10-Q 1 breit-10q_20190331.htm 10-Q breit-10q_20190331.htm

 

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 MARCH 31, 2019

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: 000-55931

 

 

Blackstone Real Estate Income Trust, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

 

Maryland

81-0696966

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

345 Park Avenue

New York, New York 10154

(Address of principal executive offices) (Zip Code)

(212) 583-5000

(Registrant’s telephone number, including area code)

 

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 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).    Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

 

Large accelerated filer

 

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.    Yes      No  

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes      No  

 

Securities registered pursuant to Section 12(b) of the Act: None

 

As of May 15, 2019, the issuer had the following shares outstanding: 356,946,820 shares of Class S common stock, 30,378,974 shares of Class T common stock, 46,242,127 shares of Class D common stock, and 151,588,240 shares of Class I common stock.

 

 


TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

1

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

1

 

 

 

 

Condensed Consolidated Financial Statements (Unaudited):

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018

1

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2019 and 2018

2

 

 

 

 

Condensed Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2019 and 2018

3

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018

4

 

 

 

 

Notes to Condensed Consolidated Financial Statements

5

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

22

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

39

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

39

 

 

 

PART II.

OTHER INFORMATION

40

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

40

 

 

 

ITEM 1A.

RISK FACTORS

40

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

41

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

42

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

42

 

 

 

ITEM 5.

OTHER INFORMATION

42

 

 

 

ITEM 6.

EXHIBITS

43

 

 

 

SIGNATURES

44

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Blackstone Real Estate Income Trust, Inc.

Condensed Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share data)

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Assets

 

 

 

 

 

 

 

 

Investments in real estate, net

 

$

11,322,056

 

 

$

10,259,687

 

Investments in real estate-related securities and loans

 

 

2,386,131

 

 

 

2,259,913

 

Cash and cash equivalents

 

 

152,756

 

 

 

68,089

 

Restricted cash

 

 

488,100

 

 

 

238,524

 

Other assets

 

 

386,749

 

 

 

410,945

 

Total assets

 

$

14,735,792

 

 

$

13,237,158

 

 

 

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Mortgage notes, term loans, and revolving credit facilities, net

 

$

7,195,847

 

 

$

6,833,269

 

Repurchase agreements

 

 

1,781,149

 

 

 

1,713,723

 

Due to affiliates

 

 

317,970

 

 

 

301,581

 

Accounts payable, accrued expenses, and other liabilities

 

 

817,987

 

 

 

464,398

 

Total liabilities

 

 

10,112,953

 

 

 

9,312,971

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

Redeemable non-controlling interest

 

 

31,135

 

 

 

9,233

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value per share, 100,000,000 shares authorized; no shares issued

   and outstanding as of March 31, 2019 and December 31, 2018

 

 

 

 

 

 

Common stock — Class S shares, $0.01 par value per share, 500,000,000 shares authorized;

   318,995,204 and 276,989,019 shares issued and outstanding as of March 31, 2019 and

   December 31, 2018, respectively

 

 

3,190

 

 

 

2,770

 

Common stock — Class T shares, $0.01 par value per share, 500,000,000 shares authorized;

  26,702,162 and 23,313,429 shares issued and outstanding as of March 31, 2019 and

   December 31, 2018, respectively

 

 

267

 

 

 

233

 

Common stock — Class D shares, $0.01 par value per share, 500,000,000 shares authorized;

  38,119,939 and 30,375,353 shares issued and outstanding as of March 31, 2019 and

   December 31, 2018, respectively

 

 

381

 

 

 

304

 

Common stock — Class I shares, $0.01 par value per share, 500,000,000 shares authorized;

   132,218,607 and 108,261,331 shares issued and outstanding as of March 31, 2019 and

   December 31, 2018, respectively

 

 

1,322

 

 

 

1,083

 

Additional paid-in capital

 

 

5,115,490

 

 

 

4,327,444

 

Accumulated deficit and cumulative distributions

 

 

(703,936

)

 

 

(587,548

)

Total stockholders' equity

 

 

4,416,714

 

 

 

3,744,286

 

    Non-controlling interests attributable to third party joint ventures

 

 

77,173

 

 

 

75,592

 

    Non-controlling interests attributable to BREIT OP unitholders

 

 

97,817

 

 

 

95,076

 

Total equity

 

 

4,591,704

 

 

 

3,914,954

 

Total liabilities and equity

 

$

14,735,792

 

 

$

13,237,158

 

 

See accompanying notes to condensed consolidated financial statements.

