UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2013
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-14788
Blackstone Mortgage Trust, Inc.
(Exact name of registrant as specified in its charter)
Maryland | 94-6181186 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
345 Park Avenue, 42nd Floor, New York, NY | 10154 | |
(Address of principal executive offices) | (Zip Code) |
(212) 655-0220
(Registrants telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of outstanding shares of the registrants class A common stock, par value $0.01 per share, as of October 22, 2013 was 29,272,244.
Forward-Looking Statements
This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as outlook, believes, expects, potential, continues, may, will, should, seeks, approximately, predicts, intends, plans, estimates, anticipates or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under the section entitled Risk Factors in our annual report on Form 10-K for the year ended December 31, 2012 and in this report, as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (SEC), which are accessible on the SECs website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.
Website and Social Media Disclosure
We use our website (www.bxmt.com) as a channel of distribution of company information. The information we post through our website may be deemed material. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about us when you enroll your e-mail address by visiting the E-mail Alerts section of our website at www.blackstonemortgagetrust.com/investor-relations. The contents of our website are not, however, a part of this report.
- 1 -
ITEM 1. | FINANCIAL STATEMENTS |
Blackstone Mortgage Trust, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(in thousands, except share and per share data)
September 30, | December 31, | |||||||
2013 | 2012 | |||||||
Assets | ||||||||
Cash and cash equivalents |
$ | 10,283 | $ | 15,423 | ||||
Restricted cash |
76,396 | 14,246 | ||||||
Loans receivable, net |
1,362,891 | 141,500 | ||||||
Loans receivable, at fair value |
66,063 | | ||||||
Investment in CT Legacy Asset, at fair value |
| 132,000 | ||||||
Equity investments in unconsolidated subsidiaries |
25,632 | 13,306 | ||||||
Accrued interest receivable, prepaid expenses, and other assets |
36,045 | 5,868 | ||||||
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Total assets |
$ | 1,577,310 | $ | 322,343 | ||||
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Liabilities and Equity | ||||||||
Liabilities |
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Accounts payable, accrued expenses and other liabilities |
$ | 47,495 | $ | 21,209 | ||||
Secured notes |
9,030 | 8,497 | ||||||
Repurchase obligations |
643,040 | | ||||||
Securitized debt obligations |
74,203 | 139,184 | ||||||
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Total liabilities |
773,768 | 168,890 | ||||||
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Equity |
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Class A common stock, $0.01 par value, 100,000 shares authorized, 28,802 and 2,927 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively |
288 | 293 | ||||||
Additional paid-in capital |
1,242,986 | 609,002 | ||||||
Accumulated deficit |
(529,947 | ) | (535,851 | ) | ||||
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Total Blackstone Mortgage Trust, Inc. stockholders equity |
713,327 | 73,444 | ||||||
Non-controlling interests |
90,215 | 80,009 | ||||||
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Total equity |
803,542 | 153,453 | ||||||
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Total liabilities and equity |
$ | 1,577,310 | $ | 322,343 | ||||
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See notes to consolidated financial statements.
- 2 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(in thousands)
The following presents the portion of the consolidated balances presented above attributable to consolidated variable interest entities, or VIEs. The following assets may only be used to settle obligations of these consolidated VIEs and these liabilities are only the obligations of consolidated VIEs and their creditors do not have recourse to the general credit of Blackstone Mortgage Trust, Inc.
September 30, 2013 |
December 31, 2012 |
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Assets | ||||||||
Loans receivable, net |
$ | 77,000 | $ | 141,500 | ||||
Accrued interest receivable, prepaid expenses, and other assets |
6,336 | 4,021 | ||||||
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Total assets |
$ | 83,336 | $ | 145,521 | ||||
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Liabilities | ||||||||
Accounts payable, accrued expenses and other liabilities |
$ | 40 | $ | 88 | ||||
Securitized debt obligations |
74,203 | 139,184 | ||||||
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Total liabilities |
$ | 74,243 | $ | 139,272 | ||||
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See notes to consolidated financial statements.
- 3 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Income from loans and other investments |
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Interest and related income |
$ | 18,853 | $ | 6,944 | $ | 26,327 | $ | 28,423 | ||||||||
Less: Interest and related expenses |
4,407 | 5,147 | 6,492 | 33,902 | ||||||||||||
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Income (loss) from loans and other investments, net |
14,446 | 1,797 | 19,835 | (5,479 | ) | |||||||||||
Other expenses |
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General and administrative |
4,048 | 3,991 | 9,512 | 6,314 | ||||||||||||
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Total other expenses |
4,048 | 3,991 | 9,512 | 6,314 | ||||||||||||
Portion of other-than-temporary impairments of securities recognized in other comprehensive income |
| | | (160 | ) | |||||||||||
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Net impairments recognized in earnings |
| | | (160 | ) | |||||||||||
Recovery of provision for loan losses |
| 2,811 | | 2,819 | ||||||||||||
Valuation allowance on loans held-for-sale |
(600 | ) | | 1,200 | | |||||||||||
Unrealized gain on investments at fair value |
464 | | 4,464 | | ||||||||||||
Fair value adjustment on investment in CT Legacy Asset |
| 11,987 | | 19,645 | ||||||||||||
Gain on deconsolidation of subsidiary |
| | | 146,380 | ||||||||||||
Gain on extinguishment of debt |
| | 38 | | ||||||||||||
Income from equity investments in unconsolidated subsidiaries |
| 411 | | 1,312 | ||||||||||||
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Income before income taxes |
10,262 | 13,015 | 16,025 | 158,203 | ||||||||||||
Income tax (benefit) provision |
(264 | ) | 166 | 329 | 467 | |||||||||||
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Income from continuing operations |
10,526 | 12,849 | 15,696 | 157,736 | ||||||||||||
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Income (loss) from discontinued operations, net of tax |
| 51 | | (863 | ) | |||||||||||
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Net income |
10,526 | 12,900 | 15,696 | 156,873 | ||||||||||||
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Net income attributable to non-controlling interests |
(2,206 | ) | (5,901 | ) | (7,743 | ) | (81,038 | ) | ||||||||
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Net income attributable to Blackstone Mortgage Trust, Inc. |
$ | 8,320 | $ | 6,999 | $ | 7,953 | $ | 75,835 | ||||||||
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Per share information |
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Income from continuing operations per share of common stock |
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Basic |
$ | 0.29 | $ | 3.00 | $ | 0.53 | $ | 33.39 | ||||||||
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Diluted |
$ | 0.29 | $ | 2.82 | $ | 0.53 | $ | 31.40 | ||||||||
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Income (loss) from discontinued operations per share of common stock |
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Basic |
$ | | $ | 0.02 | $ | | ($ | 0.37 | ) | |||||||
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Diluted |
$ | | $ | 0.02 | $ | | ($ | 0.37 | ) | |||||||
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Net income per share of common stock |
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Basic |
$ | 0.29 | $ | 3.02 | $ | 0.53 | $ | 33.02 | ||||||||
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Diluted |
$ | 0.29 | $ | 2.84 | $ | 0.53 | $ | 31.03 | ||||||||
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Weighted-average shares of common stock outstanding |
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Basic |
28,894,515 | 2,317,343 | 14,865,530 | 2,296,910 | ||||||||||||
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Diluted |
28,894,515 | 2,461,603 | 14,865,530 | 2,444,206 | ||||||||||||
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See notes to consolidated financial statements.
- 4 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income |
$ | 10,526 | $ | 12,900 | $ | 15,696 | $ | 156,873 | ||||||||
Other comprehensive income |
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Unrealized gain on derivative financial instruments |
| 2,103 | | 5,852 | ||||||||||||
Gain on interest rate swaps no longer designated as cash flow hedges |
| | | 2,481 | ||||||||||||
Amortization of unrealized gains and losses on securities |
| (4 | ) | | (769 | ) | ||||||||||
Amortization of deferred gains and losses on settlement of swaps |
| | | (56 | ) | |||||||||||
Other-than-temporary impairments of securities related to fair value adjustments in excess of expected credit losses, net of amortization |
| 206 | | 419 | ||||||||||||
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Other comprehensive income |
| 2,305 | | 7,927 | ||||||||||||
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Comprehensive income |
10,526 | 15,205 | 15,696 | 164,800 | ||||||||||||
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Less: Comprehensive income attributable to non-controlling interests |
(2,206 | ) | (5,901 | ) | (7,743 | ) | (81,048 | ) | ||||||||
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Comprehensive income attributable to Blackstone Mortgage Trust, Inc. |
$ | 8,320 | $ | 9,304 | $ | 7,953 | $ | 83,752 | ||||||||
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See notes to consolidated financial statements.
- 5 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Consolidated Statements of Changes in (Deficit) Equity (Unaudited)
(in thousands)
Class A Common Stock |
Restricted Class A Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive (Loss) Income |
Accumulated Deficit |
Total Blackstone Mortgage Trust, Inc. Stockholders (Deficit) Equity |
Non-controlling Interests |
Total | |||||||||||||||||||||||||
Balance at January 1, 2012 |
$ | 220 | $ | 2 | $ | 597,049 | ($ | 40,584 | ) | ($ | 667,111 | ) | ($ | 110,424 | ) | ($ | 18,515 | ) | ($ | 128,939 | ) | |||||||||||
Net income |
| | | | 75,835 | 75,835 | 81,038 | 156,873 | ||||||||||||||||||||||||
Other comprehensive income |
| | | 7,917 | | 7,917 | 10 | 7,927 | ||||||||||||||||||||||||
Deconsolidation of CT Legacy Asset |
| | | 1,293 | | 1,293 | | 1,293 | ||||||||||||||||||||||||
Distributions to non-controlling interests |
| | | | | | (8 | ) | (8 | ) | ||||||||||||||||||||||
Restricted class A common stock earned, net of shares deferred |
| 3 | 648 | | | 651 | | 651 | ||||||||||||||||||||||||
Deferred directors compensation |
| | 169 | | | 169 | | 169 | ||||||||||||||||||||||||
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Balance at September 30, 2012 |
$ | 220 | $ | 5 | $ | 597,866 | ($ | 31,374 | ) | ($ | 591,276 | ) | ($ | 24,559 | ) | $ | 62,525 | $ | 37,966 | |||||||||||||
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Balance at January 1, 2013 |
$ | 293 | $ | | $ | 609,002 | $ | | ($ | 535,851 | ) | $ | 73,444 | $ | 80,009 | $ | 153,453 | |||||||||||||||
Net income |
| | | | 7,953 | 7,953 | 7,743 | 15,696 | ||||||||||||||||||||||||
Consolidation of subsidiary |
| | | | 5,727 | 5,727 | 6,235 | 11,962 | ||||||||||||||||||||||||
Contributions from non-controlling interests |
| | | | | | 15,000 | 15,000 | ||||||||||||||||||||||||
Purchase of and distributions to non-controlling interests |
| | | | | | (18,772 | ) | (18,772 | ) | ||||||||||||||||||||||
Proceeds from offering of common stock |
258 | | 633,552 | | | 633,810 | | 633,810 | ||||||||||||||||||||||||
Reverse stock split |
(263 | ) | | 263 | | | | | | |||||||||||||||||||||||
Dividends declared |
| | | | (7,776 | ) | (7,776 | ) | | (7,776 | ) | |||||||||||||||||||||
Deferred directors compensation |
| | 169 | | | 169 | | 169 | ||||||||||||||||||||||||
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Balance at September 30, 2013 |
$ | 288 | $ | | $ | 1,242,986 | $ | | ($ | 529,947 | ) | $ | 713,327 | $ | 90,215 | $ | 803,542 | |||||||||||||||
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See notes to consolidated financial statements.
- 6 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Nine Months Ended | ||||||||
September 30, | ||||||||
2013 | 2012 | |||||||
Cash flows from operating activities |
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Net income |
$ | 15,696 | $ | 156,873 | ||||
Adjustments to reconcile net income to net cash provided by operating activities |
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Net impairments recognized in earnings |
| 160 | ||||||
Recovery of provision for loan losses |
| (2,819 | ) | |||||
Valuation allowance on loans held-for-sale |
(1,200 | ) | | |||||
Unrealized gain on investments at fair value |
(4,464 | ) | | |||||
Gain on extinguishment of debt |
(38 | ) | | |||||
Fair value adjustment on CT Legacy Asset |
| (19,645 | ) | |||||
Gain on deconsolidation of subsidiary |
| (146,380 | ) | |||||
Income from equity investments in unconsolidated subsidiaries |
| (1,312 | ) | |||||
Distributions of income from unconsolidated subsidiaries |
| 1,933 | ||||||
Distributions from CT Legacy Asset |
| 9,221 | ||||||
Non-cash compensation expense |
2,138 | 1,788 | ||||||
Amortization of premiums/discounts on loans and securities and deferred interest on loans |
(3,265 | ) | (669 | ) | ||||
Amortization of deferred gains and losses on settlement of swaps |
| (56 | ) | |||||
Amortization of deferred financing costs and premiums/discounts on debt obligations |
1,381 | 10,747 | ||||||
Loss on interest rate swaps not designated as cash flow hedges |
4 | 2,772 | ||||||
Changes in assets and liabilities, net |
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Accrued interest receivable |
299 | (4,765 | ) | |||||
Deferred income taxes |
| (1,826 | ) | |||||
Prepaid expenses and other assets |
883 | 2,764 | ||||||
Accounts payable and accrued expenses |
3,011 | 2,812 | ||||||
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Net cash provided by operating activities |
14,445 | 11,598 | ||||||
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Cash flows from investing activities |
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Origination/purchase of loans receivable |
(1,385,729 | ) | | |||||
Origination and exit fees received on loans receivable |
9,036 | | ||||||
Principal collections and proceeds from securities |
349 | 40,344 | ||||||
Distributions from equity investments |
3,518 | |||||||
Principal collections and proceeds from the sale of loans receivable |
239,282 | 91,889 | ||||||
Contributions to unconsolidated subsidiaries |
| (4,030 | ) | |||||
Distributions from unconsolidated subsidiaries |
| 1,006 | ||||||
Increase in restricted cash |
(62,150 | ) | (3,160 | ) | ||||
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Net cash (used in) provided by investing activities |
(1,195,694 | ) | 126,049 | |||||
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Cash flows from financing activities |
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Borrowings under repurchase obligations |
891,608 | 123,977 | ||||||
Repayments under repurchase obligations |
(268,782 | ) | (58,464 | ) | ||||
Repayments under mezzanine loan |
| (63,000 | ) | |||||
Repayment of securitized debt obligations |
(64,943 | ) | (136,078 | ) | ||||
Payment of deferred financing costs |
(5,744 | ) | | |||||
Contributions from non-controlling interests |
15,000 | | ||||||
Purchase of and distributions to non-controlling interests |
(18,717 | ) | (8 | ) | ||||
Settlement of interest rate swaps |
(6,123 | ) | | |||||
Vesting of restricted class A common stock |
| (25 | ) | |||||
Proceeds from issuance of common stock |
633,810 | | ||||||
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Net cash provided by (used in) financing activities |
1,176,109 | (133,598 | ) | |||||
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Net (decrease) increase in cash and cash equivalents |
(5,140 | ) | 4,049 | |||||
Cash and cash equivalents at beginning of period |
15,423 | 34,818 | ||||||
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Cash and cash equivalents at end of period |
$ | 10,283 | $ | 38,867 | ||||
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Supplemental disclosure of cash flows information |
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Payments of interest |
($ | 4,801 | ) | ($ | 21,922 | ) | ||
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Payments of income taxes |
($ | 218 | ) | ($ | 788 | ) | ||
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Supplemental disclosure of non-cash investing and financing activities |
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(Consolidation) deconsolidation of subsidiaries |
($ | 38,913 | ) | $ | 122,312 | |||
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See notes to consolidated financial statements.
- 7 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. ORGANIZATION
References herein to Blackstone Mortgage Trust, Company, we, us or our refer to Blackstone Mortgage Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.
We are a real estate finance company that primarily originates and purchases senior mortgage loans collateralized by properties in the United States and Europe. We are externally managed by BXMT Advisors L.L.C., which we refer to as our Manager, a subsidiary of The Blackstone Group L.P., or Blackstone, and are a real estate investment trust, or REIT, traded on the New York Stock Exchange, or NYSE, under the symbol BXMT. We are headquartered in New York City.
We conduct our operations as a REIT for U.S. federal income tax purposes. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders and maintain our qualification as a REIT. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. We are organized as a holding company and conduct our business primarily through our various subsidiaries. Our business is organized into two operating segments: the Loan Origination segment and the CT Legacy Portfolio segment.
On April 26, 2013, our board of directors approved the change of our name from Capital Trust, Inc. to Blackstone Mortgage Trust, Inc., which we effected on May 6, 2013 concurrently with a one-for-ten reverse stock split of our class A common stock. Except where the context indicates otherwise, all class A common stock numbers herein have been adjusted to give retroactive effect to the reverse stock split.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The consolidated financial statements, including the notes, are unaudited and exclude some of the disclosures required in audited financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) so that the consolidated financial statements are presented fairly and that estimates made in preparing its consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and the related managements discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission.
Principles of Consolidation and Basis of Presentation
The accompanying financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries, and variable interest entities, or VIEs, of which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. Certain of the assets and credit of our consolidated subsidiaries are not available to satisfy the debt or other obligations of us, our affiliates, or other entities.
VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary, and is generally the entity with (i) the power to direct the activities that most significantly impact the VIEs economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.
We have separately presented, following our consolidated balance sheet, the assets of consolidated VIEs that can only be used to satisfy the obligations of those VIEs, and the liabilities of consolidated VIEs that are non-recourse to us. We have aggregated all of such assets and liabilities of consolidated VIEs in this presentation due to our determination that these entities are substantively similar and therefore a further disaggregated presentation would not be more meaningful.
Our subsidiary, CT Legacy Partners, LLC, or CT Legacy Partners, accounts for its operations in accordance with industry-specific GAAP accounting guidance for investment companies, pursuant to which it reports its investments at fair value. We have retained this specialized accounting in consolidation and, accordingly, report the loans and securities investments of CT Legacy Partners at fair value on our consolidated balance sheet.
- 8 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
As more fully described in Note 3, we sold our investment management business to Blackstone in December 2012. As a result, the income and expense items related to our investment management business have been reclassified to income from discontinued operations on our consolidated statements of operations.
Certain reclassifications have been made in the presentation of the prior period consolidated financial statements to conform to the current presentation.
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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates.
Revenue Recognition
Interest income from our loans receivable is recognized over the life of the investment using the effective interest method and is recorded on the accrual basis. Fees, premiums, discounts and direct costs associated with these investments are deferred until the loan is advanced and are then recognized over the term of the loan as an adjustment to yield. Income accrual is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of our Manager, recovery of income and principal becomes doubtful. Income is then recorded on the basis of cash received until accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.
Cash and Cash Equivalents
Cash and cash equivalents represents cash on hand, cash held in banks and liquid investments with original maturities of three months or less. We deposit our cash and cash equivalents with high credit quality institutions to minimize credit risk exposure. We may have bank balances in excess of federally insured amounts. We have not experienced, and do not expect, any losses on our demand deposits, commercial paper or money market investments.
Restricted Cash
We classify the cash balances held by CT Legacy Partners as restricted because, while these cash balances are available for use by CT Legacy Partners for its operations, they cannot be used by us until our allocable share is distributed from CT Legacy Partners, and cannot be commingled with any of our other unrestricted cash balances.
Loans Receivable and Provision for Loan Losses
We purchase and originate commercial real estate debt and related instruments generally to be held as long-term investments at amortized cost. We are required to periodically evaluate each of these loans for possible impairment. Impairment is indicated 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 determined to be impaired, we write down the loan through a charge to the provision for loan losses. Impairment on these loans is measured by comparing the estimated fair value of the underlying collateral to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by our Manager. Actual losses, if any, could ultimately differ from these estimates.
Our Manager performs a quarterly review of our portfolio of loans. In conjunction with this review, our Manager assesses the performance of each loan, and assigns a risk rating based on several factors including risk of loss, loan-to-value ratio, or LTV, collateral performance, structure, exit plan, and sponsorship.
- 9 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Loans are rated 1 through 8, from less risk to greater risk, which ratings are defined as follows:
1 - |
Low Risk: A loan that is expected to perform through maturity, with relatively lower LTV, higher in-place debt yield, and stable projected cash flow. | |
2 - |
Average Risk: A loan that is expected to perform through maturity, with medium LTV, average in-place debt yield, and stable projected cash flow. | |
3 - |
Acceptable Risk: A loan that is expected to perform through maturity, with relatively higher LTV, acceptable in-place debt yield, and some uncertainty (due to lease rollover or other factors) in projected cash flow. | |
4 - |
Higher Risk: A loan that is expected to perform through maturity, but has exhibited a material deterioration in cash flow and/or other credit factors. If negative trends continue, default could occur. | |
5 - |
Low Probability of Default/Loss: A loan with one or more identified weakness that we expect to have a 15% probability of default or principal loss. | |
6 - |
Medium Probability of Default/Loss: A loan with one or more identified weakness that we expect to have a 33% probability of default or principal loss. | |
7 - |
High Probability of Default/Loss: A loan with one or more identified weakness that we expect to have a 67% or higher probability of default or principal loss. | |
8 - |
In Default: A loan which is in contractual default and/or which has a very high likelihood of principal loss. |
Loans Held-for-Sale and Related Allowance
In certain cases, we may classify loans as held-for-sale based upon the specific facts and circumstances of particular loans, including known or expected transactions. Loans held-for-sale are carried at the lower of their amortized cost basis or fair value less cost to sell. A reduction in the fair value of loans held-for-sale is recorded as a charge to our consolidated statement of operations as a valuation allowance on loans held-for-sale.
