Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
For information on financial reference rate reforms, refer to “Part II. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Reference Rate Reform” of this report and “Part I. Item 1A. Risk Factors—Risks Related to Our Lending and Investment Activities—The transition away from reference rates and the 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 this Annual Report on Form 10-K.
Investment Portfolio Net Interest Income
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 December 31, 2023, 99% of our loans 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.
The following table projects the earnings impact on our interest income and expense, net of incentive fees, for the twelve-month period following December 31, 2023 , 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 December 31, 2023 ($ in thousands):
Assets (Liabilities) Sensitive to Changes in Interest Rates (1)
Interest Rate Sensitivity as of December 31, 2023 (2)(3)
Increase in Rates Decrease in Rates
50 Basis Points
100 Basis Points
50 Basis Points 100 Basis Points
Floating rate assets (4)(5)(6)(7)
$ 21,654,625 $ 86,619 $ 173,237 $ (86,619) $ (173,237)
Floating rate liabilities (6)(8)
(18,343,890) (73,576) (147,151) 73,576 147,151
Net exposure $ 3,310,735 $ 13,043 $ 26,086 $ (13,043) $ (26,086)
(1) Reflects the USD equivalent value of floating rate assets and liabilities denominated in foreign currencies.
(2) Increases (decreases) in interest income and expense are presented net of incentive fees. Refer to Note 14 to our consolidated financial statements for additional details of our incentive fee calculation.
(3) Excludes income from loans accounted for under the cost-recovery method.
(4) Includes an interest rate swap we entered into with a notional amount of $229.9 million that effectively converts certain of our fixed rate loan exposure to floating rate exposure.
(5) Excludes $1.6 billion of floating rate loans accounted for under the cost-recovery method.
(6) Excludes $1.1 billion of non-consolidated senior interests and $337.7 million of loan participations sold, as of December 31, 2023. Our non-consolidated senior interests and loan participations sold are structurally non-recourse and term-matched to the corresponding loans, and have no impact on our net floating rate exposure.
(7) Our loan agreements generally require our borrowers to purchase interest rate caps, which mitigates our borrowers’ exposure to an increase in interest rates.
(8) Includes amounts outstanding under secured debt, securitizations, asset-specific debt, and Term Loans.
Investment Portfolio Value
As of December 31, 2023, 99% of our portfolio earned a floating rate of interest, so the value of such investments is generally not impacted by changes in market interest rates. As of December 31, 2023, the remaining 1% of our portfolio earned a fixed rate of interest and as such, the values of such loans are sensitive to changes in interest rates. Additionally, we generally hold all of our loans to maturity and so do not expect to realize gains or losses resulting from any mark to market valuation adjustments 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 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
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stress-testing during our underwriting process, which generally includes a requirement for our borrower to purchase an interest rate cap contract with an unaffiliated third party, provide an interest reserve deposit, and/or provide interest or other structural protections. As of December 31, 2023, 97% of our performing loans have interest rate caps with a weighted-average strike price of 3.3% or interest guarantees. During the year ended December 31, 2023, interest rate caps on $14.7 billion of loans, with a 3.1% weighted-average strike price, expired and 93% were replaced with new interest rate caps, with a weighted-average strike price of 3.7%, or interest guarantees.
Credit Risks
Our loans are also subject to credit risk, including the risk of default. 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 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 changes 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.
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 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 weighted-average origination LTV of 63.6%, excluding any junior participations sold, as of December 31, 2023 reflects significant equity value that we expect our sponsors will be 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. As of December 31, 2023, we had an aggregate $417.7 million asset-specific CECL reserve related to 13 of our loans receivable, with an aggregate amortized cost basis of $1.9 billion, net of cost-recovery proceeds. This CECL reserve was recorded based on our estimation of the fair value of each of the loan’s underlying collateral as of December 31, 2023.
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. 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 asset manage our portfolio and work with our borrowers throughout periods of economic stress and uncertainty.
The year ended December 31, 2023 has been characterized by continued volatility in global markets, driven by investor concerns over inflation, rising interest rates, slowing economic growth, political and regulatory uncertainty and geopolitical conditions. Events affecting financial institutions during the year also contributed to volatility in global markets and diminished liquidity and credit availability.
During 2023, inflation began to moderate as a result of the monetary policy tightening actions taken by central banks, including raising interest rates. While it is anticipated that central banks may begin to lower interest rates in 2024, interest rates may remain at or near recent highs, which creates further uncertainty for the economy and for our borrowers. Although our business model is such that higher interest rates will, all else equal, correlate to higher net income, interest rates remaining elevated for an extended period of time may adversely affect our existing borrowers and lead to non-performance, as higher costs may dampen consumer spending and slow corporate profit growth, which may negatively impact the collateral underlying certain of our loans. Additionally, higher interest rates could adversely affect commercial real estate property values. It remains difficult to predict the full impact of recent events and any future changes in interest rates or inflation.
Capital Market Risks
We are exposed to risks related to the equity capital markets, and our related ability to raise capital through the issuance of our class A common stock or other equity instruments. We are also exposed to risks related to the debt capital markets, and our related ability to finance our business through borrowings under credit facilities or other debt instruments. As a REIT, we are required to distribute a significant portion of our taxable income annually, which constrains our ability to
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accumulate operating cash flow and therefore requires us to utilize debt or equity capital to finance our business. We seek to mitigate these risks by monitoring the debt and equity capital markets to inform our decisions on the amount, timing, and terms of capital we raise.
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.
Counterparty Risk
The nature of our business requires us to hold our cash and cash equivalents and obtain financing from various financial institutions. This exposes us to the risk that these financial institutions may not fulfill their obligations to us under these various contractual arrangements. We mitigate this exposure by depositing our cash and cash equivalents and entering into financing agreements with high credit-quality institutions.
The nature of our loans also exposes us to the risk that our counterparties do not make required interest and principal payments on scheduled due dates. We seek to manage this risk through a comprehensive credit analysis prior to making a loan and active monitoring of the asset portfolios that serve as our collateral, as further discussed above.
Currency Risk
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 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 December 31, 2023.
The following table outlines our assets and liabilities that are denominated in a foreign currency (amounts in thousands):
December 31, 2023
GBP EUR All Other (2)
Foreign currency assets £ 2,790,247 € 2,569,672 $ 2,124,007
Foreign currency liabilities (2,084,493) (1,887,172) (1,659,790)
Foreign currency contracts – notional (696,919) (673,644) (457,035)
Net exposure to exchange rate fluctuations £ 8,835 € 8,856 $ 7,182
Net exposure to exchange rate fluctuations in USD (1)
$ 11,249 $ 9,776 $ 7,182
(1) Represents the U.S. Dollar equivalent as of December 31, 2023.
(2) Includes Swedish Krona, Australian Dollar, Canadian Dollar, Swiss Franc, and Danish Krone currencies.
December 31, 2022
EUR GBP All Other (2)
Foreign currency assets € 2,825,694 £ 2,827,531 $ 2,138,380
Foreign currency liabilities (2,080,867) (2,120,269) (1,614,464)
Foreign currency contracts – notional (722,311) (690,912) (515,512)
Net exposure to exchange rate fluctuations € 22,516 £ 16,350 $ 8,404
Net exposure to exchange rate fluctuations in USD (1)
$ 24,102 $ 19,756 $ 8,404
(1) Represents the U.S. Dollar equivalent as of December 31, 2022.
(2) Includes Swedish Krona, Australian Dollar, Canadian Dollar, Swiss Franc, and Danish Krone currencies.