6. COMMERCIAL REAL ESTATE INVESTMENTS

At September 30, 2014 and December 31, 2013, commercial real estate investments were composed of the following:

CRE Debt and Preferred Equity Investments

	September 30, 2014							December 31, 2013
	Outstanding Principal		Carrying Value(1)		Percentage of Loan Portfolio(2)			Outstanding Principal		Carrying Value(1)		Percentage of Loan Portfolio(2)
	(dollars in thousands)
Senior mortgages	$	372,210	$	371,285		23.9	%	$	669,512	$	667,299		42.2	%
Senior securitized mortgages(3)		399,541		398,409		25.6	%		-		-		0.0	%
Subordinate notes		-		-		0.0	%		41,059		41,408		2.6	%
Mezzanine loans		537,578		537,654		34.5	%		626,883		628,102		39.5	%
Preferred equity		249,769		247,610		16.0	%		249,769		247,160		15.7	%
Total	$	1,559,098	$	1,554,958		100.0	%	$	1,587,223	$	1,583,969		100.0	%

(1)	Carrying value includes unamortized origination fees of $4.4 million and $5.4 million as of September 30, 2014 and December 31, 2013, respectively.

(2)	Based on outstanding principal.

(3)	Assets of consolidated VIE.

	September 30, 2014
	Senior Mortgages			Senior Securitized Mortgages(1)			Subordinate Notes			Mezzanine Loans			Preferred Equity		Total
	(dollars in thousands)
Beginning balance	$	667,299		$	-		$	41,408		$	628,102		$	247,160	$	1,583,969
Originations & advances (principal)		114,946			-			-			94,748			-		209,694
Principal payments		(12,685	)		-			(41,059	)		(184,052	)		-		(237,796	)
Sales (principal)					-			-			-			-		-
Amortization & accretion of (premium) discounts		(102	)		-			(349	)		(1,031	)		82		(1,400	)
Net (increase) decrease in origination fees		(2,267	)		(116	)		-			(463	)		-		(2,846	)
Amortization of net origination fees		2,072			547			-			350			368		3,337
Transfers		(397,978	)		397,978			-			-			-		-
Allowance for loan losses		-			-			-			-			-		-
Net carrying value	$	371,285		$	398,409		$	-		$	537,654		$	247,610	$	1,554,958

(1)	Assets of consolidated VIE.

	December 31, 2013
	Senior Mortgages			Subordinate Notes			Mezzanine Loans			Preferred Equity			Total
	(dollars in thousands)
Beginning balance	$	429,229		$	41,571		$	568,759		$	187,623		$	1,227,182
Originations & advances (principal)		240,150			-			136,040			60,000			436,190
Principal payments		(388	)		(90	)		(64,035	)		-			(64,513	)
Sales (principal)		(13,750	)		-			-			-			(13,750	)
Amortization & accretion of (premium) discounts		(37	)		(73	)		(192	)		31			(271	)
Net (increase) decrease in origination fees		(1,106	)		-			14			(601	)		(1,693	)
Amortization of net origination fees		701			-			16			107			824
Transfers		12,500			-			(12,500	)		-			-
Allowance for loan losses		-			-			-			-			-
Net carrying value	$	667,299		$	41,408		$	628,102		$	247,160		$	1,583,969

Internal CRE Debt and Preferred Equity Investment Ratings

	September 30, 2014
						Internal Ratings
Investment Type	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio			Performing		Watch List		Defaulted-Recovery			Workout
	(dollars in thousands)
Senior mortgages	$	372,210		23.9	%	$	359,237	$	-	$	12,973	(2)	$	-
Senior securitized mortgages(1)		399,541		25.6	%		399,541		-		-			-
Subordinate notes		-		0.0	%		-		-		-			-
Mezzanine loans		537,578		34.5	%		522,095		-		15,483			-
Preferred equity		249,769		16.0	%		249,769		-		-			-
	$	1,559,098		100.0	%	$	1,530,642	$	-	$	28,456		$	-

(1)	Assets of consolidated VIE.

(2)	Relates to one loan on nonaccrual status.

