Note 7 — Debt Obligations

The Company utilizes various forms of short-term and long-term financing agreements to finance certain of its loans and investments. Borrowings underlying these arrangements are primarily secured by a significant amount of the Company’s loans and investments.

Credit Facilities and Repurchase Agreements

The following table outlines borrowings under the Company’s credit facilities and repurchase agreements as of September 30, 2014 and December 31, 2013:

	September 30, 2014						December 31, 2013
	Debt		Collateral		Weighted		Debt		Collateral		Weighted
	Carrying		Carrying		Average		Carrying		Carrying		Average
	Value		Value		Note Rate		Value		Value		Note Rate

$100 million warehousing credit facility	$	41,789,610	$	58,500,000	2.44	%	$	33,300,540	$	45,705,813	2.46	%
$75 million warehousing credit facility	3,225,000		5,000,000		2.44	%	30,838,180		46,774,000		2.70	%
$60 million warehousing credit facility	11,291,500		17,022,236		2.19	%	15,063,750		21,800,000		2.20	%
$33 million warehousing credit facility	—		—		—		33,000,000		55,000,000		2.45	%
$20 million revolving credit facility	—		—		—		20,000,000		—		8.50	%
$15 million term credit facility	15,000,000		—		7.50	%	—		—		—
Repurchase agreement	—		—		—		12,497,000		15,536,049		1.75	%
Repurchase agreement	—		—		—		14,425,553		18,944,735		2.00	%

Total credit facilities and repurchase agreements	$	71,306,110	$	80,522,236	3.49	%	$	159,125,023	$	203,760,597	3.16	%

At September 30, 2014 and December 31, 2013, the weighted average interest rate for the Company’s credit facilities and repurchase agreements was 3.49% and 3.16%, respectively. Including certain fees and costs, the weighted average interest rate was 4.31% and 3.57% at September 30, 2014 and December 31, 2013, respectively. There were no interest rate swaps on these facilities at September 30, 2014 and December 31, 2013.

In July 2011, the Company entered into a two year, $50.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties. In 2013, the Company amended the facility increasing the committed amount to $75.0 million, decreased the rate of interest from 275 basis points over LIBOR to 225 basis points over LIBOR, decreased certain commitment, warehousing and non-use fees and extended the maturity to April 2015. In March 2014, the facility’s committed amount was increased to $110.0 million, which included a temporary increase of $10.0 million that was repaid in April 2014 as part of the issuance of the Company’s third CLO, and required a 0.13% commitment fee, which was increased to 0.35% upon an amendment in August 2014 that included the elimination of advance fees. The facility has a maximum advance rate of 75% and contains several restrictions including full repayment of an advance if a loan becomes 60 days past due, is in default or is written down by the Company. The facility has various financial covenants including a minimum liquidity requirement of $20.0 million, minimum tangible net worth which includes junior subordinated notes as equity of $150.0 million, maximum total liabilities less subordinate debt of $2.0 billion, as well as certain other debt service coverage ratios and debt to equity ratios. The facility has a compensating balance requirement of $50.0 million to be maintained by the Company and its affiliates.

In February 2013, the Company entered into a one year, $50.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties. In April 2014, the Company amended the facility, increasing the committed amount to $75.0 million. The facility bears interest at a rate of 225 basis points over LIBOR which was originally 250 basis points over LIBOR, upon closing, requires a 35 basis point commitment fee, which was originally 12.5 basis points, upon closing, matures in March 2015, has warehousing and non-use fees and allows for an original warehousing period of up to 24 months from the initial advance on an asset. The facility has a maximum advance rate of 75% and contains certain restrictions including partial prepayment of an advance if a loan becomes 90 days past due or in the process of foreclosure, subject to certain conditions. The facility has various financial covenants including a minimum liquidity requirement of $20.0 million, minimum tangible net worth which includes junior subordinated notes as equity of $150.0 million, maximum total liabilities less subordinate debt of $2.0 billion, as well as certain other debt service coverage ratios and debt to equity ratios.

In June 2013, the Company entered into a one year, $40.0 million warehouse facility with a financial institution to finance first mortgage loans on multifamily properties, including a $10.0 million sublimit to finance retail and office properties. In February 2014, the Company amended the facility, increasing the committed amount to $45.0 million, and in April 2014 the committed amount was increased to $60.0 million. The facility bears interest at a rate of 200 basis points over LIBOR, matures in April 2015, has warehousing fees and allows for an original warehousing period of up to 24 months from the initial advance on an asset. The facility has a maximum advance rate of 70% or 75%, depending on the property type, and contains certain restrictions including prepayment of an advance if a loan becomes 60 days past due or in the process of foreclosure, subject to certain conditions. The facility has various financial covenants including a minimum liquidity requirement of $20.0 million, minimum tangible net worth of $150.0 million, as well as a minimum debt service coverage ratio.

In December 2013, the Company entered into a $33.0 million warehouse facility with a financial institution to finance the first mortgage loan on a multifamily property. The facility bore interest at a rate of 225 basis points over LIBOR which increased to 250 basis points over LIBOR in February 2014, required up to a 45 basis point commitment fee and was to mature in November 2015 with a one year extension option. In April 2014, the facility was repaid in full as part of the issuance of the Company’s third CLO.

In May 2012, the Company entered into a $15.0 million committed revolving line of credit with a one year term, which was secured by a portion of the bonds originally issued by the Company’s CDO entities that have been repurchased by the Company. This facility had a 1% commitment fee, a 1% non-use fee and paid interest at a fixed rate of 8% on any drawn portion of the line. In January 2013, the Company amended the facility, increasing the committed amount to $20.0 million and a fixed rate of interest of 8.5% on any drawn portion of the $20.0 million commitment. The amendment also required a 1% commitment fee and a 1% non-use fee. In May 2013, the Company extended the facility to a maturity in May 2014 with a one year extension option and a 1% extension fee, as well as amended the facility to have an 8.5% non-use fee on the first $5.0 million not borrowed and a 1% non-use fee on the remaining funds not borrowed. In May 2014, the facility was repaid in full from proceeds received from the issuance of senior unsecured notes.

In August 2014, the Company entered into a $15.0 million term facility with a maturity in August 2015, a fixed interest rate of 7.5% and no commitment or non-use fees. The facility is secured by a portion of the bonds originally issued by the Company’s CDO III entity that have been repurchased by the Company.

In July 2011, the Company entered into a repurchase agreement with a financial institution to finance the purchase of RMBS investments. During the first quarter of 2014, the Company paid off the remaining balance of $12.5 million due to the sale of its RMBS investments as well as principal paydowns received. See Note 4 — “Securities” for further details. The facility generally financed between 60% and 90% of the value of each investment, had a rolling monthly term, and bore interest at a rate of 125 to 200 basis points over LIBOR.

In June 2012, the Company entered into a repurchase agreement with a financial institution to finance the purchase of RMBS investments. During the first quarter of 2014, the Company paid off the remaining balance of $14.4 million due to the sale of its RMBS investments as well as principal paydowns received. The facility generally financed between 75% and 80% of the value of the investment, had a rolling monthly term, and bore interest at a rate of 180 to185 basis points over LIBOR.

Collateralized Debt Obligations

The following table outlines borrowings and the corresponding collateral under the Company’s collateralized debt obligations as of September 30, 2014:

	Debt				Collateral
					Loans				Cash
	Face		Carrying		Unpaid		Carrying		Restricted		Collateral
	Value		Value		Principal (1)		Value (1)		Cash (2)		At-Risk (3)

CDO I	$	90,984,854	$	96,469,891	$	234,132,391	$	185,525,965	$	14,996,753	$	191,226,061

CDO II	102,626,199		108,260,762		264,844,518		214,562,939		2,865,954		120,282,351

CDO III	158,610,361		167,002,626		269,114,359		237,838,404		12,133,115		156,782,558

Total CDOs	$	352,221,414	$	371,733,279	$	768,091,268	$	637,927,308	$	29,995,822	$	468,290,970

CDO I — Issued four investment grade tranches in January 2005 with a reinvestment period through April 2009 and a stated maturity date of February 2040. Interest is variable based on three-month LIBOR; the weighted average note rate was 2.64%.

CDO II — Issued nine investment grade tranches in January 2006 with a reinvestment period through April 2011 and a stated maturity date of April 2038. Interest is variable based on three-month LIBOR; the weighted average note rate was 5.96%.

CDO III — Issued ten investment grade tranches in December 2006 with a reinvestment period through January 2012 and a stated maturity date of January 2042. Interest is variable based on three-month LIBOR; the weighted average note rate was 0.92%.

The following table outlines borrowings and the corresponding collateral under the Company’s collateralized debt obligations as of December 31, 2013:

	Debt				Collateral
					Loans				Cash
	Face		Carrying		Unpaid		Carrying		Restricted		Collateral
	Value		Value		Principal (1)		Value (1)		Cash (2)		At-Risk (3)

CDO I	$	126,753,077	$	132,399,560	$	284,758,473	$	237,194,618	$	79,986	$	179,466,954

CDO II	196,046,587		201,847,417		362,150,693		312,859,875		1,719,760		187,213,841

CDO III	296,754,194		305,376,004		395,783,494		365,236,505		23,607,813		240,503,823

Total CDOs	$	619,553,858	$	639,622,981	$	1,042,692,660	$	915,290,998	$	25,407,559	$	607,184,618

(1)

Amounts include loans to real estate assets consolidated by the Company that were reclassified to real estate owned and held-for-sale, net on the Consolidated Financial Statements.

(2)

Represents restricted cash held for principal repayments in the CDOs. Does not include restricted cash related to interest payments, delayed fundings and expenses.

(3)

Amounts represent the face value of collateral in default, as defined by the CDO indenture, as well as assets deemed to be “credit risk.” Credit risk assets are reported by each of the CDOs and are generally defined as one that, in the CDO collateral manager’s reasonable business judgment, has a significant risk of declining in credit quality or, with a passage of time, becoming a defaulted asset.

At September 30, 2014 and December 31, 2013, the aggregate weighted average note rate for the Company’s CDOs, including the cost of interest rate swaps on assets financed in these facilities, was 2.83% and 2.18%, respectively. Excluding the effect of swaps, the weighted average note rate at September 30, 2014 and December 31, 2013 was 1.00% and 0.83%, respectively. Including certain fees and costs, the weighted average note rate was 4.73% and 3.26% at September 30, 2014 and December 31, 2013, respectively.

As the CDOs are past the reinvestment period, investor capital is repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CDOs. Proceeds distributed are recorded as a reduction of the CDO liability.

CDO III has a $100.0 million revolving note class that provided a revolving note facility. The outstanding note balance for CDO III was $167.0 million at September 30, 2014, which included $6.1 million outstanding under the revolving note facility.

In the three and nine months ended September 30, 2013, the Company purchased, at a discount, $2.8 million and $9.9 million, respectively, of investment grade rated Class H notes originally issued by its CDO II and CDO III issuing entities for $1.7 million and $5.0 million, respectively, from third party investors and recorded a net gain on extinguishment of debt of $1.2 million and $4.9 million, respectively, in its 2013 Consolidated Statements of Operations.

In 2010, the Company re-issued its own CDO bonds it had acquired throughout 2009 with an aggregate face amount of approximately $42.8 million as part of an exchange for the retirement of $114.1 million of its junior subordinated notes. This transaction resulted in the recording of $65.2 million of additional CDO debt, of which $42.3 million represents the portion of the Company’s CDO bonds that were exchanged and $22.9 million represents the estimated interest due on the reissued bonds through their maturity, of which $19.5 million remains at September 30, 2014. See “Junior Subordinated Notes” below for further details.

The Company accounts for these transactions on its Consolidated Balance Sheet as financing facilities. The Company’s CDOs are VIEs for which the Company is the primary beneficiary and are consolidated in the Company’s Financial Statements. The investment grade tranches are treated as secured financings, and are non-recourse to the Company.