Equity Investments in Unconsolidated Subsidiaries
Our carried interest in CT Opportunity Partners I, LP, or CTOPI is accounted for using the equity method. CTOPIs assets and liabilities are not consolidated into our financial statements due to our determination that (i) it is not a VIE and (ii) the investors have sufficient rights to preclude consolidation by us. As such, we report our allocable percentage of the net assets of CTOPI on our consolidated balance sheet. We have deferred the recognition of income from CTOPI until cash is collected or appropriate contingencies have been eliminated and, therefore do not recognize any income from equity investments in unconsolidated subsidiaries.
Deferred Financing Costs
The deferred financing costs that are included in prepaid expenses and other assets on our consolidated balance sheets include issuance costs related to our debt obligations, and are amortized using the effective interest method, or a method that approximates the effective interest method, over the life of the related obligations.
Repurchase Obligations
We record investments financed with repurchase obligations as separate assets and the related borrowings under any repurchase agreements recorded as separate liabilities on our consolidated balance sheets. Interest income earned on the investments and interest expense incurred on the repurchase obligations are reported separately on our consolidated statements of operations.
Fair Value of Financial Instruments
The Fair Value Measurements and Disclosures Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or the Codification, defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements under GAAP. Specifically, this guidance defines fair value based on exit price, or the price that would be received upon the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date.
The Fair Value Measurement and Disclosures Topic of the Codification also establishes a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring financial instruments. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument, and the state of the marketplace, including the existence and transparency of transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
- 10 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination, as follows:
| Level 1 Generally includes only unadjusted quoted prices that are available in active markets for identical financial instruments as of the reporting date. |
| Level 2 Pricing inputs include quoted prices in active markets for similar instruments, quoted prices in less active or inactive markets for identical or similar instruments where multiple price quotes can be obtained, and other observable inputs such as interest rates, yield curves, credit risks, and default rates. |
| Level 3 Pricing inputs are unobservable for the financial instruments and include situations where there is little, if any, market activity for the financial instrument. These inputs require significant judgment or estimation by management of third parties when determining fair value and generally represent anything which does not meet the criteria of Levels 1 and 2. |
Each type of asset recorded at fair value using Level 3 inputs are determined by an internal committee comprised of members of senior management of our Manager, including our chief executive officer, chief financial officer, and other senior officers.
Certain of our assets and liabilities are measured at fair value either (i) on a recurring basis, as of each quarter-end, or (ii) on a nonrecurring basis, as a result of impairment or other events. Our assets and liabilities that are measured at fair value are discussed further in Note 17. Generally, loans held-for-sale and certain of our loans receivable and securities are measured at fair value on a recurring basis, while impaired loans are measured at fair value on a nonrecurring basis.
The following valuation techniques were used to estimate the fair value of each type of asset and liability which was recorded at fair value:
Loans receivable, at fair value Loans receivable are generally valued by discounting expected cash flows using internal cash flow models and estimated market rates. Expected cash flows of each loan are based on our Managers assumptions regarding the collection of principal and interest from the respective borrowers.
Other assets, at fair value Our other assets balance include certain commercial mortgage-backed securities, collateral debt obligations, and equity investments and are generally valued by a combination of (i) obtaining assessments from third-party dealers and (ii) in cases where such assessments are unavailable or deemed not to be indicative of fair value, discounting expected cash flows using internal cash flow models and estimated market discount rates. In the case of internal models, expected cash flows of each security are based on assumptions regarding the collection of principal and interest on the underlying loans and securities.
Impaired loans Loans identified as impaired are collateral dependent loans. Impairment on these loans is measured by comparing our Managers estimation of fair value of the underlying collateral less costs to sell, to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by our Manager.
Investment in CT Legacy Asset We arrived at the fair value of our investment in CT Legacy Asset by discounting the net cash flows expected to be distributed to its equity holders after the repayment of the repurchase facility. To determine the net cash flows of CT Legacy Asset, our Manager estimated the timing and recovery amount for each of its assets, and then applied the proceeds to first satisfy the related repurchase facility.
We are also required by GAAP to disclose fair value information about financial instruments, which are otherwise not reported in the statement of financial position at fair value, to the extent it is practicable to estimate a fair value for those instruments. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the estimated market discount rate and the estimated future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate settlement of the instrument. Rather, these fair values reflect the amounts that our Manager believes are realizable in an orderly transaction among willing parties. These disclosure requirements exclude certain financial instruments and all non-financial instruments.
- 11 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following methods and assumptions were used to estimate the fair value of each class of financial instruments, excluding those described above that are carried at fair value, for which it is practicable to estimate that value:
Cash and cash equivalents The carrying amount of cash on deposit and in money market funds approximates fair value.
Restricted cash The carrying amount of restricted cash approximates fair value.
Loans receivable, net Other than impaired loans, these assets are recorded at their amortized cost and not at fair value. The fair values for these instruments are estimated by our Manager taking into consideration factors including capitalization rates, leasing, occupancy rates, availability and cost of financing, exit plan, sponsorship, actions of other lenders and indications of market value from other market participants.
Secured notes These notes are recorded at their aggregate principal balance and not at fair value. The fair value was estimated based on the rate at which a similar instrument would be priced today.
Repurchase obligations These facilities are recorded at their aggregate principal balance and not at fair value. The fair value was estimated based on the rate at which a similar credit facility would be priced today.
Securitized debt obligations These obligations are recorded at the face value of outstanding obligations to third-parties and not at fair value. The fair values for these instruments have been estimated by obtaining assessments from third party dealers.
Income Taxes
Our financial results generally do not reflect provisions for current or deferred income taxes on our REIT taxable income. We believe that we operate in a manner that will continue to allow us to be taxed as a REIT and, as a result, we generally do not expect to pay substantial corporate level taxes other than those payable by our taxable REIT subsidiaries. Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we may be subject to federal, state and local income tax on current and past income, and penalties. Refer to Note 15 for additional information.
Accounting for Stock-Based Compensation
Stock-based compensation expense is recognized in net income using a fair value measurement method, which we determine with the assistance of a third-party appraisal firm. Compensation expense for the time vesting of stock-based compensation grants is recognized on the accelerated attribution method and compensation expense for performance vesting of stock-based compensation grants is recognized on a straight line basis.
The fair value of the performance vesting restricted class A common stock is measured on the grant date using a Monte Carlo simulation to estimate the probability of the market vesting conditions being satisfied. The Monte Carlo simulation is run approximately 100,000 times. For each simulation, the payoff is calculated at the settlement date, and is then discounted to the grant date at a risk-free interest rate. The average of the values over all simulations is the expected value of the restricted class A common stock on the grant date. The valuation is performed in a risk-neutral framework, so no assumption is made with respect to an equity risk premium. Significant assumptions used in the valuation included an expected term and stock price volatility, an estimated risk-free interest rate and an estimated dividend growth rate.
Earnings per Share of Common Stock
Basic earnings per share, or Basic EPS, is computed based on the net earnings allocable to common stock and stock units, divided by the weighted-average number of shares of common stock and stock units outstanding during the period. Diluted earnings per share, or Diluted EPS, is determined using the treasury stock method, and is based on the net earnings allocable to common stock and stock units, divided by the weighted-average number of shares of common stock, stock units and potentially dilutive common stock options and warrants. On April 26, 2013, our board of directors approved a one-for-ten reverse stock split of our class A common stock which we effected on May 6, 2013. Our earnings per share disclosures have been retroactively adjusted to reflect the reverse stock split.
We have separately determined Basic EPS and Diluted EPS for income (loss) from continuing operations and for net income (loss) allocable to common stockholders. Refer to Note 12 for additional discussion of earnings per share.
Recent Accounting Pronouncements
In January 2013, the FASB issued Accounting Standards Update 2013-01, Balance Sheet (Topic 210): Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities, or ASU 2013-01. ASU 2013-01 was developed to clarify which instruments and transactions are subject to the offsetting disclosure requirements set forth by
- 12 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Accounting Standards Update 2011-11 Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU 2013-01 was effective for the first interim or annual period beginning on or after January 1, 2013, and was applied retrospectively for all comparative periods presented. The adoption of ASU 2013-01 did not have a material impact on our consolidated financial statements.
In February 2013, the FASB issued Accounting Standards Update 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income, or ASU 2013-02. ASU 2013-02 implements the previously deferred requirement to disclose reclassification adjustments into and out of accumulated other comprehensive income in either a note or on the face of the financial statements. ASU 2013-02 was effective for the first interim or annual period beginning after December 15, 2012, and was applied prospectively. As we no longer have a balance of accumulated other comprehensive income, the adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements.
In June 2013, the FASB issued Accounting Standards Update 2013-08, Financial Services-Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements, or ASU 2013-08. ASU 2013-08 amends the criteria for qualification as an investment company under Topic 946 of the FASB Accounting Standards Codification, or Topic 946, and requires additional disclosure by investment companies. ASU 2013-08 is effective for the first interim or annual period beginning after December 15, 2013, and is to be applied prospectively. We currently consolidate CT Legacy Partners, which accounts for its operations as an investment company under Topic 946. We do not expect the adoption of ASU 2013-08 to impact CT Legacy Partners status as an investment company. Further, because ASU 2013-08 specifically excludes REITs from its scope, it will not otherwise impact our consolidated financial statements.
3. CORPORATE TRANSACTIONS
Blackstone Loan Warehouse Joint Venture
On May 13, 2013, we entered into a joint venture, 42-16 Partners, LLC, or 42-16 Partners, with an affiliate of our Manager to originate and warehouse loans prior to the completion of our class A common stock offering on May 29, 2013. 42-16 Partners was controlled by us and owned 16.7% by us and 83.3% by an affiliate of our Manager, and originated one senior mortgage loan on May 21, 2013. On May 30, 2013, we ended this relationship with the affiliate of our Manager and purchased 100% of the equity interests in 42-16 Partners held by the affiliate of our Manager using proceeds from the sale of our class A common stock and, as a result, 42-16 Partners became a 100% owned and consolidated subsidiary.
CT Legacy Partners Merger
To maintain its tax efficiency, on March 22, 2013, CT Legacy REIT Mezz Borrower, Inc., or CT Legacy REIT, was merged with and into CT Legacy Partners, LLC, or CT Legacy Partners, whereby CT Legacy Partners was the surviving entity. We refer to this transaction as the Merger. As a result of the Merger, all outstanding shares of class A-1 common stock, class A-2 common stock, class B common stock, and class A preferred stock of CT Legacy REIT were converted into limited liability company shares, or LLC Shares, in CT Legacy Partners. These LLC Shares have economic and voting rights equivalent to the corresponding shares of stock of CT Legacy REIT. In addition, all outstanding shares of class B preferred stock of CT Legacy REIT were redeemed on March 21, 2013 for an aggregate of $147,000 in cash, which amount was comprised of the shares par value, liquidation preference, and accrued dividends thereon.
As a result of the Merger, we have consolidated CT Legacy Partners as of March 20, 2013 and, therefore, the remaining legacy assets and liabilities from our comprehensive debt restructuring on March 31, 2011, which we refer to as our March 2011 Restructuring. Refer to Note 8 and Note 12 for further discussion of CT Legacy Partners.
Investment Management Business Sale
On December 19, 2012, pursuant to a purchase and sale agreement, dated as of September 27, 2012, or Purchase Agreement, by and between us and an affiliate of Blackstone, we completed the disposition of our investment management and special servicing business for a purchase price of $21.4 million. The sale included our equity interests in CT Investment Management Co., LLC, or CTIMCO, our related private investment fund co-investments, and 100% of the outstanding class A preferred stock of CT Legacy REIT. We refer to the entire transaction as our Investment Management Business Sale. Pursuant to the terms of the Purchase Agreement, on December 19, 2012, we entered into a management agreement with our Manager, which was amended and restated as of March 26, 2013, pursuant to which we are now managed by our Manager pursuant to the terms and conditions of the management
- 13 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
agreement. In addition, Blackstone received the right to designate two members of our board of directors, and exercised that right by designating an employee of Blackstone and one of its senior advisors to replace two former members of our board of directors who resigned effective December 19, 2012. As a result of the Investment Management Business Sale, the income and expense items related to our investment management business have been reclassified to income from discontinued operations on our consolidated statements of operations. Refer to Note 14 for a further discussion of discontinued operations.
On December 19, 2012, we also closed our sale to Blackstone of 500,000 shares of our class A common stock for a purchase price of $10.0 million.
In connection with the consummation of the Investment Management Business Sale and the closing of our sale of 500,000 shares of class A common stock to Blackstone, we paid a $20.00 per share special cash dividend on December 20, 2012 to holders of record of our class A common stock at the close of business on November 12, 2012.
CT CDO Deconsolidation
On December 19, 2012, as a result of the Investment Management Business Sale, we are no longer the collateral manager for certain collateralized debt obligations, or CT CDOs, nor are we the special servicer on their collateral assets. Due to the externalization of these management functions, and our lack of material economic interest in the residual equity we own in CT CDOs II and IV, we ceased to be the primary beneficiary of these entities and, therefore, discontinued the consolidation of CT CDOs II and IV, which we refer to as the CT CDO Deconsolidation. We recognized a gain of $53.9 million on the deconsolidation of CT CDOs II and IV, which was due primarily to the reversal of charges to stockholders equity resulting from losses previously recorded in excess of our economic interests in these non-recourse securitization vehicles.
4. CASH AND CASH EQUIVALENTS, INCLUDING RESTRICTED CASH
As discussed in Note 2, we deposit our cash and cash equivalents, including restricted cash, with high credit quality institutions to minimize credit risk exposure. The following table provides details of our cash and cash equivalents, including restricted cash balances ($ in thousands):
Asset Category |
Depository |
Credit Rating(1) |
September 30, 2013 | December 31, 2012 | ||||||||
Cash and cash equivalents |
Bank of America | A-1 | $ | 10,283 | $ | 15,423 | ||||||
Restricted cash |
Bank of America | A-1 | 76,396 | 14,246 | ||||||||
|
|
|
|
|||||||||
$ | 86,679 | $ | 29,669 | |||||||||
|
|
|
|
(1) | Represents the short-term credit rating for the Bank of America, N.A. legal entity as issued by Standard & Poors as of August 22, 2013. |
5. LOANS RECEIVABLE
As of September 30, 2013, our consolidated balance sheet included $1.3 billion of loans receivable related to our Loan Originations segment and $77.0 million of loans receivable owned by CT CDO I, a consolidated securitization vehicle included in our CT Legacy Portfolio segment. Refer to Note 19 for further discussion of our operating segments.
- 14 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Activity relating to our loans receivable was ($ in thousands):
Gross Book | Provision for | Net Book | ||||||||||
Value | Loan Losses | Value | ||||||||||
December 31, 2012 |
$ | 164,180 | ($ | 22,680 | ) | $ | 141,500 | |||||
Loan originations |
1,384,318 | | 1,384,318 | |||||||||
Deferred origination fees and expenses |
(9,036 | ) | | (9,036 | ) | |||||||
Amortization of deferred fees and expenses |
2,939 | | 2,939 | |||||||||
Additional fundings |
1,411 | | 1,411 | |||||||||
Loan satisfactions |
(120,500 | ) | | (120,500 | ) | |||||||
Participations sold |
(17,903 | ) | | (17,903 | ) | |||||||
Partial loan repayments |
(17,838 | ) | | (17,838 | ) | |||||||
Reclassification to loans held-for-sale |
(6,601 | ) | 4,601 | (2,000 | ) | |||||||
|
|
|
|
|
|
|||||||
September 30, 2013 |
$ | 1,380,970 | ($ | 18,079 | ) | $ | 1,362,891 | |||||
|
|
|
|
|
|
As of September 30, 2013, we had unfunded commitments of $96.3 million related to nine senior mortgage loans, which amounts will only be funded to finance lease-related or capital expenditures by our borrowers. These future commitments will expire over the next five years.
The following table details overall statistics for our loans receivable portfolio ($ in thousands):
September 30, 2013 | December 31, 2012 | |||||||
Number of loans |
22 | 7 | ||||||
Principal balance |
$ | 1,387,067 | $ | 164,180 | ||||
Net book value (1) |
$ | 1,362,891 | $ | 141,500 | ||||
Weighted-average cash coupon (2) |
L+4.28 | % | L+2.51 | % | ||||
Weighted-average all-in yield (2) |
L+4.91 | % | L+4.53 | % | ||||
Weighted-average maximum maturity (years) (3) |
4.0 | 0.7 |
(1) | The difference between principal balance and net book value is due to deferred origination fees on loans in our loan origination segment, and provisions for loan losses in our CT Legacy Portfolio Segment. |
(2) | All loans are floating rate loans indexed to LIBOR as of September 30, 2013 and December 31, 2012. LIBOR was 0.18% and 0.21% as of September 30, 2013 and December 31, 2012, respectively; however, certain of our loans receivable earn interest based on a minimum LIBOR floor ranging from 0.20% to 1.00%. Amounts exclude all non-performing loans. |
(3) | Maximum maturity date assumes all extension options are exercised. |
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Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The tables below detail the types of loans in our loan portfolio, as well as the property type and geographic distribution of the properties securing these loans ($ in thousands):
September 30, 2013 | December 31, 2012 | |||||||||||||||
Net Book | Net Book | |||||||||||||||
Asset Type |
Value | Percentage | Value | Percentage | ||||||||||||
Senior mortgages (1) |
$ | 1,285,891 | 94 | % | $ | 62,500 | 44 | % | ||||||||
Subordinate interests in mortgages |
77,000 | 6 | 79,000 | 56 | ||||||||||||
|
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|
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|
|
|||||||||
$ | 1,362,891 | 100 | % | $ | 141,500 | 100 | % | |||||||||
|
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|
|
|
|
|
|||||||||
Net Book | Net Book | |||||||||||||||
Property Type |
Value | Percentage | Value | Percentage | ||||||||||||
Office |
$ | 614,025 | 45 | % | $ | 111,500 | 79 | % | ||||||||
Multifamily |
383,601 | 28 | | | ||||||||||||
Hotel |
257,942 | 19 | 30,000 | 21 | ||||||||||||
Land |
64,271 | 5 | | | ||||||||||||
Retail |
43,052 | 3 | | | ||||||||||||
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|
|
|
|
|
|||||||||
$ | 1,362,891 | 100 | % | $ | 141,500 | 100 | % | |||||||||
|
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|
|
|
|||||||||
Net Book | Net Book | |||||||||||||||
Geographic Location |
Value | Percentage | Value | Percentage | ||||||||||||
Northeast |
$ | 523,662 | 38 | % | $ | 27,000 | 19 | % | ||||||||
West |
402,121 | 30 | 92,500 | 65 | ||||||||||||
Southeast |
219,093 | 16 | 12,404 | 9 | ||||||||||||
Southwest |
132,407 | 10 | 9,596 | 7 | ||||||||||||
Midwest |
85,608 | 6 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 1,362,891 | 100 | % | $ | 141,500 | 100 | % | |||||||||
|
|
|
|
|
|
|
|
(1) | Senior mortgages include four pari passu participations in mortgages with a combined book value of $204.1 million as of September 30, 2013. |
Loan risk ratings
Quarterly, our Manager evaluates our loan portfolio as described in Note 2. In conjunction with our quarterly loan portfolio review, our Manager assesses the performance of each loan, and assigns a risk rating based on several factors including risk of loss, current LTV, collateral performance, structure, exit plan, and sponsorship. Loans are rated 1 (less risk) through 8 (greater risk), which ratings are defined in Note 2.
The following table allocates the principal balance and net book value of our loans receivable based on our internal risk ratings ($ in thousands):
September 30, 2013 | December 31, 2012 | |||||||||||||||||||||||
Number | Principal | Net | Number | Principal | Net | |||||||||||||||||||
Risk Rating |
of Loans | Balance | Book Value | of Loans | Balance | Book Value | ||||||||||||||||||
1 - 3 |
19 | $ | 1,341,988 | $ | 1,335,891 | 2 | $ | 47,000 | $ | 47,000 | ||||||||||||||
4 - 5 |
1 | 27,000 | 27,000 | 2 | 92,500 | 92,500 | ||||||||||||||||||
6 - 8 |
2 | 18,079 | | 3 | 24,680 | 2,000 | ||||||||||||||||||
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|
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|
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22 | $ | 1,387,067 | $ | 1,362,891 | 7 | $ | 164,180 | $ | 141,500 | |||||||||||||||
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|
In making this risk assessment, one of the primary factors we consider is how senior or junior each loan is relative to other debt obligations of the borrower.
- 16 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following tables further allocate our loans receivable by loan type and our internal risk ratings ($ in thousands):
Senior Mortgage Loans (1) | ||||||||||||||||||||||||
September 30, 2013 | December 31, 2012 | |||||||||||||||||||||||
Number | Principal | Net | Number | Principal | Net | |||||||||||||||||||
Risk Rating |
of Loans | Balance | Book Value | of Loans | Balance | Book Value | ||||||||||||||||||
1 - 3 |
17 | $ | 1,291,988 | $ | 1,285,891 | | $ | | $ | | ||||||||||||||
4 - 5 |
| | | 1 | 62,500 | 62,500 | ||||||||||||||||||
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|
|
|
|||||||||||||
17 | $ | 1,291,988 | $ | 1,285,891 | 1 | $ | 62,500 | $ | 62,500 | |||||||||||||||
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|
|
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|
(1) | Senior mortgages include four pari passu participations in mortgages with a combined book value of $204.1 million as of September 30, 2013. |
Subordinate Interests in Mortgages | ||||||||||||||||||||||||
September 30, 2013 | December 31, 2012 | |||||||||||||||||||||||
Number | Principal | Net | Number | Principal | Net | |||||||||||||||||||
Risk Rating |
of Loans | Balance | Book Value | of Loans | Balance | Book Value | ||||||||||||||||||
1 - 3 |
2 | $ | 50,000 | $ | 50,000 | 2 | $ | 47,000 | $ | 47,000 | ||||||||||||||
4 - 5 |
1 | 27,000 | 27,000 | 1 | 30,000 | 30,000 | ||||||||||||||||||
6 - 8 |
2 | 18,079 | | 3 | 24,680 | 2,000 | ||||||||||||||||||
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|||||||||||||
5 | $ | 95,079 | $ | 77,000 | 6 | $ | 101,680 | $ | 79,000 | |||||||||||||||
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Loan impairments
We do not have any loan impairments in our Loan Origination segment. As of September 30, 2013, CT CDO I, which is in our CT Legacy Portfolio segment, had one impaired subordinate interest in a mortgage loan with a gross book value of $7.5 million that is current in its interest payments and one impaired subordinate interest in a mortgage loan with a gross book value of $10.6 million that is delinquent on its contractual payments. We have taken a 100% loan loss reserve on each of these loans.