1


 

Blackstone Real Estate Income Trust, Inc.

Condensed Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

 

 

Three Months Ended March 31,

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

Rental revenue

$

212,197

 

 

$

87,561

 

Hotel revenue

 

75,266

 

 

 

17,821

 

Other revenue

 

9,628

 

 

 

4,302

 

Total revenues

 

297,091

 

 

 

109,684

 

Expenses

 

 

 

 

 

 

 

Rental property operating

 

87,811

 

 

 

38,618

 

Hotel operating

 

51,320

 

 

 

11,614

 

General and administrative

 

3,181

 

 

 

2,045

 

Management fee

 

17,177

 

 

 

6,969

 

Performance participation allocation

 

20,163

 

 

 

7,873

 

Depreciation and amortization

 

139,479

 

 

 

74,124

 

Total expenses

 

319,131

 

 

 

141,243

 

Other income (expense)

 

 

 

 

 

 

 

Income from real estate-related securities and loans

 

61,683

 

 

 

13,235

 

Interest income

 

194

 

 

 

77

 

Interest expense

 

(91,587

)

 

 

(31,391

)

Other income (expense)

 

1,654

 

 

 

 

Total other income (expense)

 

(28,056

)

 

 

(18,079

)

Net loss

$

(50,096

)

 

$

(49,638

)

Net loss attributable to non-controlling interests in third party joint ventures

$

2,036

 

 

$

1,716

 

Net loss attributable to non-controlling interests in BREIT OP

 

1,214

 

 

 

374

 

Net loss attributable to BREIT stockholders

$

(46,846

)

 

$

(47,548

)

Net loss per share of common stock — basic and diluted

$

(0.10

)

 

$

(0.23

)

Weighted-average shares of common stock outstanding, basic and diluted

 

488,760,077

 

 

 

206,104,310

 

See accompanying notes to condensed consolidated financial statements.

 

 

2


 

Blackstone Real Estate Income Trust, Inc.

Condensed Consolidated Statements of Changes in Equity (Unaudited)

(in thousands, except per share data)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-

controlling

 

 

Non-

controlling

 

 

 

 

 

 

 

Par Value

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Interests

 

 

Interests

 

 

 

 

 

 

 

Common

 

 

Common

 

 

Common

 

 

Common

 

 

Additional

 

 

Deficit and

 

 

Total

 

 

Attributable

 

 

Attributable

 

 

 

 

 

 

 

Stock

 

 

Stock

 

 

Stock

 

 

Stock

 

 

Paid-in

 

 

Cumulative

 

 

Stockholders'

 

 

to Third Party

 

 

to BREIT OP

 

 

Total

 

 

 

Class S

 

 

Class T

 

 

Class D

 

 

Class I

 

 

Capital

 

 

Distributions

 

 

Equity

 

 

Joint Ventures

 

 

Unitholders

 

 

Equity

 

Balance at December 31, 2017

 

$

1,301

 

 

$

56

 

 

$

40

 

 

$

307

 

 

$

1,616,720

 

 

$

(132,633

)

 

$

1,485,791

 

 

$

23,848

 

 

$

 

 

$

1,509,639

 

Common stock issued

 

 

325

 

 

 

42

 

 

 

28

 

 

 

163

 

 

 

593,143

 

 

 

 

 

 

593,701

 

 

 

 

 

 

 

 

 

593,701

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,361

)

 

 

 

 

 

(37,361

)

 

 

 

 

 

 

 

 

(37,361

)

Distribution reinvestment

 

 

11

 

 

 

 

 

 

 

 

 

4

 

 

 

16,482

 

 

 

 

 

 

16,497

 

 

 

 

 

 

 

 

 

16,497

 

Common stock repurchased

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

 

 

(2,294

)

 

 

 

 

 

(2,296

)

 

 

 

 

 

 

 

 

(2,296

)

Amortization of restricted stock grant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Net loss ($347 allocated to redeemable non-controlling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(47,548

)

