Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 1-14788

 

 

Blackstone Mortgage Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   94-6181186

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

345 Park Avenue, 42nd Floor, New York, NY   10154
(Address of principal executive offices)   (Zip Code)

(212) 655-0220

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of outstanding shares of the registrant’s class A common stock, par value $0.01 per share, as of July 24, 2013 was 28,801,651.

 

 

 


Table of Contents

Table of Contents

 

Part I.    Financial Information   
   Item 1:   Financial Statements      2   
     Consolidated Balance Sheets - June 30, 2013 (unaudited) and December 31, 2012      2   
     Consolidated Statements of Operations - Three and Six Months Ended June 30, 2013 (unaudited) and 2012 (unaudited)      4   
     Consolidated Statements of Comprehensive Income - Three and Six Months Ended June 30, 2013 (unaudited) and 2012 (unaudited)      5   
     Consolidated Statements of Changes in (Deficit) Equity - Six Months Ended June 30, 2013 (unaudited) and 2012 (unaudited)      6   
     Consolidated Statements of Cash Flows - Six Months Ended June 30, 2013 (unaudited) and 2012 (unaudited)      7   
     Notes to Consolidated Financial Statements (unaudited)      8   
   Item 2:   Management’s Discussion and Analysis of Financial Condition and Results of Operations      36   
   Item 3:   Quantitative and Qualitative Disclosures About Market Risk      51   
   Item 4:   Controls and Procedures      54   
Part II.    Other Information   
   Item 1:   Legal Proceedings      55   
   Item 1A:   Risk Factors      55   
   Item 2:   Unregistered Sales of Equity Securities and Use of Proceeds      62   
   Item 3:   Defaults Upon Senior Securities      62   
   Item 4:   Mine Safety Disclosures      62   
   Item 5:   Other Information      62   
   Item 6:   Exhibits      64   
   Signatures
 
       66   


Table of Contents

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “seeks,” “approximately,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under the section entitled “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2012 and in this report, as such factors may be updated from time to time in our periodic filings with the United States Securities and Exchange Commission (“SEC”), which are accessible on the SEC’s website at www.sec.gov. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this report and in our other periodic filings. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Website and Social Media Disclosure

We use our website (www.bxmt.com) as a channel of distribution of company information. The information we post through our website may be deemed material. Accordingly, investors should monitor our website, in addition to following our press releases, SEC filings and public conference calls and webcasts. In addition, you may automatically receive e-mail alerts and other information about us when you enroll your e-mail address by visiting the “E-mail Alerts” section of our website at http://www.blackstonemortgagetrust.com/investor-relations. The contents of our website are not, however, a part of this report.

 

- 1 -


Table of Contents

PART I. FINANCIAL INFORMATION

 

ITEM 1. Financial Statements

Blackstone Mortgage Trust, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)

June 30, 2013 and December 31, 2012

(in thousands, except per share data)

 

     June 30,
2013
    December 31,
2012
 
Assets     

Cash and cash equivalents

   $ 59,746      $ 15,423   

Restricted cash

     21,972        14,246   

Loans receivable, net

     830,101        141,500   

Loans held-for-sale, net

     3,800        —     

Loans receivable, at fair value

     117,549        —     

Investment in CT Legacy Asset, at fair value

     —          132,000   

Equity investments in unconsolidated subsidiaries

     23,240        13,306   

Accrued interest receivable, prepaid expenses, and other assets

     30,697        5,868   
  

 

 

   

 

 

 

Total assets

   $ 1,087,105      $ 322,343   
  

 

 

   

 

 

 
Liabilities and Equity     

Liabilities:

    

Accounts payable, accrued expenses and other liabilities

   $ 36,879      $ 21,209   

Secured notes

     8,848        8,497   

Repurchase obligations

     165,239        —     

Securitized debt obligations

     74,472        139,184   
  

 

 

   

 

 

 

Total liabilities

     285,438        168,890   
  

 

 

   

 

 

 

Equity:

    

Class A common stock, $0.10 par value, 100,000 shares authorized, 28,802 and 2,927 shares issued and outstanding as of June 30, 2013 and December 31, 2012, respectively

     288        293   

Additional paid-in capital

     1,242,892        609,002   

Accumulated deficit

     (530,491     (535,851
  

 

 

   

 

 

 

Total Blackstone Mortgage Trust, Inc. stockholders’ equity

     712,689        73,444   

Non-controlling interests

     88,978        80,009   
  

 

 

   

 

 

 

Total equity

     801,667        153,453   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,087,105      $ 322,343   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

- 2 -


Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Consolidated Balance Sheets (unaudited)

June 30, 2013 and December 31, 2012

(in thousands)

The following presents the portion of the consolidated balances presented above attributable to consolidated variable interest entities, or VIEs. The following assets may only be used to settle obligations of these consolidated VIEs and these liabilities are only the obligations of these consolidated VIEs and they do not have recourse to the general credit of Blackstone Mortgage Trust, Inc.

 

     June 30,
2013
     December 31,
2012
 
Assets      

Loans receivable, net

   $ 77,000       $ 141,500   

Loans held-for-sale, net

     3,800         —     

Accrued interest receivable, prepaid expenses, and other assets

     2,838         4,021   
  

 

 

    

 

 

 

Total assets

   $ 83,638       $ 145,521   
  

 

 

    

 

 

 
Liabilities      

Accounts payable, accrued expenses and other liabilities

   $ 155       $ 88   

Securitized debt obligations

     74,472         139,184   
  

 

 

    

 

 

 

Total liabilities

   $ 74,627       $ 139,272   
  

 

 

    

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Consolidated Statements of Operations

Three and Six Months Ended June 30, 2013 and 2012

(in thousands, except share and per share data)

(unaudited)

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2013     2012     2013     2012  

Income from loans and other investments:

       

Interest and related income

  $ 6,017      $ 6,763      $ 7,473      $ 21,479   

Less: Interest and related expenses

    1,306        5,413        2,083        28,754   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from loans and other investments, net

    4,711        1,350        5,390        (7,275

Other expenses:

       

General and administrative

    3,427        1,567        5,465        2,323   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

    3,427        1,567        5,465        2,323   

Total other-than-temporary impairments of securities

    —          —          —          —     

Portion of other-than-temporary impairments of securities recognized in other comprehensive income

    —          —          —          (160
 

 

 

   

 

 

   

 

 

   

 

 

 

Net impairments recognized in earnings

    —          —          —          (160

Recovery of provision for loan losses

    —          —          —          8   

Valuation allowance on loans held-for-sale

    2,000        —          1,800        —     

Unrealized gain on investments at fair value

    4,000        —          4,000        —     

Gain on extinguishment of debt

    38        —          38        —     

Fair value adjustment on investment in CT Legacy Asset

    —          3,704        —          7,657   

Gain on deconsolidation of subsidiary

    —          —          —          146,380   

Income from equity investments in unconsolidated subsidiaries

    —          205        —          901   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    7,322        3,692        5,763        145,188   

Income tax provision

    554        —          593        301   
 

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

  $ 6,768      $ 3,692      $ 5,170      $ 144,887   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of tax

    —          (341     —          (914
 

 

 

   

 

 

   

 

 

   

 

 

 

Net Income

  $ 6,768      $ 3,351      $ 5,170      $ 143,973   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interests

    (4,020     (1,068     (5,537     (75,137
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Blackstone Mortgage Trust, Inc.

  $ 2,748      $ 2,283      ($ 367   $ 68,836   
 

 

 

   

 

 

   

 

 

   

 

 

 

Per share information:

       

Income (loss) from continuing operations per share of common stock:

       

Basic

  $ 0.22      $ 1.15      ($ 0.05   $ 30.50   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.22      $ 1.08      ($ 0.05   $ 28.65   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations per share of common stock:

       

Basic

  $ —        ($ 0.15   $ —        ($ 0.40
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ —        ($ 0.15   $ —        ($ 0.38
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per share of common stock:

       

Basic

  $ 0.22      $ 1.00      ($ 0.05   $ 30.10   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

  $ 0.22      $ 0.93      ($ 0.05   $ 28.27   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares of common stock outstanding:

       

Basic

    12,401,274        2,289,352        7,734,774        2,286,582   
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    12,401,274        2,442,686        7,734,774        2,435,339   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income

For the Three and Six Months Ended June 30, 2013 and 2012

(in thousands)

(unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Net income

   $ 6,768      $ 3,351      $ 5,170      $ 143,973   

Other comprehensive income:

        

Unrealized gain on derivative financial instruments

     —          1,965        —          3,749   

Gain on interest rate swaps no longer designated as cash flow hedges

     —          —          —          2,481   

Amortization of unrealized gains and losses on securities

     —          (8     —          (765

Amortization of deferred gains and losses on settlement of swaps

     —          —          —          (56

Other-than-temporary impairments of securities related to fair value adjustments in excess of expected credit losses, net of amortization

     —          (174     —          213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income

     —          1,783        —          5,622   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 6,768      $ 5,134      $ 5,170      $ 149,595   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Comprehensive income attributable to non-controlling interests

     (4,020     (1,068     (5,537     (75,147
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Blackstone Mortgage Trust, Inc.

