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For information on financial reference rate reforms, refer to “Part I.
−Removed: Management’s Discussion and Analysis of Financial Condition and Results of Operations – Reference Rate Reform” of this report and “Part I.
−Removed: Risk Factors—Risks Related to Our Lending and Investment Activities—The transition away from 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 with the SEC on February 8, 2023.
+Added: 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 our Annual Report on Form 10-K filed with the SEC on February 14, 2024.
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.
−Removed: As of September 30, 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.
−Removed: The following table projects the earnings impact on our interest income and expense, net of incentive fees, for the twelve-month period following September 30, 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 September 30, 2023 ($ in thousands):
+Added: As of March 31, 2024, substantially all 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.
+Added: The following table projects the earnings impact on our interest income and expense, presented net of implied changes in incentive fees, for the twelve-month period following March 31, 2024 , 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, 2024 ($ in thousands):
Assets (Liabilities) Sensitive to Changes in Interest Rates (1)
−Removed: Interest Rate Sensitivity as of September 30, 2023 (2)(3)
+Added: Interest Rate Sensitivity as of March 31, 2024 (2)(3)
Increase in Rates Decrease in Rates
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(3) Excludes income from loans accounted for under the cost-recovery method.
−Removed: (4) Includes an interest rate swap with a notional amount of $229.9 million that effectively converts our fixed rate loan exposure to floating rate exposure.
−Removed: (5) Excludes $1.1 billion of non-consolidated senior interests and $275.7 million of loan participations sold, as of September 30, 2023.
+Added: (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.
+Added: (5) Excludes $2.4 billion of floating rate impaired loans.
+Added: (6) Excludes $742.6 million of non-consolidated senior interests and $335.3 million of loan participations sold, as of March 31, 2024.
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.
+Added: (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
−Removed: As of September 30, 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.
−Removed: As of September 30, 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.
+Added: As of March 31, 2024, substantially all 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.
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.
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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.
−Removed: This risk is partially mitigated by our consideration of rising rate 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 other structural guarantees.
+Added: This risk is partially mitigated by our consideration of rising rate 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
+Added: guarantees or other structural protections.
+Added: As of March 31, 2024, 95% of our performing loans have interest rate caps, with a weighted-average strike price of 3.4%, or interest guarantees.
+Added: During the three months ended March 31, 2024, interest rate caps on $4.2 billion of loans, with a 3.3% weighted-average strike price, expired and 95% were replaced with new interest rate caps, with a weighted-average strike price of 4.2%, or interest guarantees.
Our loans are also subject to credit risk, including the risk of default.
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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.
−Removed: Our loan portfolio’s low weighted-average origination LTV of 64.0%, excluding any junior participations sold, as of September 30, 2023 reflects significant equity value that we expect our sponsors will be motivated to protect through periods of cyclical disruption.
+Added: Our loan portfolio’s low weighted-average origination LTV was 63.4%, excluding any loans that are impaired and any junior participations sold, as of March 31, 2024.
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.
−Removed: As of September 30, 2023, we had an aggregate $322.6 million asset-specific CECL reserve related to ten of our loans receivable, with an aggregate amortized cost basis of $1.4 billion, net of cost-recovery proceeds.
−Removed: This CECL reserve was recorded based on our estimation of the fair value of each of the loan’s underlying collateral as of September 30, 2023.
+Added: As of March 31, 2024, we had an aggregate $602.6 million asset-specific CECL reserve related to 17 of our loans receivable, with an aggregate amortized cost basis of $2.4 billion, net of cost-recovery proceeds.
+Added: This CECL reserve was recorded based on our estimation of the fair value of each of the loan’s underlying collateral as of March 31, 2024.
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.
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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.
−Removed: The nine months ended September 30, 2023 have 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.
−Removed: Recent events affecting financial institutions have also contributed to volatility in global markets and diminished liquidity and credit availability in the market broadly.
−Removed: Continued inflation has prompted central banks to take monetary policy tightening actions, including raising interest rates, which has created further uncertainty for the economy and for our borrowers.
−Removed: Although our business model is such that rising interest rates will, all else equal, correlate to increases in our net income, increases in interest rates may adversely affect our existing borrowers and lead to nonperformance.
−Removed: Additionally, rising rates and increasing costs may dampen consumer spending and slow corporate profit growth, which may negatively impact the collateral underlying certain of our loans.
−Removed: It remains difficult to predict the full impact of recent events and any future changes in interest rates or inflation.
+Added: The three months ended March 31, 2024 have shown a mix of positive and challenging developments leading to continued volatility in global markets.
+Added: Investor concerns over inflation, interest rates, slowing economic growth, political and regulatory uncertainty and geopolitical conditions have persisted.
+Added: If inflation and other economic indicators do not meet central banks’ relevant expectations, interest rates could remain higher for longer than expected by market participants and observers, which could create further uncertainty for the economy and our borrowers.
Capital Market Risks
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As a result, we substantially reduce our exposure to changes in portfolio value related to changes in foreign currency rates.
−Removed: In addition, substantially all of our net asset exposure to foreign currencies has been hedged with foreign currency forward contracts as of September 30, 2023.
+Added: In addition, substantially all of our net asset exposure to foreign currencies has been hedged with foreign currency forward contracts as of March 31, 2024.
The following table outlines our assets and liabilities that are denominated in a foreign currency (amounts in thousands):
−Removed: September 30, 2023
+Added: March 31, 2024
GBP EUR All Other (2)
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(1) Represents the U.S.
−Removed: Dollar equivalent as of September 30, 2023.
−Removed: (2) Includes Swedish Krona, Australian Dollar, Swiss Franc, and Danish Krone currencies.
+Added: Dollar equivalent as of March 31, 2024.
+Added: (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.