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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2022-02-09 compared with 2021-02-10 · 62 added, 39 removed, 67 unchanged (60% of the section changed)

6 unchanged sentences

In certain instances where we have financed fixed rate assets with floating rate liabilities, we have purchased interest rate caps to limit our exposure to increases in interest rates on such liabilities.

LIBOR and certain other floating rate benchmark indices to which our floating rate loans and other loan agreements are tied, including, without limitation, the Euro Interbank Offered Rate, the Canadian Dollar Offered Rate and the Australian Bank Bill Swap Reference Rate, or collectively, IBORs, are the subject of recent national, international and regulatory guidance and proposals for reform.

On November 30, 2020, the Financial Conduct Authority of the U.K., or FCA, which has statutory powers to require panel banks to contribute to LIBOR where necessary, announced that subject to confirmation following its consultation with the administrator of LIBOR, it would cease publication of the one-week and two-month USD LIBOR immediately after December 31, 2021 and cease publication of the remaining tenors immediately after June 30, 2023.

Additionally, the Federal Reserve Board has advised banks to stop entering into new USD LIBOR based contracts.

LIBOR and certain other floating rate benchmark indices to which our floating rate loans and other loan agreements are tied, including, without limitation, the Euro Interbank Offered Rate, or EURIBOR, the Stockholm Interbank Offered Rate, or STIBOR, the Australian Bank Bill Swap Reference Rate, or BBSY, the Canadian Dollar Offered Rate, or CDOR, and the Swiss Average Rate Overnight, or SARON, or collectively, IBORs, are the subject of recent national, international and regulatory guidance and proposals for reform.

As of December 31, 2021, the ICE Benchmark Association, or IBA, ceased publication of all non-USD LIBOR and previously announced its intention to cease publication of remaining U.S.

dollar LIBOR settings immediately after June 30, 2023.

Federal Reserve, in conjunction with the Alternative Reference Rates Committee, a steering committee comprised of large U.S.

financial institutions, has identified the Secured Overnight Financing Rate, or SOFR, a new index calculated by short-term repurchase agreements, backed by Treasury securities, as its preferred alternative rate for LIBOR.

At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates as the transition away from the IBOR benchmarks is anticipated in coming years.

financial institutions, has identified the Secured Overnight Financing Rate, or SOFR, a new index calculated using short-term repurchase agreements backed by Treasury securities, as its preferred alternative rate for USD LIBOR.

Market participants have started to transition to the Sterling Overnight Index Average, or SONIA, in line with guidance from the U.K.

As of December 31, 2021, one-month SOFR is utilized as the floating benchmark rate on 16 of our loans, the financing provided on the 2020 FL3 and 2020 FL2 CLOs, plus a credit spread adjustment, and one of our credit facilities.

Additionally, as of December 31, 2021, daily compounded SONIA is utilized as the floating benchmark rate on nine of our loans and five of our credit facilities.

At this time, it is not possible to predict how markets will respond to SOFR, SONIA, or other alternative reference rates as the transition away from USD LIBOR and GBP LIBOR proceeds.

Despite the LIBOR transition in other markets, benchmark rate methodologies in Europe, Australia, Canada, and Switzerland have been reformed and rates such as EURIBOR, STIBOR, BBSY, CDOR, and SARON may persist as International Organization of Securities Commissions, or IOSCO, compliant reference rates moving forward.

However, multi-rate environments may persist in these markets as regulators and working groups have suggested market participants adopt alternative reference rates.

Refer to “Part I.

7 unchanged sentences

Decrease in Rates (4)

25 Basis Points

Currency 25 Basis Points

50 Basis Points

1 unchanged sentence

50 Basis Points

USD $ 17,048,180 Income $ 18,443 $ 40,991 $ (3,253) $ (3,253)

(13,486,462) Expense (22,894) (45,937) 9,435 9,435

$ 3,561,718 Net interest $ (4,451) $ (4,946) $ 6,182 $ 6,182

EUR $ 3,148,250 Income $ — $ — $ — $ —

(2,333,524) Expense — — — —

$ 814,726 Net interest $ — $ — $ — $ —

GBP $ 2,331,881 Income $ 3,660 $ 7,330 $ (3,018) $ (3,070)

(1,743,519) Expense (3,487) (6,974) 3,005 $3,131

$ 588,362 Net interest $ 173 $ 356 $ (13) $ 61

$ 1,137,905 Income $ 1,762 $ 3,534 $ (49) $ (52)

(888,118) Expense (1,776) (3,552) 435 518

$ 249,787 Net interest $ (14) $ (18) $ 386 $ 466

Total net interest $ (4,292) $ (4,608) $ 6,555 $ 6,709

2 unchanged sentences

Increases (decreases) in interest income and expense are presented net of incentive fees.

