5. REAL ESTATE SECURITIES

Commercial mortgage backed securities (“CMBS”), CMBS interest-only securities, Agency securities, Government National Mortgage Association (“GNMA”) construction securities and Government National Mortgage Association (“GNMA”) permanent securities are classified as available-for-sale and reported at fair value with changes in fair value recorded in the current period in other comprehensive income. GNMA and Federal Home Loan Mortgage Corp (“FHLMC”) securities (collectively, “Agency interest-only securities”) are recorded at fair value with changes in fair value recorded in current period earnings. The following is a summary of the Company’s securities at December 31, 2017 and 2016 ($ in thousands):

December 31, 2017



					Gross Unrealized									Weighted Average
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Gains		Losses			Carrying Value			# of Securities	Rating (1)	Coupon %		Yield %		Remaining Duration (years)

CMBS(2)	$	945,167	$	954,397	$	2,748	$	(3,646	)	$	953,499	(3)	96	AAA	3.28	%	2.79	%	2.89
CMBS interest-only(2)(4)	3,140,297		112,609		796		(334		)	113,071		(5)	25	AAA	0.81	%	3.16	%	3.08
GNMA interest-only(4)(6)	172,916		5,245		157		(925		)	4,477			13	AA+	0.58	%	6.70	%	4.18
Agency securities(2)	720		743		—		(15		)	728			2	AA+	2.82	%	1.80	%	2.94
GNMA permanent securities(2)	33,745		34,386		595		(239		)	34,742			6	AA+	3.98	%	3.62	%	5.66
Total	$	4,292,845	$	1,107,380	$	4,296	$	(5,159	)	$	1,106,517		142		1.37	%	2.87	%	3.00

(1)

Represents the weighted average of the ratings of all securities in each asset type, expressed as an S&P equivalent rating. For each security rated by multiple rating agencies, the highest rating is used. Ratings provided were determined by third-party rating agencies as of a particular date, may not be current and are subject to change (including the assignment of a “negative outlook” or “credit watch”) at any time.


(2)	CMBS, CMBS interest-only securities, Agency securities, and GNMA permanent securities are classified as available-for-sale and reported at fair value with changes in fair value recorded in the current period in other comprehensive income.


(3)	As more fully described in Note 4, certain securities which were purchased from the LCCM LC-26 securitization trust are designated as risk retention securities under the Dodd-Frank Act which are subject to transfer restrictions over the term of the securitization trust and are classified as held-to-maturity and reported at amortized cost. Includes $11.7 million of such restricted securities.


(4)	The amounts presented represent the principal amount of the mortgage loans outstanding in the pool in which the interest-only securities participate.


(5)	As more fully described in Note 4, certain securities which were purchased from the LCCM LC-26 securitization trust are designated as risk retention securities under the Dodd-Frank Act which are subject to transfer restrictions over the term of the securitization trust and are classified as held-to-maturity and reported at amortized cost. Includes $1.1 million of such restricted securities.

(6)

Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period earnings. The Company’s Agency interest-only securities are considered to be hybrid financial instruments that contain embedded derivatives. As a result, the Company accounts for them as hybrid instruments in their entirety at fair value with changes in fair value recognized in unrealized gain (loss) on Agency interest-only securities in the consolidated statements of income in accordance with ASC 815.

December 31, 2016



					Gross Unrealized								Weighted Average
Asset Type	Outstanding Face Amount		Amortized Cost Basis		Gains		Losses			Carrying Value		# of Securities	Rating (1)	Coupon %		Yield %		Remaining Duration (years)

CMBS(2)	$	1,676,680	$	1,698,616	$	10,880	$	(8,101	)	$	1,701,395	131	AAA	3.26	%	2.81	%	3.55
CMBS interest-only(2)(3)	8,160,458		343,438		1,273		(2,540		)	342,171		60	AAA	0.87	%	3.45	%	2.99
GNMA interest-only(3)(4)	478,577		18,994		159		(2,332		)	16,821		17	AA+	0.73	%	4.19	%	4.44
Agency securities(2)	774		802		—		(22		)	780		2	AA+	2.90	%	1.29	%	3.27
GNMA permanent securities(2)	38,327		39,144		882		(246		)	39,780		9	AA+	4.09	%	3.80	%	10.30
Total	$	10,354,816	$	2,100,994	$	13,194	$	(13,241	)	$	2,100,947	219		1.27	%	2.94	%	3.60

(1)


(2)	CMBS, CMBS interest-only securities, Agency securities, and GNMA permanent securities are classified as available-for-sale and reported at fair value with changes in fair value recorded in the current period in other comprehensive income.


(3)	The amounts presented represent the principal amount of the mortgage loans outstanding in the pool in which the interest-only securities participate.

(4)

The following is a breakdown of the carrying value of the Company’s securities by remaining maturity based upon expected cash flows at December 31, 2017 and 2016 ($ in thousands):

December 31, 2017



Asset Type	Within 1 year		1-5 years		5-10 years		After 10 years		Total

CMBS(1)	$	285,982	$	544,278	$	123,239	$	—	$	953,499
CMBS interest-only(1)	537		112,534		—		—		113,071
GNMA interest-only(2)	76		3,906		484		11		4,477
Agency securities(1)	—		728		—		—		728
GNMA permanent securities(1)	—		1,797		32,945		—		34,742
Total	$	286,595	$	663,243	$	156,668	$	11	$	1,106,517

December 31, 2016



Asset Type	Within 1 year		1-5 years		5-10 years		After 10 years		Total

CMBS(1)	$	132,730	$	1,156,026	$	412,639	$	—	$	1,701,395
CMBS interest-only(1)	11,188		330,983		—		—		342,171
GNMA interest-only(2)	—		15,914		724		183		16,821
Agency securities(1)	—		780		—		—		780
GNMA permanent securities(1)	—		4,488		27,675		7,617		39,780
Total	$	143,918	$	1,508,191	$	441,038	$	7,800	$	2,100,947


(1)	CMBS, CMBS interest-only securities, Agency securities, and GNMA permanent securities are classified as available-for-sale and reported at fair value with changes in fair value recorded in the current period in other comprehensive income.


(2)	Agency interest-only securities are recorded at fair value with changes in fair value recorded in current period earnings.

There were $3.5 million, $4.7 million and $1.6 million realized losses on securities recorded as other than temporary impairments for the years ended December 31, 2017, 2016 and 2015, respectively. The determination of whether a security is other-than-temporarily impaired involves judgments and assumptions based on subjective and objective factors. Consideration is given to (i) the length of time and the extent to which the fair value has been less than amortized cost, (ii) the financial condition and near-term prospects of recovery in fair value of the security, and (iii) the Company’s intent to sell the security and whether it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. The Company has no intention to sell the securities before recovery of its amortized cost basis. For cash flow statement purposes, all receipts of interest from interest-only real estate securities are treated as part of cash flows from operations.