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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2022-07-27 compared with 2022-04-27 · 32 added, 34 removed, 62 unchanged (52% of the section changed)

3 unchanged sentences

Generally, our business model is such that rising interest rates will increase our net income, while declining interest rates will decrease net income.

As of March 31, 2022, 99% of our investments by total loan exposure earned a floating rate of interest and were financed with liabilities that pay interest at floating rates, which resulted in an amount of net equity that is positively correlated to rising interest rates, subject to the impact of interest rate floors on certain of our floating rate loans.

As of March 31, 2022 the remaining 1% of our investments by total investment exposure earned a fixed rate of interest.

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 the one-week and two-month USD LIBOR and, as previously announced, intends to cease publication of remaining U.S.

As of June 30, 2022, substantially all of our investments by total loan exposure earned a floating rate of interest and were financed with liabilities that pay interest at floating rates, which resulted in an amount of net equity that is positively correlated to rising interest rates, subject to the impact of interest rate floors on certain of our floating rate loans.

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, the Swiss Average Rate Overnight, or SARON, and the Copenhagen Interbank Offering Rate, or CIBOR, 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 the one-week and two-month USD LIBOR and, as and previously announced, intends to cease publication of remaining U.S.

dollar LIBOR settings immediately after June 30, 2023.

Further, on March 15, 2022, the Consolidated Appropriations Act of 2022, which includes the Adjustable Interest Rate (LIBOR) Act, was signed into law in the U.S.

This legislation establishes a uniform benchmark replacement process for financial contracts that mature after June 30, 2023 which do not contain clearly defined or practicable fallback provisions.

This legislation establishes a uniform benchmark replacement process for financial contracts maturing after June 30, 2023 that do not contain clearly defined or practicable fallback provisions.

The legislation also creates a safe harbor that shields lenders from litigation if they choose to utilize a replacement rate recommended by the Board of Governors of the Federal Reserve.

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 using short-term repurchase agreements backed by Treasury securities, as its preferred alternative rate for USD LIBOR.

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

financial institutions, has identified the Secured Overnight Financing Rate, or SOFR, a new index calculated using short-term repurchase agreements backed by U.S.

Treasury securities, as its preferred alternative rate for USD LIBOR.

As of June 30, 2022, one-month SOFR is utilized as the floating benchmark rate on 43 of our loans, the financing provided on the 2020 FL3 and 2020 FL2 CLOs, one of our asset-specific financings, and certain borrowings under eight of our credit facilities.

As of June 30, 2022, the one-month SOFR was 1.69% and one-month USD LIBOR was 1.79%.

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

As of March 31, 2022, one-month SOFR is utilized as the floating benchmark rate on 37 of our loans, the financing provided on the 2020 FL3 and 2020 FL2 CLOs, and certain borrowings under eight of our credit facilities.

As of March 31, 2022, the one-month SOFR was 0.30% and one-month USD LIBOR was 0.45%.

Additionally, as of March 31, 2022, daily compounded SONIA is utilized as the floating benchmark rate for all of our floating rate British Pound Sterling loans and related financings.

As of June 30, 2022, daily compounded SONIA is utilized as the floating benchmark rate for all of our floating rate British Pound Sterling loans and related financings.

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.

Despite the LIBOR transition in other markets, benchmark rate methodologies in Europe, Australia, Canada, Switzerland, and Denmark have been reformed and rates such as EURIBOR, STIBOR, BBSY, CDOR, SARON, and CIBOR 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.

1 unchanged sentence

Risk Factors—Risks Related to Our Lending and Investment Activities—The expected discontinuation of currently used financial reference rates and use of alternative replacement reference rates may adversely affect net interest income related to our loans and investments or otherwise adversely affect our results of operations, cash flows and the market value of our investments.” of our Annual Report on Form 10-K filed on February 9, 2022.

The following table projects the earnings impact on our interest income and expense, net of incentive fees, for the twelve-month period following March 31, 2022, of an increase in the various floating-rate indices referenced by our portfolio, assuming no change in credit spreads, portfolio composition, or asset performance, relative to the average indices during the three months ended March 31, 2022 ($ in thousands):

The following table projects the earnings impact on our interest income and expense, net of incentive fees, for the twelve-month period following June 30, 2022, of an increase in the various floating-rate indices referenced by our portfolio, assuming no change in credit spreads, portfolio composition, or asset performance, relative to the average indices during the three months ended June 30, 2022 ($ in thousands):

Assets (Liabilities) Sensitive to Changes in Interest Rates (1)

Interest Rate Sensitivity as of March 31, 2022 (2)

Increase in Rates

Decrease in Rates

Interest Rate Sensitivity as of June 30, 2022 (2)

Increase in Rates Decrease in Rates

50 Basis Points

12 unchanged sentences

Investment Portfolio Value

As of March 31, 2022, 1% of our portfolio by total loan exposure earned a fixed rate of interest and as such, the values of such loans are sensitive to changes in interest rates.

We generally hold all of our loans to maturity and so do not expect to realize gains or losses on our fixed rate loan portfolio as a result of movements in market interest rates.

As of June 30, 2022, substantially all of our portfolio earned a floating rate of interest, and so the value of our investments is generally not impacted by changes in market interest rates.

Additionally, we generally hold all of our loans to maturity and so do not expect to realize gains or losses on our loan portfolio.

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.

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 with an unaffiliated third party.

In the case of a significant increase in interest rates, the cash flows of the collateral real estate assets may not be sufficient to pay debt service due under our loans, which may contribute to non-performance or, in severe cases, default.

This risk is partially mitigated by our consideration of rising rate stress-testing during our underwriting process, which in certain cases include a requirement for our borrower to purchase an interest rate cap contract with an unaffiliated third-party, provide an interest reserve deposit, or provide other structural guarantees.

Our loans are also subject to credit risk.

The performance and value of our loans 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 loan portfolios and in certain instances is in regular contact with our borrowers, monitoring performance of the collateral and enforcing our rights as necessary.

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

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

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

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.

While the economy has improved, 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.

In addition, the U.S.

Federal Reserve’s recent actions to increase interest rates in order to control inflation have created further uncertainty for the economy and for our borrowers.

Although our business model is such that rising interest rates will, all else being equal, correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers.

It is difficult to predict the full impact of recent changes and any future changes in interest rates or inflation.

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.

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 loan portfolio’s low origination weighted-average LTV of 64.6% as of March 31, 2022 reflects significant equity value that our sponsors are motivated to protect through periods of cyclical disruption.

Our loan portfolio’s low origination weighted-average LTV of 63.9% as of June 30, 2022 reflects significant equity value that our sponsors are motivated to protect through periods of cyclical disruption.

While we believe the principal amounts of our loans are generally adequately protected by underlying collateral value, there is a risk that we will not realize the entire principal value of certain loans.

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.

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

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.

14 unchanged sentences

Our loans that are denominated in a foreign currency are also subject to risks related to fluctuations in currency rates.

We generally mitigate this exposure by matching the currency of our foreign currency assets to the currency of the borrowings that finance those assets.

We generally mitigate this exposure by matching the currency of our assets to the currency of the financing for our assets.

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

In addition, substantially all of our net asset exposure to foreign currencies has been hedged with foreign currency forward contracts as of March 31, 2022.

In addition, substantially all of our net asset exposure to foreign currencies has been hedged with foreign currency forward contracts as of June 30, 2022.

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

March 31, 2022

June 30, 2022

EUR GBP All Other (2)

Foreign currency assets € 2,802,691 £ 2,684,277 $ 2,165,717

€ 2,806,434 £ 2,450,287 $ 1,285,343

Foreign currency liabilities (2,074,034) (1,999,181) (1,657,869)

(2,070,637) (1,835,418) (969,402)

Foreign currency contracts – notional (707,092) (670,013) (495,777)

2 unchanged sentences

$ 22,609 $ 18,368 $ 12,071

(1) Balances include non-consolidated senior interests of £196.3 million.

(2) British Pound Sterling balance includes a loan that is partially denominated in Euros, with an outstanding principal balance of €8.3 million as of March 31, 2022, that is hedged to British Pound Sterling exposure through a foreign currency forward contract.

Refer to Note 12 to our consolidated financial statements for additional discussion of our foreign currency derivatives.

(1) Represents the U.S.

Dollar equivalent as of March 31, 2022.

Dollar equivalent as of June 30, 2022.

(2) Includes Swedish Krona, Australian Dollar, Canadian Dollar, Swiss Franc, and Danish Krone currencies.

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-Q

Item 3. Quantitative and Qualitative Disclosures About Market Risk