In addition, $14.2 billion of our loans earned interest based on floors that are above the applicable index as of December 31, 2020.

Refer to Note 12 to our consolidated financial statements for additional details of our incentive fee calculation.

1 unchanged sentence

Refer to Notes 4 and 16 to our consolidated financial statements for details of the subordinate position we own in the 2018 Single Asset Securitization.

Includes amounts outstanding under secured debt agreements, securitizations, asset-specific financings, and secured term loans.

(3) Includes amounts outstanding under secured debt, securitizations, asset-specific financings, and term loans.

(4) Decrease in rates assumes the applicable benchmark rate for each currency does not decrease below 0%.

Assets balance includes a loan denominated in British Pound Sterling, with an outstanding principal balance of £146.2 million as of December 31, 2020, that is hedged to Euro exposure through a foreign currency forward contract.

Refer to Note 10 to our consolidated financial statements for additional discussion of our foreign currency derivatives.

(5) Includes Swedish Krona, Australian Dollar, Canadian Dollar, and Swiss Franc currencies.

Investment Portfolio Value

2 unchanged sentences

Risk of Non-Performance

In addition to the risks related to fluctuations in cash flows and asset values associated with movements in interest rates, there is also the risk of non-performance

on floating rate assets.

In the case of a significant increase in interest rates, the additional debt service payments due from our borrowers may strain the operating cash flows of the collateral real estate assets and, potentially, contribute to non-performance

or, in severe cases, default.

In addition to the risks related to fluctuations in cash flows and asset values associated with movements in interest rates, there is also the risk of non-performance on floating rate assets.

This risk is partially mitigated by various facts we consider during our underwriting process, which in certain cases include a requirement for our borrower to purchase an interest rate cap contract.

1 unchanged sentence

The performance and value of our loans and investments depend upon the sponsors’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us.

To monitor this risk, our Manager’s asset management team reviews our investment portfolios and in certain instances is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

enforcing our rights as necessary.

In addition, we are exposed to the risks generally associated with the commercial real estate market, including variances in occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control.

We seek to manage these risks through our underwriting and asset management processes.

pandemic has significantly impacted the commercial real estate markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development projects currently planned or underway.

These negative conditions have persisted, and in the future may continue to persist and impair our borrowers’ ability to pay principal and interest due to us under our loan agreements.

We maintain a robust asset management relationship with our borrowers and have utilized these relationships to address the potential impacts of the COVID-19

pandemic on our loans secured by properties experiencing cash flow pressure, most significantly hospitality assets.

Some of our borrowers have indicated that due to the impact of the COVID-19

pandemic, they will be unable to timely execute their business plans, have had to temporarily close their businesses, or have experienced other negative business consequences and have requested temporary interest deferral or forbearance, or other modifications of their loans.

During the three months ended December 31, 2020, we closed 18 loan modifications, representing an aggregate principal balance of $2.5 billion, as of December 31, 2020.

During the year ended December 31, 2020, we closed 49 loan modifications, representing an aggregate principal balance of $6.5 billion, as of December 31, 2020.

The loan modifications primarily included term extensions, interest rate changes, repurposing of reserves, and performance test or covenant waivers, many of which were coupled with additional equity commitments from sponsors, with virtually no interest deferrals.

We are generally encouraged by our borrowers’ initial response to the COVID-19

pandemic’s impacts on their properties.

With limited exceptions, we believe our loan sponsors are committed to supporting assets collateralizing our loans through additional equity investments, and that we will benefit from our long-standing core business model of originating senior loans collateralized by large assets in major markets with experienced, well-capitalized institutional sponsors.

The COVID-19 pandemic significantly impacted the commercial real estate markets, causing reduced occupancy, requests from tenants for rent deferral or abatement, and delays in construction and development projects currently planned or underway.

While the economy has improved significantly, macroeconomic trends associated with the COVID-19 pandemic have persisted and could continue to persist and impair our borrowers’ ability to pay principal and interest due to us under our loan agreements.

We maintain a robust asset management relationship with our borrowers and utilize these relationships to maximize the performance of our portfolio, including during periods of volatility, such as the COVID-19 pandemic.

We believe that we will benefit from these relationships and from our long-standing core business model of originating senior loans collateralized by large assets in major markets with experienced, well-capitalized institutional sponsors.

Our investment portfolio’s low origination weighted-average LTV of 64.4% as of December 31, 2021 reflects significant equity value that our sponsors are motivated to protect through periods of cyclical disruption.

1 unchanged sentence

Our Manager’s portfolio monitoring and asset management operations benefit from the deep knowledge, experience, and information advantages derived from its position as part of Blackstone’s real estate platform.

