What changed in this filing

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

2021-02-10 compared with 2020-02-11 · 49 added, 20 removed, 57 unchanged (55% of the section changed)

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Interest Rate Risk

Loan Portfolio Net Interest Income

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, 2019, 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 December 31, 2019, 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.

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.

As of December 31, 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.

As of December 31, 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.

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.

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, the Canadian Dollar Offered Rate and the Australian Bank Bill Swap Reference Rate, or collectively, IBORs, are the subject of recent national, international and regulatory guidance and proposals for reform.

On November 30, 2020, the Financial Conduct Authority of the U.K., or FCA, which has statutory powers to require panel banks to contribute to LIBOR where necessary, announced that subject to confirmation following its consultation with the administrator of LIBOR, it would cease publication of the one-week and two-month USD LIBOR immediately after December 31, 2021 and cease publication of the remaining tenors immediately after June 30, 2023.

Additionally, the Federal Reserve Board has advised banks to stop entering into new USD LIBOR based contracts.

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

At this time, it is not possible to predict how markets will respond to SOFR or other alternative reference rates as the transition away from the IBOR benchmarks is anticipated in coming years.

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 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.

The following table projects the impact on our interest income and expense, net of incentive fees, for the twelve-month period following December 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):

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Sensitive to Changes

in Interest Rates (1)(2)(3)

Interest Rate Sensitivity as of December 31, 2020

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Decrease in Rates (4)

in Interest Rates (1)(2)

25 Basis Points

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

Refer to Note 12 to our consolidated financial statements for additional details of our incentive fee calculation.

In addition, $14.2 billion of our loans earned interest based on floors that are above the applicable index as of December 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 ($13.3 million as of December 31, 2019) that are used to hedge a portion of our fixed rate debt.

Loan Portfolio Value

As of December 31, 2019, 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.

Refer to Note 12 to our consolidated financial statements for additional details of our incentive fee calculation.

Includes investment exposure to the 2018 Single Asset Securitization.

Refer to Notes 4 and 16 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, securitizations, asset-specific financings, and secured term loans.

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

Assets balance includes a loan denominated in British Pound Sterling, with an outstanding principal balance of £146.2 million as of December 31, 2020, that is hedged to Euro exposure through a foreign currency forward contract.

Refer to Note 10 to our consolidated financial statements for additional discussion of our foreign currency derivatives.

Investment Portfolio Value

As of December 31, 2020, 2% of our investments by total investment exposure earned a fixed rate of interest and as such, the values of such investments 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

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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 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 December 31, 2020, we closed 18 loan modifications, representing an aggregate principal balance of $2.5 billion, as of December 31, 2020.

During the year ended December 31, 2020, we closed 49 loan modifications, representing an aggregate principal balance of $6.5 billion, as of December 31, 2020.

The loan modifications primarily included term extensions, interest rate changes, repurposing of reserves, and performance test or covenant waivers, many of which were coupled with additional equity commitments from sponsors, with virtually no interest deferrals.

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 64.0% as of December 31, 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.

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.

Blackstone Real Estate is one of the largest owners and operators of real estate in the world, 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 manage our asset portfolio and work with our borrowers throughout periods of economic stress and uncertainty.

Capital Market Risks

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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.

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.

During the three months ended June 30, 2020, we entered into agreements with our seven largest secured credit facility lenders, representing an aggregate $7.9 billion of our secured credit facilities as of June 30, 2020, to temporarily suspend credit mark provisions and pre-approve

certain loan modifications to certain of their portfolio assets, primarily in exchange for cash repayments and pledging additional loan collateral.

During the three months ended December 31, 2020, we extended the credit facility modification agreements with the seven lenders without any further deleveraging or increased cost.

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.

In certain circumstances, we may also enter into foreign currency derivative contracts to further mitigate this exposure.

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

/C$/A$ in thousands):

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

December 31, 2020

5 unchanged sentences

senior interests of £198.8 million.

Euro balance includes a loan denominated in British Pound Sterling, with an outstanding principal balance of £146.2 million as of December 31, 2020, that is hedged to Euro exposure through a foreign currency forward contract.

Refer to Note 10 to our consolidated financial statements for additional discussion of our foreign currency derivatives.

December 31, 2019

5 unchanged sentences

senior interests of £302.0 million.

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

dollar terms of $82.5 million and $68.8 million, respectively, as of December 31, 2019.

Substantially all of our net asset exposure to the Canadian and Australian dollar has been hedged with foreign currency forward contracts.

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 as of December 31, 2020.

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-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk