What changed in this filing

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

2020-07-29 compared with 2020-04-28 · 42 added, 44 removed, 44 unchanged (66% of the section changed)

1 unchanged sentence

Interest Rate Risk

Loan 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 March 31, 2020, 97% 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.

As of March 31, 2020, the remaining 3% of our loans by total loan exposure earned a fixed rate of interest, but are financed with liabilities that pay interest at floating rates, which resulted in a negative correlation to rising interest rates to the extent of our financing.

Investment Portfolio Net Interest Income

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

As of June 30, 2020, 97% of our investments by total investment 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 June 30, 2020, the remaining 3% of our investments by total investment exposure earned a fixed rate of interest, but are financed with liabilities that pay interest at floating rates, which resulted in a negative correlation to rising interest rates to the extent of our financing.

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

The following table projects the impact on our interest income and expense, net of incentive fees, for the twelve-month period following March 31, 2020, assuming an immediate increase or decrease of both 25 and 50 basis points in the applicable interest rate benchmark by currency ($ in thousands):

Certain jurisdictions are currently reforming or phasing out their Interbank Offered Rates, or IBORS, including, without limitation, the London Interbank Offered Rate, Euro Interbank Offered Rate, the Canadian Dollar Offered Rate and the Australian Bank Bill Swap Reference Rate.

The timing of the anticipated reforms or phase-outs vary by jurisdiction, with most of the reforms or phase-outs currently scheduled to take effect at the end of calendar year 2021.

We are evaluating the operational impact of such changes on existing transactions and contractual arrangements and managing transition efforts.

Refer to “Part I.

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 interest expense 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 for the year ended December 31, 2019.

The following table projects the impact on our interest income and expense, net of incentive fees, for the twelve-month period following June 30, 2020, assuming an immediate increase or decrease of both 25 and 50 basis points in the applicable interest rate benchmark by currency ($ in thousands):

Assets (Liabilities)

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Interest Rates (1)(2)(3)

Interest Rate Sensitivity as of March 31, 2020

Interest Rate Sensitivity as of June 30, 2020

Increase in Rates

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

In addition, $13.0 billion of our loans earned interest based on floors that are above the applicable index as of June 30, 2020.

Refer to Note 11 to our consolidated financial statements for additional details of our incentive fee calculation.

In addition, $11.4 billion of our loans earned interest based on floors that are above the applicable index as of March 31, 2020.

Includes amounts outstanding under secured debt agreements, non-consolidated

senior interests, securitized debt obligations, and secured term loans.

Liabilities balance includes two interest rate swaps totaling C$17.3 million ($12.3 million as of March 31, 2020) that are used to hedge a portion of our fixed rate debt.

Loan Portfolio Value

As of March 31, 2020, 3% of our loans 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.

Includes investment exposure to the 2018 Single Asset Securitization.

Refer to Notes 4 and 15 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, non-consolidated senior interests, securitized debt obligations, non-consolidated securitized debt obligations, and secured term loans.

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

Liabilities balance includes two interest rate swaps totaling C$17.3 million ($12.7 million as of June 30, 2020) that are used to hedge a portion of our fixed rate debt.

Investment Portfolio Value

As of June 30, 2020, 3% of our investments by investment 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 investments to maturity and so do not expect to realize gains or losses on our fixed rate investment portfolio as a result of movements in market interest rates.

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.

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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 may persist into the future 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.

Accordingly, discussions we have had with our borrowers have addressed potential near-term defensive loan modifications, which could include repurposing of reserves, temporary deferrals of interest, or performance test or covenant waivers on loans collateralized by assets directly impacted by the COVID-19

pandemic, and which would typically be coupled with an additional equity commitment and/or guaranty from sponsors.

While no loan modifications of this nature have been closed to date, we are encouraged by the tone of these conversations and our borrowers’ initial response to the COVID-19

pandemic’s impacts on their properties.

We believe our loan sponsors are generally 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, patient, well-funded institutional sponsors.

Our portfolio’s low origination weighted-average LTV of 63.4% as of March 31, 2020 reflects significant equity value that our sponsors are motivated to protect through periods of cyclical disruption.

The COVID-19 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 June 30, 2020, we closed 13 loan modifications, representing an aggregate principal balance of $2.4 billion.

The loan modifications included term extensions, interest rate changes, repurposing of reserves, temporary deferrals of interest, and performance test or covenant waivers, many of which were coupled with additional equity commitments from sponsors.

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.

Our investment portfolio’s low origination weighted-average LTV of 63.6% as of June 30, 2020, 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 investments.

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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.

pandemic has resulted in extreme volatility in a variety of global markets, including the real estate-related debt markets.

The COVID-19 pandemic has resulted in extreme volatility in a variety of global markets, including the real estate-related debt markets.

financial markets, in particular, are experiencing limited liquidity and forced selling by certain market participants with insufficient liquidity available to meet current obligations has put further downward pressure on asset prices.

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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.

We have not experienced any margin calls to date under any of our credit facilities, however, given the breadth of the COVID-19

pandemic and the resulting uncertainty of its economic impact, we are focused on strengthening our financing arrangements and we have proactively entered into discussions to reduce the advance rate on certain assets within these facilities, and therefore the amount we are able to borrow against such assets, to mitigate the risk of future margin calls as well.

During the three months ended June 30, 2020, we entered into agreements with seven of our secured credit facility lenders, representing an aggregate $7.9 billion of our secured credit facilities, to temporarily suspend credit mark provisions on certain of their portfolio assets in exchange for:

(i) cash repayments;

(ii) pledges of additional collateral;

and (iii) reductions of available borrowings.

Counterparty Risk

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

We 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 foreign currency assets to the currency of the borrowings that finance those assets.

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

During the three months ended March 31, 2020, we terminated all of our outstanding foreign currency forward contracts, with aggregate notional amounts of €

552.1 million, £365.5 million, A$134.8 million, and C$23.7 million, which we previously used to hedge our net exposure to the capital we have invested in such currencies against fluctuations in foreign exchange rates and currency exchange rates.

The termination of these hedges resulted in the receipt of $68.5 million of cash from our hedge counterparties, which represents incremental liquidity to us.

Our exposure to these currencies continues to be reduced by our local-currency borrowings investments denominated in currencies other than the U.S.

The following table outlines our assets and liabilities that are denominated in a foreign currency ( €

/£/A$/C$ in thousands):

March 31, 2020

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

June 30, 2020

Foreign currency assets (1)

Foreign currency liabilities (1)

Foreign currency contracts - notional

Net exposure to exchange rate fluctuations

Balances include non-consolidated

senior interests of £302.0 million

We estimate that a 10% appreciation of the United States dollar relative to the Euro, British Pound Sterling, Australian Dollar, and Canadian Dollar would result in a decline in our net assets in U.S.

dollar terms of $69.4 million, $57.5 million, $8.5 million, and $2.0 million, respectively, as of March 31, 2020.

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.

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