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Investment Portfolio Net Interest Income
−Removed: 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).
−Removed: 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.
−Removed: 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.
−Removed: 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.
+Added: Generally, our business model is such that rising interest rates will increase our net income, while declining interest rates will decrease net income.
+Added: As of September 30, 2020, 98% 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.
+Added: As of September 30, 2020, the remaining 2% 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.
+Added: 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.
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.
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Refer to “Part I.
−Removed: 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.
−Removed: 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):
+Added: 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
+Added: for the year ended December 31, 2019.
+Added: The following table projects the impact on our interest income and expense, net of incentive fees, for the twelve-month period following September 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)
−Removed: Interest Rate Sensitivity as of June 30, 2020
+Added: Interest Rate Sensitivity as of September 30, 2020
Increase in Rates
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Increases (decreases) in interest income and expense are presented net of incentive fees.
−Removed: In addition, $13.0 billion of our loans earned interest based on floors that are above the applicable index as of June 30, 2020.
+Added: In addition, $13.9 billion of our loans earned interest based on floors that are above the applicable index as of September 30, 2020.
Refer to Note 11 to our consolidated financial statements for additional details of our incentive fee calculation.
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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.
−Removed: Includes amounts outstanding under secured debt agreements, non-consolidated senior interests, securitized debt obligations, non-consolidated securitized debt obligations, and secured term loans.
+Added: Includes amounts outstanding under secured debt agreements, non-consolidated
+Added: senior interests, securitized debt obligations, non-consolidated
+Added: securitized debt obligations, and secured term loans.
Decrease in rates assumes the applicable benchmark rate for each currency does not decrease below 0%.
−Removed: 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.
+Added: Assets balance includes a loan denominated in British Pound Sterling, with an outstanding principal balance of £145.7 million as of September 30, 2020, that is hedged to Euro exposure through a foreign currency forward contract.
+Added: Refer to Note 9 to our consolidated financial statements for additional discussion of our foreign currency derivatives.
Investment Portfolio Value
−Removed: 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.
+Added: As of September 30, 2020, 2% 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
−Removed: 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.
−Removed: 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.
+Added: 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
+Added: on floating rate assets.
+Added: 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
+Added: 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.
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We seek to manage these risks through our underwriting and asset management processes.
−Removed: 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.
+Added: 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.
−Removed: 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.
−Removed: 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.
+Added: We maintain a robust asset management relationship with our borrowers and have utilized these relationships to address the potential impacts of the COVID-19
+Added: pandemic on our loans secured by properties experiencing cash flow pressure, most significantly hospitality assets.
+Added: Some of our borrowers have indicated that due to the impact of the COVID-19
+Added: 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.
+Added: During the three months ended September 30, 2020, we closed 11 loan modifications, representing an aggregate principal balance of $1.7 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.
−Removed: We are generally encouraged by our borrowers’ initial response to the COVID-19 pandemic’s impacts on their properties.
+Added: We are generally encouraged by our borrowers’ initial response to the COVID-19
+Added: 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.
−Removed: 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.
+Added: Our investment portfolio’s low origination weighted-average LTV of 63.6% as of September 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.
−Removed: The COVID-19 pandemic has resulted in extreme volatility in a variety of global markets, including the real estate-related debt markets.
+Added: 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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The following table outlines our assets and liabilities that are denominated in a foreign currency (€/£/A$/C$ in thousands):
−Removed: June 30, 2020
+Added: September 30, 2020
Foreign currency assets (1)(2)
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Net exposure to exchange rate fluctuations
−Removed: Balances include non-consolidated senior interests of £302.0 million
+Added: Balances include non-consolidated
+Added: senior interests of £199.3 million.
+Added: Euro balance includes a loan denominated in British Pound Sterling, with an outstanding principal balance of £145.7 million as of September 30, 2020, that is hedged to Euro exposure through a foreign currency forward contract.
+Added: Refer to Note 9 to our consolidated financial statements for additional discussion of our foreign currency derivatives.
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.