 

 

(47,548

)

 

 

(1,716

)

 

 

 

 

 

(49,264

)

Distributions declared on common stock ($0.1552 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,384

)

 

 

(28,384

)

 

 

 

 

 

 

 

 

(28,384

)

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,940

 

 

 

 

 

 

6,940

 

Distributions to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(581

)

 

 

 

 

 

(581

)

Allocation to redeemable non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(883

)

 

 

 

 

 

(883

)

 

 

 

 

 

 

 

 

(883

)

Balance at March 31, 2018

 

$

1,636

 

 

$

98

 

 

$

68

 

 

$

473

 

 

$

2,185,832

 

 

$

(208,565

)

 

$

1,979,542

 

 

$

28,491

 

 

$

 

 

$

2,008,033

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

$

2,770

 

 

$

233

 

 

$

304

 

 

$

1,083

 

 

$

4,327,444

 

 

$

(587,548

)

 

$

3,744,286

 

 

$

75,592

 

 

$

95,076

 

 

$

3,914,954

 

Common stock issued

 

 

414

 

 

 

38

 

 

 

75

 

 

 

245

 

 

 

843,347

 

 

 

 

 

 

844,119

 

 

 

 

 

 

 

 

 

844,119

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(50,847

)

 

 

 

 

 

(50,847

)

 

 

 

 

 

 

 

 

(50,847

)

Distribution reinvestment

 

 

24

 

 

 

2

 

 

 

2

 

 

 

11

 

 

 

41,995

 

 

 

 

 

 

42,034

 

 

 

 

 

 

 

 

 

42,034

 

Common stock repurchased

 

 

(18

)

 

 

(6

)

 

 

 

 

 

(18

)

 

 

(45,468

)

 

 

 

 

 

(45,510

)

 

 

 

 

 

 

 

 

(45,510

)

Amortization of compensation awards

 

 

 

 

 

 

 

 

 

 

 

1

 

 

 

99

 

 

 

 

 

 

100

 

 

 

 

 

 

500

 

 

 

600

 

Net loss ($277 allocated to redeemable non-controlling interest)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(46,846

)

 

 

(46,846

)

 

 

(2,036

)

 

 

(937

)

 

 

(49,819

)

Distributions declared on common stock ($0.1582 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(69,542

)

 

 

(69,542

)

 

 

 

 

 

 

 

 

(69,542

)

Contributions from non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,894

 

 

 

4,714

 

 

 

9,608

 

Distributions to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,277

)

 

 

(1,536

)

 

 

(2,813

)

Allocation to redeemable non-controlling interest

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,080

)

 

 

 

 

 

(1,080

)

 

 

 

 

 

 

 

 

(1,080

)

Balance at March 31, 2019

 

$

3,190

 

 

$

267

 

 

$

381

 

 

$

1,322

 

 

$

5,115,490

 

 

$

(703,936

)

 

$

4,416,714

 

 

$

77,173

 

 

$

97,817

 

 

$

4,591,704

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

3


 

Blackstone Real Estate Income Trust, Inc.

Condensed Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(50,096

)

 

$

(49,638

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Management fee

 

 

17,177

 

 

 

6,969

 

Performance participation allocation

 

 

20,163

 

 

 

7,873

 

Depreciation and amortization

 

 

139,479

 

 

 

74,124

 

Unrealized gain on changes in fair value of financial instruments

 

 

(30,003

)

 

 

(1,789

)

Other items

 

 

1,477

 

 

 

813

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

(Increase) / decrease in other assets

 

 

(26,092

)

 

 

(14,876

)

Increase / (decrease) in due to affiliates

 

 

(981

)

 

 

(455

)

Increase / (decrease) in accounts payable, accrued expenses, and other liabilities

 

 

1,912

 

 

 

18,469

 

Net cash provided by operating activities

 

 

73,036

 

 

 

41,490

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisitions of real estate

 

 

(735,508

)

 

 

(2,030,126

)

Capital improvements to real estate

 

 

(32,672

)

 

 

(6,086

)

Purchase of real estate-related securities and loans

 

 

(124,258

)

 

 

(259,553

)

Proceeds from settlement of real estate-related securities and loans

 

 

28,948

 

 

 

115,619

 

Net cash used in investing activities

 

 

(863,490

)

 

 

(2,180,146

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

649,725

 

 

 

479,821

 

Offering costs paid

 

 

(14,134

)

 

 

(7,979

)

Subscriptions received in advance

 

 

423,943

 

 

 

150,213

 

Repurchase of common stock

 

 

(38,427

)

 

 

(1,260

)

Redemption of redeemable non-controlling interest

 

 

(4,314

)

 

 

 

Borrowings from mortgage notes, term loans, and revolving credit facilities

 

 

896,861

 

 

 

1,821,620

 

Repayments from mortgage notes, term loans, and revolving credit facilities

 

 

(823,483

)

 

 

(336,100

)

Borrowings under repurchase agreements

 

 

82,045

 

 

 

216,987

 

Settlement of repurchase agreements

 

 

(14,619

)

 

 

(89,557

)

Borrowings from affiliate line of credit

 

 

 

 

 

206,500

 

Repayments on affiliate line of credit

 

 

 

 

 

(211,750

)

Payment of deferred financing costs

 

 

(8,343

)

 

 

(11,180

)

Contributions from non-controlling interests

 

 

2,374

 

 

 

6,940

 

Distributions to non-controlling interests

 

 

(3,158

)

 

 

(581

)

Distributions

 

 

(23,773

)

 

 

(9,079

)

Net cash provided by financing activities

 

 

1,124,697

 

 

 

2,214,595

 

Net change in cash and cash equivalents and restricted cash

 

 

334,243

 

 

 

75,939

 

Cash and cash equivalents and restricted cash, beginning of period

 

 

306,613

 

 

 

157,729

 

Cash and cash equivalents and restricted cash, end of period

 

$

640,856

 

 

$

233,668

 

Reconciliation of cash and cash equivalents and restricted cash to the condensed consolidated balance sheets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

152,756

 

 

$

51,034

 

Restricted cash

 

 

488,100

 

 

 

182,634

 

Total cash and cash equivalents and restricted cash

 

$

640,856

 

 

$

233,668

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Assumption of mortgage notes in conjunction with acquisitions of real estate

 

$

291,618

 

 

$

67,140

 

Assumption of other liabilities in conjunction with acquisitions of real estate

 

$

4,527

 

 

$

33,456

 

Recognition of financing lease liability

 

$

56,008

 

 

$

 

Contributions from non-controlling interests

 

$

2,520

 

 

$

 

Accrued capital expenditures and acquisition related costs

 

$

4,362

 

 

$

1,870

 

Accrued distributions

 

$

3,839

 

 

$

2,808

 

Accrued stockholder servicing fee due to affiliate

 

$

36,936

 

 

$

28,868

 

Accrued offering costs due to affiliate

 

$

 

 

$

508

 

Redeemable non-controlling interest issued as settlement of performance participation allocation

 

$

37,484

 

 

$

16,974

 

Exchange of redeemable non-controlling interest for Class I shares

 

$

11,620

 

 

$

1,036

 

Allocation to redeemable non-controlling interest

 

$

1,080

 

 

$

883

 

Distribution reinvestment

 

$

42,034

 

 

$

16,497

 

Accrued common stock repurchases

 

$

5,046

 

 

$

1,036

 

Accrued common stock repurchases due to affiliate

 

$

2,037

 

 

$

 

Issuance of BREIT OP units as settlement of affiliate incentive compensation awards

 

$

4,714

 

 

$

 

 

See accompanying notes to condensed consolidated financial statements.

4


 

Blackstone Real Estate Income Trust, Inc.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Business Purpose

Blackstone Real Estate Income Trust, Inc. (“BREIT” or the “Company”) was formed on November 16, 2015 as a Maryland corporation and qualifies as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. The Company invests primarily in stabilized income-oriented commercial real estate in the United States and, to a lesser extent, in real estate-related securities and loans. The Company is the sole general partner of BREIT Operating Partnership, L.P., a Delaware limited partnership (“BREIT OP”). BREIT Special Limited Partner L.P. (the “Special Limited Partner”), a wholly-owned subsidiary of The Blackstone Group L.P. (together with its affiliates, “Blackstone”), owns a special limited partner interest in BREIT OP. Substantially all of the Company’s business is conducted through BREIT OP. The Company and BREIT OP are externally managed by BX REIT Advisors L.L.C. (the “Adviser”), an affiliate of Blackstone.  

The Company had registered with the Securities and Exchange Commission (the “SEC”) an offering of up to $5.0 billion in shares of common stock, consisting of up to $4.0 billion in shares in its primary offering and up to $1.0 billion in shares pursuant to its distribution reinvestment plan (the “Initial Offering”). The Company accepted aggregate gross offering proceeds of $4.9 billion during the period January 1, 2017 to January 1, 2019 and ceased offering shares of common stock under the Initial Offering on January 1, 2019. The Company has registered with the SEC a follow-on offering of up to $12.0 billion in shares of common stock, consisting of up to $10.0 billion in shares in its primary offering and up to $2.0 billion in shares pursuant to its distribution reinvestment plan, which the Company began using to offer shares of common stock in January 2019 (the “Current Offering” and with the Initial Offering, the “Offering”). The Company intends to sell any combination of four classes of shares of its common stock, with a dollar value up to the maximum aggregate amount of the Current Offering. The share classes have different upfront selling commissions, dealer manager fees and ongoing stockholder servicing fees. As of March 31, 2019, the Company had received net proceeds of $5.5 billion from selling shares in the Offering. The Company intends to continue selling shares on a monthly basis.

As of March 31, 2019, the Company owned 491 properties and had 118 positions in real estate-related securities and loans. The Company currently operates in five reportable segments: Multifamily, Industrial, Hotel, and Retail Properties, and Real Estate-Related Securities and Loans. Multifamily includes various forms of rental housing including apartments, student housing and manufactured housing. Financial results by segment are reported in Note 13 — Segment Reporting.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The condensed consolidated financial statements, including the condensed notes thereto, 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 condensed consolidated financial statements are presented fairly and that estimates made in preparing its condensed consolidated financial statements are reasonable and prudent. The accompanying unaudited condensed consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC.

Certain amounts in the Company’s prior period condensed consolidated financial statements have been reclassified to conform to the current period presentation. The Company has chosen to aggregate certain financial statement line items in the Company’s condensed consolidated statements of operations and condensed consolidated statements of cash flows. Such reclassifications had no effect on total revenues or net loss on the condensed consolidated statements of operations or previously reported totals or subtotals in the condensed consolidated statements of cash flows.

The accompanying condensed consolidated financial statements include the accounts of the Company, the Company’s subsidiaries and joint ventures in which the Company has a controlling interest. For consolidated joint ventures, the non-controlling partner’s share of the assets, liabilities and operations of the joint ventures is included in non-controlling interests as equity of the Company. The non-controlling partner’s interest is generally computed as the joint venture partner’s ownership percentage. All intercompany balances and transactions have been eliminated in consolidation.

5


 

The Company consolidates partially owned entities in which it has a controlling financial interest. In determining whether the Company has a controlling financial interest in a partially owned entity and the requirement to consolidate the accounts of that entity, the Company considers whether the entity is a variable interest entity (“VIE”) and whether it is the primary beneficiary. The Company is the primary beneficiary of a VIE when it has (i) the power to direct the most significant activities impacting the economic performance of the VIE and (ii) the obligation to absorb losses or receive benefits significant to the VIE. BREIT OP and each of the Company’s joint ventures are considered to be a VIE. The Company consolidates these entities because it has the ability to direct the most significant activities of the entities such as purchases, dispositions, financings, budgets, and overall operating plans.

As of March 31, 2019, the total assets and liabilities of the Company’s consolidated VIEs, excluding BREIT OP, were $3.6 billion and $2.5 billion, respectively, compared to $2.8 billion and $1.9 billion as of December 31, 2018. Such amounts are included on the Company’s Condensed Consolidated Balance Sheets.

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.

Fair Value Option

The Company elected the fair value option (“FVO”) for its investments in term loans. Unrealized gains and losses on the value of financial instruments for which the FVO has been elected are recorded as a component of net income or loss. The Company records any unrealized gains or losses on its investments in term loans as a component of Income from Real Estate-Related Securities and Loans on the Condensed Consolidated Statements of Operations.

Fair Value Measurements

Under normal market conditions, the fair value of an investment is the amount that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price). Additionally, there is a hierarchal framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment and the state of the marketplace, including the existence and transparency of transactions between market participants. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following levels within the fair value hierarchy:

Level 1 — quoted prices are available in active markets for identical investments as of the measurement date. The Company does not adjust the quoted price for these investments.

Level 2 — quoted prices are available in markets that are not active or model inputs are based on inputs that are either directly or indirectly observable as of the measurement date.

Level 3 — pricing inputs are unobservable and include instances where there is minimal, if any, market activity for the investment. These inputs require significant judgment or estimation by management or third parties when determining fair value and generally represent anything that does not meet the criteria of Levels 1 and 2. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had a ready market for these investments existed.

As of March 31, 2019 and December 31, 2018, the Company’s $2.4 billion and $2.3 billion, respectively, of investments in Real Estate-Related Securities and Loans were classified as Level 2.

Valuation

The Company’s investments in real estate-related securities and loans are reported at fair value. As of March 31, 2019, the Company’s investments in real estate-related securities and loans consisted of commercial mortgage-backed securities (“CMBS”), which are mortgage-related fixed income securities, corporate bonds, and term loans of real estate-related companies. The Company generally determines the fair value of its real estate-related securities and loans by utilizing third-party pricing service providers and broker-dealer quotations on the basis of last available bid price. 

6


 

In determining the fair 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. The pricing service providers’ internal models for securities such as real estate-related securities and loans generally consider the attributes applicable to a particular class of the security (e.g., credit rating, seniority), current market data, and estimated cash flows for each class and incorporate deal collateral performance such as prepayment speeds and default rates, as available.

As of March 31, 2019, the fair value of the Company’s mortgage notes, term loans, revolving credit facilities, repurchase agreements, and affiliate line of credit was approximately $17.6 million above carrying value. Fair value of the Company’s indebtedness is estimated by modeling the cash flows required by the Company’s debt agreements and discounting them back to the present value using the appropriate discount rate. Additionally, the Company considers current market rates and conditions by evaluating similar borrowing agreements with comparable loan-to-value ratios and credit profiles. The inputs used in determining the fair value of the Company’s indebtedness are considered Level 3.

 

Stock-Based Compensation

 

The Company’s stock-based compensation consists of incentive compensation awards issued to certain employees of affiliate portfolio company service providers. Such awards vest over the life of the awards and stock-based compensation expense is recognized for these awards in net income on a straight-line basis over the applicable vesting period of the award, based on the value of the awards at grant. Refer to Note 10 for additional information.

Recent Accounting Pronouncements

On January 1, 2019, the Company adopted Accounting Standards Update 2016-02 (“ASU 2016-02”), “Leases,” and all related amendments (codified in Accounting Standards Codification Topic 842 (“Topic 842”)). Certain of the Company’s investments in real estate are subject to ground leases, for which lease liabilities and corresponding right-of-use (“ROU”) assets were recognized as a result of adoption. The Company calculated the amount of the lease liabilities and ROU assets by taking the present value of the remaining lease payments, and adjusted the ROU assets for any existing straight-line ground rent liabilities and acquired ground lease intangibles. The Company’s estimated incremental borrowing rate of a loan with a similar term as the corresponding ground leases was used as the discount rate, which was determined to be approximately 7.0%. Considerable judgment and assumptions were required to estimate the Company’s incremental borrowing rate which was determined by considering the Company’s credit quality, ground lease duration, and debt yields observed in the market.

Three of the Company’s existing ground leases were classified as operating leases and upon adoption the Company recognized operating lease liabilities and corresponding ROU assets of $31.3 million. The Company’s existing below-market ground lease intangible asset of $4.5 million, above-market ground lease intangible liability of $4.6 million, and straight-line ground rent liability of $1.2 million were reclassified as of January 1, 2019 to be presented net of the operating ROU assets. In addition, the Company’s existing prepaid ground lease intangible asset of $15.7 million was reclassified as of January 1, 2019 to be presented along with the operating ROU assets.

