5. COMMERCIAL REAL ESTATE INVESTMENTS

At March 31, 2015 and December 31, 2014, commercial real estate investments held for investment were composed of the following:

CRE Debt and Preferred Equity Investments

	March 31, 2015							December 31, 2014
	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		431,872		430,228		28.7	%		384,304		383,895		25.2	%
Senior securitized mortgages(3)		361,861		361,179		24.1	%		399,541		398,634		26.3	%
Mezzanine loans		495,305		495,405		33.0	%		522,474		522,731		34.4	%
Preferred equity		213,213		211,594		14.2	%		214,653		212,905		14.1	%
Total	$	1,502,251	$	1,498,406		100.0	%	$	1,520,972	$	1,518,165		100.0	%

(1) Carrying value includes unamortized origination fees of $4.0 million and $3.0 million as of March 31, 2015 and December 31, 2014, respectively.

(2) Based on outstanding principal.

(3) Assets of consolidated VIEs.

	March 31, 2015
	Senior Mortgages			Senior Securitized Mortgages(1)			Mezzanine Loans			Preferred Equity			Total
	(dollars in thousands)
Beginning balance	$	383,895		$	398,634		$	522,731		$	212,905		$	1,518,165
Originations & advances (principal)		47,645			-			16,043			-			63,688
Principal payments		(76	)		(37,680	)		(43,212	)		(1,441	)		(82,409	)
Sales (principal)		-			-			-			-			-
Amortization & accretion of (premium) discounts		(36	)		-			(31	)		25			(42	)
Net (increase) decrease in origination fees		(1,950	)		-			(236	)		-			(2,186	)
Amortization of net origination fees		750			225			110			105			1,190
Transfers		-			-			-			-			-
Allowance for loan losses		-			-			-			-			-
Net carrying value	$	430,228		$	361,179		$	495,405		$	211,594		$	1,498,406

(1) Assets of consolidated VIE.

	December 31, 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)		127,112			-			-			122,742			-			249,854
Principal payments		(12,756	)		-			(41,059	)		(227,151	)		(35,116	)		(316,082	)
Sales (principal)		-			-			-			-			-			-
Amortization & accretion of (premium) discounts		(138	)		-			(349	)		(1,093	)		108			(1,472	)
Net (increase) decrease in origination fees		(2,427	)		(116	)		-			(478	)		-			(3,021	)
Amortization of net origination fees		2,783			772			-			609			753			4,917
Transfers		(397,978	)		397,978			-			-			-			-
Allowance for loan losses		-			-			-			-			-			-
Net carrying value	$	383,895		$	398,634		$	-		$	522,731		$	212,905		$	1,518,165

(1) Assets of consolidated VIE.

Internal CRE Debt and Preferred Equity Investment Ratings

	March 31, 2015
			Percentage of CRE Debt and			Internal Ratings
Investment Type	Outstanding Principal		Preferred Equity Portfolio			Performing		Watch List(2)		Defaulted-Recovery(3)			Impaired
	(dollars in thousands)
Senior mortgages	$	431,872		28.7	%	$	188,899	$	230,000	$	12,973		$	-
Senior securitized mortgages(1)		361,861		24.1	%		352,611		9,250		-			-
Mezzanine loans		495,305		33.0	%		495,305		-		-			-
Preferred equity		213,213		14.2	%		162,213		51,000		-			-
	$	1,502,251		100.0	%	$	1,199,028	$	290,250	$	12,973		$	-

(1) Assets of consolidated VIE
(2) Includes a $230.0 million loan maturing on June 30, 2015 with a risk that the borrower will be unable to refinance the outstanding principal amount before the maturity date, but full recovery is expected.
(3) Related to one loan on non-accrual status.

	December 31, 2014
			Percentage of CRE Debt and			Internal Ratings
Investment Type	Outstanding Principal		Preferred Equity Portfolio			Performing		Watch List		Defaulted-Recovery			Impaired
	(dollars in thousands)
Senior mortgages	$	384,304		25.2	%	$	371,331	$	-	$	12,973	(2)	$	-
Senior securitized mortgages(1)		399,541		26.3	%		390,291		9,250		-			-
Subordinate notes		-		0.0	%		-		-		-			-
Mezzanine loans		522,474		34.4	%		522,474		-		-			-
Preferred equity		214,653		14.1	%		214,653		-		-			-
	$	1,520,972		100.0	%	$	1,498,749	$	9,250	$	12,973		$	-

(1) Assets of consolidated VIE.
(2) Relates to one loan on nonaccrual status.

Real Estate Acquisitions

In November 2014, a joint venture, in which the Company has a 90% interest, acquired eleven retail properties located in New York, Ohio and Georgia. The purchase price was funded with cash and a new $104.0 million, ten-year, 4.03% fixed-rate interest-only mortgage loan.