Collateralized Loan Obligations

The following table outlines borrowings and the corresponding collateral under the Company’s collateralized loan obligations as of September 30, 2014:

	Debt				Collateral
					Loans				Cash
	Face		Carrying		Unpaid		Carrying		Restricted		Collateral
	Value		Value		Principal		Value		Cash (1)		At-Risk (2)

CLO I	$	87,500,000	$	87,500,000	$	96,029,510	$	95,787,645	$	29,057,140	$	—

CLO II	177,000,000		177,000,000		225,975,410		225,266,447		33,662,719		—

CLO III	281,250,000		281,250,000		340,258,087		338,578,446		34,299,996		—

Total CLOs	$	545,750,000	$	545,750,000	$	662,263,007	$	659,632,538	$	97,019,855	$	—

CLO I — Issued two investment grade tranches in September 2012 with a replacement period through September 2014 and a stated maturity date of October 2022. Interest is variable based on three-month LIBOR; the weighted average note rate was 3.60%.

CLO II — Issued two investment grade tranches in January 2013 with a replacement period through January 2015 and a stated maturity date of February 2023. Interest is variable based on three-month LIBOR; the weighted average note rate was 2.55%.

CLO III — Issued three investment grade tranches in April 2014 with a replacement period through October 2016 and a stated maturity date of May 2024. Interest is variable based on three-month LIBOR; the weighted average note rate was 2.59%.

The following table outlines borrowings and the corresponding collateral under the Company’s collateralized loan obligations as of December 31, 2013:

	Debt				Collateral
					Loans				Cash
	Face		Carrying		Unpaid		Carrying		Restricted		Collateral
	Value		Value		Principal		Value		Cash (1)		At-Risk (2)

CLO I	$	87,500,000	$	87,500,000	$	114,414,154	$	113,940,857	$	10,672,496	$	—
CLO II	177,000,000		177,000,000		255,016,564		253,989,391		4,621,675		—
Total CLOs	$	264,500,000	$	264,500,000	$	369,430,718	$	367,930,248	$	15,294,171	$	—

(1)

Represents restricted cash held for principal repayments in the CLOs. Does not include restricted cash related to interest payments, delayed fundings and expenses.

(2)

Amounts represent the face value of collateral in default, as defined by the CLO indenture, as well as assets deemed to be “credit risk.” Credit risk assets are reported by each of the CLOs and are generally defined as one that, in the CLO collateral manager’s reasonable business judgment, has a significant risk of declining in credit quality or, with a passage of time, becoming a defaulted asset.

In September 2012, the Company completed its first collateralized loan obligation, or CLO, issuing to third party investors two tranches of investment grade CLOs through two newly-formed wholly-owned subsidiaries. Initially, the notes are secured by a portfolio of loan obligations with a face value of approximately $125.1 million, consisting primarily of bridge loans and a senior participation interest in a first mortgage loan that were contributed from the Company’s existing loan portfolio. The financing had a two-year replacement period that allowed the principal proceeds and sale proceeds (if any) of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture. Thereafter, the outstanding debt balance will be reduced as loans are repaid. As of October 9, 2014, CLO I has past the reinvestment period and investor capital will be repaid quarterly from proceeds received from loan repayments held as collateral in accordance with the terms of the CLO. The aggregate principal amounts of the two classes of notes are $75.0 million of Class A senior secured floating rate notes and $12.5 million of Class B secured floating rate notes. The Company retained a residual interest in the portfolio with a notional amount of $37.6 million. The notes have an initial weighted average interest rate of approximately 3.39% plus one-month LIBOR and interest payments on the notes are payable monthly. The Company incurred approximately $2.4 million of issuance costs which is being amortized on a level yield basis over the average estimated life of the CLO. Including certain fees and costs, the initial weighted average note rate was 4.35%.

In January 2013, the Company completed its second CLO, issuing to third party investors two tranches of investment grade CLOs through two newly-formed wholly-owned subsidiaries. As of the CLO closing date, the notes are secured by a portfolio of loan obligations with a face value of approximately $210.0 million, consisting primarily of bridge loans and a senior participation interest in a first mortgage loan that were contributed from the Company’s existing loan portfolio. The financing has a two-year replacement period that allows the principal proceeds and sale proceeds (if any) of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture. Thereafter, the outstanding debt balance will be reduced as loans are repaid. Initially, the proceeds of the issuance of the securities also included $50.0 million for the purpose of acquiring additional loan obligations for a period of up to 90 days from the closing date of the CLO. Subsequently, the issuer owns loan obligations with a face value of approximately $260.0 million. The aggregate principal amounts of the two classes of notes are $156.0 million of Class A senior secured floating rate notes and $21.0 million of Class B secured floating rate notes. The Company retained a residual interest in the portfolio with a notional amount of approximately $83.0 million. The notes have an initial weighted average interest rate of approximately 2.36% plus one-month LIBOR and interest payments on the notes are payable monthly. The Company incurred approximately $3.2 million of issuance costs which is being amortized on a level yield basis over the average estimated life of the CLO. Including certain fees and costs, the initial weighted average note rate was 3.00%.

