UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED |
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: 001-14788
(Exact name of Registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
(Address of principal executive offices)(Zip Code)
(212 ) 655-0220
(Registrant’s telephone number, including area code)
345 Park Avenue, 15th Floor
New York, New York 10154
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Trading symbol(s) |
Name of each exchange on which registered | ||
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 ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation Yes ☒ No ☐
S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated
filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2
of the Exchange Act. ☒ |
Accelerated filer |
☐ | ||||
Non-accelerated filer |
☐ |
Smaller reporting company |
| |||
Emerging growth company |
| |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule ☒
12b-2
of the Exchange Act). Yes ☐ No The number of the registrant’s outstanding shares of class A common stock, par value $0.01 per share, outstanding as of April 21, 2021 was 147,030,947 .
TABLE OF CONTENTS
| PART I. |
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| ITEM 1. |
3 |
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| Consolidated Financial Statements (Unaudited): |
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3 |
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4 |
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5 |
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6 |
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7 |
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9 |
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ITEM 2. |
47 |
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ITEM 3. |
75 |
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| ITEM 4. |
78 |
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| PART II. |
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| ITEM 1. |
79 |
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| ITEM 1A. |
79 |
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ITEM 2. |
79 |
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| ITEM 3. |
79 |
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| ITEM 4. |
79 |
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| ITEM 5. |
79 |
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| ITEM 6. |
80 |
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81 |
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TABLE OF CONTENTS
Website Disclosure
We use our website (www.blackstonemortgagetrust.com) as a channel of distribution of company information. The information we post through this channel may be deemed material. Accordingly, investors should monitor this channel, in addition to following our press releases, Securities and Exchange Commission, or SEC, filings and public conference calls, and webcasts. In addition, you may automatically receive email alerts and other information about Blackstone Mortgage Trust when you enroll your email address by visiting the “Contact Us &
E-mail
Alerts” section of our website at http://ir.blackstonemortgagetrust.com. The contents of our website and any alerts are not, however, a part of this report. PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Blackstone Mortgage Trust, Inc.
Consolidated Balance Sheets (Unaudited)
(in thousands, except share data)
March 31, |
December 31, |
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2021 |
2020 |
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| Assets |
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| Cash and cash equivalents |
$ | $ | ||||||
| Loans receivable |
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| Current expected credit loss reserve |
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| Loans receivable, net |
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| Other assets |
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| Total Assets |
$ | $ | ||||||
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| Liabilities and Equity |
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| Secured debt agreements, net |
$ | $ | ||||||
| Securitized debt obligations, net |
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| Asset-specific debt agreements, net |
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| Secured term loans, net |
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| Convertible notes, net |
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| Other liabilities |
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| Total Liabilities |
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| Commitments and contingencies |
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| Equity |
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| Class A common stock, $ |
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| Additional paid-in capital |
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| Accumulated other comprehensive income (loss) |
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| Accumulated deficit |
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| Total Blackstone Mortgage Trust, Inc. stockholders’ equity |
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| Non-controlling interests |
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| Total Equity |
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| Total Liabilities and Equity |
$ | $ | ||||||
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Note: The consolidated balance sheets as of March 31, 2021 and December 31, 2020 include assets of consolidated variable interest entities, or VIEs, that can only be used to settle obligations of each respective VIE, and liabilities of consolidated VIEs for which creditors do not have recourse to Blackstone Mortgage Trust, Inc. As of March 31, 2021 and December 31, 2020, assets of the consolidated VIEs totaled $3.5 billion and $3.6 billion, respectively. As of both March 31, 2021 and December 31, 2020, liabilities of the consolidated VIEs totaled $2.9
See accompanying notes to consolidated financial statements.
3
Blackstone Mortgage Trust, Inc.
Consolidated Statements of Operations (Unaudited)
(in thousands, except share and per share data)
Three Months Ended |
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March 31, |
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2021 |
2020 |
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| Income from loans and other investments |
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| Interest and related income |
$ | $ | ||||||
| Less: Interest and related expenses |
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| Income from loans and other investments, net |
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| Other expenses |
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| Management and incentive fees |
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| General and administrative expenses |
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| Total other expenses |
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| Decrease (increase) in current expected credit loss reserve |
( |
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| Income (loss) before income taxes |
( |
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| Income tax provision |
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| Net income (loss) |
( |
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| Net income attributable to non-controlling interests |
( |
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| Net income (loss) attributable to Blackstone Mortgage Trust, Inc. |
$ | $ | ( |
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| Net income (loss) per share of common stock basic and diluted |
$ | $ | ( |
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| Weighted-average shares of common stock outstanding, basic and diluted |
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See accompanying notes to consolidated financial statements.
4
Blackstone Mortgage Trust, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
(in thousands)
Three Months Ended |
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March 31, |
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2021 |
2020 |
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| Net income (loss) |
$ | $ | ( |
) | ||||
| Other comprehensive income |
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| Unrealized loss on foreign currency translation |
( |
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| Realized and unrealized gain on derivative financial instruments |
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| Other comprehensive income |
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| Comprehensive income (loss) |
( |
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| Comprehensive income attributable to non-controlling interests |
( |
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| Comprehensive income (loss) attributable to Blackstone Mortgage Trust, Inc. |
$ | $ | ( |
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See accompanying notes to consolidated financial statements.
5
Blackstone Mortgage Trust, Inc.
Consolidated Statements of Changes in Equity (Unaudited)
(in thousands)
Blackstone Mortgage Trust, Inc. |
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Class A Common Stock |
Additional Paid-In Capital |
Accumulated Other Comprehensive Income |
Accumulated Deficit |
Stockholders’ Equity |
Non-controlling Interests |
Total Equity |
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| Balance at December 31, 2019 |
$ | $ | $ | ( |
) | $ | ( |
) | $ | $ | $ | |||||||||||||||||
| Adoption of ASU 2016-13, see Note 2 |
— | — | — | ( |
) | ( |
) | ( |
) | ( |
) | |||||||||||||||||
| Shares of class A common stock issued, net |
— | — | — | — | ||||||||||||||||||||||||
| Restricted class A common stock earned |
— | — | — | — | ||||||||||||||||||||||||
| Dividends reinvested |
— | — | ( |
) | — | |||||||||||||||||||||||
| Deferred directors’ compensation |
— | — | — | — | ||||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | ||||||||||||||||||||||||
| Net (loss) income |
— | — | — | ( |
) | ( |
) | ( |
) | |||||||||||||||||||
| Dividends declared on common stock, $ |
— | — | — | ( |
) | ( |
) | — | ( |
) | ||||||||||||||||||
| Contributions from non-controlling interests |
— | — | — | — | — | |||||||||||||||||||||||
| Distributions to non-controlling interests |
— | — | — | — | — | ( |
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| Balance at March 31, 2020 |
$ | $ | $ | $ | ( |
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| Balance at December 31, 2020 |
$ | $ | $ | $ | ( |
) | $ | $ | $ | |||||||||||||||||||
| Shares of class A common stock issued, net |
— | — | — | — | ||||||||||||||||||||||||
| Restricted class A common stock earned |
— | — | — | — | ||||||||||||||||||||||||
| Dividends reinvested |
— | — | ( |
) | — | |||||||||||||||||||||||
| Deferred directors’ compensation |
— | — | — | — | ||||||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | ||||||||||||||||||||||||
| Net income |
— | — | — | |||||||||||||||||||||||||
| Dividends declared on common stock, $ |
— | — | — | ( |
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) | — | ( |
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| Contributions from non-controlling interests |
— | — | — | — | — | |||||||||||||||||||||||
| Distributions to non-controlling interests |
— | — | — | — | — | ( |
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| Balance at March 31, 2021 |
$ | $ | $ | $ | ( |
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See accompanying notes to consolidated financial statements.
6
Blackstone Mortgage Trust, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)
Three Months Ended March 31, |
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2021 |
2020 |
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| Cash flows from operating activities |
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| Net income (loss) |
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$ | $ | ( |
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| Adjustments to reconcile net income (loss) to net cash provided by operating activities |
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| Non-cash compensation expense |
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| Amortization of deferred fees on loans and debt securities |
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( |
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| Amortization of deferred financing costs and premiums/ discount on debt obligations |
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| (Decrease) increase in current expected credit loss reserve |
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( |
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| Unrealized gain on assets denominated in foreign currencies, net |
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( |
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| Unrealized loss on derivative financial instruments, net |
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| Realized loss on derivative financial instruments, net |
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| Changes in assets and liabilities, net |
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| Other assets |
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( |
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| Other liabilities |
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| Net cash provided by operating activities |
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| Cash flows from investing activities |
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| Origination and fundings of loans receivable |
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| Principal collections and sales proceeds from loans receivable and debt securities |
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| Origination and exit fees received on loans receivable |
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| Receipts under derivative financial instruments |
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| Payments under derivative financial instruments |
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| Collateral deposited under derivative agreements |
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| Return of collateral deposited under derivative agreements |
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| Net cash used in investing activities |
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continued…
See accompanying notes to consolidated financial statements.
7
Blackstone Mortgage Trust, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(Unaudited)
Three Months Ended March 31, |
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2021 |
2020 |
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| Cash flows from financing activities |
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| Borrowings under secured debt agreements |
$ | $ | ||||||
| Repayments under secured debt agreements |
( |
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| Proceeds from issuance of collateralized loan obligations |
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| Repayment of collateralized loan obligations |
( |
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| Borrowings under asset-specific debt agreements |
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| Repayments under asset-specific debt agreements |
( |
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| Net proceeds from issuance of secured term loan |
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| Repayments of secured term loan |
( |
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| Payment of deferred financing costs |
( |
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| Contributions from non-controlling interests |
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| Distributions to non-controlling interests |
( |
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| Dividends paid on class A common stock |
( |
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| Net cash provided by financing activities |
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| Net (decrease) increase in cash and cash equivalents |
( |
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| Cash and cash equivalents at beginning of period |
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| Effects of currency translation on cash and cash equivalents |
( |
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| Cash and cash equivalents at end of period |
$ | $ | ||||||
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| Supplemental disclosure of cash flows information |
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| Payments of interest |
$ | ( |
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| Receipts (payments) of income taxes |
$ | $ | ( |
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| Supplemental disclosure of non-cash investing and financing activities |
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| Dividends declared, not paid |
$ | ( |
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| Loan principal payments held by servicer, net |
$ | $ | ||||||
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See accompanying notes to consolidated financial statements.
8
Blackstone Mortgage Trust, Inc.
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.
Blackstone Mortgage Trust is a real estate finance company that originates senior loans collateralized by commercial real estate in North America, Europe, and Australia. Our portfolio is composed primarily of loans secured by high-quality, institutional assets in major markets, sponsored by experienced, well-capitalized real estate investment owners and operators. These senior loans are capitalized by accessing a variety of financing options, including borrowing under our credit facilities, issuing CLOs or single-asset securitizations, and syndicating senior loan participations, depending on our view of the most prudent financing option available for each of our investments. We are not in the business of buying or trading securities, and the only securities we own are the retained interests from our securitization financing transactions, which we have not financed. We are externally managed by BXMT Advisors L.L.C., or our Manager, a subsidiary of The Blackstone Group Inc., or Blackstone, and are a real estate investment trust, or REIT, traded on the New York Stock Exchange, or NYSE, under the symbol “BXMT.” Our principal executive offices are located at 345 Park Avenue, 24th Floor, New York, New York 10154. We were incorporated in Maryland in 1998, when we reorganized from a California common law business trust into a Maryland corporation.
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 an exclusion from registration under the Investment Company Act of 1940, as amended. We are organized as a holding company and conduct our business primarily through our various subsidiaries.
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 thereto, are unaudited and exclude some of the disclosures required in audited financial statements. We believe we have 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 our 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 included in our Annual Report on Form 10-K
for the fiscal year ended December 31, 2020 filed with the Securities and Exchange Commission, or the SEC. Basis of Presentation
The accompanying consolidated financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries, majority-owned subsidiaries, and variable interest entities, or VIEs, of which we are the primary beneficiary. All intercompany balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made in the presentation of the prior period statements of cash flows and loans receivable in Note 3 to conform to the current period presentation.
Principles of Consolidation
We consolidate all entities that we control through either majority ownership or voting rights. In addition, we consolidate all VIEs of which we are considered the primary beneficiary. 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 affect the VIE’s 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.
In the third quarter of 2018, we contributed a loan to a single asset securitization vehicle, or the 2018 Single Asset Securitization, which is a VIE, and invested in the related subordinate position. We are not the primary beneficiary of the VIE because we do not have the power to direct the activities that most significantly affect the VIE’s economic
9
Blackstone Mortgage Trust, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
performance and, therefore, do not consolidate the 2018 Single Asset Securitization on our balance sheet. We have classified the subordinate position we own as a debt security that is included in other assets on our consolidated balance sheets. Refer to Note 16 for additional discussion of our VIEs.
held-to-maturity
In April 2017, we entered into a joint venture, or our Multifamily Joint Venture, with Walker & Dunlop Inc. to originate, hold, and finance multifamily bridge loans. Pursuant to the terms of the agreements governing the joint venture, Walker & Dunlop contributed 15 % of the venture’s equity capital and we contributed 85 %. We consolidate the Multifamily Joint Venture as we have a controlling financial interest. The
non-controlling
interests included on our consolidated balance sheets represent the equity interests in our Multifamily Joint Venture that are owned by Walker & Dunlop. A portion of our Multifamily Joint Venture’s consolidated equity and results of operations are allocated to these non-controlling
interests based on Walker & Dunlop’s pro rata ownership of our Multifamily Joint Venture. Use of Estimates
The preparation of consolidated 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 as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. As of March 31, 2021, the novel coronavirus, or
COVID-19,
pandemic is ongoing. During 2020, the COVID-19
pandemic created disruption in global supply chains, increased rates of unemployment and adversely impacted many industries, including industries related to the collateral underlying certain of our loans. In 2021, the global economy has, with certain setbacks, begun reopening and wider distribution of vaccines will likely encourage greater economic activity. Nonetheless, the recovery could remain uneven, particularly given uncertainty with respect to the distribution and acceptance of the vaccines and their effectiveness with respect to new variants of the virus. We believe the estimates and assumptions underlying our consolidated financial statements are reasonable and supportable based on the information available as of March 31, 2021, however uncertainty over the ultimate impact COVID-19
will have on the global economy generally, and our business in particular, makes any estimates and assumptions as of March 31, 2021 inherently less certain than they would be absent the current and potential impacts of COVID-19.
Actual results may ultimately differ from those estimates.Revenue Recognition
Interest income from our loans receivable portfolio and debt securities is recognized over the life of each investment using the effective interest method and is recorded on the accrual basis. Recognition of fees, premiums, and discounts associated with these investments is deferred and recorded over the term of the loan or debt security 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. Interest received is then recorded as a reduction in the outstanding principal balance until accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. In addition, for loans we originate, the related origination expenses are deferred and recognized as a component of interest income, however expenses related to loans we acquire are included in general and administrative expenses as incurred.
Cash and Cash Equivalents
10
Blackstone Mortgage Trust, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Through our subsidiaries, we have oversight of certain servicing accounts held with third-party servicers, or Servicing Accounts, which relate to borrower escrows and other cash balances aggregating $391.1 million and $384.6 million as of March 31, 2021 and December 31, 2020, respectively. This cash is maintained in segregated bank accounts, and these amounts are not included in the assets and liabilities presented in our consolidated balance sheets. Cash in these Servicing Accounts will be transferred by the respective third-party servicer to the borrower or us under the terms of the applicable loan agreement upon occurrence of certain future events. We do not generate any revenue or incur any expenses as a result of these Servicing Accounts.
Loans Receivable
We originate and purchase commercial real estate debt and related instruments generally to be held as long-term investments at amortized cost.
Debt Securities
Held-to-Maturity
We classify our debt securities as as we have the intent and ability to hold these securities until maturity. We include our debt securities in other assets on our consolidated balance sheets at amortized cost.
held-to-maturity,
Current Expected Credit Losses Reserve
The current expected credit loss, or CECL, reserve required under Accounting Standard Update, or ASU,
2016-13
“Financial Instruments – Credit Losses – Measurement of Credit Losses on Financial Instruments (Topic 326),” or ASU 2016-13,
reflects our current estimate of potential credit losses related to our loans and debt securities included in our consolidated balance sheets. The initial CECL reserve recorded on January 1, 2020 is reflected as a direct charge to retained earnings on our consolidated statements of changes in equity; however subsequent changes to the CECL reserve are recognized through net income on our consolidated statements of operations. While ASU 2016-13
does not require any particular method for determining the CECL reserve, it does specify the reserve should be based on relevant information about past events, including historical loss experience, current portfolio and market conditions, and reasonable and supportable forecasts for the duration of each respective loan. In addition, other than a few narrow exceptions, ASU 2016-13
requires that all financial instruments subject to the CECL model have some amount of loss reserve to reflect the GAAP principal underlying the CECL model that all loans, debt securities, and similar assets have some inherent risk of loss, regardless of credit quality, subordinate capital, or other mitigating factors. We estimate our CECL reserve primarily using the Weighted Average Remaining Maturity, or WARM
,
method which has been identified as an acceptable loss-rate method for estimating CECL reserves in the Financial Accounting Standards Board Staff Q&A Topic 326, No. 1. The WARM method requires us to reference historic loan loss data across a comparable data set and apply such loss rate to each of our loans over their expected remaining term, taking into consideration expected economic conditions over the relevant timeframe. We apply the WARM method for the majority of our loan portfolio, which loans share similar risk characteristics. In certain instances, for loans with unique risk characteristics, we may instead use a probability-weighted model that considers the likelihood of default and expected loss given default for each such individual loan. Application of the WARM method to estimate a CECL reserve requires judgment, including (i) the appropriate historical loan loss reference data, (ii) the expected timing and amount of future loan fundings and repayments, and (iii) the current credit quality of our portfolio and our expectations of performance and market conditions over the relevant time period. To estimate the historic loan losses relevant to our portfolio, we have augmented our historical loan performance, which includes zero realized loan losses since the launch of our senior loan origination business in 2013, with market loan loss data licensed from Trepp LLC. This database includes commercial mortgage-backed securities, or CMBS, issued since January 1, 1999 through February 28, 2021. Within this database, we focused our historical loss reference calculations on the most relevant subset of available CMBS data, which we determined based on loan metrics that are most comparable to our loan portfolio including asset type, geography, and origination or LTV. We believe this CMBS data, which includes month-over-month loan and property performance, is the most relevant, available, and comparable dataset to our portfolio.
loan-to-value,
Our loans typically include commitments to fund incremental proceeds to our borrowers over the life of the loan, which future funding commitments are also subject to the CECL model. The CECL reserve related to future loan fundings is recorded as a component of Other Liabilities on our consolidated balance sheets. This CECL reserve is estimated using the same process outlined above for our outstanding loan balances, and changes in this component of the CECL reserve will similarly impact our consolidated net income. For both the funded and unfunded portions of our loans, we consider our internal risk rating of each loan as the primary credit quality indicator underlying our assessment.