As of December 31, 2012, consolidated securitization vehicles in our CT Legacy Portfolio segment had one impaired subordinate interest in a mortgage loan with a gross book value of $7.5 million that was current in its interest payments and two impaired subordinate interest in a mortgage loans with a combined gross book value of $17.2 million that was delinquent on their contractual payments. We had an aggregate 92% loan loss reserve on these loans resulting in a net book value of $2.0 million.
Generally, we have recorded loan loss reserves for loans which are in maturity default, or otherwise have past-due principal payments. As of September 30, 2013, CT CDO I, which is in our CT Legacy Portfolio segment, had one loan with a net book value of $27.0 million which was in maturity default but had no reserve recorded. We expect to collect all principal and interest due under this loan. We do not have any loans in maturity default or with past-due principal payments in our Loan Origination segment.
There was no income recorded on impaired loans during the nine months ended September 30, 2013. We recorded $404,000 of income on impaired subordinate interests in mortgage loans owned by CT CDO I that had an average net book value of $5.1 million during the nine months ended September 30, 2012. In addition, we recorded $378,000 of income on loans owned by CDOs no longer consolidated that had an average net book value of $9.4 million during the nine months ended September 30, 2012. Substantially all income recorded on impaired loans during the period was received in cash.
Nonaccrual loans
We do not have any nonaccrual loans in our Loan Origination segment. CT CDO I, which is in our CT Legacy Portfolio segment, had two subordinate interests in mortgages on nonaccrual status with an aggregate principal balance of $18.1 million and an aggregate net book value of zero as of September 30, 2013. Consolidated securitization vehicles in our CT Legacy Portfolio segment had three subordinate interests in mortgages on nonaccrual status with an aggregate principal balance of $24.7 million and an aggregate net book value of $2.0 million as of December 31, 2012. In accordance with our revenue recognition policies discussed in Note 2, we do not accrue interest on loans which are 90 days past due or, in the opinion of our Manager, are otherwise uncollectable. Accordingly, we do not have any material interest receivable accrued on nonperforming loans as of September 30, 2013 or December 31, 2012.
- 17 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
6. LOANS HELD-FOR-SALE
Activity relating to our loans held-for-sale was ($ in thousands):
Gross Book | Valuation | Net Book | ||||||||||||
Value | Allowance | Value | ||||||||||||
December 31, 2012 |
$ | | $ | | $ | | ||||||||
Reclassification from loans receivable |
6,601 | (4,601 | ) | 2,000 | ||||||||||
Valuation allowance on loans held-for-sale |
| 1,200 | 1,200 | |||||||||||
Loans sold |
(6,601 | ) | 3,401 | (3,200 | ) | |||||||||
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|
|||||||||
September 30, 2013 |
$ | | $ | | $ | | ||||||||
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|
During the first quarter of 2013, we reclassified a $6.6 million subordinate mortgage loan and its related $4.6 million provision for loan losses to loans held-for-sale. We subsequently sold this loan and recorded a $1.2 million valuation adjustment to reflect the position at its fair value based on the proceeds expected to be received from the sale.
7. LOANS RECEIVABLE, AT FAIR VALUE
We record CT Legacy Partners loans receivable investments at fair value, which are determined using internal financial model-based estimations. The CT Legacy Partners loans receivable portfolio included nine loans with an aggregate principal balance of $176.0 million, which were reported at their aggregate fair value of $66.1 million as of September 30, 2013. As of December 31, 2012, there were no loans receivables at fair value because we accounted for CT Legacy Partners as a non-consolidated subsidiary. Refer to Note 3 and Note 8 for additional discussion of CT Legacy Partners. Refer to Note 17 for additional disclosure regarding fair value and Note 19 for an allocation of our loans receivable between our operating segments.
Activity relating to our loans receivable, at fair value was ($ in thousands):
December 31, 2012 |
$ | | ||
Consolidation of CT Legacy Partners |
150,332 | |||
Capitalized interest |
325 | |||
Loan satisfactions |
(79,959 | ) | ||
Partial loan repayments |
(1,721 | ) | ||
Unrealized gain on investments at fair value |
3,899 | |||
Reclassification to other assets |
(6,813 | ) | ||
|
|
|||
September 30, 2013 |
$ | 66,063 | ||
|
|
- 18 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table details overall statistics for CT Legacy Partners loans receivable, which is held at fair value as of September 30, 2013 ($ in thousands):
Loans Receivable, at Fair Value | ||||||||||||
Floating Rate | Fixed Rate | Total | ||||||||||
Number of loans |
6 | 3 | 9 | |||||||||
Net book value |
$ | 42,452 | $ | 23,611 | $ | 66,063 | ||||||
Weighted-average cash coupon (1) |
L+3.78 | % | 8.14 | % | 5.13 | % | ||||||
Weighted-average all-in yield (1) |
L+3.78 | % | 8.14 | % | 5.13 | % | ||||||
Weighted-average maximum maturity (years) (2) |
1.1 | 1.1 | 1.1 |
(1) | Floating rate loans are indexed to LIBOR as of September 30, 2013. LIBOR was 0.18% as of September 30, 2013; however, certain of our loans receivable earn interest based on a minimum LIBOR floor of 2.00%. Amounts exclude all non-performing loans. |
(2) | Maximum maturity date assumes all extension options are exercised. |
The tables below detail the types of loans in CT Legacy Partners loan portfolio, as well as the property type and geographic distribution of the properties securing these loans ($ in thousands):
September 30, 2013 | ||||||||
Asset Type |
Fair Value | Percentage | ||||||
Senior mortgages |
$ | 25,597 | 39 | % | ||||
Mezzanine loans |
40,466 | 61 | ||||||
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|
|||||
Total |
$ | 66,063 | 100 | % | ||||
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|
|||||
Property Type |
Fair Value | Percentage | ||||||
Office |
$ | 39,560 | 60 | % | ||||
Hotel |
26,503 | 40 | ||||||
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|
|||||
Total |
$ | 66,063 | 100 | % | ||||
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|
|||||
Geographic Location |
Fair Value | Percentage | ||||||
Northeast |
$ | 39,560 | 60 | % | ||||
West |
14,604 | 22 | ||||||
Southeast |
11,899 | 18 | ||||||
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|
|
|||||
Total |
$ | 66,063 | 100 | % | ||||
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|
|
Nonaccrual loans
In accordance with our revenue recognition policies discussed in Note 2, we do not accrue interest on loans which are 90 days past due or, in the opinion of our Manager, are otherwise uncollectable. We do not have any material interest receivable accrued on nonperforming loans as of September 30, 2013.
The following table details CT Legacy Partners loans receivable which are on nonaccrual status ($ in thousands):
September 30, 2013 | ||||||||
Principal | ||||||||
Asset Type |
Balance | Fair Value | ||||||
Subordinate Interests in Mortgages |
$ | 43,448 | $ | | ||||
Mezzanine & Other Loans |
69,146 | 11,899 | ||||||
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|
|
|
|||||
Total |
$ | 112,594 | $ | 11,899 | ||||
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|
8. INVESTMENT IN CT LEGACY ASSET, AT FAIR VALUE
As a result of the merger effective on March 22, 2013, we began consolidating CT Legacy Partners and its subsidiary, CT Legacy Asset, LLC, or CT Legacy Asset. Previously, we accounted for CT Legacy Asset on a non-consolidated basis, and as of December 31, 2012, our consolidated balance sheet included a net investment in CT Legacy Asset of $132.0 million. We had elected the fair value option of accounting for CT Legacy REITs
- 19 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
investment in CT Legacy Asset due to our determination that the fair value of the investment in CT Legacy Asset, as a net liquidating portfolio of assets, was more meaningful and indicative of our interests in CT Legacy Asset than equity method accounting. Following its consolidation, the loans receivable and repurchase obligations of CT Legacy Partners, as well as its other assets and liabilities, are included in our consolidated balance sheet. Refer to Note 3 for additional discussion of the consolidation of CT Legacy Partners and Note 7 and Note 10 for further discussion of CT Legacy Partners loan receivables and repurchase obligation, respectively.
CT Legacy Partners
CT Legacy Partners holds a portion of our legacy portfolio, which we had previously transferred to CT Legacy REIT (the predecessor of CT Legacy Partners) in connection with our March 2011 Restructuring. CT Legacy Partners is beneficially owned 52% by us and 48% by our former lenders. In addition, CT Legacy Partners has issued class B common shares, a subordinate class of equity which entitles its holders to receive approximately 25% of the dividends that would otherwise be payable to us on our equity interest in CT Legacy Partners, after aggregate cash distributions of $50.0 million have been paid to all other classes of common equity. Further, CT Legacy Partners has issued class A preferred shares which entitle its holder to cumulative preferred distributions in an amount generally equal to the greater of (i) 2.5% of certain of CT Legacy Partners assets, and (ii) $1.0 million per annum.
Our equity interest in CT Legacy Partners is comprised of 4,393,750 class A-1 common shares, 775,000 class A-2 common shares, and 118,651 class B common shares. The outstanding common shares of CT Legacy Partners are comprised of 4.4 million class A-1 common shares, 5.6 million class A-2 common shares, and 1.5 million class B common shares. The equity interests of other members of CT Legacy Partners are reflected as non-controlling interests on our consolidated balance sheet. As of September 30, 2013, CT Legacy Partners had not made any distribution payments to its common equity holders; however on October 9, 2013 CT Legacy Partners made a $75.0 million distribution to its common equity holders. Refer to Note 20 for additional discussion of this distribution.
9. EQUITY INVESTMENTS IN UNCONSOLIDATED SUBSIDIARIES
As of September 30, 2013, our equity investment in unconsolidated subsidiaries consisted solely of our carried interest in CTOPI, a fund sponsored and managed by CTIMCO. Historically, this balance has also included our co-investments in investment management vehicles that were sponsored and managed by CTIMCO. As described in Note 3, we sold two such co-investments to an affiliate of Blackstone in December 2012 in conjunction with our Investment Management Business Sale; however, we retained 100% of our carried interest in CTOPI.
Activity relating to our equity investments in unconsolidated subsidiaries was ($ in thousands):
CTOPI Carried Interest (1) |
||||
Total as of December 31, 2012 |
$ | 13,306 | ||
Incentive income allocation (2) |
12,326 | |||
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|
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Total as of September 30, 2013 |
$ | 25,632 | ||
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(1) | The allocation of carried interest from CTOPI is net of a $1.4 million advance distribution of incentive compensation to satisfy our 2012 income tax obligation related to the allocation of taxable income in respect of our carried interest in CTOPI. |
(2) | We have deferred the recognition of incentive income allocated to us from CTOPI in respect of our carried interest in CTOPI, and recorded an offsetting liability as a component of accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet. |
Our carried interest in CTOPI entitles us to earn incentive compensation in an amount equal to 17.7% of the funds profits, after a 9% preferred return and 100% return of capital to the CTOPI partners. As of September 30, 2013, we had been allocated $27.0 million of incentive compensation from CTOPI based on a hypothetical liquidation of the fund at its net asset value.
Accordingly, we have recognized this allocation as an equity investment in CTOPI on our consolidated balance sheet; however, we have deferred the recognition of income until cash is collected or appropriate contingencies have been eliminated.
- 20 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The CTOPI partnership agreement provides for advance distributions in respect of our incentive compensation to allow us to pay any income taxes owed on phantom taxable income allocated to us from the partnership. We refer to these distributions as CTOPI Tax Advances. During 2012, we received one such CTOPI Tax Advance of $1.4 million, which reduced our equity investment in CTOPI. In the event the performance of CTOPI does not ultimately result in a sufficient allocation of incentive compensation to us, we would be required to return these CTOPI Tax Advances to the fund. As of September 30, 2013, our maximum exposure to loss from CTOPI was $1.4 million, the amount of CTOPI Tax Advances we have received from CTOPI.
CTOPI Incentive Management Fee Grants
In January 2011, we created a management compensation pool for employees equal to 45% of the CTOPI incentive management fee received by us. As of September 30, 2013, we had granted 96% of the pool to our former employees, and the remainder remained unallocated. If any awards remain unallocated at the time incentive management fees are received by us, any amounts otherwise payable to the unallocated awards will be distributed prorata to the plan participants then employed by an affiliate of our Manager.
Approximately 96% of these grants have the following vesting schedule, which is contingent on continued employment with an affiliate of our Manager: (i) one-third on the date of grant; (ii) one-third on September 13, 2012; and (iii) the remainder vests upon our receipt of incentive management fees from CTOPI. The remaining 4% of these grants vest solely upon our receipt of incentive management fees from CTOPI or the disposition of certain investments owned by CTOPI.
10. DEBT OBLIGATIONS
Secured Notes
In conjunction with our March 2011 Restructuring, certain wholly-owned subsidiaries of ours issued secured notes to our former creditors, which secured notes are non-recourse to us. The secured notes had an aggregate initial face value of $7.8 million and are secured by 93.5% of our equity interests in the class A-1 and class A-2 common shares of CT Legacy Partners, which represents 48.3% of the total outstanding class A-1 and class A-2 common shares of CT Legacy Partners. The secured notes mature on March 31, 2016 and bear interest at a rate of 8.2% per annum, which interest may be deferred until maturity. All distributions we receive from our equity interests in the common shares of CT Legacy Partners which serve as collateral under the secured notes must be used to pay, or prepay, interest and principal due thereunder, and only after the notes full satisfaction will we receive any cash flow from the common equity interests in CT Legacy Partners that serve as collateral for the notes. Any prepayment, or partial prepayment, of the secured notes will incur a prepayment premium resulting in a total payment of principal and interest under the secured notes of $11.1 million. We had secured notes outstanding with an accreted book value of $9.0 million and $8.5 million as of September 30, 2013 and December 31, 2012, respectively.
Repurchase Facilities
During the third quarter of 2013, we upsized two existing revolving repurchase facilities and closed two new asset-specific repurchase agreements, providing an additional $591.8 million of credit. As of September 30, 2013, we had aggregate borrowings of $643.0 million outstanding under repurchase facilities, with a weighted-average cash coupon of LIBOR plus 2.26% per annum and a weighted-average all-in cost of credit, including associated fees and expenses, of LIBOR plus 2.49% per annum. As of September 30, 2013, these facilities had a weighted-average initial maturity, excluding extension options and term-out provisions, of 2.4 years.
- 21 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table details the repurchase obligations outstanding as of September 30, 2013 ($ in thousands):
Collateral Assets | Repurchase Borrowings2 | |||||||||||||||||||||||
Maximum | Principal | Net Book | ||||||||||||||||||||||
Lender |
Facility Size | Balance (1) | Value (1) | Potential | Current | Available | ||||||||||||||||||
Revolving Repurchase Facilities |
|
|||||||||||||||||||||||
Bank of America |
$ | 500,000 | $ | 278,811 | $ | 277,336 | $ | 210,930 | $ | 59,404 | $ | 151,526 | ||||||||||||
Citibank |
500,000 | 232,875 | 232,162 | 176,168 | 5,000 | 171,168 | ||||||||||||||||||
JP Morgan (3) |
362,000 | 378,950 | 376,949 | 296,760 | 274,913 | 21,847 | ||||||||||||||||||
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|
|||||||||||||
Subtotal |
1,362,000 | 890,636 | 886,447 | 683,858 | 339,317 | 344,541 | ||||||||||||||||||
Asset-Specific Repurchase Agreements |
||||||||||||||||||||||||
Wells Fargo (4) |
334,721 | 401,352 | 399,444 | 334,721 | 303,723 | | ||||||||||||||||||
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|
|||||||||||||
Total |
$ | 1,696,721 | $ | 1,291,988 | $ | 1,285,891 | $ | 1,018,579 | $ | 643,040 | $ | 344,541 | ||||||||||||
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(1) | The difference between principal balance and net book value of collateral assets is due to deferred origination fees. |
(2) | Potential borrowings represent the total amount we could draw under each facility based on collateral already approved and pledged. When undrawn, these amounts are immediately available to us at our sole discretion under the terms of each revolving credit facility. |
(3) | JP Morgan has a maximum facility size of $250.0 million plus $112.0 million related solely to a specific asset with a repurchase date of June 27, 2014. |
(4) | Represents an aggregate of three asset-specific repurchase agreements with Wells Fargo. The $31.0 million of potential borrowings under these agreements are contingent on our funding additional draws by the borrower under a specific collateral asset. |
On July 30, 2013, we entered into a $59.8 million, asset-specific, repurchase agreement with Wells Fargo. Advances under the repurchase agreement accrue interest at a per annum pricing rate equal to LIBOR plus a margin of 2.25%. The initial maturity date of the facility is August 8, 2015, which may be extended pursuant to three one-year extension options, each of which may be exercised by us. We do not guarantee the obligations under this repurchase agreement.
On July 8, 2013, we entered into a $32.0 million, asset-specific, repurchase agreement with Wells Fargo. Advances under the repurchase agreement accrue interest at a per annum pricing rate equal to LIBOR plus a margin of 3.50%. The initial maturity date of the facility is February 9, 2014, which may be extended pursuant to a one-year extension option, which may be exercised by us. We do not guarantee the obligations under this repurchase agreement.
On June 28, 2013, we entered into a $250.0 million master repurchase agreement with JP Morgan. Advances under the repurchase agreement accrue interest at a per annum pricing rate equal to LIBOR plus a margin of between 2.00% and 3.25% depending on the attributes of the collateral loans. The repurchase agreement specifies a one-year availability period, during which new advances can be made and which availability period is renewable at the discretion of JP Morgan. Maturity dates for individual advances are tied to their respective collateral loan maturity dates subject to annual renewal at our discretion. In the event that the availability period is not renewed, it is followed by a two year stabilization period and then a term out period, during which all collateral interest and principal proceeds would be required to repay existing advances, subject to certain provisions for REIT income distribution requirements. Obligations under this repurchase agreement are not recourse to us, except that we guarantee 25% of the advances related to senior mortgage collateral and 100% of the advances related to mezzanine and junior mortgage collateral. On September 30, 2013, we entered into an agreement with JP Morgan to advance $112.0 million under the facility related to a specific asset and to increase the maximum facility size by the amount of that advance, which matures in June 2014.
On June 12, 2013, we entered into a $250.0 million master repurchase agreement with Citibank. Advances under the repurchase agreement accrue interest at a per annum pricing rate equal to LIBOR plus a margin of between 2.00% and 2.25% depending on the attributes of the collateral loans. The initial facility expiration date is June 12, 2016, which may be extended annually by us. If upon the initial facility expiration date, Citibank does not extend the facility availability period, in its sole discretion, then no new advances may be drawn and all collateral interest and principal proceeds would be required to repay existing advances, subject to certain provisions for REIT income distribution requirements. In either case, individual advances mature upon the maturity date of the respective collateral maturity dates. We guarantee 25% of the advances under this facility. Otherwise, obligations under this repurchase agreement are not recourse to us. On July 26, 2013, we amended our master repurchase agreement with Citibank to provide for a second $250.0 million tranche of potential advances. The second tranche is subject to a one year availability period, during which new financing transactions can be initiated. All other terms, including maturity dates, for the second tranche advances are the same as the original $250.0 million tranche.
- 22 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
On June 7, 2013, we entered into a $250.0 million, asset specific, repurchase agreement with Wells Fargo. Advances under the repurchase agreement accrue interest at a per annum pricing rate equal to LIBOR plus a margin of 2.50%. The initial maturity date of the facility is June 7, 2016, which may be extended pursuant to (i) two one-year extension options, each of which may be exercised by us, and (ii) an additional one-year extension option, contingent upon notice regarding the failure of the collateral mortgage loan to be repaid at its final maturity. We do not guarantee the obligations under this repurchase agreement.
On May 21, 2013, we entered into a $250.0 million master repurchase agreement with Bank of America. Advances under the repurchase agreement accrue interest at a per annum pricing rate equal to LIBOR plus a margin of between 1.75% and 3.25% depending on the attributes of the collateral loans. The initial maturity date of the facility is May 21, 2016, subject to two one-year extension options, each of which may be exercised by us. Obligations under this repurchase agreement are not recourse to us, except that we guarantee 50% of the advances related to senior collateral and 100% of the advances related to mezzanine and junior mortgage collateral. On September 23, 2013, we amended our master repurchase agreement with Bank of America to provide for an additional $250.0 million of potential advances. All of the terms of the additional potential advances, including maturity dates, are the same as the original $250.0 million.
Each of the guarantees related to our master repurchase agreements contain the following uniform financial covenants: (i) our ratio of earnings before interest, taxes, depreciation, and amortization, or EBITDA, to fixed charges shall be not less than 1.40 to 1.0; (ii) our tangible net worth, as defined in the agreements, shall not be less than $525.0 million plus 75% of the net cash proceeds of future equity issuances; (iii) cash liquidity shall not be less than the greater of (x) $10.0 million or (y) 5% of our recourse indebtedness; and (iv) our indebtedness shall not exceed 80% of our total assets. As of September 30, 2013, we were in compliance with all applicable covenants.
The weighted average outstanding repurchase obligation balance for the three months ended September 30, 2013 was $428.7 million.
Repurchase Obligations CT Legacy Partners
As of March 31, 2013, CT Legacy Partners was party to a repurchase facility with JP Morgan with an outstanding balance of $20.2 million. On June 5, 2013, CT Legacy Partners repaid the outstanding balance and terminated the repurchase facility. CT Legacy Partners has no outstanding debt obligations as of September 30, 2013.