In April 2014, the Company completed its third CLO, issuing to third party investors three tranches of investment grade CLOs through two newly-formed wholly-owned subsidiaries. As of the CLO closing date, the notes are secured by a portfolio of loan obligations with a face value of approximately $307.3 million, consisting primarily of bridge loans that were contributed from the Company’s existing loan portfolio. The financing has an approximate 2.5 year replacement period that allows the principal proceeds and sale proceeds (if any) of the loan obligations to be reinvested in qualifying replacement loan obligations, subject to the satisfaction of certain conditions set forth in the indenture. Thereafter, the outstanding debt balance will be reduced as loans are repaid. Initially, the proceeds of the issuance of the securities also included $67.7 million for the purpose of acquiring additional loan obligations for a period of up to 120 days from the closing date of the CLO, which was fully utilized in July 2014. Subsequently, the issuer owns loan obligations with a face value of approximately $375.0 million. The aggregate principal amounts of the three classes of notes are $221.3 million of Class A senior secured floating rate notes, $24.3 million of Class B secured floating rate notes and $35.8 million of Class C secured floating rate notes. The Company retained a residual interest in the portfolio with a notional amount of approximately $93.8 million. The notes have an initial weighted average interest rate of approximately 2.39% plus one-month LIBOR and interest payments on the notes are payable monthly. Including certain fees and costs, the initial weighted average note rate was 3.07%.

The Company accounts for these transactions on its Consolidated Balance Sheet as financing facilities. The Company’s CLOs are VIEs for which the Company is the primary beneficiary and are consolidated in the Company’s Financial Statements. The investment grade tranches are treated as secured financings, and are non-recourse to the Company.

At September 30, 2014 and December 31, 2013, the aggregate weighted average note rate for the Company’s collateralized loan obligations was 2.74% and 2.91%, respectively. Including certain fees and costs, the weighted average note rate was 3.18% and 3.49% at September 30, 2014 and December 31, 2013, respectively.

Senior Unsecured Notes

In May 2014, the Company issued $55.0 million aggregate principal amount of 7.375% senior unsecured notes due in 2021 in an underwritten public offering, generating net proceeds of approximately $52.9 million after deducting the underwriting discount and offering expenses. Also in May 2014, the underwriters exercised a portion of their over-allotment option for a $3.6 million aggregate principal amount providing additional net proceeds of $3.5 million.

In August 2014, the Company issued an additional $35.0 million of the senior unsecured notes for net proceeds of approximately $32.5 million after deducting the issuance and underwriting discounts and offering expenses. Additionally, the underwriters exercised a portion of their over-allotment option for a $4.2 million aggregate principal amount providing additional net proceeds of $3.9 million. The notes can be redeemed by the Company after May 15, 2017. The interest is paid quarterly in February, May, August, and November starting in August 2014. Including certain fees and costs, the weighted average note rate was 7.98% at September 30, 2014. The Company used the net proceeds to make investments, to repurchase or pay liabilities and for general corporate purposes.

Junior Subordinated Notes

The carrying value of borrowings under the Company’s junior subordinated notes was $159.7 million and $159.3 million at September 30, 2014 and December 31, 2013, respectively, which is net of a deferred amount of $16.2 million and $16.6 million, respectively. These notes have maturities ranging from March 2034 through April 2037 and pay interest quarterly at a fixed or floating rate of interest based on three-month LIBOR and, absent the occurrence of special events, were not redeemable for the first two years. The current weighted average note rate was 3.01% at both September 30, 2014 and December 31, 2013, however, based upon the accounting treatment for the restructuring mentioned below, the effective rate was 3.05% and 3.06% at September 30, 2014 and December 31, 2013, respectively. Including certain fees and costs, the weighted average note rate was 3.16% and 3.18% at September 30, 2014 and December 31, 2013, respectively. The entities that issued the junior subordinated notes have been deemed VIEs. The impact of these VIEs with respect to consolidation is discussed in Note 9 — “Variable Interest Entities.”

In 2009, the Company retired $265.8 million of its then outstanding trust preferred securities, primarily consisting of $258.4 million of junior subordinated notes issued to third party investors and $7.4 million of common equity issued to the Company in exchange for $289.4 million of newly issued unsecured junior subordinated notes, representing 112% of the original face amount. The notes bear interest equal to three month LIBOR plus a weighted average spread of 2.77%. The 12% increase to the face amount due upon maturity, which had a balance of $16.2 million at September 30, 2014, is being amortized into interest expense over the life of the notes. The Company also paid transaction fees of approximately $1.3 million to the issuers of the junior subordinated notes related to this restructuring which is being amortized into interest expense over the life of the notes.

Notes Payable

The following table outlines borrowings under the Company’s notes payable as of September 30, 2014 and December 31, 2013:

	September 30, 2014				December 31, 2013
	Debt		Collateral		Debt		Collateral
	Carrying		Carrying		Carrying		Carrying
	Value		Value		Value		Value

Junior loan participation, secured by the Company’s interest in a first mortgage loan with a principal balance of $1.3 million, participation interest was based on a portion of the interest received from the loan which has a fixed rate of 9.57%	$	1,300,000	$	1,300,000	$	1,300,000	$	1,300,000
Junior loan participation, maturity of October 2018, secured by the Company’s interest in a mezzanine loan with a principal balance of $3.0 million, participation interest is a fixed rate of 13.00%	—		—		750,000		750,000
Junior loan participation, maturity of September 2014, secured by the Company’s interest in a mezzanine loan with a principal balance of $3.0 million, participation interest is a fixed rate of 15.00%	—		—		450,000		450,000

Total notes payable	$	1,300,000	$	1,300,000	$	2,500,000	$	2,500,000

At September 30, 2014 and December 31, 2013, the aggregate weighted average note rate for the Company’s notes payable was 0% and 4.26%, respectively. There were no interest rate swaps on the notes payable at September 30, 2014 and December 31, 2013.

The Company’s obligation to pay interest on the junior loan participations is based on the performance of the related loan. Interest expense is based on the portion of the interest received from the loan that is paid to the junior participant. In the third quarter of 2014, the Company paid off its $0.8 million and $0.5 million junior loan participations. In March 2014, the Company entered into non-recourse junior loan participations with ACM totaling $15.0 million on a $70.1 million bridge loan, with a weighted average variable interest rate of 7.20%. In May 2014, the junior loan participations with ACM were paid off.

Mortgage Note Payable — Real Estate Owned and Held-For-Sale

The Company has a first lien mortgage in connection with the acquisition of real property pursuant to bankruptcy proceedings for an entity in which the Company had a loan secured by the Multifamily Portfolio. At September 30, 2014 and December 31, 2013, the outstanding balance of this loan was $48.8 million and $53.8 million, respectively. The mortgage bears interest at a variable rate of one-month LIBOR plus 1.23% and in July 2014, the maturity date was extended to July 2015.

In 2013, a property in the Multifamily Portfolio was classified as held-for-sale and accordingly, $11.0 million of the first lien mortgage related to this property was classified as held-for-sale. In the second quarter of 2014, it was determined that a sale of this property would not take place and the entire first lien mortgage was reclassified as real estate owned. In the fourth quarter of 2014, one of the properties classified as held-for-sale was sold and the first lien mortgage was paid down $11.1 million.

In the third quarter of 2014, a property in the Multifamily Portfolio was sold and accordingly, the Company repaid the $3.4 million first mortgage related to this property. Additionally, in the third quarter of 2014, three properties in the Multifamily Portfolio were classified as held-for-sale and accordingly, $23.8 million of the first lien mortgage was classified as held-for-sale.

For the three and nine months ended September 30, 2014, the Company made required paydowns of $1.3 million and $1.6 million, respectively, related to the Multifamily Portfolio first lien mortgage.