	December 31, 2013
						Internal Ratings
Investment Type	Outstanding Principal		Percentage of CRE Debt and Preferred Equity Portfolio			Performing		Watch List		Defaulted-Recovery			Workout
	(dollars in thousands)
Senior mortgages	$	669,512		42.2	%	$	644,039	$	-	$	25,473	(1)	$	-
Subordinate notes		41,059		2.6	%		41,059		-		-			-
Mezzanine loans		626,883		39.5	%		620,883		-		6,000			-
Preferred equity		249,769		15.7	%		249,769		-		-			-
	$	1,587,223		100.0	%	$	1,555,750	$	-	$	31,473		$	-

(1)	Relates to one loan on nonaccrual status.

Real Estate Acquisitions

The following table summarizes acquisitions of real estate held for investment during the nine months ended September 30, 2014:


Date of Acquisition	Type	Location	Purchase Price		Remaining Lease Term (1)
(dollars in thousands)
April 2014	Single-tenant retail	Tennessee	$	19,000		2022
June 2014	Multi-tenant retail	Virginia	$	17,743		2021

(1)	Does not include extension options.

The aforementioned acquisitions were accounted for using the acquisition method of accounting. The Company incurred approximately $1.0 million of transaction costs in connection with the acquisitions, which were expensed during the period ended September 30, 2014 and are reflected in other general and administrative expenses in the accompanying Consolidated Statements of Comprehensive Income (Loss).

The following table presents the aggregate allocation of the purchase price:

	September 30, 2014
	(dollars in thousands)
Purchase Price Allocation:
Land	$	9,711
Buildings		25,972
Site improvements		2,548
Real estate held for investment		38,231
Intangible assets (liabilities):
Leasehold intangible assets		7,698
Below market lease value		(9,186	)
Total purchase price	$	36,743

Total Commercial Real Estate Investment

	September 30, 2014			December 31, 2013
	(dollars in thousands)
Real estate held for investment, at amortized cost
Land	$	16,350		$	6,639
Buildings and improvements		59,619			31,100
Subtotal		75,969			37,739
Less: accumulated depreciation		(2,142	)		(877	)
Total real estate held for investment at amortized cost, net		73,827			36,862
Real estate held for sale at fair value		-			23,270
Total investment in commercial real estate, net		73,827			60,132
Net carrying value of CRE Debt and Preferred Equity Investments		1,554,958			1,583,969
Total commercial real estate investments	$	1,628,785		$	1,644,101

Securitizations and VIEs

In January 2014, the Company closed NLY Commercial Mortgage Trust 2014-FL1 (the “Trust”), a $399.5 million securitization financing transaction which provides permanent, non-recourse financing collateralized by floating-rate first mortgage debt investments originated or co-originated by the Company and is not subject to margin calls. A total of $260.7 million of investment grade bonds were issued by the Trust, representing an advance rate of 65.3% at a weighted average coupon of LIBOR plus 1.74% at closing. The Company is using the proceeds to originate commercial real estate investments. The Company retained bonds rated below investment grade and the only interest-only bond issued by the Trust, which are referred to as the subordinate bonds.

The Company incurred approximately $4.3 million of costs in connection with the securitization that have been capitalized and are being amortized to interest expense. Deferred financing costs are included in Other assets in the accompanying Consolidated Statements of Financial Condition.

The Trust is structured as a pass-through entity that receives principal and interest on the underlying collateral and distributes those payments to the certificate holders. The Trust is a VIE and the Company is the primary beneficiary as a result of its ability to replace the special servicer without cause through its ownership interest in the subordinate bonds. The Company’s exposure to the obligations of the VIE is generally limited to the Company’s investment in the Trust. Assets of the Trust may only be used to settle obligations of the Trust. Creditors of the Trust have no recourse to the general credit of the Company. The Company is not contractually required to provide and has not provided any form of financial support to the Trust. No gain or loss was recognized upon initial consolidation of the Trust.

As of September 30, 2014 the carrying value of the Trust’s assets was $398.4 million, net of $1.1 million of unamortized origination fees, which are included in Commercial real estate debt and preferred equity in the accompanying Consolidated Statements of Financial Condition. As of September 30, 2014, the carrying value of the Trust’s liabilities was $260.7 million, classified as Securitized debt in the accompanying Consolidated Statements of Financial Condition.