11
Blackstone Mortgage Trust, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The CECL reserve is measured on a collective basis wherever similar risk characteristics exist within a pool of similar assets. We have identified the following pools and measure the reserve for credit losses using the following methods:
| • | U.S. Loans |
| • | Non-U.S. Loans |
| • | Unique Loans |
| • | Impaired Loans non-recoverability may also be concluded if, in our determination, it is nearly certain that all amounts due will not be collected. |
We adopted ASU The following table details the impact of this adoption ($ in thousands):
2016-13
using the modified-retrospective method for all financial assets measured at amortized cost. Prior to our adoption, we had no loan loss provisions on our consolidated balance sheets. We recorded a cumulative-effective adjustment to the opening retained earnings in our consolidated statement of equity as of January 1, 2020. Impact of ASU 2016-13 Adoption |
||||
| Assets: |
||||
| Loans |
||||
| U.S. Loans |
$ | |||
| Non-U.S. Loans |
||||
| Unique Loans |
||||
| |
|
|||
| CECL reserve on loans |
$ | |||
| |
|
|||
| CECL reserve on held-to-maturity |
||||
| Liabilities: |
||||
| CECL reserve on unfunded loan commitments |
||||
| |
|
|||
| Total impact of ASU 2016-13 adoption on retained earnings |
$ | |||
| |
|
|||
Contractual Term and Unfunded Loan Commitments
Expected credit losses are estimated over the contractual term of each loan, adjusted for expected prepayments. As part of our quarterly review of our loan portfolio, we assess the expected repayment date of each loan, which is used to determine the contractual term for purposes of computing our CECL reserve.
Additionally, the expected credit losses over the contractual period of our loans are subject to the obligation to extend credit through our unfunded loan commitments. The CECL reserve for unfunded loan commitments is adjusted
12
Blackstone Mortgage Trust, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
quarterly, as we consider the expected timing of future funding obligations over the estimated life of the loan. The considerations in estimating our CECL reserve for unfunded loan commitments are similar to those used for the related outstanding loan receivables.
Credit Quality Indicator
Our risk rating is our primary credit quality indicator in assessing our current expected credit loss reserve. Our Manager performs a quarterly risk review of our portfolio of loans, and assigns each loan a risk rating based on a variety of factors, including, without limitation, LTV, debt yield, property type, geographic and local market dynamics, physical condition, cash flow volatility, leasing and tenant profile, loan structure and exit plan, and project sponsorship. Based on a
5-point
scale, our loans are rated “l” through “5,” from less risk to greater risk, relative to our loan portfolio in the aggregate, which ratings are defined as follows: 1 - |
Very Low Risk | |||
2 - |
Low Risk | |||
3 - |
Medium Risk | |||
4 - |
High Risk/Potential for Loss: | |||
5 - |
Impaired/Loss Likely: | |||
Estimation of Economic Conditions
In addition to the WARM method computations and probability-weighted models described above, our CECL reserve is also adjusted to reflect our estimation of the current and future economic conditions that impact the performance of the commercial real estate assets securing our loans. These estimations include unemployment rates, interest rates, and other macroeconomic factors impacting the likelihood and magnitude of potential credit losses for our loans during their anticipated term. In addition to the CMBS data we have licensed from Trepp LLC, we have also licensed certain macroeconomic financial forecasts to inform our view of the potential future impact that broader economic conditions may have on our loan portfolio’s performance. These estimations require significant judgments about future events that, while based on the information available to us as of the balance sheet date, are ultimately indeterminate and the actual economic condition impacting our portfolio could vary significantly from the estimates we made as of March 31, 2021.
Derivative Financial Instruments
We classify all derivative financial instruments as either other assets or other liabilities on our consolidated balance sheets at fair value.
On the date we enter into a derivative contract, we designate each contract as (i) a hedge of a net investment in a foreign operation, or net investment hedge, (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability, or cash flow hedge, (iii) a hedge of a recognized asset or liability, or fair value hedge, or (iv) a derivative instrument not to be designated as a hedging derivative, or
non-designated
hedge. For all derivatives other than those designated as non-designated
hedges, we formally document our hedge relationships and designation at the contract’s inception. This documentation includes the identification of the hedging instruments and the hedged items, its risk management objectives, strategy for undertaking the hedge transaction and our evaluation of the effectiveness of its hedged transaction. On a quarterly basis, we also formally assess whether the derivative we designated in each hedging relationship is expected to be, and has been, highly effective in offsetting changes in the value or cash flows of the hedged items. If it is determined that a derivative is not highly effective at hedging the designated exposure, hedge accounting is discontinued and the changes in fair value of the instrument are included in net income prospectively. Effective April 1, 2020, our net investment hedges are assessed using a method based on changes in spot exchange rates. Gains and losses, representing hedge components excluded from the assessment of effectiveness, are recognized in interest income on our consolidated statements of operations over the contractual term of our net investment hedges on a systematic and rational basis, as documented at hedge inception in accordance with our accounting policy election. All other changes in the fair value of our derivative instruments that qualify as hedges are reported as a component of accumulated other comprehensive income (loss) on our consolidated financial statements. Deferred gains and losses
13
Blackstone Mortgage Trust, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
non-designated
hedge, the changes in its fair value are included in net income concurrently.Secured Debt Agreements and Asset-Specific Debt Agreements
We record investments financed with secured debt agreements or asset-specific debt agreements as separate assets and the related borrowings under any secured debt agreements or asset-specific debt agreements are recorded as separate liabilities on our consolidated balance sheets. Interest income earned on the investments and interest expense incurred on the secured debt agreements or asset-specific debt agreements are reported separately on our consolidated statements of operations.
Senior Loan Participations
In certain instances, we finance our loans through
the non-recourse syndication
of a senior loan interest to a third-party. Depending on the particular structure of the syndication, the senior loan interest may remain on our GAAP balance sheet or, in other cases, the sale will be recognized and the senior loan interest will no longer be included in our consolidated financial statements. When these sales are not recognized under GAAP we reflect the transaction by recording a loan participations sold liability on our consolidated balance sheet, however this gross presentation does not impact stockholders’ equity or net income. When the sales are recognized, our balance sheet only includes our remaining subordinate loan and not the non-consolidated senior
interest we sold. Secured Term Loans
We record our secured term loans as liabilities on our consolidated balance sheets. Where applicable, any issue discount or transaction expenses are deferred and amortized through the maturity date of the secured term loans as additional
non-cash
interest expense. Convertible Notes
The “Debt with Conversion and Other Options” Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, requires the liability and equity components of convertible debt instruments that may be settled in cash upon conversion, including partial cash settlement, to be separately accounted for in a manner that reflects the issuer’s nonconvertible debt borrowing rate. The initial proceeds from the sale of convertible notes are allocated between a liability component and an equity component in a manner that reflects interest expense at the rate of similar nonconvertible debt that could have been issued at such time. The equity component represents the excess initial proceeds received over the fair value of the liability component of the notes as of the date of issuance. We measured the estimated fair value of the debt component of our convertible notes as of the respective issuance dates based on our nonconvertible debt borrowing rate. The equity component of each series of our convertible notes is reflected within additional
paid-in
capital on our consolidated balance sheet, and the resulting issue discount is amortized over the period during which such convertible notes are expected to be outstanding (through the maturity date) as additional non-cash
interest expense. The additional non-cash
interest expense attributable to such convertible notes will increase in subsequent periods through the maturity date as the notes accrete to their par value over the same period. Deferred Financing Costs
The deferred financing costs that are included as a reduction in the net book value of the related liability on our consolidated balance sheets include issuance and other costs related to our debt obligations. These costs are amortized as interest expense using the effective interest method over the life of the related obligations.
Fair Value of Financial Instruments
The “Fair Value Measurements and Disclosures” Topic of the FASB, or ASC 820, 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.
14
Blackstone Mortgage Trust, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
ASC 820 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.
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 that does not meet the criteria of Levels 1 and 2. |
The estimated value of each asset reported at fair value using Level 3 inputs is determined by an internal committee composed of members of senior management of our Manager, including our Chief Executive Officer, Chief Financial Officer, and other senior officers.
Certain of our other assets are reported at fair value, as of
quarter-end,
either (i) on a recurring basis or (ii) on a nonrecurring basis, as a result of impairment or other events. Our assets that are recorded at fair value are discussed further in Note 15. We generally value our assets recorded at fair value by either (i) discounting expected cash flows based on assumptions regarding the collection of principal and interest and estimated market rates, or (ii) obtaining assessments from third-party dealers. For collateral-dependent loans that are identified as impaired, we measure impairment by comparing our Manager’s estimation of the 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, discount rates, leasing, creditworthiness of major tenants, occupancy rates, availability and cost of financing, exit plan, loan sponsorship, actions of other lenders, and other factors deemed relevant by our Manager. During the three months ended June 30, 2020, we recorded an aggregate $69.7 million CECL reserve specifically related to two of our loans receivable, which was unchanged as of March 31, 2021. These two loans have an aggregate outstanding principal balance of $338.7 million, net of cost-recovery proceeds, as of March 31, 2021. The CECL reserve was recorded based on our Manager’s estimation of the fair value of the loan’s underlying collateral as of March 31, 2021. These loans receivable are therefore measured at fair value on a nonrecurring basis using significant unobservable inputs, and are classified as Level 3 assets in the fair value hierarchy. The significant unobservable inputs used to estimate the fair value of these loans receivable include the exit capitalization rate assumption used to forecast the future sale price of the underlying real estate collateral, which ranged from 4.25 % to 4.80 %.