Blackstone Real Estate is one of the largest owners and operators of real estate in the world, with a proven track record of successfully navigating market cycles and emerging stronger through periods of volatility.

The market-leading real estate expertise derived from the strength of the Blackstone platform deeply informs our credit and underwriting process, and we believe gives us the tools to expertly manage our asset portfolio and work with our borrowers throughout periods of economic stress and uncertainty.

Blackstone has built the world's preeminent global real estate business, with a proven track record of successfully navigating market cycles and emerging stronger through periods of volatility.

The market-leading real estate expertise derived from the strength of the Blackstone platform deeply informs our credit and underwriting process, and gives us the tools to expertly asset manage our portfolio and work with our borrowers throughout periods of economic stress and uncertainty.

Capital Market Risks

4 unchanged sentences

Margin call provisions under our credit facilities do not permit valuation adjustments based on capital markets events, and are limited to collateral-specific credit marks generally determined on a commercially reasonable basis.

During the three months ended June 30, 2020, we entered into agreements with our seven largest secured credit facility lenders, representing an aggregate $7.9 billion of our secured credit facilities as of June 30, 2020, to temporarily suspend credit mark provisions and pre-approve

certain loan modifications to certain of their portfolio assets, primarily in exchange for cash repayments and pledging additional loan collateral.

During the three months ended December 31, 2020, we extended the credit facility modification agreements with the seven lenders without any further deleveraging or increased cost.

Counterparty Risk

8 unchanged sentences

As a result, we substantially reduce our exposure to changes in portfolio value related to changes in foreign currency rates.

The following tables outline our assets and liabilities that are denominated in a foreign currency (€/£/C$/A$ in thousands):

In addition, substantially all of our net asset exposure to the Euro, the British Pound Sterling, the Swedish Krona, the Canadian Dollar, the Australian Dollar, and the Swiss Franc has been hedged with foreign currency forward contracts as of December 31, 2021 and December 31, 2020.

The following table outlines our assets and liabilities that are denominated in a foreign currency (amounts in thousands):

December 31, 2021

EUR GBP All Other (4)

Foreign currency assets (1)(2)

€ 2,845,833 £ 1,789,220 $ 1,168,242

Foreign currency liabilities (1)

(2,097,126) (1,293,241) (890,386)

Foreign currency contracts – notional (731,182) (489,204) (270,555)

Net exposure to exchange rate fluctuations € 17,525 £ 6,775 $ 7,301

Balances include non-consolidated

senior interests of £198.8 million.

Euro balance includes a loan denominated in British Pound Sterling, with an outstanding principal balance of £146.2 million as of December 31, 2020, that is hedged to Euro exposure through a foreign currency forward contract.

Net exposure to exchange rate fluctuations in USD (3)

$ 19,926 $ 9,168 $ 7,301

(1) Balances include non-consolidated senior interests of £196.8 million.

(2) British Pound Sterling balance includes a loan denominated in Euro, with an outstanding principal balance of €8.3 million as of December 31, 2021, that is hedged to British Pound Sterling exposure through a foreign currency forward contract.

Refer to Note 11 to our consolidated financial statements for additional discussion of our foreign currency derivatives.

(3) Represents the U.S.

Dollar equivalent as of December 31, 2021.

(4) Includes Swedish Krona, Australian Dollar, Canadian Dollar, and Swiss Franc currencies.

December 31, 2020

EUR GBP All Other (4)

Foreign currency assets (1)(2)

€ 2,817,831 £ 1,400,798 $ 287,103

Foreign currency liabilities (1)

(2,044,299) (1,023,437) (207,381)

Foreign currency contracts – notional (763,132) (372,487) (75,527)

Net exposure to exchange rate fluctuations € 10,400 £ 4,874 $ 4,195

Balances include non-consolidated

senior interests of £302.0 million.

Substantially all of our net asset exposure to the Euro, the British Pound Sterling, the Australian Dollar, and the Canadian Dollar has been hedged with foreign currency forward contracts as of December 31, 2020.

Net exposure to exchange rate fluctuations in USD (3)

$ 11,472 $ 6,053 $ 4,195

(1) Balances include non-consolidated senior interests of £198.8 million.

(2) Euro balance includes a loan denominated in British Pound Sterling, with an outstanding principal balance of £146.2 million as of December 31, 2020, that is hedged to Euro exposure through a foreign currency forward contract.

Refer to Note 11 to our consolidated financial statements for additional discussion of our foreign currency derivatives.

(3) Represents the U.S.

Dollar equivalent as of December 31, 2020.

(4) Includes Australian Dollar and Canadian Dollar.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements required by this item and the reports of the independent accountants thereon required by Item 14(a)(2) appear on pages F-2 to F-48.

See accompanying Index to the Consolidated Financial Statements on page F-1.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk