Increase		Increase		Decrease (2)		Decrease (2)
Investment income from variable rate investments	$	8,561,874	$	163,168	$	78,441	$	(53,416)	$	(83,996)
Interest expense from variable rate debt, net of interest rate derivatives		(6,955,649)		(140,664)		(70,341)		68,500		131,966
Net investment income from variable rate instruments	$	1,606,225	$	22,504	$	8,100	$	15,084	$	47,970
Impact per diluted shares outstanding			$	0.08	$	0.03	$	0.05	$	0.17

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

(2)Assumes LIBOR or other applicable index rates do 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 September 30, 2019 GBP closing rate of 1.2287, Euro (“EUR”) closing rate of 1.0902 and Australian Dollar (“AUD”) closing rate of 0.6749.

Carrying Value of Net Investment		Local Currency	Number of Foreign Exchange Contracts		Aggregate Notional Value of Hedges Applied		Expiration Range of Contracts
$	5,208	EUR	48		$	6,140	August 2020 – July 2021
	2,203	GBP	2			5,097	October 2019
	13,132	GBP	3			10,549	November 2019 – June 2020
	25,059	GBP	17			120,459	October 2019 – July 2021
	31,783	EUR	8			35,880	May 2020 – March 2022
	17,708	EUR	36			29,847	November 2019 – August 2022
	88,098	GBP	14			105,541	October 2019- January 2022
	39,029	GBP	6			39,369	April 2021
	2,996	AUD	1			4,751	October 2019
	55,950	EUR	13			69,651	November 2019 – November 2022
	153,314	EUR	9			193,654	December 2019 – June 2020
	26,391	GBP	9	(1)		32,814	December 2019 – December 2021
	818	AUD	1			3,556	November 2021
	53,941	GBP	36			70,276	November 2019 – November 2021
	11,286	GBP	11			13,055	December 2019 – April 2022
$	526,916		214		$	740,639

(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 September 30, 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.

Except as set forth below, there have been no material changes to the risk factors previously disclosed in our Form 10-K. 

Risks Related to Our Investments

We may sponsor, or purchase the more junior securities of collateralized loan obligations (“CLO”s) and such instruments involve significant risks, including that these securities receive distributions from the CLO only if the CLO generates enough income to first pay all the investors holding senior tranches and all CLO expenses.

In August 2019, we entered into a CLO, and in the future we may enter into additional CLOs. In CLOs, investors purchase specific tranches, or slices, of debt instruments that are secured or backed by a pool of loans. The CLO debt classes have a specific seniority structure and priority of payments. The most junior securities of a CLO are generally retained by the sponsor of the CLO and are usually entitled to all of the income generated by the pool of loans after the payment of debt service on all the more senior classes of debt and the payment of all expenses. Defaults on the pool of loans therefore first affect the most junior tranches. The subordinate tranches of CLO debt may also experience a lower recovery and greater risk of loss, including risk of deferral or non-payment of interest than more senior tranches of the CLO debt because they bear the bulk of defaults from the loans held in the CLO and serve to protect the other, more senior tranches from default in all but the most severe circumstances. Despite the protection provided by the subordinate tranches, even more senior CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, decline in market value due to market anticipation of defaults and aversion to CLO securities as a class. Further, the transaction documents relating to the issuance of CLO securities may impose eligibility criteria on the assets of the CLO, restrict the ability of the CLO’s sponsor to trade investments and impose certain portfolio-wide asset quality requirements. Finally, the credit risk retention rules of the Securities and Exchange Commission (the “Risk Retention Rules”) impose a retention requirement of 5% of the issued debt classes by the sponsor of the CLO. These criteria, restrictions and requirements may limit the ability of the CLO’s sponsor (or collateral manager) to maximize returns on the CLO securities.

In addition, CLOs are not actively traded and are relatively illiquid investments and volatility in CLO trading markets may cause the value of these investments to decline. The market value of CLO securities may be affected by, among other things, changes in the market value of the underlying loans held by the CLO, changes in the distributions on the underlying loans, defaults and recoveries on the underlying loans, capital gains and losses on the underlying losses (or foreclosure assets), prepayments on the underlying loans and the availability, prices and interest rate of underlying loans. Furthermore, the leveraged nature of each subordinated tranche may magnify the adverse impact on such class of changes in the value of the loans, changes in the distributions on the loans, defaults and recoveries on the loans, capital gains and losses on the loans (or foreclosure assets), prepayment on loans and availability, price and interest rates of the loans.

A CLO may include certain interest coverage tests, overcollateralization coverage tests or other tests that, if not met, may result in a change in the priority of distributions, which may result in the reduction or elimination of distributions to the subordinate debt and equity tranches until the tests have been met or certain senior classes of securities have been paid in full. Accordingly, if we hold subordinate debt interests in a CLO that contains such tests and such tests are not satisfied, we may experience a significant reduction in our cash flow from those interests.

Furthermore, if any CLO that we sponsor or in which we hold interests fails to meet certain tests relevant to the most senior debt issued and outstanding by the CLO issuer, an event of default may occur under that CLO. If that occurs, (i) if we were serving as manager of the CLO, our ability to manage the CLO may be terminated and (ii) our ability to

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attempt to cure any defaults in the CLO may be limited, which would increase the likelihood of a reduction or elimination of cash flow and returns to us in the CLOs for an indefinite time.

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

There were no unregistered sales of securities during the three months ended September 30, 2019.

Issuer Purchases of Equity Securities

There were no purchases of common stock during the three months ended September 30, 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	Indenture, dated as of August 15, 2019, by and among STWD 2019-FL1, Ltd., as Issuer, STWD 2019-FL1, LLC, as Co-Issuer, Starwood Property Mortgage, L.L.C., as Advancing Agent, Wilmington Trust, National Association, as Trustee, and Wells Fargo Bank, National Association, as Note Administrator and Custodian (Incorporated by reference to Exhibit 10.1 of the Company’s Current Report on Form 8-K filed August 21, 2019)
10.2	Restricted Stock Unit Award Agreement (Starwood Property Trust, Inc. 2017 Manager Equity Plan)
10.3	Form of Restricted Stock Award Agreement for Independent Directors (Starwood Property Trust, Inc. 2017 Equity Plan)
10.4	Guarantee Agreement, dated as of December 10, 2015, made by Starwood Property Trust, Inc. in favor of JPMorgan Chase Bank, National Association (the “Guarantee”)
10.5	First Amendment to Guarantee Agreement, dated as of September 15, 2017, made by Starwood Property Trust, Inc. for the benefit of JPMorgan Chase Bank, National Association (the “First Amendment to Guarantee”)
10.6	Second Amendment to Guarantee Agreement dated as of March 15, 2019, between Starwood Property Trust, Inc. and JPMorgan Chase Bank, National Association (collectively with the Guarantee Agreement, dated as of December 10, 2015, and the First Amendment to Guarantee, the “Guarantee Agreement”)
10.7	Letter Agreement, dated September 17, 2019, between Starwood Property Trust, Inc. and JPMorgan Chase Bank, National Association with respect to the Guarantee 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 – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	Inline XBRL Taxonomy Extension Schema Document
101.CAL	Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE	Inline XBRL Taxonomy Extension Presentation Linkbase Document
104	Cover Page Interactive Data File (embedded within the Inline XBRL document)

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SIGNATURES

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

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

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