   $ 2,748      $ 4,066      ($ 367   $ 74,448   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Consolidated Statements of Changes in (Deficit) Equity

For the Six Months Ended June 30, 2013 and 2012

(in thousands)

(unaudited)

 

    Class A
Common
Stock
    Restricted
Class A
Common
Stock
    Additional
Paid-In
Capital
    Accumulated
Other
Comprehensive
(Loss) Income
    Accumulated
Deficit
    Total Blackstone
Mortgage Trust, Inc.
Stockholders’  (Deficit)
Equity
    Noncontrolling
Interests
    Total  

Balance at January 1, 2012

  $ 220      $ 2      $ 597,049      ($ 40,584   ($ 667,111   ($ 110,424   ($ 18,515   ($ 128,939
 

Net income

    —          —          —          —          68,836        68,836        75,137        143,973   

Other comprehensive income

    —          —          —          5,612        —          5,612        10        5,622   

Deconsolidation of CT Legacy Asset

    —          —          —          1,293        —          1,293        —          1,293   

Distributions to noncontrolling interests

    —          —          —          —          —          —          (7     (7

Restricted class A common stock earned, net of shares deferred

    —          3        182        —          —          185        —          185   

Deferred directors’ compensation

    —          —          113        —          —          113        —          113   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

  $ 220      $ 5      $ 597,344      ($ 33,679   ($ 598,275   ($ 34,385   $ 56,625      $ 22,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
 

Balance at January 1, 2013

  $ 293      $ —        $ 609,002      $ —        ($ 535,851   $ 73,444      $ 80,009      $ 153,453   
 

Net (loss) income

    —          —          —          —          (367     (367     5,537        5,170   

Consolidation of subsidiary

    —          —          —          —          5,727        5,727        6,235        11,962   

Contributions from non-controlling interests

    —          —          —          —          —          —          15,000        15,000   

Purchase of and distributions to non-controlling interests

    —          —          —          —          —          —          (17,803     (17,803

Proceeds from offering of common stock

    258        —          633,552        —          —          633,810        —          633,810   

Reverse stock split

    (263     —          263        —          —          —          —          —     

Deferred directors’ compensation

    —          —          75        —          —          75        —          75   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

  $ 288      $ —        $ 1,242,892      $ —        ($ 530,491   $ 712,689      $ 88,978      $ 801,667   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2013 and 2012

(in thousands)

(unaudited)

 

     2013     2012  

Cash flows from operating activities:

    

Net income

   $ 5,170      $ 143,973   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Net impairments recognized in earnings

     —          160   

Recovery of provision for loan losses

     —          (8

Valuation allowance on loans held-for-sale

     (1,800     —     

Unrealized gain on investments at fair value

     (4,000     —     

Gain on extinguishment of debt

     (38     —     

Fair value adjustment on CT Legacy Asset

     —          (7,657

Gain on deconsolidation of subsidiary

     —          (146,380

Income from equity investments in unconsolidated subsidiaries

     —          (901

Distributions of income from unconsolidated subsidiaries

     —          1,710   

Distributions from CT Legacy Asset

     —          6,634   

Non-cash compensation expense

     1,586        504   

Amortization of premiums/discounts on loans and securities and deferred interest on loans

     (434     (393

Amortization of deferred gains and losses on settlement of swaps

     —          (56

Amortization of deferred financing costs and premiums/discounts on debt obligations

     401        9,846   

Loss on interest rate swaps not designated as cash flow hedges

     4        2,772   

Changes in assets and liabilities, net:

    

Deferred origination fees and other revenue

     4,219        —     

Accrued interest receivable

     1,309        (3,785

Deferred income taxes

     —          (1,458

Prepaid expenses and other assets

     896        2,622   

Accounts payable and accrued expenses

     1,289        (1,075
  

 

 

   

 

 

 

Net cash provided by operating activities

     8,602        6,508   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Origination/purchase of loans receivable

     (756,638     —     

Principal collections and proceeds from securities

     349        28,122   

Principal collections of loans receivable

     96,546        83,245   

Contributions to unconsolidated subsidiaries

     —          (4,030

Distributions from unconsolidated subsidiaries

     —          677   

Increase in restricted cash

     (7,726     (2,448
  

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (667,469     105,566   
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Borrowings under repurchase obligations

     216,464        123,977   

Repayments under repurchase obligations

     (71,439     (58,464

Repayments under mezzanine loan

     —          (63,000

Repayment of securitized debt obligations

     (64,674     (114,768

Payment of deferred financing costs

     (2,175     —     

Contributions from non-controlling interests

     15,000        —     

Purchase of and distributions to non-controlling interests

     (17,672     (8

Settlement of interest rate swaps

     (6,123     —     

Vesting of restricted class A common stock

     —          (25

Proceeds from issuance of common stock

     633,810        —     
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     703,191        (112,288
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     44,323        (214

Cash and cash equivalents at beginning of period

     15,423        34,818   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 59,746      $ 34,604   
  

 

 

   

 

 

 

Supplemental disclosure of cash flows information

    

Payments of interest

   ($ 1,434   ($ 17,105
  

 

 

   

 

 

 

Payments of income taxes

   ($ 410   ($ 1,119

Supplemental disclosure of non-cash investing and financing activities

    

(Consolidation) deconsolidation of subsidiaries

   ($ 38,913   $ 122,308   
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

Note 1. Organization

References herein to “Blackstone Mortgage Trust,” “Company,” “we,” “us” or “our” refer to Blackstone Mortgage Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.

We are a real estate finance company that primarily originates and purchases senior mortgage loans collateralized by properties in the United States and Europe. We are externally managed by BXMT Advisors L.L.C., which we refer to as our Manager, a subsidiary of The Blackstone Group L.P., or Blackstone, and are a real estate investment trust traded on the New York Stock Exchange, or NYSE, under the symbol “BXMT.” We are headquartered in New York City.

We conduct our operations as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders and maintain our qualification as a REIT. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. We are organized as a holding company and conduct our business primarily through our various subsidiaries. Our business is organized into two operating segments, the Loan Origination segment and the CT Legacy Portfolio segment.

On April 26, 2013, our board of directors approved the change of our name from Capital Trust, Inc. to Blackstone Mortgage Trust, Inc., which we effected on May 6, 2013 concurrently with a one-for-ten reverse stock split of our class A common stock. Except where the context indicates otherwise, all class A common stock numbers herein have been adjusted to give retroactive effect to the reverse stock split.

Note 2. Summary of Significant Accounting Policies

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP, for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. The consolidated financial statements, including the notes, are unaudited and exclude some of the disclosures required in audited financial statements. Management believes it has made all necessary adjustments (consisting of only normal recurring items) so that the consolidated financial statements are presented fairly and that estimates made in preparing its consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. The accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements and the related management’s discussion and analysis of financial condition and results of operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 filed with the Securities and Exchange Commission.

Principles of Consolidation and Basis of Presentation

The accompanying financial statements include, on a consolidated basis, our accounts, the accounts of our wholly-owned subsidiaries, and variable interest entities, or VIEs, in which we are the primary beneficiary. All significant intercompany balances and transactions have been eliminated in consolidation. Certain of the assets and credit of our consolidated subsidiaries are not available to satisfy the debt or other obligations of us, our affiliates, or other entities.

VIEs are defined as entities in which equity investors (i) do not have the characteristics of a controlling financial interest, and/or (ii) do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The entity that consolidates a VIE is known as its primary beneficiary, and is generally the entity with (i) the power to direct the activities that most significantly impact the VIE’s economic performance, and (ii) the right to receive benefits from the VIE or the obligation to absorb losses of the VIE that could be significant to the VIE.

We have separately presented, following our consolidated balance sheet, the assets of consolidated VIEs that can only be used to satisfy the obligations of those VIEs, and the liabilities of consolidated VIEs that are non-recourse to us. We have aggregated all of such assets and liabilities of consolidated VIEs in this presentation due to our determination that these entities are substantively similar and therefore a further disaggregated presentation would not be more meaningful.

Our CT Legacy Partners, LLC, or CT Legacy Partners, subsidiary accounts for its operations in accordance with industry-specific GAAP accounting guidance for investment companies, pursuant to which it reports its investments at fair value. We have retained this specialized accounting in consolidation and, accordingly, report the loans and securities investments of CT Legacy Partners at fair value on our consolidated balance sheet.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

As more fully described in Note 3, we sold our investment management business to Blackstone in December 2012. As a result, the income and expense items related to our investment management business have been reclassified to income from discontinued operations on our consolidated statements of operations.