Securitized Debt Obligations
The balances of each of our consolidated securitization vehicles outstanding securitized debt obligations, their respective coupons and all-in effective costs, including the amortization of fees and expenses, were as follows ($ in thousands):
September 30, | December 31, | September 30, | ||||||||||||||||||||||
2013 | 2012 | 2013 | ||||||||||||||||||||||
Non-Recourse Securitized | Principal | Book | Book | All-In | Maturity | |||||||||||||||||||
Debt Obligations |
Balance | Value | Value | Coupon(1) | Cost(1) | Date(2) | ||||||||||||||||||
CT CDO I |
$ | 74,203 | $ | 74,203 | $ | 91,131 | L+1.60 | % | L+1.60 | % | July 2039 | |||||||||||||
GSMS 2006-FL8A |
| | 48,053 | | | N/A | ||||||||||||||||||
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|
|
|
|
| ||||||||||||||
Total/Weighted-Average |
$ | 74,203 | $ | 74,203 | $ | 139,184 | L+1.60 | % | L+1.60 | % | July 2039 | |||||||||||||
|
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|
(1) | Represents a weighted-average for the facility. All non-recourse securitization obligations are floating rate obligations indexed to LIBOR as of September 30, 2013. LIBOR was 0.18% as of September 30, 2013. |
(2) | Maturity date represent the contractual maturity of the securitization vehicle. Repayment of securitized debt is a function of collateral cash flows which are disbursed in accordance with the contractual provisions of each vehicle, and is generally expected to occur prior to the maturity date above. |
As of September 30, 2013, loans receivable with an aggregate book value of $77.0 million served as collateral for the non-recourse debt and equity securities issued by our consolidated securitizations vehicles. As of December 31, 2012, loans receivable with an aggregate book value of $141.5 million served as collateral for the securities issued by these same vehicles.
- 23 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Our consolidated securitization vehicle, CT CDO I, is subject to interest coverage and overcollateralization tests which, when breached, provide for hyper-amortization of the senior notes by a redirection of cash flow that would otherwise have been paid to the subordinate classes, some of which are owned by us. Furthermore, CT CDO I provides for the re-classification of interest proceeds from impaired collateral as principal proceeds, which also serve to hyper-amortize the senior notes sold. As a result of collateral asset impairments and the related breaches of these interest coverage and overcollateralization tests, we currently do not receive any cash payments from CT CDO I.
11. DERIVATIVE FINANCIAL INSTRUMENTS
As of, and during the nine months ended, September 30, 2013, we were not party to any derivative financial instruments. However, our consolidated subsidiary, CT Legacy Partners, was party to five interest rate swaps which it terminated in June 2013. A gain of $136,000 resulting from the termination is included as a component of interest expense on our consolidated statements of operations for the nine months ended September 30, 2013. CT Legacy Partners is no longer party to any derivative financial instruments as of September 30, 2013.
12. EQUITY
Balance Sheet Activity
Total equity increased $650.0 million during the first nine months of 2013 to $803.5 million. This increase was primarily driven by the issuance of additional shares of our class A common stock in our May 2013 equity offering. See below for further discussion on the share issuance.
Accumulated Other Comprehensive Loss
We did not have any accumulated other comprehensive income or loss as of September 30, 2013. The following table details the primary components of accumulated other comprehensive loss as of September 30, 2012, and significant activity for the nine months ended September 30, 2012 ($ in thousands):
Accumulated Other Comprehensive Loss |
Mark-to-Market on Interest Rate Hedges |
Deferred Gains on Settled Hedges |
Other-than- Temporary Impairments |
Unrealized Gains on Securities |
Total | |||||||||||||||||
Total as of December 31, 2011 |
($ | 27,423 | ) | $ | 56 | ($ | 16,578 | ) | $ | 3,361 | ($ | 40,584 | ) | |||||||||
Unrealized gain on derivative financial instruments |
5,853 | | | | 5,853 | |||||||||||||||||
Ineffective portion of cash flow hedges (1) |
2,481 | | | | 2,481 | |||||||||||||||||
Amortization of net unrealized gains on securities |
| | | (770 | ) | (770 | ) | |||||||||||||||
Amortization of net deferred gains on settlement of swaps |
| (56 | ) | | | (56 | ) | |||||||||||||||
Other-than-temporary impairments of securities (2) |
| | 409 | | 409 | |||||||||||||||||
Deconsolidation of CT Legacy Assets (3) |
| | 3,879 | (2,586 | ) | 1,293 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total as of September 30, 2012 |
($ | 19,089 | ) | $ | | ($ | 12,290 | ) | $ | 5 | ($ | 31,374 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
(1) | As a result of the deconsolidation of CT Legacy Assets in the first quarter of 2012, the balance of accumlated other comprehensive loss related to cash flow hedges of CT Legacy Assets was reclassified to interest expense. |
(2) | Represents other-than-temporary impairments of securities in excess of credit losses, including amortization of prior other-than-temporary impairments of $248,000. |
- 24 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Non-controlling Interests
The non-controlling interests included on our consolidated balance sheet represent the equity interests in CT Legacy Partners that are not owned by us, as described in Note 8. CT Legacy Partners outstanding common stock includes class A-1 common shares, class A-2 common shares, and subordinate class B common shares. A portion of CT Legacy Partners consolidated equity and results of operations are allocated to these non-controlling interests based on their pro rata ownership of CT Legacy Partners.
The following table details the components of non-controlling interests in CT Legacy Partners as of September 30, 2013 ($ in thousands):
Gross investment in CT Legacy Partners |
||||
Restricted cash |
$ | 76,396 | ||
Loans receivable, at fair value |
66,063 | |||
Accrued interest receivable, prepaid expenses, and other assets |
21,054 | |||
Accounts payable, accrued expenses and other liabilities |
(412 | ) | ||
|
|
|||
$ | 163,101 | |||
|
|
|||
Equity interests owned by Blackstone Mortgage Trust, Inc. |
(72,886 | ) | ||
|
|
|||
Non-controlling interests in CT Legacy Partners |
$ | 90,215 | ||
|
|
Share and Share Equivalents
Authorized Capital
We have the authority to issue up to 200,000,000 shares of stock, consisting of 100,000,000 shares of class A common stock and 100,000,000 shares of preferred stock. Subject to applicable NYSE listing requirements, our board of directors is authorized to cause us to issue additional shares of authorized stock without stockholder approval. In addition, to the extent not issued, currently authorized stock may be reclassified between class A common stock and preferred stock.
Reverse Stock Split
On April 26, 2013, our board of directors approved a one-for-ten reverse stock split of our class A common stock which we effected on May 6, 2013. As a result of the reverse stock split, the number of outstanding shares of our class A common stock was reduced to 2,926,651. In addition, there was a reclassification of $263,000 from the par value of our class A common stock to additional paid-in capital to reflect the impact of the reverse stock split.
Class A Common Stock and Deferred Stock Units
Holders of shares of class A common stock are entitled to vote on all matters submitted to a vote of stockholders, subject to the voting rights of any outstanding shares of preferred stock. Holders of record of shares of class A common stock on the record date fixed by our board of directors are entitled to receive such dividends as may be authorized by our board of directors and declared by us, subject to the rights of the holders of any shares of outstanding preferred stock. On May 29, 2013, we issued 25,875,000 shares of class A common stock at a public offering price of $25.50 per share. We generated net proceeds from the issuance of $633.8 million after underwriting discounts and other offering expenses.
In addition to our class A common stock, we also issue deferred stock units to certain members of our board of directors in lieu of cash compensation for services rendered. These deferred stock units are non-voting, but carry the right to receive dividends in the form of additional deferred stock units in an amount equivalent to the cash dividends paid to holders of shares of class A common stock.
A total of 28,898,165 shares of class A common stock and stock units were issued and outstanding as of September 30, 2013.
- 25 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table details the movement in our outstanding shares of class A common stock, restricted class A common stock, and deferred stock units:
Nine Months Ended September 30, | ||||||||
Common Stock Outstanding (1)(2)(3) |
2013 | 2012 | ||||||
Beginning balance |
3,016,407 | 2,277,344 | ||||||
Issuance of class A common stock |
25,875,000 | | ||||||
Transactions related to stock-based incentive plans |
||||||||
Issuance of restricted class A common stock, net |
| 36,400 | ||||||
Issuance of deferred stock units |
6,758 | 5,418 | ||||||
|
|
|
|
|||||
Ending balance |
28,898,165 | 2,319,162 | ||||||
|
|
|
|
(1) | Includes shares of our class A common stock, restricted class A common stock, and deferred stock units. |
(2) | Deferred stock units held by members of our board of directors totaled 96,514, and 61,652 as of September 30, 2013 and 2012, respectively. |
(3) | Share amounts have been retroactively updated to reflect the one-for-ten reverse stock split which we effected as of May 6, 2013. See above for further discussion. |
Preferred Stock
We have not issued any shares of preferred stock since we repurchased all of our previously issued and outstanding preferred stock in 2001.
Dividends
We generally intend to distribute each year substantially all of our taxable income, which does not necessarily equal net income as calculated in accordance with GAAP, to our stockholders to comply with the REIT provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code.
Our dividend policy remains subject to revision at the discretion of our board of directors. All distributions will be made at the discretion of our board of directors and will depend upon our taxable income, our financial condition, our maintenance of REIT status, applicable law, and other factors as our board of directors deems relevant.
On September 10, 2013, we declared a dividend of $7.8 million, or $0.27 per share, which was paid on October 15, 2013 to class A common stockholders of record as of September 30, 2013.
Earnings Per Share
The following table sets forth the calculation of basic and diluted net income per share of class A common stock based on the weighted-average of both restricted and unrestricted class A common stock outstanding, for the indicated periods ($ in thousands, except per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income |
$ | 8,320 | $ | 6,999 | $ | 7,953 | $ | 75,835 | ||||||||
Weighted-average shares outstanding (1) |
28,894,515 | 2,317,343 | 14,865,530 | 2,296,910 | ||||||||||||
Warrants and options outstanding for the purchase of class A common stock |
| 144,260 | | 147,296 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average shares outstanding, diluted |
28,894,515 | 2,461,603 | 14,865,530 | 2,444,206 | ||||||||||||
Per share amount, basic |
$ | 0.29 | $ | 3.02 | $ | 0.53 | $ | 33.02 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Per share amount, diluted |
$ | 0.29 | $ | 2.84 | $ | 0.53 | $ | 31.03 | ||||||||
|
|
|
|
|
|
|
|
(1) | Share and per share amounts have been retroactively updated to reflect the one-for-ten reverse stock split which we effected as of May 6, 2013. See above for further discussion. |
Refer to Note 19 for a breakdown of our results of operations for each of our operating segments.
- 26 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table sets forth the calculation of basic and diluted income from continuing operations per share of class A common stock based on the weighted-average of both restricted and unrestricted class A common stock outstanding ($ in thousands, except per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Income from continuing operations |
$ | 10,526 | $ | 12,849 | $ | 15,696 | $ | 157,736 | ||||||||
Net income attributable to non-controlling interests |
(2,206 | ) | (5,901 | ) | (7,743 | ) | (81,038 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations attributable to Blackstone Mortgage Trust, Inc. |
$ | 8,320 | $ | 6,948 | $ | 7,953 | $ | 76,698 | ||||||||
Weighted-average shares outstanding (1) |
28,894,515 | 2,317,343 | 14,865,530 | 2,296,910 | ||||||||||||
Warrants and options outstanding for the purchase of class A common stock |
| 144,260 | | 147,296 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted-average shares outstanding, diluted |
28,894,515 | 2,461,603 | 14,865,530 | 2,444,206 | ||||||||||||
Per share amount, basic |
$ | 0.29 | $ | 3.00 | $ | 0.53 | $ | 33.39 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Per share amount, diluted |
$ | 0.29 | $ | 2.82 | $ | 0.53 | $ | 31.40 | ||||||||
|
|
|
|
|
|
|
|
(1) | Share and per share amounts have been retroactively updated to reflect the one-for-ten reverse stock split which we effected as of May 6, 2013. See above for further discussion. |
Refer to Note 19 for a breakdown of our results of operations for each of our operating segments.
13. GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses consisted of the following ($ in thousands):
Nine Months Ended September 30, | ||||||||
2013 | 2012 | |||||||
Management fees to affiliates |
$ | 3,416 | $ | | ||||
Professional services |
2,109 | 3,611 | ||||||
Operating and other costs |
1,123 | 849 | ||||||
|
|
|
|
|||||
6,648 | 4,460 | |||||||
|
|
|
|
|||||
Non-cash compensation expenses |
||||||||
Management incentive awards plan - CT Legacy Partners (1) |
1,969 | 944 | ||||||
Director stock-based compensation |
169 | 169 | ||||||
Employee stock-based compensation |
| 675 | ||||||
|
|
|
|
|||||
2,138 | 1,788 | |||||||
|
|
|
|
|||||
Expenses of consolidated securitization vehicles |
726 | 66 | ||||||
|
|
|
|
|||||
$ | 9,512 | $ | 6,314 | |||||
|
|
|
|
(1) | Represents the accrual of amounts payable under the CT Legacy Partners management incentive awards during the period. See below for discussion of the CT Legacy Partners management incentive awards plan. |
As a result of our Investment Management Business Sale, the operating expenses related to our investment management business have been reclassified to income (loss) from discontinued operations on our consolidated statements of operations. Refer to Note 3 for further discussion of the Investment Management Business Sale.
In conjunction with the Investment Management Business Sale, we entered into a new management agreement with our Manager, which was amended and restated as of March 26, 2013, pursuant to which our Manager earns a base management fee in an amount equal to the greater of (i) $250,000 per annum and (ii) 1.50% per annum multiplied by our outstanding Equity balance, as defined in the management agreement with our Manager. In addition, our Manager is entitled to an incentive fee in an amount equal to the product of (i) 20% and (ii) the excess of (a) our Core Earnings (as defined in the management agreement) for the previous 12-month period (or the period since January 1, 2013, whichever is shorter) over (b) an amount equal to 7.00% per annum multiplied by our outstanding Equity, provided that our Core Earnings over the prior three-year period (or the period since the date of the first offering of our class A common stock following December 19, 2012, whichever is shorter) is greater than zero. Core Earnings is generally equal to our net income (loss) prepared in accordance with GAAP, excluding (i) certain non-cash items and (ii) the net income (loss) related to our legacy portfolio.
- 27 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
During the nine months ended September 30, 2013, we incurred $3.4 million of management fees payable to our Manager, which are included in general and administrative expenses. We did not incur any incentive fees payable to our Manager during the nine months ended September 30, 2013.
CT Legacy Partners Management Incentive Awards Plan
In conjunction with our March 2011 Restructuring, we created an employee pool for up to 6.75% of the distributions paid to the common equity holders of CT Legacy Partners (subject to certain caps and priority distributions). As of September 30, 2013, incentive awards for 92% of the pool were granted to our former employees, and the remainder remains unallocated. If any awards remain unallocated at the time distributions are paid, any amounts otherwise payable to the unallocated awards will be distributed pro rata to the plan participants then employed by an affiliate of our Manager.
Approximately 82% of these grants have the following vesting schedule, which is contingent on continued employment with an affiliate of our Manager: (i) 25% vests on the date of grant; (ii) 25% vests in March 2013; (iii) 25% vests in March 2014; and (iv) the remainder vests upon our receipt of distributions from CT Legacy Partners. The remaining 18% of these grants vest upon our receipt of distributions from CT Legacy Partners.
We accrue a liability for the amounts due under these grants based on the value of CT Legacy Partners and the periodic vesting of the awards granted. Accrued payables for these awards were $7.3 million and $5.3 million as of September 30, 2013 and December 31, 2012, respectively.
14. DISCONTINUED OPERATIONS
As more fully described in Note 3, we sold our investment management business, CTIMCO, to an affiliate of Blackstone in December 2012. As a result, the income and expense items related to our investment management business have been reclassified to loss from discontinued operations on our consolidated statement of operations.
The following table provides additional information on the components of discontinued operations ($ in thousands):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Servicing fees |
$ | | $ | 2,206 | $ | | $ | 5,591 | ||||||||
Management fees from affiliates |
| 1,546 | | 4,741 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenues |
| 3,752 | | 10,332 | ||||||||||||
General and administrative expenses |
| 3,150 | | 9,879 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from discontinued operations before income taxes |
| 602 | | 453 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income tax provision |
| (550 | ) | | (1,316 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from discontinued operations |
$ | | $ | 51 | $ | | ($ | 863 | ) | |||||||
|
|
|
|
|
|
|
|
15. INCOME TAXES
We elected to be taxed as a REIT, effective January 1, 2003, under the Internal Revenue Code for U.S. federal income tax purposes. We generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal income tax not to apply to our earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our net taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.
Our qualification as a REIT also depends on our ability to meet various other requirements imposed by the Internal Revenue Code, which relate to organizational structure, diversity of stock ownership and certain restrictions with regard to the nature of our assets and the sources of our income. Even if we qualify as a REIT, we may be subject to certain U.S. federal income and excise taxes and state and local taxes on our income and assets. If we fail to maintain our qualification as a REIT for any taxable year, we may be subject to material penalties as well as federal, state and
- 28 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
local income tax on our taxable income at regular corporate rates and we would not be able to qualify as a REIT for the subsequent four full taxable years. As of September 30, 2013 and December 31, 2012, we were in compliance with all REIT requirements.
During the nine months ended September 30, 2013, we recorded a current income tax provision of $329,000 related to our taxable REIT subsidiaries. As a result of our sale of CTIMCO we no longer have any deferred tax assets or liabilities as of December 31, 2012.
As a result of our issuance of 25,875,000 shares of class A common stock in May 2013, the availability of our net operating losses, or NOLs, and net capital losses, or NCLs, is significantly limited by change of control provisions promulgated by the Internal Revenue Service with respect to the ownership of Blackstone Mortgage Trust, Inc. As of December 31, 2012, we had NOLs of $161.5 million and NCLs of $121.4 million available to be carried forward and utilized in current or future periods. If we are unable to utilize our NOLs, they will expire in 2029. If we are unable to utilize our NCLs, $2.0 million will expire in 2013, $87.4 million will expire in 2014, $31.4 million will expire in 2015, and $602,000 will expire in 2017.
As of September 30, 2013, tax years 2009 through 2012 remain subject to examination by taxing authorities.
16. STOCK-BASED INCENTIVE PLANS
We do not have any employees following the consummation of the Investment Management Business Sale on December 19, 2012, as described in Note 3. However, as of September 30, 2013, our Manager, certain individuals employed by an affiliate of our Manager, and certain members of our board of directors are compensated, in part, through the issuance of stock-based instruments. In addition, certain of our former employees continue to participate in the CTOPI incentive management fee grants and the CT Legacy Partners management incentive awards plan.
We had stock-based incentive awards outstanding under four benefit plans as of September 30, 2013: (i) our amended and restated 1997 non-employee director stock plan, or 1997 Plan; (ii) our 2007 long-term incentive plan, or 2007 Plan; (iii) our 2011 long-term incentive plan, or 2011 Plan; and (iv) our 2013 stock incentive plan, or 2013 Plan. No awards have been granted under our 2013 manager incentive plan, or 2013 Manager Plan, as of September 30, 2013. We refer to our 1997 Plan, our 2007 Plan, and our 2011 Plan as our Expired Plans and we refer to our 2013 Plan and 2013 Manager Plan as our Current Plans.
Our Expired Plans have expired and no new awards may be issued under them. Under our Current Plans, a maximum of 2,160,106 shares of our class A common stock may be issued to our Manager, our directors and officers, and certain employees of affiliates of our Manager. As of September 30, 2013, there were 2,154,956 shares available under the Current Plans.
Awards outstanding under these plans as of September 30, 2013 was comprised entirely of 96,514 deferred stock units granted to certain members of our board of directors in lieu of cash compensation for services and in lieu of dividends earned on previously granted stock units. Awards outstanding under Expired Plans have been adjusted to reflect the one-for-ten reverse stock split which we effected as of May 6, 2013. Refer to Note 12 for further discussion of our reverse stock split.
Refer to Notes 9 and 13 for additional discussion of the CTOPI incentive management fee grants and the CT Legacy Partners management incentive awards plan, respectively.
- 29 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
17. FAIR VALUES
Assets Recorded at Fair Value
The following table summarizes our assets that are recorded at fair value as of September 30, 2013 ($ in thousands):
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Markets | Inputs | Inputs | ||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Measured on a recurring basis | ||||||||||||||||
Loans receivable, at fair value |
$ | 66,063 | $ | | $ | | $ | 66,063 | ||||||||
Other assets, at fair value (1) |
$ | 19,272 | $ | | $ | 1,925 | $ | 17,347 | ||||||||
Measured on a non-recurring basis | ||||||||||||||||
Impaired loans receivable (2) |
$ | | $ | | $ | | $ | |
(1) | Other assets include securities, equity investments, and other receivables carried at fair value. |
(2) | All impaired loans receivable have a 100% loan loss reserve and are held by CT CDO I as of September 30, 2013. |
The following table summarizes our assets that are recorded at fair value as of December 31, 2012 ($ in thousands):
Fair Value Measurements Using | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Markets | Inputs | Inputs | ||||||||||||||
Fair Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
Measured on a recurring basis | ||||||||||||||||
Investment in CT Legacy Asset |
$ | 132,000 | $ | | $ | | $ | 132,000 | ||||||||
Measured on a non-recurring basis | ||||||||||||||||
Impaired loans receivable (1) |
$ | 2,000 | $ | | $ | | $ | 2,000 |
(1) | Impaired loans receivable have a 92% loan loss reserve and are held by consolidated securitization vehicles as of December 31, 2012. |
The following table reconciles the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs ($ in thousands):
Loans | Loans receivable, | Other assets, | Investment in | |||||||||||||
held-for-sale, net | at fair value | at fair value (1) | CT Legacy Assets | |||||||||||||
December 31, 2012 |
$ | | $ | | $ | | $ | 132,000 | ||||||||
Consolidation of CT Legacy Partners |
| 150,332 | 15,761 | (132,000 | ) | |||||||||||
Transfer from loans receivable, net |
2,000 | | | | ||||||||||||
Transfer from loans receivable, at fair value |
| (6,813 | ) | 6,813 | | |||||||||||
Deferred interest |
| 325 | | | ||||||||||||
Proceeds from investments |
(3,200 | ) | (81,680 | ) | (3,867 | ) | | |||||||||
Adjustments to fair value included in earnings |
||||||||||||||||
Valuation allowance on loans held-for-sale |
1,200 | | | | ||||||||||||
Unrealized gain on investments at fair value |
| 3,899 | 565 | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
September 30, 2013 |
$ | | $ | 66,063 | $ | 19,272 | $ | | ||||||||
|
|
|
|
|
|
|
|
(1) | Other assets include securities, equity investments, and other receivables carried at fair value. |
The following describes the key assumptions used in arriving at the fair value of each type of asset that was recorded at fair value as of September 30, 2013 and December 31, 2012. There were no liabilities recorded at fair value as of September 30, 2013 or December 31, 2012. Refer to Note 2 for further discussion regarding fair value measurement.
Loans held-for-sale Loans held-for-sale are valued based on expected net proceeds from a sale of the asset.
- 30 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Loans receivable, at fair value The following table lists the range of key assumptions for each type of loans receivable as of September 30, 2013 ($ in millions):
Assumption Ranges for Significant | Book Value | |||||||||||
Unobservable Inputs (Level 3) (1) | Sensitivity to a | |||||||||||
Recovery | 100 bp Discount | |||||||||||
Collateral Type |
Discount Rate | Percentage (2) | Book Value | Rate Increase | ||||||||
Hotel |
8% - 9% | 84% - 100% | $ | 26.5 | (0.7 | %) | ||||||
Office |
7% - 20% | 78% - 100% | 39.6 | (1.5 | %) | |||||||
|
|
|||||||||||
$ | 66.1 | |||||||||||
|
|
(1) | Excludes loans for which there is no expectation of future cash flows. |
(2) | Represents the proportion of the principal expected to be collected relative to the loan balance as of September 30, 2013. |
Other assets, at fair value Our other assets balance include certain CMBS, CDO, equity investments, and other receivables and are generally valued by a combination of (i) obtaining assessments from third-party dealers and (ii) in cases where such assessments are unavailable or deemed not to be indicative of fair value, discounting expected cash flows using internal cash flow models and estimated market discount rates. In the case of internal models, expected cash flows of each security are based on assumptions regarding the collection of principal and interest on the underlying loans and securities.
Impaired loans receivable Our impaired loans receivables, which are held by our CT CDO I, include two subordinate interests in mortgage loans with an aggregate principal balance of $18.1 million. These hotel loans are in maturity default as of September 30, 2013. The range of key assumptions used for arriving at the fair value of these loans included capitalization rates between 9% and 15% and assumed occupancy rates between 75% and 83%.
Investment in CT Legacy Asset We elected the fair value option of accounting for CT Legacy REITs investment in CT Legacy Asset, at December 31, 2012. We arrived at the fair value of our Investment in CT Legacy Asset by discounting the net cash flows expected to be distributed to its equity holders after the repayment of the repurchase facility. The key assumptions for significant unobservable inputs were: (i) a discount rate of 15% and (ii) loss severities applied to the underlying assets.
Fair Value of Financial Instruments
As discussed in Note 2, GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which it is practicable to estimate that value. The following table details the carrying amount, face amount, and approximate fair value of the financial instruments described in Note 2. All fair value estimates, except for cash and cash equivalents, are measured using significant unobservable inputs, or Level 3 inputs, as further described above. ($ in thousands):
September 30, 2013 | December 31, 2012 | |||||||||||||||||||||||
Carrying | Face | Fair | Carrying | Face | Fair | |||||||||||||||||||
Amount | Amount | Value | Amount | Amount | Value | |||||||||||||||||||
Financial assets | ||||||||||||||||||||||||
Cash and cash equivalents |
$ | 10,283 | $ | 10,283 | $ | 10,283 | $ | 15,423 | $ | 15,423 | $ | 15,423 | ||||||||||||
Restricted cash |
76,396 | 76,396 | 76,396 | 14,246 | 14,246 | 14,246 | ||||||||||||||||||
Loans receivable, net |
1,362,891 | 1,387,067 | 1,360,842 | 141,500 | 164,180 | 133,682 | ||||||||||||||||||
Financial liabilities | ||||||||||||||||||||||||
Secured notes |
9,030 | 9,030 | 8,068 | 8,497 | 8,497 | 7,374 | ||||||||||||||||||
Repurchase obligations |
643,040 | 643,040 | 643,040 | | | | ||||||||||||||||||
Securitized debt obligations |
74,203 | 74,203 | 57,138 | 139,184 | 139,184 | 89,880 |
18. TRANSACTIONS WITH RELATED PARTIES
Transactions Related to Our Manager and its Affiliates
As further described in Note 3, in December 2012 we concluded multiple, related transactions with Blackstone and its affiliates, including: (i) the Investment Management Business Sale; (ii) the sale of 500,000 shares of our class A
- 31 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
common stock for $20.00 per share; and (iii) the execution of a new external management agreement with our Manager. In addition, Blackstone received the right to designate two members of our board of directors, and exercised that right by designating an employee and one of its senior advisors to replace two former members of our board of directors who resigned effective December 19, 2012. Certain of our former employees are now employed by an affiliate of our Manager.
On March 26, 2013, we amended the external management agreement with our Manager to, among other things, amend our investment guidelines to permit the investment risk management committee of our board of directors, which consists of only independent directors, to approve any proposed investment by our Manager.
As of September 30, 2013, our consolidated balance sheet included $2.4 million of accrued management fees payable to our Manager. During the nine months ended September 30, 2013, we paid $920,000 of management fees to our Manager. In addition, as of September 30, 2013, our consolidated balance sheet includes $306,000 of preferred distributions payable by CT Legacy Partners to an affiliate of our Manager. During the nine months ended September 30, 2013, CT Legacy Partners made aggregate preferred distributions of $3.4 million to such affiliate.
During the nine months ended September 30, 2013, CT CDO I, which is consolidated by us, paid $704,000 of special servicing fees to CTIMCO, which is an affiliate of our Manager.
There may be conflicts between us and our Manager with respect to certain of the investments in the CT Legacy Partners and CTOPI portfolios where an affiliate of our Manager holds a related investment that is senior, junior, or pari passu to the investments held by these portfolios.
The management agreement with our Manager excludes from the management fee calculation our interests in CT Legacy Partners, CTOPI, and CT CDO I, which may result in further conflicts between the economic interests of us and our Manager. Refer to Note 13 for further discussion of the management agreement with our Manager.
On May 13, 2013, we entered into a joint venture, 42-16 Partners, with an affiliate of our Manager to originate and warehouse loans prior to the completion of our class A common stock offering on May 29, 2013. 42-16 Partners was owned 16.7% by us and 83.3% by an affiliate of our Manager, and originated one senior mortgage loan on May 21, 2013. On May 30, 2013, we ended this relationship with the affiliate of our Manager and purchased 100% of the equity interests in 42-16 Partners held by the affiliate our Manager using proceeds from the sale of our class A common stock and, as a result, 42-16 Partners became a 100% owned and consolidated subsidiary. We recorded a $193,000 charge to non-controlling interest as a result of the purchase of these equity interests at their fair value, rather than GAAP book value.
An affiliate of our Manager purchased 1,960,784 shares of our class A common stock as part of our stock offering on May 22, 2013. These shares were purchased for $25.50 each, the same price offered to non-affiliated purchasers. This affiliate owned class A common stock representing 9.5% of outstanding class A common stock and stock units as of October 22, 2013. In addition, an affiliate of our Manager was compensated $1.0 million for its role as co-manager of our offering of class A common stock on May 22, 2013.
On October 2, 2013 we originated a $71.0 million loan, the proceeds of which were used by the borrower to repay an existing loan owned by an affiliate of our Manager.
On October 23, 2013, we purchased a $176.9 million loan from a third-party. In conjunction with our acquisition of this loan we consented to its restructuring, which restructuring resulted in an affiliate of our Manager earning a $2.3 million modification fee. This affiliate was previously named special servicer of the related mortgage loan in 2011 by the then controlling holder, and was entitled to the modification fee without respect to our purchase of the loan.
Other Related Party Transactions
In conjunction with the Investment Management Business Sale, we entered into a letter agreement with W.R. Berkley Corporation, or WRBC, pursuant to which we agreed not to undertake any offering of our class A common stock, or other equity securities, in an aggregate amount greater than $30.0 million without prior approval of a majority of the independent members of our board of directors. This approval was obtained in conjunction with our May 2013 offering of Class A common stock, and no further approval requirement remains. WRBC beneficially owned class A common stock representing 1.3% of our outstanding class A common stock and stock units as of October 22, 2013, and a member of our board of directors is an employee of WRBC.
19. SEGMENT REPORTING
We operate our real estate finance business through a Loan Origination segment and a CT Legacy Portfolio segment. The Loan Origination segment includes our activities associated with the origination and acquisition of mortgage loans, the capitalization of our loan portfolio, and the costs associated with operating our business generally. The CT
- 32 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Legacy Portfolio segment includes our activities specifically related to CT Legacy Partners, CT CDO I, and our equity investment in CTOPI. Our Manager identifies, makes operating decisions, and assesses the performance of each of our business segments based on financial and operating data and metrics generated from our internal information systems.
Our Loan Origination business commenced during 2013. Accordingly, no comparable segment data exists for 2012 or any other prior period, and we have therefore not retrospectively restated our previously reported information.
The following table presents our results of operations for each segment for the three months ended September 30, 2013 ($ in thousands):
Loan Origination |
CT Legacy Portfolio |
Total | ||||||||||
Income from loans and other investments |
||||||||||||
Interest and related income |
$ | 15,143 | $ | 3,710 | $ | 18,853 | ||||||
Less: Interest and related expenses |
3,822 | 585 | 4,407 | |||||||||
|
|
|
|
|
|
|||||||
Income from loans and other investments, net |
11,321 | 3,125 | 14,446 | |||||||||
Other expenses |
||||||||||||
General and administrative |
3,459 | 589 | 4,048 | |||||||||
|
|
|
|
|
|
|||||||
Total other expenses |
3,459 | 589 | 4,048 | |||||||||
Valuation allowance on loans held-for-sale |
| (600 | ) | (600 | ) | |||||||
Unrealized gain on investments at fair value |
| 464 | 464 | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
7,862 | 2,400 | 10,262 | |||||||||
Income tax benefit |
(21 | ) | (243 | ) | (264 | ) | ||||||
|
|
|
|
|
|
|||||||
Net income |
7,883 | 2,643 | 10,526 | |||||||||
|
|
|
|
|
|
|||||||
Net income attributable to non-controlling interests |
| (2,206 | ) | (2,206 | ) | |||||||
|
|
|
|
|
|
|||||||
Net income attributable to Blackstone Mortgage Trust, Inc. |
$ | 7,883 | $ | 437 | $ | 8,320 | ||||||
|
|
|
|
|
|
All consolidated revenues for the three months ended September 30, 2013 were generated from external domestic sources. There were no transactions between our operating segments during the three months ended September 30, 2013.
- 33 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table presents the key components of our results of operations for each segment for the nine months ended September 30, 2013 ($ in thousands):
Loan | CT Legacy | |||||||||||
Origination | Portfolio | Total | ||||||||||
Income from loans and other investments |
||||||||||||
Interest and related income |
$ | 17,051 | $ | 9,276 | $ | 26,327 | ||||||
Less: Interest and related expenses |
3,991 | 2,501 | 6,492 | |||||||||
|
|
|
|
|
|
|||||||
Income from loans and other investments, net |
13,060 | 6,775 | 19,835 | |||||||||
Other expenses |
||||||||||||
General and administrative |
6,339 | 3,173 | 9,512 | |||||||||
|
|
|
|
|
|
|||||||
Total other expenses |
6,339 | 3,173 | 9,512 | |||||||||
Valuation allowance on loans held-for-sale |
| 1,200 | 1,200 | |||||||||
Unrealized gain on investments at fair value |
| 4,464 | 4,464 | |||||||||
Gain on extinguishment of debt |
| 38 | 38 | |||||||||
|
|
|
|
|
|
|||||||
Income before income taxes |
6,721 | 9,304 | 16,025 | |||||||||
Income tax (benefit) provision |
(19 | ) | 348 | 329 | ||||||||
|
|
|
|
|
|
|||||||
Net income |
6,740 | 8,956 | 15,696 | |||||||||
|
|
|
|
|
|
|||||||
Net income attributable to non-controlling interests |
(193 | ) | (7,550 | ) | (7,743 | ) | ||||||
|
|
|
|
|
|
|||||||
Net income attributable to Blackstone Mortgage Trust, Inc. |
$ | 6,547 | $ | 1,406 | $ | 7,953 | ||||||
|
|
|
|
|
|
All consolidated revenues for the nine months ended September 30, 2013 were generated from external domestic sources. There were no transactions between our operating segments during the nine months ended September 30, 2013.
- 34 -
Blackstone Mortgage Trust, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The following table presents our consolidated statement of financial condition for each segment as of September 30, 2013 ($ in thousands):
Loan | CT Legacy | |||||||||||
Origination | Portfolio | Total | ||||||||||
Assets | ||||||||||||
Cash and cash equivalents |
$ | 10,283 | $ | | $ | 10,283 | ||||||
Restricted cash |
| 76,396 | 76,396 | |||||||||
Loans receivable, net |
1,285,891 | 77,000 | 1,362,891 | |||||||||
Loans receivable, at fair value |
| 66,063 | 66,063 | |||||||||
Equity investments in unconsolidated subsidiaries |
| 25,632 | 25,632 | |||||||||
Accrued interest receivable, prepaid expenses, and other assets |
8,655 | 27,390 | 36,045 | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
$ | 1,304,829 | $ | 272,481 | $ | 1,577,310 | ||||||
|
|
|
|
|
|
|||||||
Liabilities and Equity | ||||||||||||
Liabilities |
||||||||||||
Accounts payable, accrued expenses and other liabilities |
$ | 12,781 | $ | 34,714 | $ | 47,495 | ||||||
Secured notes |
| 9,030 | 9,030 | |||||||||
Repurchase obligations |
643,040 | | 643,040 | |||||||||
Securitized debt obligations |
| 74,203 | 74,203 | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities |
655,821 | 117,947 | 773,768 | |||||||||
|
|
|
|
|
|
|||||||
Equity |
||||||||||||
Total Blackstone Mortgage Trust, Inc. stockholders equity |
649,008 | 64,319 | 713,327 | |||||||||
Non-controlling interests |
| 90,215 | 90,215 | |||||||||
|
|
|
|
|
|
|||||||
Total equity |
649,008 | 154,534 | 803,542 | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities and equity |
$ | 1,304,829 | $ | 272,481 | $ | 1,577,310 | ||||||
|
|
|
|
|
|
20. SUBSEQUENT EVENTS
Subsequent to quarter-end, we originated an additional three loans with total commitments of $330.8 million, of which an aggregate $315.7 million was funded at closing, and we borrowed $214.3 million under existing repurchase facilities.
On October 3, 2013, we granted 470,593 shares of restricted class A common stock to certain officers and members of our board of directors, our Manager, and an employee of an affiliate of our Manager. These awards were granted pursuant to award agreements under our Current Plans. Refer to Note 16 for additional discussion of our Current Plans.
On October 9, 2013, CT Legacy Partners made a $75.0 million distribution to its Class A-1, Class A-2, and Class B common shareholders, including $36.2 million to us. We paid $11.1 million of this distribution to fully repay the principal and interest due under our secured notes, and $4.8 million under the CT Legacy Partners management incentive awards plan.
- 35 -
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
References herein to Blackstone Mortgage Trust, Company, we, us or our refer to Blackstone Mortgage Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.
The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those in this discussion as a result of various factors, including but not limited to those discussed in Item 1A. Risk Factors in our annual report on Form 10-K for the year ended December 31, 2012 and elsewhere in this quarterly report on Form 10-Q.
Introduction
We are a real estate finance company that primarily originates and purchases senior mortgage loans collateralized by properties in the United States and Europe. We are externally managed by BXMT Advisors L.L.C., which we refer to as our Manager, a subsidiary of The Blackstone Group L.P., or Blackstone, and are a real estate investment trust, or REIT, traded on the NYSE under the symbol BXMT. We are headquartered in New York City. Further information is available at www.bxmt.com.
We conduct our operations as a REIT for U.S. federal income tax purposes. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders and maintain our qualification as a REIT. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. We are organized as a holding company and conduct our business primarily through our various subsidiaries.
We operate our real estate finance business through a Loan Origination segment and a CT Legacy Portfolio segment. The Loan Origination segment includes our activities associated with the origination and acquisition of mortgage loans, the capitalization of our loan portfolio, and the costs associated with operating our business generally. The CT Legacy Portfolio segment includes our activities specifically related to our CT Legacy Partners, LLC, or CT Legacy Partners, subsidiary, CT CDO I, and our equity investment in CT Opportunity Partners I, LP, or CTOPI.
I. Key Financial Measures and Indicators
As a real estate finance company, we believe the key financial measures and indicators for our business are earnings per share, dividends declared, book value per share, and Core Earnings. Our book value per share was $24.68 as of September 30, 2013, and for the three months ended September 30, 2013 we recorded earnings per share of $0.29, declared a dividend of $0.27 per share, and reported $0.28 per share of Core Earnings. As further described below, Core Earnings is a measure that is not prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. We use Core Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio and operations.
Earnings Per Share and Quarterly Results
The following table sets forth the calculation of basic and diluted net income per share of class A common stock based on the weighted average of both restricted and unrestricted class A common stock outstanding ($ in thousands, except per share data):
Three Months Ended | ||||||||
September 30, 2013 | June 30, 2013 | |||||||
Net income |
$ | 8,320 | $ | 2,748 | ||||
Weighted-average shares outstanding, basic and diluted |
28,894,515 | 12,401,274 | ||||||
|
|
|
|
|||||
Net income per share, basic and diluted |
$ | 0.29 | $ | 0.22 | ||||
|
|
|
|
- 36 -
The following table calculates our net income per share of class A common stock allocated between our two reportable segments ($ in thousands, except per share data):
Three Months Ended September 30, 2013 | ||||||||||||
Loan Origination | CT Legacy Portfolio | Total | ||||||||||
Net income |
$ | 7,883 | $ | 437 | $ | 8,320 | ||||||
Weighted-average shares outstanding, basic and diluted |
28,894,515 | 28,894,515 | 28,894,515 | |||||||||
|
|
|
|
|
|
|||||||
Net income per share, basic and diluted |
$ | 0.27 | $ | 0.02 | $ | 0.29 | ||||||
|
|
|
|
|
|
The following table compares our operating results for the three months ended September 30, 2013 and June 30, 2013 ($ in thousands, except per share data):
Q3 2013 | Q2 2013 | $ Change | % Change | |||||||||||||
Income from loans and other investments |
||||||||||||||||
Interest and related income |
$ | 18,853 | $ | 6,017 | $ | 12,836 | 213.3 | % | ||||||||
Less: Interest and related expenses |
4,407 | 1,306 | 3,101 | 237.4 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from loans and other investments, net |
14,446 | 4,711 | 9,735 | 206.6 | % | |||||||||||
General and administrative expenses |
4,048 | 3,427 | 621 | 18.1 | % | |||||||||||
Other (loss) income |
(136 | ) | 6,038 | (6,174 | ) | (102.3 | %) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
10,262 | 7,322 | 2,940 | 40.2 | % | |||||||||||
Income tax (benefit) provision |
(264 | ) | 554 | (818 | ) | (147.7 | %) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
10,526 | 6,768 | 3,758 | 55.5 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to non-controlling interests |
(2,206 | ) | (4,020 | ) | 1,814 | (45.1 | %) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to Blackstone Mortgage Trust, Inc. |
$ | 8,320 | $ | 2,748 | $ | 5,572 | 202.8 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Dividends per share |
$ | 0.27 | $ | 0.00 | $ | 0.27 | 100.0 | % | ||||||||
|
|
|
|
|
|
|
|
Income from loans and other investments, net
Income from loans and other investments increased $9.7 million, or 207%, during the third quarter of 2013 compared to the second quarter of 2013. The increase was primarily due to (i) earning a full quarter of interest on the loans originated during the second quarter of 2013, and (ii) additional interest earned on the $629.1 million of loans originated and funded during the third quarter of 2013. This was offset by additional interest expense resulting from $477.8 million of additional net borrowings under repurchase agreements.
General and administrative expenses
General and administrative expenses primarily include our management fees, operating expenses, and various professional fees. General and administrative expenses increased by $621,000 during the third quarter of 2013 compared to the second quarter of 2013 primarily due to a $1.5 million increase in management fees to our Manager, representing a full quarter of fees following our May 2013 equity offering. This was partially offset by a decrease in professional and other fees.
Other (loss) income
During the third quarter of 2013, we recognized $136,000 of net unrealized losses on investments carried at fair value in the CT Legacy Portfolio. During the second quarter of 2013, we recognized $6.0 million of net unrealized gains on investments carried at fair value in the CT Legacy Portfolio.
Dividends per share
On September 10, 2013, we declared a dividend of $7.8 million, or $0.27 per share, which was paid on October 15, 2013 to class A common stockholders of record as of September 30, 2013. We did not declare any dividends during the three months ended June 30, 2013.
- 37 -
Book Value per Share
The following table calculates our book value per share ($ in thousands, except per share data):
September 30, 2013 | June 30, 2013 | |||||||
Equity |
$ | 713,327 | $ | 712,689 | ||||
Shares |
||||||||
Class A common stock |
28,801,651 | 28,801,651 | ||||||
Stock units |
96,514 | 92,824 | ||||||
|
|
|
|
|||||
28,898,165 | 28,894,475 | |||||||
|
|
|
|
|||||
Book value per share |
$ | 24.68 | $ | 24.67 | ||||
|
|
|
|
The following table calculates our book value per share allocated between our two reportable segments ($ in thousands, except per share data):
September 30, 2013 | ||||||||||||
Loan Origination | CT Legacy Portfolio | Total | ||||||||||
Equity |
$ | 649,008 | $ | 64,319 | $ | 713,327 | ||||||
Shares |
||||||||||||
Class A common stock |
28,801,651 | 28,801,651 | 28,801,651 | |||||||||
Stock units |
96,514 | 96,514 | 96,514 | |||||||||
|
|
|
|
|
|
|||||||
Total |
28,898,165 | 28,898,165 | 28,898,165 | |||||||||
|
|
|
|
|
|
|||||||
Book value per share |
$ | 22.46 | $ | 2.22 | $ | 24.68 | ||||||
|
|
|
|
|
|
Core Earnings
Core Earnings is a non-GAAP measure, which we defined as GAAP net income (loss), including realized losses not otherwise included in GAAP net income (loss), and excluding (i) net income (loss) attributable to our CT Legacy Portfolio segment, (ii) non-cash equity compensation expense, (iii) incentive management fees, (iv) depreciation and amortization, and (v) unrealized gains (losses) or similar non-cash items. Core Earnings may also be adjusted from time to time to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges as determined by our Manager, subject to approval by a majority of our independent directors.
We believe that Core Earnings provides meaningful information to consider in addition to our net income and cash flow from operating activities determined in accordance with GAAP. This adjusted measure helps us to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that are not necessarily indicative of our current investment portfolio and operations. We also use Core Earnings to calculate the incentive and base management fees due to our Manager under our management agreement and, as such, we believe that the disclosure of Core Earnings is useful to our investors.
Core Earnings does not represent net income or cash generated from operating activities and should not be considered as an alternative to GAAP net income, or an indication of our cash flow from GAAP operating activities, a measure of our liquidity, or an indication of funds available for our cash needs. In addition, our methodology for calculating Core Earnings may differ from the methodologies employed by other companies 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 companies.
- 38 -
The following table provides a reconciliation of Core Earnings to GAAP net income ($ in thousands, except per share data):
Three Months Ended | ||||
September 30, 2013 | ||||
Net income attributable to Blackstone Mortgage Trust, Inc. |
$ | 8,320 | ||
CT Legacy Portfolio segment net income |
(437 | ) | ||
Non-cash compensation expense |
94 | |||
|
|
|||
Core earnings |
$ | 7,977 | ||
|
|
|||
Weighted-average shares outstanding, basic and diluted |
28,894,515 | |||
|
|
|||
Core earnings per share, basic and diluted |
$ | 0.28 | ||
|
|
II. Loan Origination Portfolio
During the three months ended September 30, 2013, our Loan Origination segment funded $629.1 million under new and existing loan commitments and generated interest income of $15.1 million. Our loan portfolio was financed with $643.0 million of borrowings under repurchase facilities, resulting in interest expense of $3.8 million during the period. In the aggregate, our Loan Origination segment generated net interest income of $11.3 million during the period.
Portfolio Overview
The following table details our loan originations activity during the three months ended September 30, 2013 ($ in thousands):
Loans | Loan | Loan | ||||||||||
Originated | Commitments | Fundings(1) | ||||||||||
Senior mortgage loans |
10 | $ | 728,925 | $ | 629,091 |
(1) | Includes additional fundings of $1.4 million under new and existing loan commitments. |
The following table details our loan repayment activity during the three months ended September 30, 2013 ($ in thousands):
Principal | Participation | |||||||||||||||
Satisfactions | Repayments | Sales | Total | |||||||||||||
Senior mortgage loans |
$ | 58,000 | $ | 17,838 | $ | 17,903 | $ | 93,741 |
- 39 -
As of September 30, 2013, all loans in the Loan Origination segment are senior mortgage loans. The following table details overall statistics for our loans receivable portfolio within the Loan Origination segment ($ in thousands):
September 30, 2013 | ||||
Number of loans |
17 | |||
Principal balance |
$ | 1,291,988 | ||
Net book value (1) |
$ | 1,285,891 | ||
Weighted-average cash coupon (2) |
L+4.31 | % | ||
Weighted-average all-in yield (2) |
L+4.88 | % | ||
Weighted-average maximum maturity (years) (3) |
4.3 |
(1) | The difference between principal balance and net book value is due to deferred origination fees. |
(2) | All loans are floating rate loans indexed to LIBOR as of September 30, 2013. LIBOR was 0.18% as of September 30, 2013; however, certain of our loans receivable earn interest based on a minimum LIBOR floor ranging from 0.20% to 1.00%. |
(3) | Maximum maturity date assumes all extension options are executed. |
The charts below detail the geographic distribution and types of properties securing these loans, as of September 30, 2013:
Refer to section IV of this Item 2 for details of our loan portfolio, on a loan-by-loan basis.
Floating Rate Portfolio
Our Loan Origination portfolio as of September 30, 2013 was comprised entirely of floating rate mortgage loans and all of our debt financing was also floating rate, which results in a return on equity that is correlated to one-month LIBOR. Generally, our business model is such that rising interest rates will increase our net income, while declining interest rates will decrease net income. For instance, all other things being equal, as of September 30, 2013, a 100 basis point increase in LIBOR would have increased our net income by $6.5 million per annum. The following table details our Loan Origination segments sensitivity to interest rates ($ in thousands):
Interest Rate Sensitivity - Loan Origination Segment
September 30, 2013 | ||||
Floating rate loans(1) |
$ | 1,291,988 | ||
Floating rate debt(1) |
(643,040 | ) | ||
|
|
|||
Net floating rate exposure |
$ | 648,948 | ||
|
|
|||
Net income impact from 100 bps increase in LIBOR(2) |
$ | 6,489 | ||
|
|
(1) | All of our loans and credit facilities were indexed to one-month LIBOR as of September 30, 2013. |
(2) | Excludes the impact of LIBOR floors on certain of our loans receivable investments. |
Asset Management and Performance
We actively monitor and manage the investments in our Loan Origination portfolio, and exercise the rights afforded to us as a lender. These rights may include collateral level budget approvals, lease approvals, loan covenant enforcement, escrow/reserve management/collection, collateral release approvals and other rights that we may negotiate.
As discussed in Note 2 to our consolidated financial statements, our Manager performs a quarterly review of our loan portfolio, assesses the performance of each loan, and assigns it a risk rating between 1 (lowest risk) to 8 (highest risk). Loans that pose a higher risk of non-performance and / or loss are place on our Watch List. Watch list loans are those with an internal risk rating of 4 or higher.
As of September 30, 2013, all of the investments in the Loan Origination segment are performing as expected and the weighted-average risk rating of our loan portfolio is 2.6.
Repurchase Facilities
During the third quarter of 2013, we upsized two existing revolving repurchase facilities and closed two new asset-specific repurchase agreements, providing an additional $591.8 million of credit. As of September 30, 2013, we had aggregate borrowings of $643.0 million outstanding under these facilities, with a weighted-average cash coupon of
- 40 -
LIBOR plus 2.26% per annum and a weighted-average all-in cost of credit, including associated fees and expenses, of LIBOR plus 2.49% per annum. As of September 30, 2013, these facilities had a weighted-average initial maturity, excluding extension options and term-out provisions, of 2.4 years and contain margin call provisions limited to asset-specific credit events. The following table details the repurchase obligations outstanding as of September 30, 2013 ($ in thousands):
Collateral Assets | Repurchase Borrowings(2) | |||||||||||||||||||||||
Maximum | Principal | Net Book | ||||||||||||||||||||||
Lender |
Facility Size | Balance (1) | Value (1) | Potential | Current | Available | ||||||||||||||||||
Revolving Repurchase Facilities |
|
|||||||||||||||||||||||
Bank of America |
$ | 500,000 | $ | 278,811 | $ | 277,336 | $ | 210,930 | $ | 59,404 | $ | 151,526 | ||||||||||||
Citibank |
500,000 | 232,875 | 232,162 | 176,168 | 5,000 | 171,168 | ||||||||||||||||||
JP Morgan (3) |
362,000 | 378,950 | 376,949 | 296,760 | 274,913 | 21,847 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Subtotal |
1,362,000 | 890,636 | 886,447 | 683,858 | 339,317 | 344,541 | ||||||||||||||||||
Asset-Specific Repurchase Agreements |
||||||||||||||||||||||||
Wells Fargo (4) |
334,721 | 401,352 | 399,444 | 334,721 | 303,723 | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 1,696,721 | $ | 1,291,988 | $ | 1,285,891 | $ | 1,018,579 | $ | 643,040 | $ | 344,541 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | The difference between principal balance and net book value of collateral assets is due to deferred origination fees. |
(2) | Potential borrowings represent the total amount we could draw under each facility based on collateral already approved and pledged. When undrawn, these amounts are immediately available to us at our sole discretion under the terms of each revolving credit facility. |
(3) | JP Morgan maximum facility size is $250 million plus $112 million related solely to a specific asset with a repurchase date of June 27, 2014. |
(4) | Represents an aggregate of three asset-specific repurchase agreements with Wells Fargo. The $31.0 million of potential borrowings under these agreements are contingent on our funding additional draws by the borrower under a specific collateral asset. |
Refer to Note 10 to our consolidated financial statements for additional terms and details of our repurchase facilities.
III. CT Legacy Portfolio
Our CT Legacy Portfolio consists primarily of: (i) our interests in CT Legacy Partners; (ii) our carried interest in CTOPI, a private investment fund that was previously under our management and is now managed by an affiliate of our Manager; and (iii) our subordinated interests in CT CDO I.
During the three months ended September 30, 2013, our CT Legacy Portfolio segment recorded net income of $437,000 driven primarily by the net interest margin generated by the CT Legacy Partners loan portfolio. We collected $51.5 million of repayments on investments in our CT Legacy Portfolio segment during the three months ended September 30, 2013, and as of September, 30, 2013, our CT Legacy Portfolio segment had $76.4 million of cash and cash equivalents. In addition, our net investment in the CTOPI carried interest increased by $2.4 million during the three months ended September 30, 2013.
CT Legacy Partners
Portfolio Overview
Our investment in CT Legacy Partners represents our 52% equity interest in a vehicle we formed to own and finance certain assets that we retained in connection with a comprehensive debt restructuring in 2011. As of September 30, 2013, the CT Legacy Partners portfolio included loans with an aggregate principal balance of $176.0 million and securities with an aggregate face value of $135.0 million. Refer to section IV of this Item 2 for details of the CT Legacy Partners loan portfolio, on a loan-by-loan basis.
- 41 -
The following table details the components of our gross investment in CT Legacy Partners included in our consolidated balance sheet, as well as our net investment in CT Legacy Partners after the future payments under the secured notes and management incentive awards plan as of September 30, 2013 ($ in thousands):
Gross investment in CT Legacy Partners |
||||
Restricted cash |
$ | 76,396 | ||
Loans receivable, at fair value |
66,063 | |||
Accrued interest receivable, prepaid expenses, and other assets |
21,054 | |||
Accounts payable, accrued expenses and other liabilities |
(412 | ) | ||
Non-controlling interests |
(90,215 | ) | ||
|
|
|||
72,886 | ||||
|
|
|||
Secured notes, including prepayment premium (1) |
(11,059 | ) | ||
Management incentive awards plan, fully vested (2) |
(11,010 | ) | ||
|
|
|||
Net investment in CT Legacy Partners |
$ | 50,817 | ||
|
|
(1) | Includes the full potential prepayment premium on secured notes, as described below. We carry this liability at its amortized basis of $9.0 million on our balance sheet as of September 30, 2013. The remaining interest and prepayment premium will be recognized, as applicable, over the term of the secured notes as a component of interest expense. |
(2) | Assumes full payment of the management incentive awards plan, as described below, based on the hypothetical GAAP liquidation value of CT Legacy Partners as of September 30, 2013. We periodically accrue a payable for the management incentive awards plan based on the vesting schedule for the awards and continued employment with an affiliate of our Manager of the award recipients. As of September 30, 2013, our balance sheet includes $7.3 million in accounts payable and accrued expenses for the management incentive awards plan. |
Asset Management and Performance
The CT Legacy Partners portfolio is primarily comprised of investments that were originated in 2006 and 2007, a substantial portion of which are distressed and not expected to repay in full or, in certain cases, at all. As discussed in the loan origination section in this Item 2, our Manager performs a quarterly review of our loan portfolio and higher risk assets on our Watch List. Watch List Loans include those which are risk rated 4 or higher.
The table below details the Watch List Loans held in CT Legacy Partners ($ in millions):
Watch List Loans - CT Legacy Partners (1)
September 30, 2013 | ||||
CT Legacy Partners loans receivables ($ / #) |
$ | 66 / 9 | ||
Watch list loans ($ / #) |
$ | 46 / 8 | ||
|
|
|||
Percentage of loans on Watch List |
69.8 | % |
(1) | All values are in terms of net book value. |
Secured Notes
In conjunction with our comprehensive debt restructuring on March 31, 2011, which we refer to as our March 2011 Restructuring, certain wholly-owned subsidiaries of ours issued secured notes to our former creditors, which secured notes are non-recourse to us. Any prepayment, or partial prepayment, of the secured notes will incur a prepayment premium resulting in a total payment of principal and interest under the secured notes of $11.1 million. Refer to Note 10 of our consolidated financial statements for further discussion of the secured notes.
- 42 -
CT Legacy Partners Management Incentive Awards Plan
In conjunction with our March 2011 Restructuring, we created an employee pool for up to 6.75% of the distributions paid to the common equity holders of CT Legacy Partners (subject to certain caps and priority distributions).
We accrue a liability for the amounts due under these grants based on the value of CT Legacy Partners and the periodic vesting of the awards granted. Accrued payables for these awards were $7.3 million and $5.3 million as of September 30, 2013 and December 31, 2012, respectively. Refer to Note 13 of our consolidated financial statements for further details.
Repurchase Obligations
As of March 31, 2013, CT Legacy Partners was party to a repurchase facility with JP Morgan with an outstanding balance of $20.2 million. On June 5, 2013, CT Legacy Partners repaid the outstanding balance and terminated the repurchase facility. CT Legacy Partners has no outstanding debt obligations as of September 30, 2013.
Interest Rate Swap Liabilities
CT Legacy Partners was party to five interest rate swaps which it terminated in June 2013. A gain of $136,000 resulting from the termination is included as a component of interest expense on our consolidated statement of operations for the nine months ended September 30, 2013. CT Legacy Partners is no longer party to any derivative financial instruments as of September 30, 2013.
CT Legacy Partners Background
On March 31, 2011, we restructured, amended, or extinguished all of our outstanding recourse debt obligations, which we refer to as our March 2011 Restructuring. Our March 2011 Restructuring involved: (i) the contribution of certain of our legacy assets to a newly formed subsidiary, CT Legacy REIT Mezz Borrower, Inc., or CT Legacy REIT, (the predecessor of CT Legacy Partners); (ii) the assumption of our legacy repurchase obligations by CT Legacy REIT; and (iii) the extinguishment of the remainder of our recourse obligations, our senior credit facility and junior subordinated notes. CT Legacy Partners is beneficially owned 52% by us and 48% by our former lenders. In addition, CT Legacy Partners has issued class B common shares, a subordinate class of equity which entitles its holders to receive approximately 25% of the dividends that would otherwise be payable to us on our equity interest in CT Legacy Partners, after aggregate cash distributions of $50.0 million have been paid to all other classes of common equity. Further, CT Legacy Partners has issued class A preferred shares which entitle its holder to cumulative preferred distributions in an amount generally equal to the greater of (i) 2.5% of certain of CT Legacy Partners assets, and (ii) $1.0 million per annum. Refer to Note 8 to our consolidated financial statements for additional details on CT Legacy Partners.
To maintain its tax efficiency, on March 20, 2013, a majority of the stockholders CT Legacy REIT voted in favor of a plan of merger, dated March 22, 2013, or the Merger, whereby CT Legacy REIT merged with and into CT Legacy Partners, effective as of March 22, 2013. Refer to Note 3 to our consolidated financial statements for further details on the Merger.
Our economic interest in CT Legacy Partners is subject to (i) the secured notes, which are non-recourse obligations that are collateralized by certain of our equity interests in the common shares of CT Legacy Partners, (ii) incentive awards that provide for the participation in amounts earned from our retained equity interests in CT Legacy Partners, and (iii) the subordinate class B common stock of CT Legacy Partners.
Carried Interest in CTOPI
CTOPI is a private equity real estate fund that we sponsored and formed in 2007. The fund invested $491.5 million in 39 transactions between 2007 and the end of its investment period in 2012. To date, $295.4 million of these investments have been realized and $196.1 million remain outstanding (carried at 143.5% of cost) as of September 30, 2013. In conjunction with the sale of our investment management business, we transferred our management of CTOPI and sold our 4.6% co-investment to Blackstone. However, we retained our carried interest in CTOPI following the sale.
Our carried interest in CTOPI entitles us to earn incentive compensation in an amount equal to 17.7% of the funds profits, after a 9% preferred return and 100% return of capital to the CTOPI partners. We own a net 55% of the carried interest of CTOPIs general partner; the remaining 45% is payable under incentive awards to our former employees.
As of September 30, 2013, we had been allocated $27.0 million of incentive compensation from CTOPI based on a hypothetical liquidation of the fund at its net asset value, and after payment of the related incentive awards. The CTOPI partnership agreement provides for advance distributions in respect of our incentive compensation to allow us to pay any income taxes owed on phantom taxable income allocated to us from the partnership. We refer to these distributions as CTOPI Tax Advances. During 2012, we received one such CTOPI Tax Advance of $1.4 million, resulting in a net asset value for our investment in CTOPI of $25.6 million as of September 30, 2013. In the event the performance of CTOPI does not ultimately result in a sufficient allocation of incentive compensation to us, we would be required to return these CTOPI Tax Advances to the fund.
We have elected to defer the recognition of income on our carried interest in CTOPI until cash is collected or appropriate contingencies have been eliminated. As a result, our net investment in the CTOPI carried interest has a book value of zero as of September 30, 2013.
- 43 -
Refer to Note 9 of our consolidated financial statements for additional discussion on the CTOPI incentive management fee awards to our former employees.
CT CDO I
Portfolio Overview
As of September 30, 2013, our consolidated balance sheet included an aggregate $83.3 million of assets and $74.2 million of liabilities related to CT CDO I, a highly-levered securitization vehicle that we formed in 2004.
Specifically, we own the residual debt and equity positions of CT CDO I. As a result of consolidation, our subordinate debt and equity ownership interests in CT CDO I not included on our balance sheet, which instead reflects both the assets held and debt issued by CT CDO I to third-parties. Similarly, our operating results and cash flows include the gross amounts related to the assets and liabilities of CT CDO I, as opposed to our net economic interests in this entity.
Our economic interest in the loans receivable assets held by CT CDO I, which is consolidated on our balance sheet, is restricted by the structural provisions of CT CDO I, and our recovery of these assets will be limited by its distribution provisions. The liabilities of CT CDO I, which are also consolidated on our balance sheet, are non-recourse to us, and can only be satisfied by proceeds from its collateral asset pool.
We are not obligated to provide, nor have we provided, any financial support to CT CDO I.
The following table details the components of CT CDO I included in our consolidated balance sheet ($ in thousands):
Investment in CT CDO I |
September 30, 2013 | |||
Loans receivable, net |
$ | 77,000 | ||
Accrued interest receivable, prepaid expenses, and other assets |
6,336 | |||
|
|
|||
Total assets |
$ | 83,336 | ||
Accounts payable, accrued expenses and other liabilities |
40 | |||
Securitized debt obligations |
74,203 | |||
|
|
|||
Total liabilities |
$ | 74,243 | ||
|
|
|||
Net investment in CT CDO I |
$ | 9,093 | ||
|
|
Refer to section IV of this Item 2 for details of CT CDO I loan portfolio, on a loan-by-loan basis.
Asset Management
As discussed in the Loan Origination section in this Item 2, our Manager performs a quarterly review of our loan portfolio and places higher risk assets on our Watch List. Watch List Loans include those with an internal risk rating of 4 or higher.
The table below details the Watch List Loans held in CT CDO I ($ in millions):
Watch List Loans - Consolidated Securitization Vehicle (1)
September 30, 2013 | December 31, 2012 | |||||||
Loans in consolidated securitization vehicle ($ / #) |
$ | 77 / 5 | $ | 142 / 8 | ||||
Watch List loans ($ / #) |
$ | 27 / 3 | $ | 65 / 4 | ||||
Percentage loans on Watch List |
35.1 | % | 45.6 | % |
(1) | All values are in terms of net book value. |
- 44 -
IV. Our Results of Operations and Liquidity
Results of Operations
Comparison of Results of Operations: Three Months Ended September 30, 2013 vs. September 30, 2012
($ in thousands, except per share data)
2013 | 2012 | $ Change | % Change | |||||||||||||
Income from loans and other investments |
||||||||||||||||
Interest and related income |
$ | 18,853 | $ | 6,944 | $ | 11,909 | 171.5 | % | ||||||||
Less: Interest and related expenses |
4,407 | 5,147 | (740 | ) | (14.4 | %) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from loans and other investments, net |
14,446 | 1,797 | 12,649 | 703.9 | % | |||||||||||
Other expenses |
||||||||||||||||
General and administrative |
4,048 | 3,991 | 57 | 1.4 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expenses |
4,048 | 3,991 | 57 | 1.4 | % | |||||||||||
Impairments, provisions, and valuation adjustments |
(136 | ) | 14,798 | (14,934 | ) | N/A | ||||||||||
Income from equity investments in unconsolidated subsidiaries |
| 411 | (411 | ) | (100.0 | %) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
10,262 | 13,015 | (2,753 | ) | (21.2 | %) | ||||||||||
Income tax (benefit) provision |
(264 | ) | 166 | (430 | ) | N/A | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
$ | 10,526 | $ | 12,849 | ($ | 2,323 | ) | (18.1 | %) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Loss from discontinued operations, net of tax |
| 51 | (51 | ) | (100.0 | %) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 10,526 | $ | 12,900 | ($ | 2,374 | ) | (18.4 | %) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to non-controlling interests |
(2,206 | ) | (5,901 | ) | 3,695 | (62.6 | %) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to Blackstone Mortgage Trust, Inc. |
$ | 8,320 | $ | 6,999 | $ | 1,321 | 18.9 | % | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income from continuing operations per share - diluted |
$ | 0.29 | $ | 2.82 | ($ | 2.54 | ) | (89.8 | %) | |||||||
Net income per share - diluted |
$ | 0.29 | $ | 2.84 | ($ | 2.55 | ) | (89.8 | %) | |||||||
Dividends per share |
$ | 0.27 | $ | 0.00 | $ | 0.27 | 100.0 | % | ||||||||
Average one-month LIBOR |
0.19 | % | 0.24 | % | (0.1 | %) | (21.3 | %) |
Income from loans and other investments, net
Interest income increased $11.9 million during the third quarter of 2013 compared to the third quarter of 2012 primarily due to the interest earned on our $1.4 billion of new loan originations during 2013. Interest expense decreased during the same period, primarily as a result of expenses recognized in 2012 related to previously consolidated securitization vehicles. Income from loans and other investments increased $12.6 million on a net basis during the third quarter of 2013 compared to the third quarter of 2012.