We are also required by GAAP to disclose fair value information about financial instruments, which are not otherwise reported at fair value in our consolidated balance sheet, to the extent it is practicable to estimate a fair value for those instruments. These disclosure requirements exclude certain financial instruments and all
non-financial
instruments. The following methods and assumptions are used to estimate the fair value of each class of financial instruments, for which it is practicable to estimate that value:
| • | Cash and cash equivalents: The carrying amount of cash and cash equivalents approximates fair value. |
| • | Loans receivable, net: The fair values of these loans were estimated by our Manager based on a discounted cash flow methodology, taking into consideration various factors including capitalization rates, discount rates, leasing, credit worthiness of major tenants, occupancy rates, availability and cost of financing, exit plan, loan sponsorship, actions of other lenders, and other factors deemed relevant by our Manager. |
15
Blackstone Mortgage Trust, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
| • | Debt securities held-to-maturity: |
| • | Derivative financial instruments: The fair value of our foreign currency and interest rate contracts was estimated using advice from a third-party derivative specialist, based on contractual cash flows and observable inputs comprising foreign currency rates and credit spreads. |
| • | Secured debt agreements, net: The fair value of these instruments was estimated based on the rate at which a similar credit facility would currently be priced. |
| • | Securitized debt obligations, net: The fair value of these instruments was estimated by utilizing third-party pricing service providers. In determining the value of a particular investment, pricing service providers may use broker-dealer quotations, reported trades, or valuation estimates from their internal pricing models to determine the reported price. |
| • | Asset-specific debt agreements, net: The fair value of these instruments was estimated based on the rate at which a similar agreement would currently be priced. |
| • | Secured term loans, net: The fair value of these instruments was estimated by utilizing third-party pricing service providers. In determining the value of a particular investment, pricing service providers may use broker-dealer quotations, reported trades, or valuation estimates from their internal pricing models to determine the reported price. |
| • | Convertible notes, net: Each series of the convertible notes is actively traded and their fair values were obtained using quoted market prices. |
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. 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 13 for additional information.
Stock-Based Compensation
Our stock-based compensation consists of awards issued to our Manager and certain individuals employed by an affiliate of our Manager that vest over the life of the awards, as well as deferred stock units issued to certain members of our board of directors. Stock-based compensation expense is recognized for these awards in net income on a variable basis over the applicable vesting period of the awards, based on the value of our class A common stock. Refer to Note 14 for additional information.
Earnings per Share
Basic earnings per share, or Basic EPS, is computed in accordance with the
two-class
method and is based on the net earnings allocable to our class A common stock, including restricted class A common stock and deferred stock units, divided by the weighted-average number of shares of our class A common stock, including restricted class A common stock and deferred stock units outstanding during the period. Our restricted class A common stock is considered a participating security, as defined by GAAP, and has been included in our Basic EPS under the two-class
method as these restricted shares have the same rights as our other shares of class A common stock, including participating in any gains or losses. Diluted earnings per share, or Diluted EPS, is determined using the treasury stock method, and is based on the net earnings allocable to our class A common stock, including restricted class A common stock and deferred stock units, divided by the weighted-average number of shares of our class A common stock, including restricted class A common stock and deferred stock units. Refer to Note 11 for additional discussion of earnings per share.
16
Blackstone Mortgage Trust, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
Foreign Currency
In the normal course of business, we enter into transactions not denominated in United States, or U.S., dollars. Foreign exchange gains and losses arising on such transactions are recorded as a gain or loss in our consolidated statements of operations. In addition, we consolidate entities that have a
non-U.S.
dollar functional currency. Non-U.S.
dollar denominated assets and liabilities are translated to U.S. dollars at the exchange rate prevailing at the reporting date and income, expenses, gains, and losses are translated at the average exchange rate over the applicable period. Cumulative translation adjustments arising from the translation of non-U.S.
dollar denominated subsidiaries are recorded in other comprehensive income (loss). Underwriting Commissions and Offering Costs
Underwriting commissions and offering costs incurred in connection with common stock offerings are reflected as a reduction of additional
paid-in
capital. Costs incurred that are not directly associated with the completion of a common stock offering are expensed when incurred. Recent Accounting Pronouncements
In March 2020, the FASB issued ASU The guidance in ASU
2020-04
“Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting,” or ASU 2020-04.
ASU 2020-04
provides optional expedients and exceptions to GAAP requirements for modifications on debt instruments, leases, derivatives, and other contracts, related to the expected market transition from LIBOR, and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU 2020-04
generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. In January 2021, the FASB issued ASU 2021-01
“Reference Rate Reform (Topic 848): Scope,” or ASU 2021-01.
ASU 2021-01
clarifies that the practical expedients in ASU 2020-04
apply to derivatives impacted by changes in the interest rate used for margining, discounting, or contract price alignment.2020-04
is optional and may be elected over time, through December 31, 2022, as reference rate reform activities occur. Once ASU 2020-04
is elected, the guidance must be applied prospectively for all eligible contract modifications. In the first quarter of 2020, we have elected to apply the hedge accounting expedients, related to probability and the assessments of effectiveness, for future IBOR-indexed cash flows, to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with our past presentation. We continue to evaluate the impact of ASU 2020-04
and may apply other elections, as applicable, as the expected market transition from IBORs to alternative reference rates continues to develop. In August 2020, the FASB issued ASU
2020-06
“Debt—Debt with Conversion and Other Options (Subtopic 470-20)
and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40):
Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity,” or ASU 2020-06.