Certain reclassifications have been made in the presentation of the prior period consolidated financial statements to conform to the June 30, 2013 presentation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may ultimately differ from those estimates.

Revenue Recognition

Interest income from our loans receivable is recognized over the life of the investment using the effective interest method and is recorded on the accrual basis. Fees, premiums, discounts and direct costs associated with these investments are deferred until the loan is advanced and are then recognized over the term of the loan as an adjustment to yield. Income accrual is generally suspended for loans at the earlier of the date at which payments become 90 days past due or when, in the opinion of our Manager, recovery of income and principal becomes doubtful. Income is then recorded on the basis of cash received until accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed.

Cash and Cash Equivalents

Cash and cash equivalents represents cash on hand, cash held in banks and liquid investments with original maturities of three months or less. We place our cash and cash equivalents with high credit quality institutions to minimize credit risk exposure. We may have bank balances in excess of federally insured amounts. We have not experienced, and do not expect, any losses on our demand deposits, commercial paper or money market investments.

Restricted Cash

We classify the cash balances held by CT Legacy Partners as restricted because, while these cash balances are available for use by CT Legacy Partners for operations, debt service, or other purposes, they cannot be used by us until our allocable share is distributed from CT Legacy Partners, and cannot be commingled with any of our other, unrestricted cash balances.

Loans Receivable, Provision for Loan Losses, Loans Held-for-Sale and Related Allowance

We purchase and originate commercial real estate debt and related instruments generally to be held as long-term investments at amortized cost. We are required to periodically evaluate each of these loans for possible impairment. Impairment is indicated when it is deemed probable that we will not be able to collect all amounts due according to the contractual terms of the loan. If a loan is determined to be impaired, we write down the loan through a charge to the provision for loan losses. Impairment on these loans is measured by comparing the estimated fair value of the underlying collateral to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by our Manager. Actual losses, if any, could ultimately differ from these estimates.

Our Manager performs a quarterly review of our portfolio of loans. In conjunction with this review, our Manager assesses the performance of each loan, and assigns a risk rating based on several factors including risk of loss, loan-to-value ratio, or LTV, collateral performance, structure, exit plan, and sponsorship.

Loans are rated one through eight, which ratings are defined as follows:

 

1 -   Low Risk: A loan that is expected to perform through maturity, with relatively lower LTV, higher in-place debt yield, and stable projected cash flow.
2 -   Average Risk: A loan that is expected to perform through maturity, with medium LTV, average in-place debt yield, and stable projected cash flow.
3 -   Acceptable Risk: A loan that is expected to perform through maturity, with relatively higher LTV, acceptable in-place debt yield, and some uncertainty (due to lease rollover or other factors) in projected cash flow.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

4 -   Higher Risk: A loan that is expected to perform through maturity, but has exhibited a material deterioration in cash flow and/or other credit factors. If negative trends continue, default could occur.
5 -   Low Probability of Default/Loss: A loan with one or more identified weakness that we expect to have a 15% probability of default or principal loss.
6 -   Medium Probability of Default/Loss: A loan with one or more identified weakness that we expect to have a 33% probability of default or principal loss.
7 -   High Probability of Default/Loss: A loan with one or more identified weakness that we expect to have a 67% or higher probability of default or principal loss.
8 -   In Default: A loan which is in contractual default and/or which has a very high likelihood of principal loss.

In certain cases, we may classify loans as held-for-sale based upon the specific facts and circumstances of particular loans, including known or expected transactions. Loans held-for-sale are carried at the lower of their amortized cost basis and fair value less cost to sell. A reduction in the fair value of loans held-for-sale is recorded as a charge to our consolidated statement of operations as a valuation allowance on loans held-for-sale.

Equity Investments in Unconsolidated Subsidiaries

Our carried interest in CT Opportunity Partners I, LP, or CTOPI is accounted for using the equity method. CTOPI’s assets and liabilities are not consolidated into our financial statements due to our determination that (i) it is not a VIE and (ii) the investors have sufficient rights to preclude consolidation by us. As such, we report our allocable percentage of the net assets of CTOPI on our consolidated balance sheet. We have deferred the recognition of income from CTOPI until cash is collected or appropriate contingencies have been eliminated and, therefore do not recognize any income from equity investments in unconsolidated subsidiaries.

Deferred Financing Costs

The deferred financing costs that are included in prepaid expenses and other assets on our consolidated balance sheets include issuance costs related to our debt obligations, and are amortized using the effective interest method, or a method that approximates the effective interest method, over the life of the related obligations.

Repurchase Obligations

We record investments financed with repurchase obligations as separate assets and the related borrowings under any repurchase agreements recorded as separate liabilities on our consolidated balance sheets. Interest income earned on the investments and interest expense incurred on the repurchase obligations are reported separately on our consolidated statements of operations.

Interest Rate Derivative Financial Instruments

In the normal course of business, we use interest rate derivative financial instruments to manage, or hedge, cash flow variability caused by interest rate fluctuations. Specifically, we may use interest rate swaps to convert floating rate liabilities that are financing fixed rate assets into fixed rate liabilities. The differential to be paid or received on these agreements is recognized on the accrual basis as an adjustment to the interest expense related to the attendant liability. In cases where interest rate swap agreements are terminated early, any gain or loss is generally amortized over the remaining life of the hedged item. These swap agreements must be effective in reducing the variability of cash flows of the hedged items in order to qualify for the aforementioned hedge accounting treatment. Changes in the fair value of effective cash flow hedges are reflected on our consolidated financial statements through accumulated other comprehensive income (loss) and do not affect our net income (loss). To the extent a derivative does not qualify for hedge accounting, and is deemed a non-hedge derivative, the changes in its fair value are included in net income (loss).

Fair Value of Financial Instruments

The “Fair Value Measurements and Disclosures” Topic of the Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or the Codification, defines fair value, establishes a framework for measuring fair value, and requires certain disclosures about fair value measurements under GAAP. Specifically, this guidance defines fair value based on exit price, or the price that would be received upon the sale of an asset or the transfer of a liability in an orderly transaction between market participants at the measurement date.

The “Fair Value Measurement and Disclosures” Topic of the Codification also establishes a fair value hierarchy that prioritizes and ranks the level of market price observability used in measuring financial instruments. Market price observability is affected by a number of factors, including the type of financial instrument, the characteristics specific to the financial instrument, and the state of the marketplace, including the existence and transparency of

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

transactions between market participants. Financial instruments with readily available quoted prices in active markets generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Financial instruments measured and reported at fair value are classified and disclosed based on the observability of inputs used in the determination, as follows:

 

   

Level 1 - Generally includes only unadjusted quoted prices that are available in active markets for identical financial instruments as of the reporting date.

 

   

Level 2 - Pricing inputs include quoted prices in active markets for similar instruments, quoted prices in less active or inactive markets for identical or similar instruments where multiple price quotes can be obtained, and other observable inputs such as interest rates, yield curves, credit risks, and default rates.

 

   

Level 3 - Pricing inputs are unobservable for the financial instruments and include situations where there is little, if any, market activity for the financial instrument. These inputs require significant judgment or estimation by management of third parties when determining fair value and generally represent anything which does not meet the criteria of Levels 1 and 2.

Each type of asset recorded at fair value using Level 3 inputs are determined by an internal committee comprised of members of senior management of our Manager, including our chief executive officer, chief financial officer, and other senior officers.

Certain of our assets and liabilities are measured at fair value either (i) on a recurring basis, as of each quarter-end, or (ii) on a nonrecurring basis, as a result of impairment or other events. Our assets and liabilities that are measured at fair value are discussed further in Note 17. Generally, loans held-for-sale, loans receivable, and securities are measured at fair value on a recurring basis, while impaired loans are measured at fair value on a nonrecurring basis.

The following valuation techniques were used to estimate the fair value of each type of asset and liability which was recorded at fair value as of June 30, 2013 and December 31, 2012:

Loans held-for-sale: Loans held-for-sale are valued based on expected net proceeds from a sale of the asset.

Loans receivable, at fair value: Loans receivable are generally valued by discounting expected cash flows using internal cash flow models and estimated market rates. Expected cash flows of each loan are based on our Manager’s assumptions regarding the collection of principal and interest from the respective borrowers.

Other assets, at fair value: CT Legacy Partners’ other assets are generally valued by a combination of (i) obtaining assessments from third-party dealers and (ii) in cases where such assessments are unavailable or deemed not to be indicative of fair value, discounting expected cash flows using internal cash flow models and estimated market discount rates. In the case of internal models, expected cash flows of each security are based on assumptions regarding the collection of principal and interest on the underlying loans and securities.