There were no acquisitions of real estate during the quarter ended March 31, 2015. The following table summarizes acquisitions of real estate held for investment in 2014:


Date of Acquisition	Type	Location	Purchase Price	Remaining Lease Term (Years) (1)
(dollars in thousands)
April 2014	Single-tenant retail	Tennessee	$ 19,000	8
June 2014	Multi-tenant retail	Virginia	$ 17,743	7
November 2014	Multi-tenant retail	New York, Ohio, Georgia	$ 154,000	4.6
(1) Does not include extension options.

The aforementioned acquisitions were accounted for using the acquisition method of accounting. No additional real estate acquisition costs were expensed during the period ended March 31, 2015.

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

	Tennessee			Virginia			Joint Venture			Total
	(dollars in thousands)
Purchase Price Allocation:
Land	$	3,503		$	6,394		$	21,581		$	31,478
Buildings		11,960			10,862			97,133			119,955
Site improvements		1,349			1,184			12,952			15,485
Tenant Improvements		-			-			9,601			9,601
Real estate held for investment		16,812			18,440			141,267			176,519

Intangible assets (liabilities):
Leasehold intangible assets		4,288			3,218			22,555			30,061
Above market lease		-			-			5,463			5,463
Below market lease value		(2,100	)		(3,915	)		(15,285	)		(21,300	)
Total purchase price	$	19,000		$	17,743		$	154,000		$	190,743

The weighted average amortization period for intangible assets and liabilities is 3.7 years. Above market leases and leasehold intangible assets are included in Other assets and below market leases are included in Accounts payable and other liabilities in the Consolidated Statements of Financial Conditi the joint venture at the acquisition date was $15.4 million. The fair value of the acquisition and the related non-controlling interest was determined based on the purchase price.on. The fair value of the 10% non-controlling interest in

Total Commercial Real Estate Investment at amortized cost

	March 31, 2015			December 31, 2014
	(dollars in thousands)
Real estate held for investment, at amortized cost
Land	$	38,117		$	38,117
Buildings and improvements		176,139			176,139
Subtotal		214,256			214,256
Less: accumulated depreciation		(7,047	)		(4,224	)
Total real estate held for investment at amortized cost, net		207,209			210,032
Total investment in commercial real estate, net		207,209			210,032
Net carrying value of CRE Debt and Preferred Equity Investments		1,498,406			1,518,165
Total commercial real estate investments, at amortized cost	$	1,705,615		$	1,728,197

Depreciation expense was $2.8 million and $0.3 million for the quarters ended March 31, 2015 and 2014, respectively, and is included in Other income (loss) in the Consolidated Statements of Comprehensive Income (Loss). The table below presents the minimum future rentals on noncancelable leases of the Company’s commercial real estate investments as of March 31, 2015.

Rental Income

The minimum rental amounts due under the leases are generally either subject to scheduled fixed increases or adjustments. The leases generally also require that the tenants reimburse us for certain operating costs. Approximate future minimum rents to be received over the next five years and thereafter for non-cancelable operating leases in effect at March 31, 2015 for the consolidated properties, including consolidated joint venture properties are as follows (in thousands):

	March 31, 2015
	(dollars in thousands)
2015 (remaining)	$	15,495
2016		18,684
2017		15,977
2018		13,620
2019		11,301
Later years		51,241
	$	126,318

Mortgage loans payable as of March 31, 2015 and December 31, 2014, were as follows:

March 31, 2015
Property	Mortgage Carrying Value		Mortgage Principal		Interest Rate			Fixed/Floating Rate	Maturity Date	Priority
			(dollars in thousands)
Joint Venture	$	103,950	$	103,950		4.03	%	Fixed	12/6/2024	First liens
Tennessee		12,350		12,350		4.01	%	Fixed	6/6/2019	First liens
Virginia		11,025		11,025		3.58	%	Fixed	9/6/2019	First liens
Arizona		16,644		16,548		3.50	%	Fixed	1/1/2017	First liens
Nevada		2,501		2,488		3.45	%	Floating (1)	3/29/2017	First liens
	$	146,470	$	146,361

(1) Rate is fixed via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200).

December 31, 2014
Property	Mortgage Carrying Value		Mortgage Principal		Interest Rate			Fixed/Floating Rate	Maturity Date	Priority
			(dollars in thousands)
Joint Venture	$	103,950	$	103,950		4.03	%	Fixed	12/6/2024	First liens
Tennessee		12,350		12,350		4.01	%	Fixed	6/6/2019	First liens
Virginia		11,025		11,025		3.58	%	Fixed	9/6/2019	First liens
Arizona		16,709		16,600		3.50	%	Fixed	1/1/2017	First liens
Nevada		2,519		2,505		3.45	%	Floating (1)	3/29/2017	First liens
	$	146,553	$	146,430

(1) Rate is fixed via an interest rate swap (pay fixed 3.45%, receive floating rate of L+200).