General and administrative expenses
General and administrative expenses primarily include our management fees, operating expenses, and various professional fees. General and administrative expenses increased by $57,000 during the three months ended September 30, 2013 compared to the three months ended September 30, 2012. The net increase was primarily the result of (i) $2.4 million of management fees to our Manager and $528,000 of additional corporate expenses incurred during 2013, offset by (ii) $2.1 million of professional fees related to the sale of our investment management business and $770,000 of non-cash compensation expenses incurred during the three months ended September 30, 2012. All general and administrative expenses incurred during the third quarter of 2012 related to our former investment management business have been reclassified to loss from discontinued operations.
Impairments, provisions, and valuation adjustments
During the third quarter of 2013, we recognized (i) $464,000 of net unrealized gains on investments held by CT Legacy Partners and (ii) a $600,000 negative valuation adjustment on CT CDO Is loan classified as held-for-sale. During the third quarter of 2012, we recognized (i) a $12.0 million positive fair value adjustment on our net investment in CT Legacy Asset, LLC, or CT Legacy Asset, a subsidiary of CT Legacy Partners and (ii) a net $2.8 million of recovery of provisions for loan losses.
- 45 -
Other significant items
In December 2012, we sold our investment management business, including CT Investment Management Co., LLC, or CTIMCO and our co-investments in CTOPI and CT High Grade Partners II, LLC. As a result, our 2013 operating results do not include any income or expense items related to our former investment management business, and the income and expense items related to our investment management business in 2012 have been reclassified to loss from discontinued operations.
During the third quarter of 2013, we recorded an income tax benefit of $264,000 related to activities of our taxable REIT subsidiaries. During the third quarter of 2012, we recorded a $166,000 provision primarily related to alternative minimum taxes incurred as a result of our use of net operating losses, or NOLs, to offset 2012 taxable income. All income taxes related to our former investment management business have been reclassified to loss from discontinued operations.
Dividends per share
On September 10, 2013, we declared a dividend of $7.8 million, or $0.27 per share, which was paid on October 15, 2013 to class A common stockholders of record as of September 30, 2013. We did not declare any dividends during the three months ended September 30, 2012.
Comparison of Results of Operations: Nine Months Ended September 30, 2013 vs. September 30, 2012
($ in thousands, except per share data)
2013 | 2012 | $ Change | % Change | |||||||||||||
Income from loans and other investments |
||||||||||||||||
Interest and related income |
$ | 26,327 | $ | 28,423 | ($ | 2,096 | ) | (7.4 | %) | |||||||
Less: Interest and related expenses |
6,492 | 33,902 | (27,410 | ) | (80.9 | %) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income (loss) from loans and other investments, net |
19,835 | (5,479 | ) | 25,314 | N/A | |||||||||||
Other expenses |
||||||||||||||||
General and administrative |
9,512 | 6,314 | 3,199 | 50.7 | % | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other expenses |
9,512 | 6,314 | 3,199 | 50.7 | % | |||||||||||
Impairments, provisions, and valuation adjustments |
5,664 | 22,304 | (16,639 | ) | (74.6 | %) | ||||||||||
Gain on deconsolidation of subsidiaries |
| 146,380 | (146,380 | ) | (100.0 | %) | ||||||||||
Gain on extinguishment of debt |
38 | | 38 | 100.0 | % | |||||||||||
Income from equity investments in unconsolidated subsidiaries |
| 1,312 | (1,312 | ) | (100.0 | %) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
16,025 | 158,204 | (146,642 | ) | (89.9 | %) | ||||||||||
Income tax provision |
329 | 467 | (138 | ) | (29.6 | %) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from continuing operations |
$ | 15,696 | $ | 157,736 | ($ | 146,504 | ) | (90.0 | %) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Income from discontinued operations, net of tax |
| (863 | ) | 863 | (100.0 | %) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 15,696 | $ | 156,873 | ($ | 145,641 | ) | (90.0 | %) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to non-controlling interests |
(7,743 | ) | (81,038 | ) | 73,295 | (90.4 | %) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income attributable to Blackstone Mortgage Trust, Inc. |
$ | 7,953 | $ | 75,835 | ($ | 72,346 | ) | (89.5 | %) | |||||||
|
|
|
|
|
|
|
|
|||||||||
Net income from continuing operations per share - diluted |
$ | 0.53 | $ | 31.39 | ($ | 30.86 | ) | (98.3 | %) | |||||||
Net income per share - diluted |
$ | 0.53 | $ | 31.03 | ($ | 30.50 | ) | (98.3 | %) | |||||||
Dividends per share |
$ | 0.27 | $ | 0.00 | $ | 0.27 | 100.0 | % | ||||||||
Average one-month LIBOR |
0.20 | % | 0.24 | % | ($ | 0.00 | ) | (20.0 | %) |
Income from loans and other investments, net
As discussed in Note 3 to our consolidated financial statements, we deconsolidated the assets and liabilities of CT CDOs II and IV in 2012. As a result of this deconsolidation and significant repayments in our portfolio, interest income decreased $2.1 million, or 7.4%, and interest expense decreased by $27.4 million, or 81%, during the first nine months of 2013 compared to the first nine months of 2012. Also, interest expense for 2012 included $10.2 million relating to the acceleration of discount associated with the $83.0 million CT Legacy Partners mezzanine loan. On a net basis, net interest income increased by $25.3 million as the decrease in interest income was less than the reduction in interest expense.
- 46 -
General and administrative expenses
General and administrative expenses primarily include our management fees, operating expenses, and various professional fees. General and administrative expenses increased by $3.2 million during the first nine months of 2013 compared to the first nine months of 2012 primarily due to (i) an increase of $3.4 million of management fees to our Manager, (ii) $872,000 of additional professional fees and other operating costs, (iii) $660,000 of additional expenses of our consolidated securitized vehicles, and (iv) $350,000 of additional non-cash compensation expenses incurred during the nine months ended September 30, 2013. These were partially offset by a decrease of $2.1 million resulting from professional fees related to the sale of our investment management business during the nine months ended September 30, 2012. All general and administrative expenses incurred during the first nine months of 2012 related to our former investment management business have been reclassified to income from discontinued operations.
Impairments, provisions, and valuation adjustments
During the first nine months of 2013, we recognized (i) $4.5 million of net unrealized gains on investments held by CT Legacy Partners and (ii) a $1.2 million positive valuation adjustment on CT CDO Is loan classified as held-for-sale. During the first nine months of 2012, we recognized (i) a $19.6 million positive fair value adjustment on our net investment in CT Legacy Asset, and (ii) a $2.8 million net recovery of provision for loan losses.
Other significant items
In December 2012, we sold our investment management business, including CTIMCO and our co-investments in CTOPI and CT High Grade Partners II, LLC. As a result, our 2013 operating results do not include any income or expense items related to our former investment management business, and the income and expense items related to our investment management business in 2012 have been reclassified to loss from discontinued operations.
During the first quarter of 2012, we recognized a gain of $146.4 million on the deconsolidation of CT Legacy Asset. This gain was primarily the result of a reversal of charges to GAAP equity resulting from losses previously recorded in excess of our economic interests in securitization vehicles which were consolidated by CT Legacy Asset, and therefore us.
During the first nine months of 2013, we recorded an income tax provision primarily related to income generated by investments held by taxable REIT subsidiaries. During the first nine months of 2012, we recorded an income tax provision primarily related to alternative minimum taxes incurred as a result of our use of net operating losses, or NOLs, to offset 2012 taxable income. All income taxes related to our former investment management business have been reclassified to loss from discontinued operations.
Dividends per share
On September 10, 2013, we declared a dividend of $7.8 million, or $0.27 per share, which was paid on October 15, 2013 to class A common stockholders of record as of September 30, 2013. We did not declare any dividends during the three months ended September 30, 2012.
Liquidity and Capital Resources
Capitalization
On May 29, 2013, we issued an additional 25,875,000 shares of class A common stock in a public offering at a price of $25.50 per share. We generated net proceeds from the issuance of $633.8 million after underwriter discounts and other offering expenses. Our stockholders equity was comprised entirely of 28,801,651 shares of class A common stock as of September 30, 2013.
In addition, as of September 30, 2013, we were party to six repurchase agreements which collectively provide us with $1.7 billion of maximum available credit. As of September 30, 2013, we had aggregate borrowings of $643.0 million outstanding under these facilities. As of September 30, 2013, these facilities had a weighted-average initial maturity, excluding extension options and term-out provisions, of 2.4 years. Refer to Note 10 to our consolidated financial statements for additional details about our repurchase facilities.
As of September 30, 2013, our CT Legacy Portfolios consolidated debt obligations included our non-recourse secured notes secured only by certain of our equity interests in the common stock of CT Legacy Partners and the non-recourse securitized debt obligations of CT CDO I. See above discussion of CT Legacy Partners and the related secured notes, as well as the discussion of CT CDO I for further information.
- 47 -
Sources of Liquidity
Our primary sources of liquidity include cash and cash equivalents and available borrowings under our repurchase facilities. The following table sets forth our sources of liquidity ($ in thousands):
Available Liquidity as of | ||||||||
September 30, 2013 | December 31, 2012 | |||||||
Cash and cash equivalents |
$ | 10,283 | $ | 15,423 | ||||
Available borrowings under repurchase facilities |
344,541 | | ||||||
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|
|
|
|||||
$ | 354,824 | $ | 15,423 | |||||
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|
See to Note 10 to our consolidated financial statements for additional terms and details of our repurchase facilities.
We currently do not have access to liquidity from our CT Legacy Portfolio, including our equity interests in CT Legacy Partners, our carried interest in CTOPI, and our residual ownership interest in CT CDO I, other than to the extent we received cash distributions from these vehicles. We have received no cash distributions from these vehicles as of September 30, 2013, however we received a cash distribution from our equity interests in CT Legacy Partners on October 11, 2013. Refer to Note 20 to our consolidated financial statements for additional details on this distribution. We expect to realize cash recoveries from each of these portfolios over the next several years.
Liquidity Needs
In addition to our ongoing loan origination activity, our primary liquidity needs include interest and principal payments under our $643.0 million of outstanding repurchase facilities, our $96.3 million of unfunded loan commitments, dividend distributions to our stockholders, and operating expenses.
We have no obligations to provide financial support to CT Legacy Partners, CTOPI, or CT CDO I, and all debt obligations of such entities, some of which are consolidated onto our financial statements, are non-recourse to us.
Cash Flows
The following table provides a breakdown of the net change in our cash and cash equivalents ($ in thousands):
Nine Months Ended September 30, | ||||||||||||
2013 | 2012 | $ Change | ||||||||||
Cash flows from operating activities |
$ | 14,445 | $ | 11,598 | $ | 2,847 | ||||||
Cash flows from investing activities |
(1,195,694 | ) | 126,049 | (1,321,743 | ) | |||||||
Cash flows from financing activities |
1,176,109 | (133,598 | ) | 1,309,707 | ||||||||
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|
|||||||
Net (decrease) increase in cash and cash equivalents |
($ | 5,140 | ) | $ | 4,049 | ($ | 9,189 | ) | ||||
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We experienced a net decrease in cash of $5.1 million for the nine months ended September 30, 2013, compared to a net increase of $4.0 million for the nine months ended September 30, 2012. The decrease was primarily due to the financing and investing activities associated with our loan origination business.
During the nine months ended September 30, 2013, we (i) generated $633.8 million of net proceeds from the sale of our class A common stock, (ii) borrowed $643.0 million under our repurchase facilities, and (iii) collected $242.8 million of proceeds from loans receivables. We used the proceeds from our debt and equity financing activities and loan repayments to originate $1.4 billion of new loans during the nine months ended September 30, 2013. Refer to Note 12 and Note 10 to our consolidated financial statements for additional discussion of our sale of shares of class A common stock and our repurchase facilities, respectively. Refer to Note 5 to our consolidated financial statements for further discussion of our loan origination activity.
Our consolidated statements of cash flows also include the cash inflows and outflows of the consolidated entities described in Note 3 to our consolidated financial statements. While this does not impact our net cash flow, it does increase certain gross cash flow disclosures. As discussed above, we do not have access to the liquidity in our CT Legacy Portfolio other than to the extent we receive cash distributions.
- 48 -
Income Taxes
We made an election to be taxed as a REIT, effective January 1, 2003, under the Internal Revenue Code for U.S. federal income tax purposes. We generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal income tax not to apply to our earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our net taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.
Our qualification as a REIT also depends on our ability to meet various other requirements imposed by the Internal Revenue Code, which relate to organizational structure, diversity of stock ownership and certain restrictions with regard to the nature of our assets and the sources of our income. Even if we qualify as a REIT, we may be subject to certain U.S. federal income and excise taxes and state and local taxes on our income and assets. If we fail to maintain our qualification as a REIT for any taxable year, we may be subject to material penalties as well as federal, state and local income tax on our taxable income at regular corporate rates and we would not be able to qualify as a REIT for the subsequent four full taxable years. As of September 30, 2013 and December 31, 2012, we were in compliance with all REIT requirements.
During the nine months ended September 30, 2013, we recorded a current income tax provision of $329,000 related to our taxable REIT subsidiaries. As a result of our sale of CTIMCO we no longer have any deferred tax assets or liabilities as of December 31, 2012.
As a result of our issuance of 25,875,000 shares of class A common stock in May 2013, the availability of our NOLs and net capital losses, or NCLs, is significantly limited by change of control provisions promulgated by the Internal Revenue Service with respect to the ownership of Blackstone Mortgage Trust, Inc. As of December 31, 2012, we had net operating losses, or NOLs, of $161.5 million and net capital losses, or NCLs, of $121.4 million available to be carried forward and utilized in current or future periods. If we are unable to utilize our NOLs, they will expire in 2029. If we are unable to utilize our NCLs, $2.0 million will expire in 2013, $87.4 million will expire in 2014, $31.4 million will expire in 2015, and $602,000 will expire in 2017.
As of September 30, 2013, tax years 2009 through 2012 remain subject to examination by taxing authorities.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP. The preparation of these financial statements requires our Manager to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from these estimates. There have been no material changes to our Critical Accounting Policies described in our annual report on Form 10-K filed with the Securities and Exchange Commission on March 26, 2013.
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V. Loan Portfolio Details
The following table provides details of the Loan Origination segments portfolio, on a loan-by-loan basis ($ in millions):
Loan Origination Segments Loans Receivable as of September 30, 2013
Risk Rating as of | ||||||||||||||||||||||||||||||||
Loan Type |
Principal Balance |
Book Value |
Cash Coupon (1) |
All-in Yield (1) |
Maximum Maturity (2) |
Geographic Location |
Property Type |
Origination LTV |
September 30, 2013 |
December 31, 2012 | ||||||||||||||||||||||
Loan 1 |
Sr. mortgage |
$ | 291.5 | $ | 290.1 | L + 3.80 | %(3) | L + 3.98 | %(3) | 6/15/2018 | West | Office | 53% | 2 | N/A | |||||||||||||||||
Loan 2 |
Sr. mortgage |
140.0 | 139.7 | L + 3.70 | % | L + 3.83 | % | 9/30/2020 | Northeast | Multifamily | 67% | 3 | N/A | |||||||||||||||||||
Loan 3 |
Sr. mortgage |
109.8 | 109.7 | L + 5.25 | % | L + 8.20 | % | 7/9/2014 | Northeast | Multifamily | 65%(4) | 3 | N/A | |||||||||||||||||||
Loan 4 |
Sr. mortgage |
87.2 | 86.6 | L + 4.25 | % | L + 4.52 | % | 8/10/2018 | Diversified | Hotel/Office | 61% | 3 | N/A | |||||||||||||||||||
Loan 5 |
Sr. mortgage |
81.0 | 80.6 | L + 3.85 | % | L + 4.03 | % | 7/9/2018 | Southeast | Multifamily | 75% | 2 | N/A | |||||||||||||||||||
Loan 6 |
Sr. mortgage |
69.2 | 69.0 | L + 3.95 | %(3) | L + 4.05 | %(3) | 6/9/2018 | West | Office | 72% | 2 | N/A | |||||||||||||||||||
Loan 7 |
Sr. mortgage |
68.0 | 67.7 | L + 4.00 | % | L + 4.23 | % | 6/10/2016 | (5) | Northeast | Office | 68% | 3 | N/A | ||||||||||||||||||
Loan 8 |
Sr. mortgage |
64.0 | 64.3 | L + 8.00 | %(6) | L + 9.46 | %(6) | 2/9/2015 | (5) | Northeast | Land | 69% | 3 | N/A | ||||||||||||||||||
Loan 9 |
Sr. mortgage |
57.1 | 56.5 | L + 3.85 | % | L + 4.24 | % | 10/10/2018 | Diversified | Multifamily | 76% | 3 | N/A | |||||||||||||||||||
Loan 10 |
Sr. mortgage |
48.4 | 48.5 | L + 5.00 | %(7) | L + 5.68 | %(7) | 12/9/2016 | Midwest | Hotel | 53% | 3 | N/A | |||||||||||||||||||
Loan 11 |
Sr. mortgage |
46.3 | 45.8 | L + 4.25 | % | L + 4.64 | % | 7/10/2018 | Southwest | Hotel | 69% | 3 | N/A | |||||||||||||||||||
Loan 12 |
Sr. mortgage |
45.9 | 45.0 | L + 5.00 | % | L + 6.07 | % | 8/9/2018 | (5) | Southeast | Office | 73% | 3 | N/A | ||||||||||||||||||
Loan 13 |
Sr. mortgage |
43.5 | 43.1 | L + 4.50 | % | L + 5.11 | % | 7/16/2017 | Northeast | Retail | 69% | 3 | N/A | |||||||||||||||||||
Loan 14 |
Sr. mortgage |
42.6 | 42.1 | L + 3.85 | % | L + 4.29 | % | 9/10/2018 | Diversified | Multifamily | 77% | 3 | N/A | |||||||||||||||||||
Loan 15 |
Sr. mortgage |
37.5 | 37.1 | L + 3.85 | % | L + 4.04 | % | 8/9/2018 | Midwest | Office | 68% | 3 | N/A | |||||||||||||||||||
Loan 16 |
Sr. mortgage |
32.9 | 32.9 | L + 3.95 | % | L + 4.20 | %(6) | 8/9/2017 | Southwest | Hotel | 51% | 3 | N/A | |||||||||||||||||||
Loan 17 |
Sr. mortgage |
27.1 | 27.1 | L + 3.87 | % | L + 3.87 | % | 7/7/2017 | (5) | Northeast | Hotel | 32% | 1 | N/A | ||||||||||||||||||
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| ||||||||||||||||||||
$ | 1,292.0 | $ | 1,285.8 | L + 4.31 | % | L + 4.88 | % | 4.3 years | 64% | 2.6 | N/A | |||||||||||||||||||||
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(1) | All loans are floating rate loans indexed to LIBOR as of September 30, 2013. LIBOR was 0.18% as of September 30, 2013. |
(2) | Maximum maturity date assumes all extension options are exercised. |
(3) | Minimum LIBOR floor of 0.20%. |
(4) | The gross origination LTV for this loan is 79%. After giving effect to a recourse guaranty, the net origination LTV is 65%. |
(5) | Represents a pari passu participation in a senior mortgage loan. |
(6) | Minimum LIBOR floor of 0.50%. |
(7) | Minimum LIBOR floor of 1.00%. |
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The following tables provide details of our CT Legacy Portfolio segment loan portfolios, on a loan-by-loan basis ($ in millions):
CT Legacy Partners Loans Receivable as of September 30, 2013
Principal | Book | Cash | All-in | Maximum | Geographic | Property | Risk Rating as of | |||||||||||||||||||||||
Loan Type |
Balance | Value (1) | Coupon (2) | Yield (2) | Maturity (3) | Location |
Type |
September 30, 2013 | December 31, 2012 | |||||||||||||||||||||
Loan 1 |
Mezzanine |
$ | 19.7 | $ | 20.0 | 8.00 | % | 8.00 | % | 9/1/14 | Northeast | Office | 2 | 2 | ||||||||||||||||
Loan 2 |
Sr. mortgage |
16.3 | 11.0 | L + 4.00 | %(4) | L + 4.00 | %(4) | 5/1/16 | Northeast | Office | 6 | 8 | ||||||||||||||||||
Loan 3 |
Sr. mortgage |
15.0 | 14.6 | L + 4.00 | %(4) | L + 4.00 | %(4) | 12/9/14 | West | Hotel | 4 | 4 | ||||||||||||||||||
Loan 4 (5) |
Mezzanine |
14.3 | 11.9 | L + 2.76 | % | L + 2.76 | % | N/A | Southeast | Hotel | 8 | 5 | ||||||||||||||||||
Loan 5 |
Mezzanine |
8.0 | 5.0 | L + 4.75 | % | L + 4.75 | % | 10/9/13 | Northeast | Office | 5 | 3 | ||||||||||||||||||
Loan 6 |
Mezzanine |
4.4 | 3.6 | 8.77 | % | 8.77 | % | 2/1/16 | Northeast | Office | 4 | 4 | ||||||||||||||||||
Other (6) |
Various |
98.3 | | N/A | N/A | Various | Various | Various | 8 | 8 | ||||||||||||||||||||
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$ | 176.0 | $ | 66.1 | 5.13 | %(7) | 5.13 | % | 1.1 years | 6.6 | 6.4 | ||||||||||||||||||||
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(1) | Represents the fair value of each loan as of September 30, 2013. |
(2) | All floating rate loans are indexed to LIBOR as of September 30, 2013. LIBOR was 0.18% as of September 30, 2013. |
(3) | Maximum maturity date assumes all extension options are exercised. |
(4) | Minimum LIBOR floor of 2.00%. |
(5) | Includes three loans receivable investments, each of which are 100% impaired as of September 30, 2013. |
(6) | Weighted average includes LIBOR of 0.18% for floating rate loans. |
(7) | Loan is in maturity default as of September 30, 2013. |
CT CDO Is Loans Receivable as of September 30, 2013
Principal | Book | Cash | All-in | Maximum | Geographic | Property | Risk Rating as of | |||||||||||||||||||||||
Loan Type |
Balance | Value | Coupon (1) | Yield (1) | Maturity (2) | Location | Type | September 30, 2013 | December 31, 2012 | |||||||||||||||||||||
Loan 1 |
Sub. mortgage |
$ | 30.0 | $ | 30.0 | L + 3.25 | % | L + 7.44 | % | 5/9/14 | West | Hotel | 2 | 4 | ||||||||||||||||
Loan 2 |
Sub. mortgage |
27.0 | 27.0 | L + 3.53 | % | L + 3.53 | % | 10/9/13 | Northeast | Office | 5 | 3 | ||||||||||||||||||
Loan 3 |
Sub. mortgage |
20.0 | 20.0 | L + 5.06 | % | L + 5.06 | % | 10/9/13 | Diversified | Office | 2 | 2 | ||||||||||||||||||
Other (3) |
Various |
18.0 | | N/A | N/A | Various | Various | Various | 8 | 8 | ||||||||||||||||||||
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$ | 95.0 | $ | 77.0 | L + 3.82 | % | L + 5.45 | % | 0.2 years | 4.0 | 4.1 | ||||||||||||||||||||
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(1) | All loans are floating rate loans indexed to LIBOR as of September 30, 2013. LIBOR was 0.18% as of September 30, 2013. |
(2) | Maximum maturity date assumes all extension options are exercised. |
(3) | Includes two loans receivable investments, each of which are 100% impaired as of September 30, 2013. |
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Interest Rate Risk
Our business is exposed to the risks related to interest rate fluctuations. We generally originate floating rate assets and finance those assets with index-matched floating rate liabilities. As a result, we effectively eliminate exposure to changes in portfolio value related to changes in interest rates.
Our investments in fixed rate assets are generally exposed to changes in value due to interest rate fluctuations, and our investments in floating rate assets are generally exposed to cash flow variability from fluctuations in rates.
Loan Origination Portfolio
Our Loan Origination investments are exposed to the risks related to interest rate fluctuations discussed above. The table below details our interest rate exposure to this portfolio ($ in thousands):
September 30, 2013 | ||||
Cash flow exposure to interest rates (1) |
||||
Floating rate assets |
$ | 1,291,988 | ||
Floating rate debt |
(643,040 | ) | ||
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|
|||
Net floating rate exposure |
$ | 648,948 | ||
|
|
|||
Weighted-average cash coupon (2) |
L + 4.31 | % | ||
Net income impact from 100 bps increase in LIBOR (3) |
$ | 6,489 | ||
|
|
(1) | All values are in terms of face or notional amounts. |
(2) | LIBOR was 0.18% as of September 30, 2013. |
(3) | Excludes the impact of LIBOR floors on certain of our loans receivable investments. |
CT Legacy Partners
Our investment in CT Legacy Partners is exposed to the risks related to interest rate fluctuations discussed above. The table below details our interest rate exposure to this portfolio ($ in thousands):
September 30, 2013 | ||||
Cash flow exposure to interest rates(1) |
||||
Floating rate assets |
$ | 53,669 | ||
Weighted-average cash coupon (2) |
L + 3.78 | % | ||
Net income impact from 100 bps increase in LIBOR (3) |
||||
$ | 537 | |||
|
|
(1) | All values are in terms of face or notional amounts, and exclude investments from which we do not expect any future cash flows. |
(2) | LIBOR was 0.18% as of September 30, 2013. |
(3) | Excludes the impact of LIBOR floors on certain of our loans receivable investments. |
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CT CDO I
Our investment in CT CDO I is exposed to the risks related to interest rate fluctuations discussed above. The table below details our interest rate exposure to this portfolio ($ in thousands):
September 30, 2013 | ||||
Cash flow exposure to interest rates(1) |
||||
Floating rate assets |
$ | 77,000 | ||
Floating rate debt |
(74,203 | ) | ||
|
|
|||
Net floating rate exposure |
$ | 2,797 | ||
|
|
|||
Weighted-average cash coupon (2) |
L + 3.82 | % | ||
Net income impact from 100 bps change in LIBOR |
$ | 28 | ||
|
|
(1) | All values are in terms of face or notional amounts, and exclude investments from which we do not expect any future cash flows. |
(2) | LIBOR was 0.18% as of September 30, 2013. |
CTOPI
Although our carried interest investment in CTOPI generally relates to a portfolio of interest earning assets, our economic interest in this portfolio relates primarily to the realization of investments purchased at a discount by CTOPI. Accordingly, our investment in this portfolio is not exposed to a significant degree of interest rate risk. Refer to Note 9 to our consolidated financial statements for additional discussion of CTOPI.
Secured Notes
Although our secured notes are interest-bearing liabilities, they contain prepayment provisions such that we will ultimately be required to pay $11.1 million to satisfy these obligations. Accordingly, we are not exposed to any interest rate risk under our secured notes. Refer to Note 10 to our consolidated financial statements for additional discussion of our secured notes.
Risk of Non-Performance
In addition to the risks related to fluctuations in asset values and cash flows associated with movements in interest rates, there is also the risk of non-performance on floating rate assets. In the case of a significant increase in interest rates, the additional debt service payments due from our borrowers may strain the operating cash flows of the collateral real estate assets and, potentially, contribute to non-performance or, in severe cases, default.
Market Risks
Our loans and investments are also subject to credit risk. The performance and value of our loans and investments depends 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 Managers asset management team reviews our investment portfolios and in certain instances is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.
In addition, we are exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control. We seek to manage these risks through our underwriting and asset management processes.
Capital Market Risks
We are exposed to risks related to the equity capital markets, and our related ability to raise capital through the issuance of our class A 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 which requires us to utilize debt or equity capital to finance our business.
Counterparty Risk
The nature of our business requires us to hold our cash and cash equivalents, obtain financing from, and enter into hedging agreements with various financial institutions. This exposes us to the risk that these financial institutions may not fulfill their obligations to us under these various contractual arrangements. We mitigate this exposure by depositing our cash and cash equivalents, and entering into financing and hedging agreements with high credit quality institutions.
- 53 -
The nature of our loans and investments also expose us to the risk that our counterparties do not make required interest and principal payments on scheduled due dates. We seek to manage this risk through a comprehensive credit analysis prior to making an investment and actively monitoring the asset portfolio that serves as our collateral.
Currency Risk
We are not currently exposed to future changes in foreign currency rates.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), as of the end of the period covered by this quarterly report on Form 10-Q was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) are effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by Securities and Exchange Commission rules and forms and (b) include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Controls over Financial Reporting
There have been no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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ITEM 1: | LEGAL PROCEEDINGS |
From time to time, we may be involved in various claims and legal actions arising in the ordinary course of business. As of September 30, 2013, we were not involved in any material legal proceedings.
ITEM 1A: | RISK FACTORS |
There have been no material changes to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2012, as updated in our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2013 and June 30, 2013.
ITEM 2: | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
None.
ITEM 3: | DEFAULTS UPON SENIOR SECURITIES |
None.
ITEM 4: | MINE SAFETY DISCLOSURES |
Not applicable.
ITEM 5: | OTHER INFORMATION |
None.
ITEM 6: | EXHIBITS |
The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
10.1 | Amendment No. 1 to Master Repurchase Agreement, dated as of September 23, 2013, by and between Bank of America, N.A. and Parlex 1 Finance, LLC | |||
10.2 | Amendment No. 1 to Guarantee Agreement, dated as of September 23, 2013, made by Blackstone Mortgage Trust, Inc. in favor of Bank of America, N.A. | |||
10.3 | Joinder Agreement, dated as of September 23, 2013, by Parlex 1 Finance, LLC, Parlex 3 Finance LLC and Bank of America, N.A. | |||
10.4 | Summary of Non-Employee Director Compensation | |||
10.5 | Form of Restricted Stock Award of Blackstone Mortgage Trust, Inc. 2013 Stock Incentive Plan | |||
10.6 | Form of Restricted Stock Award of Blackstone Mortgage Trust, Inc. 2013 Manager Incentive Plan | |||
31.1 | Certification of Stephen D. Plavin, Chief Executive Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
31.2 | Certification of Geoffrey G. Jervis, Chief Financial Officer, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |||
+ | 32.1 | Certification of Stephen D. Plavin, Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
+ | 32.2 | Certification of Geoffrey G. Jervis, Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
99.1 | Section 13(r) Disclosure |
- 55 -
* | 101.INS | XBRL Instance Document | ||
* | 101.SCH | XBRL Taxonomy Extension Schema Document | ||
* | 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | ||
* | 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | ||
* | 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | ||
* | 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
+ | This exhibit shall not be deemed filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the Exchange Act) or otherwise subject to the liability of that Section. Such exhibit shall not be deemed incorporated into any filing under the Securities Act of 1933, as amended (the Securities Act), or the Exchange Act. |
* | Attached as Exhibit 101 to this Quarterly Report on Form 10-Q are the following materials, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets at September 30, 2013 and December 31, 2012; (ii) the Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012; (iii) the Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2013 and 2012; (iv) the Consolidated Statements of Changes in (Deficit) Equity for the nine months ended September 30, 2013 and 2012; (v) the Consolidated Statements of Cash Flows for the nine months ended September 30, 2013 and 2012; and (vi) Notes to Consolidated Financial Statements. |
Pursuant to Rule 406T of Regulation S-T, this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act, is deemed not filed for purposes of Section 18 of the Exchange Act, and otherwise is not subject to liability under these sections. |
- 56 -
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.
BLACKSTONE MORTGAGE TRUST, INC. | ||||
[October 29, 2013] | /s/ Stephen D. Plavin | |||
Date | Stephen D. Plavin | |||
Chief Executive Officer | ||||
(Principal Executive Officer) | ||||
[October 29, 2013] | /s/ Anthony F. Marone, Jr. | |||
Date | Anthony F. Marone, Jr. | |||
Principal Accounting Officer |
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Exhibit 10.1
AMENDMENT NO. 1 TO MASTER REPURCHASE AGREEMENT
AMENDMENT NO. 1 TO MASTER REPURCHASE AGREEMENT, dated as of September 23, 2013 (this Amendment), between PARLEX 1 FINANCE, LLC (Seller), and BANK OF AMERICA, N.A., a national banking association (Buyer). Capitalized terms used but not otherwise defined herein shall have the meanings given to them in the Repurchase Agreement (as defined below).
RECITALS
WHEREAS, Seller and Buyer are parties to that certain Master Repurchase Agreement, dated as of May 21, 2013 (as amended by this Amendment, the Parlex 3 Joinder (as defined below) and as may be further amended, restated, supplemented, or otherwise modified and in effect from time to time, the Repurchase Agreement);
WHEREAS, contemporaneously with the execution and delivery of this Amendment, Buyer, Seller and Parlex 3 Finance, LLC, a Delaware limited liability (Parlex 3) will enter into that certain Joinder Agreement dated September 9, 2013 (the Parlex 3 Joinder) in the form of Annex A to this Amendment, pursuant to which Parlex 3 will be admitted to the Repurchase Agreement as a Seller; and
WHEREAS, Seller and Buyer have agreed to amend certain provisions of the Repurchase Agreement in the manner set forth herein.
Therefore, in consideration of the premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Seller and Buyer each hereby agree as follows:
SECTION 1. Amendment to Repurchase Agreement.
(a) The definition Facility Amount in Section 2 of the Repurchase Agreement is hereby amended by deleting $250,000,000 and replacing such text with $500,000,000.
(b) The following definition of Joinder Agreement is hereby added to Section 2 of the Repurchase Agreement:
Joinder Agreement shall have the meaning set forth in the definition of Seller.
(c) The definition of Seller in Section 2 of the Repurchase Agreement is hereby amended by replacing such definition in its entirety with the following:
Seller shall refer, collectively, to the applicable entity identified as the Seller in the introductory paragraph of this Agreement along with each such other Seller as may be approved by Buyer in its sole discretion from time to time and admitted to this Agreement by a joinder agreement executed and delivered by Buyer, Seller and such approved other Seller in the form of Exhibit VIII to this Agreement (a Joinder Agreement).
(d) A new Section 27 is hereby added to the Repurchase Agreement, reading in its entirety as follows:
SECTION 27
JOINT AND SEVERAL OBLIGATIONS
(a) Each Seller hereby acknowledges and agrees that (i) each Seller shall be jointly and severally liable to Buyer to the maximum extent permitted by Requirement of Law for all Repurchase Obligations, (ii) the liability of each Seller with respect to the Repurchase Obligations (A) shall be absolute and unconditional to the extent set forth in this Agreement and shall remain in full force and effect (or be reinstated) until all Repurchase Obligations shall have been paid in full, and (B) until such payment has been made, shall not be discharged, affected, modified or impaired on the occurrence from time to time of any event, including any of the following, whether or not with notice to or the consent of each Seller, (1) the waiver, compromise, settlement, release, termination or amendment (including any extension or postponement of the time for payment or performance or renewal or refinancing) of any of the Repurchase Obligations except for and to the extent that any waiver, compromise, settlement, release, termination or amendment that, by its terms, expressly discharges, affects, modifies or impairs the obligations of any Seller, (2) the failure to give notice to each Seller of the occurrence of an Event of Default, (3) the release, substitution or exchange by Buyer of any Purchased Asset (whether with or without consideration) or the acceptance by Buyer of any additional collateral or the availability or claimed availability of any other collateral or source of repayment or any nonperfection or other impairment of collateral, (4) the release of any Person primarily or secondarily liable for all or any part of the Repurchase Obligations, whether by Buyer or in connection with any Insolvency Proceeding affecting any Seller or any other Person who, or any of whose property, shall at the time in question be obligated in respect of the Repurchase Obligations or any part thereof, or (5) to the extent permitted by Requirements of Law, any other event, occurrence, action or circumstance that would, in the absence of this Section 27, result in the release or discharge of any or all of Sellers from the performance or observance of any Repurchase Obligation other than any such release or discharge expressly set forth in a written instrument between Buyer and the applicable Seller, (iii) Buyer shall not be required first to initiate any suit or to exhaust its remedies against any Seller or any other Person to become liable, or against any of the Purchased Loans, in order to enforce the Transaction Documents and each Seller expressly agrees that, notwithstanding the occurrence of any of the foregoing, each Seller shall be and remain directly and primarily liable for all sums due under any of the Transaction Documents, (iv) when making any demand hereunder against any Seller, Buyer may, but shall be under no obligation to, make a similar demand on any other Seller, and any failure by Buyer to make any such demand or to collect any payments from any other Seller, or any release of any such other Seller shall not relieve any Seller in a respect of which a demand or collection is not made or Sellers not so released of their obligations or liabilities hereunder, and shall not impair or affect
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the rights and remedies, express or implied, or as a matter of law, of Buyer against Sellers, and (v) on disposition by Buyer of any property encumbered by any Purchased Loans, each Seller shall be and shall remain jointly and severally liable for any deficiency to the extent set forth in this Agreement.
(b) Notwithstanding anything in this Agreement or any other Transaction Document to the contrary, (i) the obligations of each Seller with respect to joint and several liability hereunder shall be limited to a maximum aggregate amount equal to the greatest amount that would not render such Sellers obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of Title 11 of the Bankruptcy Code or any provisions of applicable state law (collectively, the Fraudulent Transfer Laws), in each case after giving effect to all other liabilities of such Seller, contingent or otherwise, that are relevant under the Fraudulent Transfer laws and (ii) Buyer and each Seller acknowledges and agrees that the obligation of Sellers hereunder is a joint and several obligation of each Seller and all Sellers.
(c) Buyer hereby acknowledges and agrees that the provisions of this Section 27 and the obligation of each Seller to be jointly and severally liable for the Repurchase Obligations do not and shall not violate any of the provisions of Section 9 of this Agreement or otherwise cause any Seller to no longer be a Special Purpose Entity.
(e) A new Exhibit VIII shall be added to the Repurchase Agreement in the form attached as Annex A to this Amendment.
SECTION 2. Effectiveness. This Amendment and its provisions shall become effective when this Amendment is executed and delivered by a duly authorized officer of each of Seller and Buyer (the Amendment Effective Date).
SECTION 3. Compliance with Transaction Documents. Seller hereby represents and warrants to Buyer, as of the Amendment Effective Date, that (i) Seller is in compliance with all of the terms and provisions set forth in each Transaction Document to which it is a party on its part to be observed or performed.
SECTION 4. Acknowledgement. Seller hereby acknowledges that, as of the date hereof, Buyer is in compliance with its undertakings and obligations under the Repurchase Agreement and the other Transaction Documents.
SECTION 5. Limited Effect; Additional Meanings for Defined Terms. Except as expressly amended and modified by this Amendment, the Repurchase Agreement and each of the other Transaction Documents shall continue to be, and shall remain, in full force and effect in accordance with their respective terms; provided, however, that upon the Amendment Effective Date, (a) each reference therein and herein to Blocked Account shall be deemed to include any Blocked Account established pursuant to the Repurchase Agreement by a new Seller that has been admitted to the Repurchase Agreement pursuant to a Joinder Agreement, (b) each reference therein and herein to Blocked Account Agreement and Servicing Agreement shall be deemed to include any Blocked Account Agreement and Servicing Agreement entered into in accordance with the Repurchase Agreement by a new Seller that has been admitted to the
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Repurchase Agreement pursuant to a Joinder Agreement, (c) each reference therein and herein to the Transaction Documents shall be deemed to include, in any event, this Amendment and any Joinder Agreement entered into contemporaneously with or following the Amendment Effective Date (including, without limitation, the Parlex 3 Joinder), (d) each reference to the Repurchase Agreement in any of the Transaction Documents shall be deemed to be a reference to the Repurchase Agreement as amended by this Amendment and any Joinder Agreement entered into contemporaneously with or following the Amendment Effective Date (including, without limitation, the Parlex 3 Joinder), and (e) each reference in the Repurchase Agreement to this Agreement, this Repurchase Agreement, hereof, herein or words of similar effect in referring to the Repurchase Agreement shall be deemed to be references to the Repurchase Agreement as amended by this Amendment and any Joinder Agreement entered into contemporaneously with or following the Amendment Effective Date (including, without limitation, the Parlex 3 Joinder).
SECTION 6. Counterparts. This Amendment may be executed by each of the parties hereto on any number of separate counterparts, each of which shall be an original and all of which taken together shall constitute one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment in Portable Document Format (PDF) or by facsimile transmission shall be effective as delivery of a manually executed original counterpart thereof.
SECTION 7. Expenses. Seller agrees to pay and reimburse Buyer for all actual out-of-pocket costs and expenses reasonably incurred by Buyer in connection with the preparation, execution and delivery of this Amendment in accordance with Section 20(b) of the Repurchase Agreement.
SECTION 8. GOVERNING LAW.
THIS AMENDMENT AND ANY CLAIM, CONTROVERSY OR DISPUTE ARISING UNDER OR RELATED TO OR IN CONNECTION WITH THIS AMENDMENT, THE RELATIONSHIP OF THE PARTIES, AND/OR THE INTERPRETATION AND ENFORCEMENT OF THE RIGHTS AND DUTIES OF THE PARTIES WILL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE (OTHER THAN SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW) THAT WOULD CAUSE THE APPLICATION OF THE LAWS OF ANY OTHER JURISDICTION.
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IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the day and year first above written.
BUYER: | ||||
BANK OF AMERICA, N.A., | ||||
a national banking association | ||||
By: | /s/ Leland F. Bunch | |||
Name: | Leland F. Bunch | |||
Title: | Director | |||
SELLER: | ||||
PARLEX 1 FINANCE, LLC, a Delaware limited liability company | ||||
By: | /s/ Douglas Armer | |||
Name: | Douglas Armer | |||
Title: | Principal, Head of Capital Markets |
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ANNEX A TO AMENDMENT No. 1 TO MASTER REPURCHASE AGREEMENT
EXHIBIT VIII
FORM OF JOINDER AGREEMENT
This JOINDER AGREEMENT (this Joinder Agreement), dated as of [ ], [ ] by Parlex 1 Finance, LLC, [ADD OTHER PREVIOUSLY ADDED SELLERS], [each] a Delaware limited liability company (collectively, the Existing Sellers), [ ], a [Delaware limited liability company] (the Joining Seller) and Bank of America, N.A. (Buyer).
BACKGROUND
A. Existing Seller[s] and Buyer, entered into that certain Master Repurchase Agreement, dated as of May 21, 2013, as amended by Amendment No. 1 to the Master Repurchase Agreement, dated as of September 23, 2013 (as further amended, modified and/or restated from time to time, the Repurchase Agreement), pursuant to which