Impaired loans: The loans identified for impairment are collateral dependent loans. Impairment on these loans is measured by comparing our Manager’s estimation of fair value of the underlying collateral less costs to sell, to the book value of the respective loan. These valuations require significant judgments, which include assumptions regarding capitalization rates, leasing, creditworthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders and other factors deemed necessary by our Manager.

Investment in CT Legacy Asset: We arrived at the fair value of our Investment in CT Legacy Asset by discounting the net cash flows expected to be distributed to its equity holders after the repayment of the repurchase facility. To determine the net cash flows of CT Legacy Asset, our Manager estimated the timing and recovery amount for each of its assets, and then applied the proceeds to first satisfy the related repurchase facility.

We are also required by GAAP to disclose fair value information about financial instruments, whether or not recognized in the statement of financial position, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the estimated market discount rate and the estimated future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in an immediate settlement of the instrument. Rather, these fair values reflect the amounts that our Manager believes are realizable in an orderly transaction among willing parties. These disclosure requirements exclude certain financial instruments and all non-financial instruments.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments, excluding those described above that are carried at fair value, for which it is practicable to estimate that value:

Cash and cash equivalents: The carrying amount of cash on deposit and in money market funds approximates fair value.

Restricted cash: The carrying amount of restricted cash approximates fair value.

Loans receivable, net: Other than impaired loans, these assets are recorded at their amortized cost and not at fair value. The fair values for these instruments are estimated by our Manager taking into consideration factors including capitalization rates, leasing, occupancy rates, availability and cost of financing, exit plan, sponsorship, actions of other lenders and indications of market value from other market participants.

Secured notes: These notes are recorded at their aggregate principal balance and not at fair value. The fair value was estimated based on the rate at which a similar instrument would be priced today.

Repurchase obligations: These facilities were recorded at their aggregate principal balance and not at fair value. The fair value was estimated based on the rate at which a similar credit facility would be priced today.

Securitized debt obligations: These obligations are recorded at the face value of outstanding obligations to third-parties and not at fair value. The fair values for these instruments have been estimated by obtaining assessments from third-party dealers.

Income Taxes

Our financial results generally do not reflect provisions for current or deferred income taxes on our REIT taxable income. We believe that we operate in a manner that will continue to allow us to be taxed as a REIT and, as a result, we generally do not expect to pay substantial corporate level taxes other than those payable by our taxable REIT subsidiaries. Many of these requirements, however, are highly technical and complex. If we were to fail to meet these requirements, we may be subject to federal, state and local income tax on current and past income, and penalties. See Note 15 for additional information.

Accounting for Stock-Based Compensation

Stock-based compensation expense is recognized in net income using a fair value measurement method, which we determine with the assistance of a third-party appraisal firm. Compensation expense for the time vesting of stock-based compensation grants is recognized on the accelerated attribution method and compensation expense for performance vesting of stock-based compensation grants is recognized on a straight line basis.

The fair value of the performance vesting restricted class A common stock is measured on the grant date using a Monte Carlo simulation to estimate the probability of the market vesting conditions being satisfied. The Monte Carlo simulation is run approximately 100,000 times. For each simulation, the payoff is calculated at the settlement date, and is then discounted to the grant date at a risk-free interest rate. The average of the values over all simulations is the expected value of the restricted class A common stock on the grant date. The valuation is performed in a risk-neutral framework, so no assumption is made with respect to an equity risk premium. Significant assumptions used in the valuation include an expected term and stock price volatility, an estimated risk-free interest rate and an estimated dividend growth rate.

Comprehensive Income

The primary component of comprehensive income other than net income is the unrealized gains and losses on derivative financial instruments.

Earnings per Share of Common Stock

Basic earnings per share, or EPS, is computed based on the net earnings allocable to common stock and stock units, divided by the weighted average number of shares of common stock and stock units outstanding during the period. Diluted EPS is determined using the treasury stock method, and is based on the net earnings allocable to common stock and stock units, divided by the weighted average number of shares of common stock, stock units and potentially dilutive common stock options and warrants. On April 26, 2013, our board of directors approved a one-for-ten reverse stock split of our class A common stock which we effected on May 6, 2013. Our earnings per share disclosures have been retroactively adjusted to reflect the reverse stock split.

We have separately determined EPS and diluted EPS for income (loss) from continuing operations and for net income (loss) allocable to common stockholders. See Note 12 for additional discussion of earnings per share.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

Recent Accounting Pronouncements

In January 2013, the FASB issued Accounting Standards Update 2013-01, “Balance Sheet (Topic 210): Clarifying the Scope of Disclosures About Offsetting Assets and Liabilities,” or ASU 2013-01. ASU 2013-01 was developed to clarify which instruments and transactions are subject to the offsetting disclosure requirements set forth by Accounting Standards Update 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities.” ASU 2013-01 is effective for the first interim or annual period beginning on or after January 1, 2013, and should be applied retrospectively for all comparative periods presented. The adoption of ASU 2013-01 did not have a material impact on our consolidated financial statements.

In February 2013, the FASB issued Accounting Standards Update 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income,” or ASU 2013-02. ASU 2013-02 implements the previously deferred requirement to disclose reclassification adjustments into and out of accumulated other comprehensive income in either a note or on the face of the financial statements. ASU 2013-02 is effective for the first interim or annual period beginning after December 15, 2012, and should be applied prospectively. As we no longer have a balance of accumulated other comprehensive income, the adoption of ASU 2013-02 did not have a material impact on our consolidated financial statements.

In June 2013, the FASB issued Accounting Standards Update 2013-08, “Financial Services-Investment Companies (Topic 946): Amendments to the Scope, Measurement, and Disclosure Requirements,” or ASU 2013-08. ASU 2013-08 amends the criteria for qualification as an investment company under Topic 946 of the FASB Accounting Standards Codification, or Topic 946, and requires additional disclosure by investment companies. ASU 2013-08 is effective for the first interim or annual period beginning after December 15, 2013, and should be applied prospectively. We currently consolidate CT Legacy Partners, which accounts for its operations as an investment company under Topic 946. We do not expect the adoption of ASU 2013-08 to impact CT Legacy Partners’ status as an investment company. Further, because ASU 2013-08 specifically excludes REITs from its scope, it will not otherwise impact our consolidated financial statements.

Note 3. Corporate Transactions

Blackstone Loan Warehouse Joint Venture

On May 13, 2013, we entered into a joint venture, 42-16 Partners, LLC, or 42-16 Partners, with an affiliate of our Manager to originate and warehouse loans prior to the completion of our class A common stock offering on May 29, 2013. 42-16 Partners was controlled by us and owned 16.7% by us and 83.3% by an affiliate of our Manager, and originated one senior mortgage loan on May 21, 2013. On May 30, 2013, we ended this relationship with the affiliate of our Manager and purchased 100% of the equity interests in 42-16 Partners held by the affiliate of our Manager using proceeds from the sale of our class A common stock and, as a result, 42-16 Partners became a 100% owned and consolidated subsidiary.

CT Legacy Partners Merger

To maintain its tax efficiency, on March 20, 2013, CT Legacy REIT Mezz Borrower, Inc., or CT Legacy REIT, was merged with and into CT Legacy Partners, LLC, or CT Legacy Partners, and whereby CT Legacy Partners was the surviving entity, effective as of March 22, 2013. We refer to this transaction as the Merger. As a result of the Merger, all outstanding shares of class A-1 common stock, class A-2 common stock, class B common stock, and class A preferred stock of CT Legacy REIT were converted into limited liability company shares, or LLC Shares, in CT Legacy Partners. These LLC Shares have economic and voting rights equivalent to the corresponding shares of stock of CT Legacy REIT. In addition, all outstanding shares of class B preferred stock of CT Legacy REIT were redeemed on March 21, 2013 for an aggregate $147,000, which amount is comprised of the shares’ par value, liquidation preference, and accrued dividends thereon.

As a result of the Merger, we have consolidated CT Legacy Partners as of March 20, 2013 and, therefore, the remaining legacy assets and liabilities from our comprehensive debt restructuring on March 31, 2011, which we refer to as our March 2011 Restructuring. See Note 8 and Note 12 for further discussion of CT Legacy Partners.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

Sale of Investment Management Platform

On December 19, 2012, pursuant to a purchase and sale agreement, dated as of September 27, 2012, or Purchase Agreement, by and between us and Blackstone, we completed the disposition of our investment management and special servicing business for a purchase price of $21.4 million. The sale included our equity interests in CT Investment Management Co., LLC, or CTIMCO, our related private investment fund co-investments, and 100% of the outstanding class A preferred stock of CT Legacy REIT. We refer the entire transaction as our Investment Management Business Sale. Pursuant to the terms of the Purchase Agreement, on December 19, 2012, we entered into a management agreement with our Manager, which was amended and restated as of March 26, 2013, pursuant to which we are now managed by our Manager pursuant to the terms and conditions of the management agreement. In addition, Blackstone received the right to designate two members of our board of directors, and exercised that right by designating an employee and one of its senior advisors to replace two former members of our board of directors who resigned effective December 19, 2012. As a result of the Investment Management Business Sale, the income and expense items related to our investment management business have been reclassified to income from discontinued operations on our consolidated statements of operations. See Note 14 for a further discussion of discontinued operations.

On December 19, 2012, we also closed our sale to Blackstone of 500,000 shares of our class A common stock for a purchase price of $10.0 million.

In connection with the consummation of the Investment Management Business Sale and the closing of our sale of 500,000 shares of class A common stock to Blackstone, we paid a $20.00 per share special cash dividend on December 20, 2012 to holders of record of our class A common stock at the close of business on November 12, 2012.

The assets we retained following our Investment Management Business Sale consisted primarily of: (i) cash and cash equivalents, (ii) our interests in CT Legacy Partners, a vehicle we formed to own and finance certain legacy assets that we retained in connection with a comprehensive debt restructuring in 2011, (iii) our carried interest in CTOPI, a private investment fund that was previously under our management and is now managed by an affiliate of our Manager, and (iv) our subordinated interests in certain collateral debt obligations, or CT CDOs.

CT CDO Deconsolidation

On December 19, 2012, as a result of the Investment Management Business Sale, we are no longer the collateral manager for certain collateralized debt obligations, or CT CDOs, nor the special servicer on their collateral assets. Due to the externalization of these management functions, and our lack of material economic interest in the residual equity we own in CT CDOs II and IV, we ceased to be the primary beneficiary of these entities and, therefore, discontinued the consolidation of CT CDOs II and IV, which we refer to as the CT CDO Deconsolidation. We recognized a gain of $53.9 million on the deconsolidation of CT CDOs II and IV, which was due primarily to the reversal of charges to shareholders’ equity resulting from losses previously recorded in excess of our economic interests in these non-recourse securitization vehicles.

Note 4. Cash and Cash Equivalents, Including Restricted Cash

As discussed in Note 2, we place our cash and cash equivalents, including restricted cash, with high credit quality institutions to minimize credit risk exposure. The following table outlines details of our cash and cash equivalents, including restricted cash balances as of June 30, 2013 and December 31, 2012.

 

               Balance as of  

Asset Type

  

Depository

   Credit Rating  (1)    June 30, 2013      December 31, 2012  

Cash

   Bank of America    A-1    $ 59,746       $ 15,423   

Restricted Cash

   Bank of America    A-1      21,972         14,246   
        

 

 

    

 

 

 

Total

         $ 81,718       $ 29,669   
        

 

 

    

 

 

 

 

(1) Represents the short-term credit rating for the Bank of America, N.A. legal entity as issued by Standard & Poor’s as of May 16, 2013.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

Note 5. Loans Receivable

As of June 30, 2013, our consolidated balance sheet includes $753.1 million of loans receivable related to our Loan Originations segment and $77.0 million of loans receivable owned by CT CDO I, a consolidated securitization vehicle included in our CT Legacy Portfolio segment. See Note 19 for further discussion of our operating segments.

Activity relating to our loans receivable for the six months ended June 30, 2013 was as follows ($ in thousands):

 

     Gross Book
Value
    Provision for
Loan Losses
    Net Book
Value
 

December 31, 2012

   $ 164,180      ($ 22,680   $ 141,500   

Loan originations

     756,638        —          756,638   

Deferred origination fees and expenses

     (3,776     —          (3,776

Amortization of deferred fees and expenses

     239        —          239   

Loan satisfactions

     (62,500     —          (62,500

Partial loan repayments

     —          —          —     

Reclassification to loans held-for-sale

     (6,601     4,601        (2,000
  

 

 

   

 

 

   

 

 

 

June 30, 2013

   $ 848,180      ($ 18,079   $ 830,101   
  

 

 

   

 

 

   

 

 

 

As of June 30, 2013, we had unfunded commitments of $8.6 million related to one senior mortgage loan, which amounts will only be funded to finance lease-related or capital expenditures by the borrower until the commitment terminates in June 2016.

The following table details overall statistics for our loans receivable portfolio as of June 30, 2013 and December 31, 2012 ($ in thousands):

 

     June 30, 2013     December 31, 2012  

Number of loans

     13        7   

Principal balance

   $ 851,716      $ 164,180   

Net book value

   $ 830,101      $ 141,500   

Wtd. Avg. cash coupon (1)

     L+4.38     L+2.51

Wtd. Avg. all-in yield (1)

     L+5.27     L+4.53

Wtd. Avg. maximum maturity (years) (2)

     3.7        0.7   

 

(1) All loans are floating rate loans indexed to LIBOR as of both June 30, 2013 and December 31, 2012. LIBOR was 0.19% and 0.21% as of June 30, 2013 and December 31, 2012, respectively; however, certain of our loans receivable earn interest based on a minimum LIBOR ranging from 0.20% to 1.00%. Amounts exclude all non-performing loans.
(2) Maximum maturity date assumes all extension options are exercised.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

The tables below detail the types of loans in our loan portfolio, as well as the property type and geographic distribution of the properties securing these loans, as of June 30, 2013 and December 31, 2012 ($ in thousands):

 

     June 30, 2013     December 31, 2012  

Asset Type

   Net Book
Value
     Percentage     Net Book
Value
     Percentage  

Senior mortgages (1)

   $ 753,101         91   $ 62,500         44

Subordinate interests in mortgages

     77,000         9        79,000         56   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 830,101         100   $ 141,500         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

Property Type

   Net Book
Value
     Percentage     Net Book
Value
     Percentage  

Office

   $ 413,648         49   $ 111,500         79

Hotel

     162,885         20        30,000         21   

Multifamily

     189,557         23        —           —     

Land

     64,011         8        —           —     
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 830,101         100   $ 141,500         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

Geographic Location

   Net Book
Value
     Percentage     Net Book
Value
     Percentage  

West

   $ 454,091         54   $ 92,500         65

Northeast

     227,034         27        27,000         19   

Southeast

     93,000         12        12,404         9   

Midwest

     48,380         6        —           —     

Southwest

     7,596         1        9,596         7   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 830,101         100   $ 141,500         100
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) Senior mortgages include two pari passu participations in mortgages with a combined book value of $91.1 million as of June 30, 2013.

Loan risk ratings

Quarterly, our Manager evaluates our loan portfolio as described in Note 2. In conjunction with our quarterly loan portfolio review, our Manager assesses the performance of each loan, and assigns a risk rating based on several factors including risk of loss, current LTV, collateral performance, structure, exit plan, and sponsorship. Loans are rated one (less risk) through eight (greater risk), which ratings are defined in Note 2.

The following table allocates the net book value and principal balance of our loans receivable based on our internal risk ratings as of June 30, 2013 and December 31, 2012 ($ in thousands):

 

     Loans Receivable as of June 30, 2013      Loans Receivable as of December 31, 2012  

Risk Rating

   Number
of Loans
     Principal
Balance
     Net
Book Value
     Number
of Loans
     Principal
Balance
     Net
Book Value
 

1- 3

     9       $ 776,637       $ 773,101         2       $ 47,000       $ 47,000   

4 - 5

     2         57,000         57,000         2         92,500         92,500   

6 - 8

     2         18,079         —           3         24,680         2,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     13       $ 851,716       $ 830,101         7       $ 164,180       $ 141,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

In making this risk assessment, one of the primary factors we consider is how senior or junior each loan is relative to other debt obligations of the borrower. The following tables further allocate our loans receivable by both loan type and our internal risk ratings as of June 30, 2013 and December 31, 2012 ($ in thousands):

 

     Senior Mortgage Loans (1)  
     as of June 30, 2013      as of December 31, 2012  

Risk Rating

   Number
of  Loans
     Principal
Balance
     Net
Book  Value
     Number
of Loans
     Principal
Balance
     Net
Book  Value
 

1 - 3

     8       $ 756,638       $ 753,101         —         $ —         $ —     

4 - 5

     —           —           —           1         62,500         62,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     8       $ 756,638       $ 753,101         1       $ 62,500       $ 62,500   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Senior mortgage loans include two pari passu participations with an aggregate principal balance and net book value of $91.1 million.

 

     Subordinate Interests in Mortgages  
     as of June 30, 2013      as of December 31, 2012  

Risk Rating

   Number
of Loans
     Principal
Balance
     Net
Book  Value
     Number
of Loans
     Principal
Balance
     Net
Book  Value
 

1 - 3

     1       $ 20,000       $ 20,000         2       $ 47,000       $ 47,000   

4 - 5

     2         57,000         57,000         1         30,000         30,000   

6 - 8

     2         18,079         —           3         24,680         2,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5       $ 95,079       $ 77,000         6       $ 101,680       $ 79,000   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loan impairments

We do not have any loan impairments in our Loan Origination segment. As of June 30, 2013, CT CDO I, which is in our CT Legacy Portfolio segment, had one impaired subordinate interest in a mortgage loan with a gross book value of $7.5 million that is current in its interest payments and one impaired subordinate interest in a mortgage loan with a gross book value of $10.6 million that is delinquent on its contractual payments. We have taken 100% loan loss reserve on each of these loans.

As of December 31, 2012, consolidated securitization vehicles in our CT Legacy Portfolio segment had one impaired subordinate interest in a mortgage loan with a gross book value of $7.5 million that was current in its interest payments and two impaired subordinate interest in a mortgage loans with a combined gross book value of $17.2 million that was delinquent on their contractual payments. We had an aggregate 92% loan loss reserve on these loans resulting in a net book value of $2.0 million.

Generally, we have recorded loan loss reserves for all loans which are in maturity default, or otherwise have past-due principal payments. We do not have any loans in maturity default or with past-due principal payments in our Loan Origination segment. As of June 30, 2013, CT CDO I, which is in our CT Legacy Portfolio segment, had one loan with a net book value of $27.0 million which was in maturity default but had no reserve recorded. We expect to collect all principal and interest due under this loan.

There was no income recorded on impaired loans during the six months ended June 30, 2013. We recorded $290,000 of income on impaired subordinate interests in mortgage loans with an average net book value of $3.3 million during the six months ended June 30, 2012. Substantially all income recorded on impaired loans during the period was received in cash.

Nonaccrual loans

We do not have any nonaccrual loans in our Loan Origination segment. Consolidated securitization vehicles in our CT Legacy Portfolio segment had subordinate interests in mortgages on nonaccrual status with an aggregate principal balance of $18.1 million and an aggregate net book value of zero as of June 30, 2013. Consolidated securitization vehicles in our CT Legacy Portfolio segment had subordinate interests in mortgages on nonaccrual status with an aggregate principal balance of $24.7 million and an aggregate net book value of $2.0 million as of December 31, 2012. In accordance with our revenue recognition policies discussed in Note 2, we do not accrue interest on loans which are 90 days past due or, in the opinion of our Manager, are otherwise uncollectable. Accordingly, we do not have any material interest receivable accrued on nonperforming loans as of June 30, 2013 or December 31, 2012.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

Note 6. Loans Held-For-Sale

Activity relating to our loans held-for-sale for the six months ended June 30, 2013 was as follows ($ in thousands):

 

     Gross Book
Value
     Valuation
Allowance
    Net Book
Value
 

December 31, 2012

   $ —         $ —        $ —     

Reclassification from loans receivable

     6,601         (4,601     2,000   

Valuation allowance on loans held-for-sale

     —           1,800        1,800   
  

 

 

    

 

 

   

 

 

 

June 30, 2013

   $ 6,601       ($ 2,801   $ 3,800   
  

 

 

    

 

 

   

 

 

 

During the first quarter of 2013, we reclassified a $6.6 million subordinate mortgage loan and its related $4.6 million reserve for loan losses to loans held-for-sale. During the six months ended June 30, 2013, we recorded a $1.8 million valuation adjustment to reflect this loan at its approximate fair value as of June 30, 2013.

Note 7. Loans Receivable, At Fair Value

We record CT Legacy Partners’ loans receivable investments at fair value, which are determined using internal financial model-based estimations. The CT Legacy Partners loans receivable portfolio included eleven loans with an aggregate principal balance of $220.7 million, which were reported at their aggregate fair value of $117.5 million as of June 30, 2013. As of December 31, 2012, there were no loans receivables at fair value because we accounted for CT Legacy Partners as a non-consolidated subsidiary. Refer to Note 3 and Note 8 for additional discussion of CT Legacy Partners. See Note 17 for further discussion of fair value and Note 19 for an allocation of our loans receivable between our operating segments.

The following table details overall statistics for CT Legacy Partners’ loans receivable, which is held at fair value as of June 30, 2013 ($ in millions):

 

     Loans Receivable, at Fair Value  
     Floating Rate     Fixed Rate     Total  

Number of loans

     8        3        11   

Net Book Value

   $ 94      $ 24      $ 118   

Wtd. Avg. cash coupon (1)

     L+3.90     8.14     4.74

Wtd. Avg. all-in yield (1)

     L+4.64     8.12     5.34

Wtd. Avg. maximum maturity (years) (2)

     0.6        1.4        0.8   

 

(1) Floating rate loans are indexed to LIBOR as of June 30, 2013. LIBOR was 0.19% as of June 30, 2013; however, certain of our loans receivable earn interest based on a minimum LIBOR of 2.0%. Amounts exclude all non-performing loans.
(2) Maximum maturity date assumes all extension options are exercised.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

The tables below detail the types of loans in CT Legacy Partners’ loan portfolio, as well as the property type and geographic distribution of the properties securing these loans, as of June 30, 2013 ($ in thousands):

 

     June 30, 2013  

Asset Type

   Net Book
Value
     Percentage  

Subordinate interests in mortgages

   $ 49,695         42

Mezzanine loans

     41,043         35   

Senior mortgages

     26,811         23   
  

 

 

    

 

 

 

Total

   $ 117,549         100
  

 

 

    

 

 

 

 

Property Type

   Net Book
Value
     Percentage  

Hotel

   $ 51,761         44

Office

     41,682         35   

Other

     24,106         21   
  

 

 

    

 

 

 

Total

   $ 117,549         100
  

 

 

    

 

 

 

 

Geographic Location

   Net Book
Value
     Percentage  

Northeast

   $ 41,682         35

Northwest

     24,106         21   

West

     14,302         12   

Southeast

     11,869         10   

International

     25,590         22   
  

 

 

    

 

 

 

Total

   $ 117,549         100
  

 

 

    

 

 

 

Nonaccrual loans

In accordance with our revenue recognition policies discussed in Note 2, we do not accrue interest on loans which are 90 days past due or, in the opinion of our Manager, are otherwise uncollectable. We do not have any material interest receivable accrued on nonperforming loans as of June 30, 2013.

The following table details our loans receivable which are on nonaccrual status as of June 30, 2013 ($ in thousands):

 

Non-Accrual Loans Receivable as of June 30, 2013

 

Asset Type

   Principal
Balance
     Net
Book  Value
 

Senior Mortgage Loans

   $ —         $ —     

Subordinate Interests in Mortgages

     43,448         —     

Mezzanine & Other Loans

     69,146         11,869   
  

 

 

    

 

 

 

Total

   $ 112,594       $ 11,869   
  

 

 

    

 

 

 

Note 8. Investment in CT Legacy Asset, at Fair Value

As a result of the merger effective on March 22, 2013, we began consolidating CT Legacy Partners and its subsidiary, CT Legacy Asset, LLC or CT Legacy Asset. Previously, we accounted for CT Legacy Asset on a non-consolidated basis, and as of December 31, 2012, our consolidated balance sheet included a net investment in CT Legacy Asset of $132.0 million. We have elected the fair value option of accounting for CT Legacy REIT’s investment in CT Legacy Asset due to our determination that the fair value of the investment in CT Legacy Asset, as a net liquidating portfolio of assets, is more meaningful and indicative of our interests in CT Legacy Asset than equity method accounting. Following its consolidation, the loans receivable and repurchase obligations of CT Legacy Partners, as well as its other assets and liabilities, are included in our consolidated balance sheet. See Note 3 for additional discussion of the consolidation of CT Legacy Partners and Note 7 and Note 10 for further discussion of CT Legacy Partners’ loan receivables and repurchase obligation, respectively.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

CT Legacy Partners

CT Legacy Partners holds a portion of our legacy portfolio, which we had previously transferred to CT Legacy REIT (the predecessor of CT Legacy Partners) in connection with our March 2011 Restructuring. CT Legacy Partners is beneficially owned 52% by us and 48% by our former lenders. In addition, CT Legacy Partners has issued class B common shares, a subordinate class of equity which entitles its holders to receive approximately 25% of the dividends that would otherwise be payable to us on our equity interest in CT Legacy Partners, after aggregate cash distributions of $50.0 million have been paid to all other classes of common equity. Further, CT Legacy Partners has issued class A preferred shares which entitle its holder to cumulative preferred distributions in an amount generally equal to the greater of (i) 2.5% of certain of CT Legacy Partners’ assets, and (ii) $1.0 million per annum.

Our equity interest in CT Legacy Partners is comprised of 4,393,750 class A-1 common shares, 775,000 class A-2 common shares, and 118,651 class B common shares. The outstanding common shares of CT Legacy Partners are comprised of 4.4 million class A-1 common shares, 5.6 million class A-2 common shares, and 1.5 million class B common shares. The equity interests of other members of CT Legacy Partners are reflected as non-controlling interests on our consolidated balance sheet. As of June 30, 2013, CT Legacy Partners had not made any distribution payments to its common equity holders.

Note 9. Equity Investments in Unconsolidated Subsidiaries

As of June 30, 2013, our equity investments in unconsolidated subsidiaries consisted solely of our carried interest in CTOPI, a fund sponsored and managed by CTIMCO. Historically, this balance has also included our co-investments in investment management vehicles that were sponsored and managed by CTIMCO. As described in Note 3, we sold two such co-investments to an affiliate of Blackstone in December 2012 in conjunction with our Investment Management Business Sale; however, we retained 100% of our carried interest in CTOPI.

Activity relating to our equity investments in unconsolidated subsidiaries for the six months ended June 30, 2013 was as follows ($ in thousands):

 

     CTOPI
Carried Interest  (1)
 

Total as of December 31, 2012

   $ 13,306   

Incentive income allocation (2)

     9,934   
  

 

 

 

Total as of June 30, 2013

   $ 23,240   
  

 

 

 

 

(1) The allocation of carried interest from CTOPI is net of a $1.4 million advance distribution of incentive compensation to satisfy our 2012 income tax obligation related to the allocation of taxable income in respect of our carried interest in CTOPI.
(2) We have deferred the recognition of incentive income allocated to us from CTOPI in respect of our carried interest in CTOPI, and recorded an offsetting liability as a component of accounts payable and other liabilities on our consolidated balance sheet.

Our carried interest in CTOPI entitles us to earn incentive compensation in an amount equal to 17.7% of the fund’s profits, after a 9% preferred return and 100% return of capital to the CTOPI partners. As of June 30, 2013, we had been allocated $24.6 million of incentive compensation from CTOPI based on a hypothetical liquidation of the fund at its net asset value.

Accordingly, we have recognized this allocation as an equity investment in CTOPI on our consolidated balance sheet; however, we have deferred the recognition of income until cash is collected or appropriate contingencies have been eliminated.

The CTOPI partnership agreement provides for advance distributions in respect of our incentive compensation to allow us to pay any income taxes owed on phantom taxable income allocated to us from the partnership. We refer to these distributions as CTOPI Tax Advances. During 2012, we received one such CTOPI Tax Advance of $1.4 million. In the event the performance of CTOPI does not ultimately result in a sufficient allocation of incentive compensation to us, we would be required to return these CTOPI Tax Advances to the fund. As of June 30, 2013, our maximum exposure to loss from CTOPI was $1.4 million, the amount of CTOPI Tax Advances we have received from CTOPI.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

CTOPI Incentive Management Fee Grants

In January 2011, we created a management compensation pool for employees equal to 45% of the CTOPI incentive management fee received by us. As of June 30, 2013, we had granted 96% of the pool to our former employees, and the remainder remained unallocated. If any awards remain unallocated at the time incentive management fees are received by us, any amounts otherwise payable to the unallocated awards will be distributed pro-rata to the plan participants then employed by an affiliate of our Manager.

Approximately 96% of these grants have the following vesting schedule, which is contingent on continued employment with an affiliate of our Manager: (i) one-third on the date of grant; (ii) one-third on September 13, 2012; and (iii) the remainder vests upon our receipt of incentive management fees from CTOPI. The remaining 4% of these grants vest solely upon our receipt of incentive management fees from CTOPI or the disposition of certain investments owned by CTOPI.

Note 10. Debt Obligations

Secured Notes

In conjunction with our March 2011 Restructuring and the corresponding satisfaction of our senior credit facility and junior subordinated notes, certain wholly-owned subsidiaries of ours issued secured notes to these former creditors, which secured notes are non-recourse to us. The secured notes had an aggregate initial face value of $7.8 million and are secured by 93.5% of our equity interests in the class A-1 and class A-2 common shares of CT Legacy Partners, which represents 48.3% of the total outstanding class A-1 and class A-2 common shares of CT Legacy Partners. The secured notes mature on March 31, 2016 and bear interest at a rate of 8.2% per annum, which interest may be deferred until maturity. All distributions we receive from our equity interests in the common shares of CT Legacy Partners which serve as collateral under the secured notes must be used to pay, or prepay, interest and principal due thereunder, and only after the notes’ full satisfaction will we receive any cash flow from the common equity interests in CT Legacy Partners that serve as collateral for the notes. Any prepayment, or partial prepayment, of the secured notes will incur a prepayment premium resulting in a total payment of principal and interest under the secured notes of $11.1 million.

We had secured notes outstanding with an accreted book value of $8.8 million and $8.5 million as of June 30, 2013 and December 31, 2012, respectively.

Repurchase Obligations

During the second quarter of 2013, we entered into $1.0 billion of master repurchase agreements with four counterparties. As of June 30, 2013, we had aggregate borrowings of $165.2 million outstanding under these facilities, with a weighted-average cash coupon, excluding associated fees and expenses, of LIBOR plus 1.98% per annum and a weighted-average initial maturity, excluding extension options and term-out provisions, of 2.5 years. The following table details the repurchase obligations outstanding as of June 30, 2013 ($ in thousands):

 

            Collateral Assets      Repurchase Balances  

Repurchase Lender

   Facility
Size
     Principal
Balance
     Net Book
Value
     Maximum
Borrowings
     Current
Borrowings
     Available
Borrowings  (1)
 

Bank of America

   $ 250,000       $ 126,300       $ 125,557       $ 101,040       $ 46,400       $ 54,640   

Wells Fargo

     250,000         300,000         298,533         250,000         —           250,000   

Citibank

     250,000         156,438         156,039         118,839         118,839         —     

JP Morgan

     250,000         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,000,000       $ 582,738       $ 580,129       $ 469,879       $ 165,239       $ 304,640   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Available borrowings is based on assets pledged as collateral under credit facilities as of June 30, 2013. There were two loans with an aggregate principal balance of $173.8 million as of June 30, 2013 that were not pledged under repurchase agreements, and therefore are available to be pledged as collateral in the future.

On May 21, 2013, we entered into a $250.0 million master repurchase agreement with Bank of America. Advances under the repurchase agreement accrue interest at a per annum pricing rate equal to LIBOR plus a margin of between 1.75% and 3.25% depending on the attributes of the collateral loans. The initial maturity date of the facility is May 21, 2016, subject to two one-year extension options, each of which may be exercised by us. Obligations under this repurchase agreement are not recourse to us, except that we guarantee 50% of the advances related to senior collateral and 100% of the advances related to mezzanine and junior mortgage collateral.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

On June 7, 2013, we entered into a $250.0 million, asset specific, repurchase agreement with Wells Fargo. Advances under the repurchase agreement accrue interest at a per annum pricing rate equal to LIBOR plus a margin of 2.50%. The initial maturity date of the facility is June 7, 2016, which may be extended pursuant to (i) two one-year extension options, each of which may be exercised by us, and (ii) an additional one-year extension option, contingent upon notice regarding the failure of the collateral mortgage loan to be repaid at its final maturity. We do not guarantee the obligations under this repurchase agreement.

On June 12, 2013, we entered into a $250.0 million master repurchase agreement with Citibank. Advances under the repurchase agreement accrue interest at a per annum pricing rate equal to LIBOR plus a margin of between 2.00% and 2.25% depending on the attributes of the collateral loans. The initial facility expiration date is June 12, 2016, which may be extended annually by us. If upon the initial facility expiration date, Citibank does not extend the facility availability period, in its sole discretion, then no new advances may be drawn and all collateral interest and principal proceeds would be required to repay existing advances, subject to certain provisions for REIT income distribution requirements. In either case, individual advances mature upon the maturity date of the respective collateral maturity dates. We guarantee 25% of the advances under this facility. Otherwise, obligations under this repurchase agreement are not recourse to us.

On June 28, 2013, we entered into a $250.0 million master repurchase agreement with JP Morgan. Advances under the repurchase agreement accrue interest at a per annum pricing rate equal to LIBOR plus a margin of between 2.00% and 3.25% depending on the attributes of the collateral loans. The repurchase agreement specifies a one-year availability period, during which new advances can be made and which availability period is renewable at the discretion of JP Morgan. Maturity dates for individual advances are tied to their respective collateral loan maturity dates subject to annual renewal at our discretion. In the event that the availability period is not renewed, it is followed by a two year ‘stabilization’ period and then a ‘term out’ period, during which all collateral interest and principal proceeds would be required to repay existing advances, subject to certain provisions for REIT income distribution requirements. Obligations under this repurchase agreement are not recourse to us, except that we guarantee 25% of the advances related to senior mortgage collateral and 100% of the advances related to mezzanine and junior mortgage collateral.

