Blackstone Mortgage Trust(BXMT) - 2020 Q4 - Annual Report

PART I Business The company is a real estate finance REIT focused on originating senior loans for commercial properties in major global markets - Blackstone Mortgage Trust is a real estate finance company focused on originating senior loans for commercial real estate in North America, Europe, and Australia and operates as a REIT externally managed by a subsidiary of Blackstone[13] - The company's investment guidelines stipulate that no more than 25% of its equity can be invested in a single investment without board committee approval[36] Investment Portfolio Overview as of December 31, 2020 | Metric | Balance Sheet Portfolio | Total Loan Exposure | Total Investment Portfolio | | :--- | :--- | :--- | :--- | | Number of investments | 120 | 120 | 121 | | Principal balance | $16.7 billion | $17.5 billion | $18.2 billion | | Net book value | $16.4 billion | $16.4 billion | $16.5 billion | | Unfunded loan commitments | $3.2 billion | $4.0 billion | $4.0 billion | | Weighted-average all-in yield | L + 3.53% | L + 3.58% | L + 3.56% | | Origination LTV | 64.9% | 64.9% | 64.0% | Portfolio Financing as of December 31, 2020 | Financing Type | Outstanding Principal Balance | | :--- | :--- | | Secured debt agreements | $7.90 billion | | Securitizations | $3.60 billion | | Asset-specific financings | $1.20 billion | | Total portfolio financing | $12.70 billion | Risk Factors The company faces significant risks from the COVID-19 pandemic, lending activities, financing, and its external management structure Risks Related to the Ongoing COVID-19 Pandemic The COVID-19 pandemic adversely impacted collateral values, increased loan modifications, and materially raised credit loss reserves - The company's portfolio, particularly assets in the hotel and retail sectors, has been negatively impacted, with 17% of total investment exposure in hospitality assets as of December 31, 2020[51] - The company processed 49 loan modifications in 2020, representing an aggregate principal balance of $6.5 billion, including term extensions and covenant waivers[51] - The company materially increased its Current Expected Credit Loss (CECL) reserve, with a net increase of $167.7 million recorded during 2020, bringing the total to $185.4 million[53] Risks Related to Our Lending and Investment Activities Lending risks include borrower defaults, intense competition, asset illiquidity, and the transition away from LIBOR - The company faces significant competition from other financial entities, which may limit loan origination opportunities and negatively affect yields[39][70] - The adoption of the Current Expected Credit Loss (CECL) model has materially affected the allowance for loan losses, potentially creating more earnings volatility[83][85] - Investments in subordinated instruments like B-Notes and mezzanine loans expose the company to a greater risk of loss in a default scenario[90][93] - The planned discontinuation of LIBOR creates uncertainty, as the transition to alternative rates like SOFR may adversely affect net interest income and increase financing costs[35][113] Risks Related to Our Financing and Hedging Significant debt usage exposes the company to restrictive covenants, margin calls, and imperfect hedging outcomes - The company's significant debt exposes it to risks such as insufficient cash flow for payments and violation of covenants[138][140] - Financing facilities may require the company to provide additional collateral or repay debt if the market value of pledged assets declines[143][144] - The use of non-recourse securitizations exposes the company to magnified losses, and Dodd-Frank risk retention rules may increase costs[155][157] - Hedging activities may be ineffective and expose the company to counterparty credit risk, with derivative agreements totaling $1.7 billion in notional value as of December 31, 2020[159][163] Risks Related to Our Relationship with Our Manager and its Affiliates The company's reliance on its external manager, a Blackstone affiliate, creates potential conflicts of interest and high termination costs - The company is completely reliant on its external Manager, an affiliate of Blackstone, and has no employees of its own[170][171] - The Manager's fee structure may incentivize strategies that are not optimal for stockholders, such as taking on riskier investments to boost short-term income[175][177] - Significant conflicts of interest exist as Blackstone manages other vehicles with overlapping investment strategies, potentially reducing opportunities for the company[178][180] - Terminating the Management Agreement without cause is costly, requiring a termination fee equal to three times the average annual base management and incentive fees[194] Risks Related to Our Company Operational risks include maintaining exclusion from the Investment Company Act, regulatory changes, and cybersecurity threats - The company must conduct its operations to avoid being regulated as an investment company, which may restrict certain attractive investments[200][203] - Changes in laws and regulations, such as the Dodd-Frank Act, could negatively impact operations and impose additional costs[209][213] - The company is exposed to operational risks, including cybersecurity threats and system failures, which could result in significant losses and business disruption[226][228] Risks Related to our REIT Status and Certain Other Tax Items Maintaining REIT status requires strict compliance with tax code provisions, including annual distribution requirements - Failure to maintain REIT qualification would subject the company to corporate income tax and prevent requalification for four years[235] - To comply with REIT asset tests, the company must ensure that at least 75% of its assets are qualified real estate assets at the end of each quarter[239] - The company may recognize "phantom income" where taxable income exceeds cash received, complicating its ability to meet the 90% distribution requirement[254][255] Risks Related to Our Class A Common Stock The company's stock price is subject to high volatility, and charter provisions may deter potential takeovers - The market price of the company's class A common stock has been highly volatile, fluctuating between a high of $40.51 and a low of $13.02 following the COVID-19 outbreak[269] - Provisions in the company's charter and Maryland law may deter potential acquisitions, limiting opportunities for stockholders to sell shares at a premium[272][273][276] - Future issuances of equity or debt securities may dilute existing shareholders' ownership and adversely affect the market price of the stock[287] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - There are no unresolved staff comments[298] Properties The company's principal executive offices are located in leased space in New York and it does not own any real property - The company leases its principal executive offices and does not own any real property[299] Legal Proceedings As of year-end 2020, the company was not involved in any material legal proceedings - As of December 31, 2020, there were no material legal proceedings involving the company[300] Mine Safety Disclosures This item is not applicable to the company's business operations - Not applicable[301] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, with dividends subject to board discretion and no Q4 2020 stock repurchases - The company's class A common stock is listed on the NYSE under the ticker symbol "BXMT"[304] - The company did not repurchase any of its class A common stock in the fourth quarter of 2020[306] Selected Financial Data This section presents a five-year summary of key operating and balance sheet data, showing recent financial trends Selected Operating Data (2016-2020) | (in thousands, except per share) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Interest and related income | $779,648 | $882,679 | $756,109 | $537,915 | $497,974 | | Net income | $140,414 | $307,393 | $285,813 | $217,968 | $246,440 | | Net income per share (Basic & Diluted) | $0.97 | $2.35 | $2.50 | $2.27 | $2.53 | | Dividends declared per share | $2.48 | $2.48 | $2.48 | $2.48 | $2.48 | Selected Balance Sheet Data (2016-2020) | (in thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | | :--- | :--- | :--- | :--- | :--- | :--- | | Total assets | $16,958,955 | $16,551,871 | $14,467,375 | $10,258,825 | $8,812,615 | | Total liabilities | $13,054,724 | $12,767,190 | $11,092,768 | $7,341,419 | $6,319,012 | | Total equity | $3,904,231 | $3,784,681 | $3,374,607 | $2,917,406 | $2,493,603 | Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion details the financial impact of COVID-19, including a significant increase in the CECL reserve and its effect on net income Key Financial Measures and Indicators The company uses Distributable Earnings, a non-GAAP measure, to evaluate performance excluding certain non-cash items like the CECL reserve Key Metrics for FY 2020 | Metric | Value | | :--- | :--- | | Net Income per Share | $0.97 | | Distributable Earnings per Share | $2.48 | | Dividends Declared per Share | $2.48 | | Book Value per Share (as of 12/31/20) | $26.42 | Reconciliation of GAAP Net Income to Distributable Earnings (FY 2020 vs 2019) | (in thousands) | Year Ended Dec 31, 2020 | Year Ended Dec 31, 2019 | | :--- | :--- | :--- | | Net income attributable to BXMT | $137,670 | $305,567 | | Increase in CECL reserve | $167,653 | — | | Non-cash compensation expense | $34,532 | $30,656 | | Other adjustments | $12,135 | $14,472 | | Distributable Earnings | $351,990 | $350,695 | Loan Portfolio The loan portfolio saw modest net growth in 2020, with a high interest collection rate despite an increase in its overall risk rating - The company collected 99.7% of contractual interest payments due during 2020, demonstrating the general strength of its borrowers[320][337] - The weighted-average risk rating of the loan portfolio increased from 2.8 to 3.0 at year-end 2020, primarily due to downgrades of loans impacted by COVID-19[343] - The total CECL reserve increased by $167.7 million during 2020 to a total of $185.4 million, reflecting the macroeconomic impact of the pandemic[346] Loan Activity for Year Ended December 31, 2020 | Activity | Amount (in billions) | | :--- | :--- | | Loan originations | $1.6 | | Loan fundings | $2.1 | | Loan repayments and sales | $2.0 | | Total net fundings | $0.14 | Results of Operations Net income decreased significantly in 2020 due to a large provision for credit losses, while net interest income remained stable - The decrease in net income in 2020 was primarily due to the $167.7 million increase in the CECL reserve, reflecting the impact of the COVID-19 pandemic[375][381] - Net interest income increased by $8.0 million year-over-year, driven by a larger loan portfolio and the benefit of interest rate floors[376] Consolidated Results of Operations (2018-2020) | (in thousands) | 2020 | 2019 | 2018 | | :--- | :--- | :--- | :--- | | Income from loans and other investments, net | $432,177 | $424,176 | $396,484 | | Total other expenses | $123,787 | $117,289 | $110,363 | | Increase in current expected credit loss reserve | ($167,653) | — | — | | Net income attributable to BXMT | $137,670 | $305,567 | $285,078 | | Net income per share – basic and diluted | $0.97 | $2.35 | $2.50 | Liquidity and Capital Resources The company maintained a strong liquidity position, increasing total available liquidity to $1.1 billion and improving its debt-to-equity ratio - Primary liquidity needs include funding $3.2 billion in unfunded loan commitments, for which the company has identified financing for $2.2 billion[405] Sources of Liquidity | (in thousands) | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Cash and cash equivalents | $289,970 | $150,090 | | Available borrowings under secured debt agreements | $829,165 | $598,840 | | Loan principal payments held by servicer, net | $19,460 | $1,965 | | Total Liquidity | $1,138,595 | $750,895 | Leverage Ratios | Ratio | Dec 31, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Debt-to-equity ratio | 2.5x | 3.0x | | Total leverage ratio | 3.6x | 3.7x | Other Items This section covers the company's REIT tax status, lack of off-balance sheet arrangements, and critical accounting policies like CECL - The company has elected to be taxed as a REIT and must distribute at least 90% of its net taxable income annually to maintain this status[413][417] - The company adopted the CECL accounting standard on January 1, 2020, resulting in an initial charge to retained earnings of $17.7 million[421][427] - The company's primary credit quality indicator is an internal 5-point risk rating system, and the CECL reserve for impaired loans is based on collateral fair value[425][430] Loan Portfolio Details This section provides a comprehensive, loan-by-loan breakdown of the company's portfolio as of December 31, 2020 - A detailed table presents specifics for each of the 120 loans in the portfolio as of December 31, 2020, including metrics like principal balance, coupon, and risk rating[435] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk, credit risk heightened by the pandemic, and currency risk from foreign investments - The company's business model is positively correlated to rising interest rates, as 98% of its investments earn a floating rate of interest[441] - Credit risk is actively managed, and in response to COVID-19, the company closed 49 loan modifications in 2020, representing $6.5 billion in principal[449] - The company mitigates currency risk by matching the currency of its foreign assets with borrowings and using foreign currency forward contracts to hedge its net asset exposure[457][460] Interest Rate Sensitivity Analysis (12-Month Impact) | Change in Benchmark Rates | Impact on Net Interest Income (in thousands) | | :--- | :--- | | +50 basis points | ($16,463) | | +25 basis points | ($8,699) | | -25 basis points | $4,811 | | -50 basis points | $4,913 | Financial Statements and Supplementary Data This item refers to the company's audited consolidated financial statements and supplementary data included in the report - The company's financial statements and supplementary data are located in the report starting on page F-1[461] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None reported[462] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective - Management concluded that the company's disclosure controls and procedures were effective as of the end of the fiscal year[463] - Management's report on internal control over financial reporting concluded that such controls were effective as of December 31, 2020, with an unqualified opinion from the auditor[466][469][470] Other Information The company reports no other information for this item - None[471] PART III Directors, Executive Officers and Corporate Governance Required information is incorporated by reference from the company's 2021 definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[473] Executive Compensation Required information is incorporated by reference from the company's 2021 definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[474] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides information on equity compensation plans and incorporates other details by reference - Other information required by this item is incorporated by reference from the company's definitive proxy statement[476] Equity Compensation Plan Information as of December 31, 2020 | Plan category | Securities to be issued upon exercise of outstanding options, warrants, and rights | Weighted-average exercise price | Securities remaining available for future issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by security holders | 306,691 | — | 2,263,098 | | Equity compensation plans not approved by security holders | — | — | — | | Total | 306,691 | — | 2,263,098 | Certain Relationships and Related Transactions, and Director Independence Required information is incorporated by reference from the company's 2021 definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[477] Principal Accountant Fees and Services Required information is incorporated by reference from the company's 2021 definitive proxy statement - Information is incorporated by reference from the company's definitive proxy statement[478] PART IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the annual report - This item provides an index of all financial statements, schedules, and exhibits included with or incorporated by reference into the annual report[479][481] Form 10-K Summary The company indicates that no Form 10-K summary is provided - None[493]