ASU 2020-06
simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models. ASU 2020-06
also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares. ASU 2020-06
is effective for fiscal years beginning after December 15, 2021 and is to be adopted through a cumulative-effect adjustment to the opening balance of retained earnings either at the date of adoption or in the first comparative period presented. Upon adoption of ASU 2020-06,
convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature, will no longer be allocated between debt and equity components. This will reduce the issue discount and result in less non-cash
interest expense in our consolidated financial statements. Additionally, ASU 2020-06
will result in the reporting of a diluted earnings per share, if the effect is dilutive, in our consolidated financial statements, regardless of our settlement intent. 17
Blackstone Mortgage Trust, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
3. LOANS RECEIVABLE, NET
The following table details overall statistics for our loans receivable portfolio ($ in thousands):
March 31, 2021 |
December 31, 2020 |
|||||||
Number of loans |
||||||||
Principal balance |
$ | $ | ||||||
Net book value |
$ | $ | ||||||
Unfunded loan commitments (1) |
$ | $ | ||||||
Weighted-average cash coupon (2) |
% | % | ||||||
Weighted-average all-in yield(2) |
% | % | ||||||
Weighted-average maximum maturity (years) (3) |
||||||||
____________ __ _ _ |
(1) |
Unfunded commitments will primarily be funded to finance our borrowers’ construction or development of real estate-related assets, capital improvements of existing assets, or lease-related expenditures. These commitments will generally be funded over the term of each loan, subject in certain cases to an expiration date. | |||||
(2) |
The weighted-average cash coupon and all-in yield are expressed as a spread over the relevant floating benchmark rates, which include USD LIBOR, GBP LIBOR, EURIBOR, STIBOR, BBSY, and CDOR, as applicable to each loan. As of March 31, 2021, all-in yield includes the amortization of deferred origination and extension fees, loan origination costs, and purchase discounts, as well as the accrual of exit fees. Excludes loans accounted for under the cost-recovery method. | |||||
(3) |
Maximum maturity assumes all extension options are exercised by the borrower, however our loans may be repaid prior to such date. As of March 31, 2021, | |||||
Activity relating to our loans receivable portfolio was as follows ($ in thousands):
Principal Balance |
Deferred Fees / Other Items (1) |
Net Book Value |
||||||||||
Loans receivable, as of December 31, 2020 |
$ | $ | ( |
) | $ | |||||||
Loan fundings |
— | |||||||||||
Loan repayments and sales |
( |
) | — | ( |
) | |||||||
Unrealized (loss) gain on foreign currency translation |
( |
) | ( |
) | ||||||||
Deferred fees and other items |
— | ( |
) | ( |
) | |||||||
Amortization of fees and other items |
— | |||||||||||
Loans receivable, as of March 31, 2021 |
$ | $ | ( |
) | $ | |||||||
CECL reserve |
( |
) | ||||||||||
Loans receivable, net, as of March 31, 2021 |
$ | |||||||||||
____________ __ _ _ |
(1) |
Other items primarily consist of purchase and sale discounts or premiums, exit fees, and deferred origination expenses. | |||||
18
Blackstone Mortgage Trust, Inc.
Notes to Consolidated Financial Statements (continued)
(Unaudited)
The tables below detail the property type and geographic distribution of the properties securing the loans in our portfolio ($ in thousands):
| March 31, 2021 |
||||||||||||||||
| Property Type |
Number of Loans |
Net Book Value |
Total Loan Exposure (1)(2) |
Percentage of Portfolio |
||||||||||||
| Office |
|
$ | $ | |
||||||||||||
| Hospitality |
|
|
||||||||||||||
| Multifamily |
|
|
||||||||||||||
| Industrial |
|
|
||||||||||||||
| Retail |
|
|
||||||||||||||
| Life Sciences |
|
|
||||||||||||||
| Self-Storage |
|
|
||||||||||||||
| Condominium |
|
|
||||||||||||||
| Other |
|
|
||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Total loans receivable |
$ |
$ |
||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| CECL reserve |
( |
) | ||||||||||||||
| |
|
|||||||||||||||
| Loans receivable, net |
$ | |||||||||||||||
| |
|
|||||||||||||||
| Geographic Location |
Number of Loans |
Net Book Value |
Total Loan Exposure (1)(2) |
Percentage of Portfolio |
||||||||||||
| United States |
||||||||||||||||
| Northeast |
|
$ | $ | |
||||||||||||
| West |
|
|
||||||||||||||
| Southeast |
|
|
||||||||||||||
| Midwest |
|
|
||||||||||||||
| Southwest |
|
|
||||||||||||||
| Northwest |
|
— | ||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Subtotal |
|
|
||||||||||||||
| International |
||||||||||||||||
| United Kingdom |
|
|
||||||||||||||
| Ireland |
|
|
||||||||||||||
| Spain |
|
|
||||||||||||||
| Australia |
|
|
||||||||||||||
| Canada |
|
— | ||||||||||||||
| Other Europe |
|
|
||||||||||||||
| |
|
|
|
|
|
|
|
|||||||||
| Subtotal |
|
|||||||||||||||