Debt Covenants

The Company’s debt facilities contain various financial covenants and restrictions, including minimum net worth, minimum liquidity and maximum debt balance requirements, as well as certain other debt service coverage ratios and debt to equity ratios. The Company was in compliance with all financial covenants and restrictions at September 30, 2014.

The Company’s CDO and CLO vehicles contain interest coverage and asset overcollateralization covenants that must be met as of the waterfall distribution date in order for the Company to receive such payments. If the Company fails these covenants in any of its CDOs or CLOs, all cash flows from the applicable CDO or CLO would be diverted to repay principal and interest on the outstanding CDO or CLO bonds and the Company would not receive any residual payments until that CDO or CLO regained compliance with such tests. The Company’s CDOs and CLOs were in compliance with all such covenants as of September 30, 2014, as well as on the most recent determination dates in October 2014. In the event of a breach of the CDO or CLO covenants that could not be cured in the near-term, the Company would be required to fund its non-CDO or non-CLO expenses, including management fees and employee costs, distributions required to maintain REIT status, debt costs, and other expenses with (i) cash on hand, (ii) income from any CDO or CLO not in breach of a covenant test, (iii) income from real property and loan assets, (iv) sale of assets, or (v) or accessing the equity or debt capital markets, if available. The Company has the right to cure covenant breaches which would resume normal residual payments to it by purchasing non-performing loans out of the CDOs or CLOs. However, the Company may not have sufficient liquidity available to do so at such time.

The chart below is a summary of the Company’s CDO and CLO compliance tests as of the most recent determination dates in October 2014:

Cash Flow Triggers	CDO I		CDO II		CDO III		CLO I		CLO II		CLO III

Overcollateralization (1)

Current	173.33	%	161.20	%	110.65	%	142.96	%	146.89	%	133.33	%

Limit	145.00	%	127.30	%	105.60	%	137.86	%	144.25	%	132.33	%

Pass / Fail	Pass		Pass		Pass		Pass		Pass		Pass

Interest Coverage (2)

Current	631.39	%	397.36	%	1083.81	%	213.63	%	298.52	%	288.49	%

Limit	160.00	%	147.30	%	105.60	%	120.00	%	120.00	%	120.00	%

Pass / Fail	Pass		Pass		Pass		Pass		Pass		Pass

(1)

The overcollateralization ratio divides the total principal balance of all collateral in the CDO and CLO by the total principal balance of the bonds associated with the applicable ratio. To the extent an asset is considered a defaulted security, the asset’s principal balance for purposes of the overcollateralization test is the lesser of the asset’s market value or the principal balance of the defaulted asset multiplied by the asset’s recovery rate which is determined by the rating agencies. Rating downgrades of CDO and CLO collateral will generally not have a direct impact on the principal balance of a CDO and CLO asset for purposes of calculating the CDO and CLO overcollateralization test unless the rating downgrade is below a significantly low threshold (e.g. CCC-) as defined in each CDO and CLO vehicle.

(2)

The interest coverage ratio divides interest income by interest expense for the classes senior to those retained by the Company.

The chart below is a summary of the Company’s CDO and CLO overcollateralization ratios as of the following determination dates:

Determination Date	CDO I		CDO II		CDO III		CLO I		CLO II		CLO III

October 2014	173.33	%	161.20	%	110.65	%	142.96	%	146.89	%	133.33	%
July 2014	171.01	%	153.44	%	109.20	%	142.96	%	146.89	%	133.33	%
April 2014	184.35	%	138.15	%	108.74	%	142.96	%	146.89	%	—
January 2014	167.15	%	137.87	%	107.80	%	142.96	%	146.89	%	—
October 2013	166.88	%	133.77	%	106.64	%	142.96	%	146.89	%	—

The ratio will fluctuate based on the performance of the underlying assets, transfers of assets into the CDOs and CLOs prior to the expiration of their respective replenishment dates, purchase or disposal of other investments, and loan payoffs. No payment due under the Junior Subordinated Indentures may be paid if there is a default under any senior debt and the senior lender has sent notice to the trustee. The Junior Subordinated Indentures are also cross-defaulted with each other.