The following table details future mortgage loan principal payments as of March 31, 2015:

	Mortgage Loan Principal Payments
	(dollars in thousands)
2015 (remaining)	$	291
2016		399
2017		18,346
2018		-
2019		23,375
Later years		103,950
	$	146,361

VIEs

Securitizations

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 March 31, 2015 the carrying value of the Trust’s assets was $361.2 million, net of $0.7 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 March 31, 2015, the carrying value of the Trust’s liabilities was $223.0 million, classified as Securitized debt in the accompanying Consolidated Statements of Financial Condition.

In February 2015, the Company purchased the junior-most tranche, Class C Certificates of the Freddie Mac securitization, FREMF Mortgage Trust 2015-KLSF (the “FREMF Trust”) for $102.1 million. The underlying portfolio is a pool of 11 floating rate multifamily mortgage loans with a cut-off principal balance of $1.4 billion. The Company was required to consolidate the FREMF Trust’s assets and liabilities of $1.4 billion and $1.3 billion, respectively, at March 31, 2015.

The FREMF 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 FREMF 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 of the Class C Certificates and its current designation as the directing certificate holder. The Company’s exposure to the obligations of the VIE is generally limited to the Company’s investment in the FREMF Trust of $102.1 million. Assets of the FREMF Trust may only be used to settle obligations of the FREMF Trust. Creditors of the FREMF 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 FREMF Trust. A nominal loss was recognized upon initial consolidation of the FREMF Trust and $0.6 million of related costs were expensed.

Upon consolidation, the Company elected the fair value option for the financial assets and liabilities of the FREMF Trust in order to avoid an accounting mismatch, and to more faithfully represent the economics of its interest in the entity. The fair value option requires that changes in fair value be reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss). The Company has early adopted ASU 2014-13 and applied the fair value measurement practical expedient whereby the Company determines whether the fair value of the financial assets or financial liabilities is more observable as a basis for measuring the less observable financial instruments. The Company has determined that the fair value of the financial liabilities of the FREMF Trust are more observable, since the prices for these liabilities are primarily available from third-party pricing services utilized for multifamily mortgage-backed securities, while the individual assets of the trusts are inherently less capable of precise measurement given their illiquid nature and the limitations on available information related to these assets. Given that the Company’s methodology for valuing the financial assets of the FREMF Trust is an aggregate fair value derived from the fair value of the financial liabilities, the Company has determined that the fair value of each of the financial assets in their entirety should be classified in Level 2 of the fair value measurement hierarchy.

The statement of financial condition of the FREMF Trust that is reflected in the Company’s Consolidated Statements of Financial Condition at March 31, 2015 follows:

	March 31, 2015
	(dollars in thousands)

Securitized loans at fair value	$	1,370,903
Accrued interest receivable		2,431

Total assets	$	1,373,334

Liabilities and equity
Securitized debt (non-recourse) at fair value	$	1,268,809
Accrued interest payable		2,204
	$	1,271,013

Equity		102,321
Total liabilities and equity	$	1,373,334

The FREMF Trust mortgage loans had an unpaid principal balance of $1.4 billion, at March 31, 2015. As of March 31, 2015 there are no loans 90 days or more past due or on nonaccrual status. There is no gain or loss attributable to instrument-specific credit risk of the underlying loans or securitized debt securities as of March 31, 2015 based upon theCompany’s process of monitoring events of default on the underlying mortgage loans.

The statement of comprehensive income (loss) of the FREMF Trust that is reflected in the Company’s Consolidated Statements of Comprehensive Income (Loss) at March 31, 2015 follows:

	For the period February 25, 2015 to March 31, 2015
	(dollars in thousands)
Net interest income:
Interest income	$	2,742
Interest expense		(1,606	)
Net interest income		1,136

Other income:
Unrealized gain (loss) on financial instruments at fair value (1)		3
Transaction and acquistion expenses		810
Other income		813
General and administration expenses		96
Net income	$	227

(1) Included in Other income (loss).

The geographic concentrations of credit risk exceeding 5% of the total loan balances related to the trusts as of March 31, 2015 follows:

Securitized Loans at Fair Value Geographic Concentration of Credit Risk
Property Location	Principal Balance		% of Balance
	(dollars in thousands)
North Carolina	$	516,150		37.9	%
Texas		339,014		24.9	%
Ohio		197,455		14.5	%
Florida		156,836		11.5	%