On March 29, 2019, the Company made an acquisition which was subject to ground leases. The present value of the future lease payments under such leases exceeded the fair value of the underlying asset, as such the Company recorded financing lease liabilities and corresponding ROU assets of $56.0 million. The Company’s existing financing ROU asset of $6.1 million is presented along with the acquired financing ROU assets for total ROU assets of $62.1 million as of March 31, 2019. The Company’s financing lease liabilities include the Company’s existing financing lease liability in the amount of $4.3 million.

The lease liabilities are included as a component of Accounts Payable, Accrued Expenses, and Other Liabilities and the related ROU assets are recorded as a component of Investments in Real Estate, Net on the Company’s Condensed Consolidated Balance Sheet. Refer to Note 3 and Note 8 for additional information.

In transition, the Company elected the package of practical expedients to not reassess (i) whether existing arrangements are or contain a lease, (ii) the classification of an operating or financing lease in a period prior to adoption, and (iii) any initial direct costs for existing leases. Additionally, the Company elected to not use hindsight and carried forward its lease term assumptions when adopting Topic 842 and did not recognize lease liabilities and lease assets for leases with a term of 12 months or less. The Company applied ASU 2016-02 as of the effective date of January 1, 2019 and there was no impact to retained earnings as a result of the Company’s adoption.

7


 

The adoption of ASU 2016-02 for leases in which the Company is lessor did not have a material impact on the Company’s condensed consolidated financial statements. The Company elected to not separate non-lease components from lease components and presented lease related revenues as a single line item, net of bad debt expense on the Company’s Condensed Consolidated Statement of Operations. Prior to the adoption of ASU 2016-02 the Company separated lease related revenue between “rental revenue” and “tenant reimbursement income” and bad debt expense as a component of “rental property operating” expense. As a result of adoption, the Company reclassified the prior period balances of “tenant reimbursement income” to “rental revenue” to conform to the current period presentation. The Company did not reclassify the prior period balance of bad debt expense on its condensed consolidated statement of operations. The prior period operating lease income presented in “rental revenue” includes $9.0 million previously classified as “tenant reimbursement income” which was determined under the standard in effect prior to the Company’s adoption of ASU 2016-02. Refer to Note 3 for additional information.

3. Investments in Real Estate

Investments in real estate, net consisted of the following ($ in thousands):

 

 

 

March 31, 2019

 

 

December 31, 2018

 

Building and building improvements

 

$

9,285,485

 

 

$

8,389,864

 

Land and land improvements

 

 

2,090,200

 

 

 

1,961,977

 

Furniture, fixtures and equipment

 

 

204,182

 

 

 

182,418

 

Right of use asset - operating leases

 

 

45,678

 

 

 

 

Right of use asset - financing leases

 

 

62,130

 

 

 

 

Total

 

 

11,687,675

 

 

 

10,534,259

 

Accumulated depreciation

 

 

(365,619

)

 

 

(274,572

)

Investments in real estate, net

 

$

11,322,056

 

 

$

10,259,687

 

 

During the three months ended March 31, 2019, the Company acquired interests in 4 real estate investments, which were comprised of one industrial, 15 multifamily and one hotel property.

The following table provides further details of the properties acquired during the three months ended March 31, 2019 ($ in thousands):

 

Investment

 

Ownership

Interest(1)

 

 

Number of

Properties

 

 

Location

 

Segment

 

Acquisition

Date

 

Purchase

Price(2)

 

4500 Westport Drive

 

100%

 

 

 

1

 

 

Harrisburg, PA

 

Industrial

 

Jan. 2019

 

$

11,975

 

Roman Multifamily Portfolio

 

100%

 

 

 

14

 

 

Various(3)

 

Multifamily

 

Feb. 2019

 

 

857,540

 

Gilbert Heritage Apartments

 

90%

 

 

 

1

 

 

Phoenix, AZ

 

Multifamily

 

Feb. 2019

 

 

60,984

 

Courtyard Kona

 

100%

 

 

 

1

 

 

Kailua-Kona, HI

 

Hotel

 

Mar. 2019

 

 

105,587

 

 

 

 

 

 

 

 

17

 

 

 

 

 

 

 

 

$

1,036,086

 

 

(1)

Certain of the investments made by the Company provide the seller or the other partner a profits interest based on certain internal rate of return hurdles being achieved. Such investments are consolidated by the Company and any profits interest due to the other partner is reported wi