Each of the guarantees related to our master repurchase agreements contain the following uniform financial covenants: (i) our ratio of EBITDA to fixed charges shall be not less than 1.40 to 1.0; (ii) our tangible net worth shall not be less than $525.0 million plus 75% of the net cash proceeds of future equity issuances; (iii) cash liquidity shall not be less than the greater of (x) $10.0 million or (y) 5% of our recourse indebtedness; and (iv) our indebtedness shall not exceed 80% of our total assets. As of June 30, 2013, we were in compliance with all applicable covenants.

The weighted average outstanding repurchase obligation balance for the three months ended June 30, 2013 was $28.3 million.

Repurchase Obligations - CT Legacy Partners

As of March 31, 2013, CT Legacy Partners was party to a repurchase facility with JP Morgan with an outstanding balance of $20.2 million. On June 5, 2013, CT Legacy Partners repaid the outstanding balance and terminated the repurchase facility. CT Legacy Partners has no outstanding debt obligations as of June 30, 2013.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

Securitized Debt Obligations

The balances of each of our consolidated securitization vehicles’ outstanding securitized debt obligations, their respective coupons and all-in effective costs, including the amortization of fees and expenses, were as follows ($ in thousands):

 

     June  30,
2013
     December 31,
2012
          June  30,
2013
 

Non-Recourse Securitized Debt Obligations

   Principal
Balance
     Book
Value
     Book
Value
          Coupon  (1)     All-In
Cost  (1)
    Maturity
Date  (2)
 

CT CDO I

   $ 74,472       $ 74,472       $ 91,131             1.79     1.79     July 2039   

GSMS 2006-FL8A

     —           —           48,053             —          —          N/A   
  

 

 

    

 

 

    

 

 

        

 

 

   

 

 

   

 

 

 

Total/Weighted Average

   $ 74,472       $ 74,472       $ 139,184             1.79     1.79     July 2039   
  

 

 

    

 

 

    

 

 

        

 

 

   

 

 

   

 

 

 

 

(1) Represents a weighted average for the facility, assuming LIBOR of 0.19% at June 30, 2013 for floating rate debt obligations.
(2) Maturity date represent the contractual maturity of the securitization trust. Repayment of securitized debt is a function of collateral cash flows which are disbursed in accordance with the contractual provisions of each trust, and is generally expected to occur prior to the maturity date above.

As of June 30, 2013, loans receivable with an aggregate book value of $80.8 million served as collateral for the non-recourse debt and equity securities issued by our consolidated securitizations vehicles. As of December 31, 2012, loans receivable with an aggregate book value of $141.5 million served as collateral for the securities issued by these same vehicles.

Our consolidated securitization vehicle, CT CDO I, is subject to interest coverage and overcollateralization tests which, when breached, provide for hyper-amortization of the senior notes by a redirection of cash flow that would otherwise have been paid to the subordinate classes, some of which are owned by us. Furthermore, CT CDO I provides for the re-classification of interest proceeds from impaired collateral as principal proceeds, which also serve to hyper-amortize the senior notes sold. As a result of collateral asset impairments and the related breaches of these interest coverage and overcollateralization tests, we currently do not receive any cash payments from CT CDO I.

Note 11. Derivative Financial Instruments

We may, in the normal course of business, enter into interest rate derivative financial instruments to manage, or hedge, cash flow variability caused by interest rate fluctuations. As of, and during the six months ended, June 30, 2013, we were not party to any such derivative financial instruments. However, our consolidated subsidiary, CT Legacy Partners, was party to five interest rate swaps which it terminated in June 2013. A gain of $136,000 resulting from the termination is included as a component of interest expense on our consolidated statements of operations for the six months ended June 30, 2013. CT Legacy Partners is no longer party to any derivative financial instruments as of June 30, 2013.

Note 12. Stockholders’ Equity

Balance Sheet Data

Stockholders’ Equity increased $639.2 million during the first six months of 2013 to $712.7 million. This increase was primarily driven by the issuance of additional shares of class A common stock. See below for further discussion on the share issuance.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

Accumulated Other Comprehensive Loss

We did not have any accumulated other comprehensive income or loss as of December 31, 2012 or June 30, 2013. The following table details the primary components of accumulated other comprehensive loss as of June 30, 2012, and significant activity for the six months ended June 30, 2012 ($ in thousands):

 

Accumulated Other Comprehensive Loss

   Mark-to-Market
on Interest Rate
Hedges
    Deferred Gains
on Settled
Hedges
    Other-than-
Temporary
Impairments
    Unrealized
Gains on
Securities
          Total  
 

Total as of December 31, 2011

   ($ 27,423   $ 56      ($ 16,578   $ 3,361           ($ 40,584
 

Unrealized gain on derivative financial instruments

     3,749        —          —          —               3,749   

Ineffective portion of cash flow hedges (1)

     2,481        —          —          —               2,481   

Amortization of net unrealized gains on securities

     —          —          —          (765          (765

Amortization of net deferred gains on settlement of swaps

     —          (56     —          —               (56

Other-than-temporary impairments of securities (2)

     —          —          203        —               203   

Deconsolidation of CT Legacy Assets (3)

     —          —          3,879        (2,586          1,293   
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

Total as of June 30, 2012

   ($ 21,193   $ —        ($ 12,496   $ 10           ($ 33,679
  

 

 

   

 

 

   

 

 

   

 

 

        

 

 

 

Allocation to non-controlling interest (3)

                  —     
               

 

 

 

Accumulated other comprehensive loss as of June 30, 2012

  

             ($ 33,679
               

 

 

 

 

(1) As a result of the deconsolidation of CT Legacy Assets in the first quarter of 2012, the balance of accumulated other comprehensive income related to cash flow hedges of CT Legacy Assets was reclassified to interest expense.
(2) Represents other-than-temporary impairments of securities in excess of credit losses, including amortization of prior other-than-temporary impairments of $391,000.
(3) As further described in Note 1 above, we deconsolidated CT Legacy Assets in the first quarter of 2012. As a result, the balances of accumulated other comprehensive income related to CT Legacy Assets, including those allocable to non-controlling interests are no longer included in our consolidated financial statements.

Non-controlling Interests

The non-controlling interests included on our consolidated balance sheet represent the equity interests in CT Legacy Partners that are not owned by us, as described in Note 8. CT Legacy Partners’ outstanding common stock includes class A-1 common shares, class A-2 common shares, and subordinate class B common shares. A portion of CT Legacy Partners’ consolidated equity and results of operations are allocated to these non-controlling interests based on their pro-rata ownership of CT Legacy Partners.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

The following table details the components of non-controlling interests as of June 30, 2013 ($ in thousands):

 

Non-controlling Interests in CT Legacy Partners as of June 30, 2013

 

Gross investment in CT Legacy Partners:

  

Restricted cash

   $ 21,972   

Loans receivable, at fair value

     117,549   

Accrued interest receivable, prepaid expenses, and other assets

     21,948   

Accounts payable, accrued expenses and other liabilities

     (485
  

 

 

 
   $ 160,984   
  

 

 

 

Equity interests owned by Blackstone Mortgage Trust, Inc.

     (72,006
  

 

 

 

Non-controlling interests in CT Legacy Partners

   $ 88,978   
  

 

 

 

Share and Share Equivalents

Authorized Capital

We have the authority to issue up to 200,000,000 shares of stock, consisting of 100,000,000 shares of class A common stock and 100,000,000 shares of preferred stock. Subject to applicable NYSE listing requirements, our board of directors is authorized to cause us to issue additional shares of authorized stock without stockholder approval. In addition, to the extent not issued, currently authorized stock may be reclassified between class A common stock and preferred stock.

Reverse Stock Split

On April 26, 2013, our board of directors approved a one-for-ten reverse stock split of our class A common stock which we effected on May 6, 2013. As a result of the reverse stock split, the number of outstanding shares of our class A common stock was reduced to 2,926,651. In addition, there was a reclassification of $263,000 from the par value of our class A common stock to additional paid-in capital to reflect the impact of the reverse stock split.

Class A Common Stock and Deferred Stock Units

Holders of shares of class A common stock are entitled to vote on all matters submitted to a vote of stockholders, subject to the voting rights of any outstanding shares of preferred stock. Holders of record of shares of class A common stock on the record date fixed by our board of directors are entitled to receive such dividends as may be authorized by our board of directors and declared by us, subject to the rights of the holders of any shares of outstanding preferred stock. On May 29, 2013, we issued 25,875,000 shares of class A common stock at a public offering price of $25.50 per share. We generated net proceeds from the issuance of $633.8 million after underwriting discounts and other offering expenses. A total of 28,894,475 shares of class A common stock and stock units were issued and outstanding as of June 30, 2013.

In addition to our class A common stock, we also issue deferred stock units to certain members of our board of directors in lieu of cash compensation for services rendered. These deferred stock units are non-voting, but carry the right to receive dividends in the form of additional deferred stock units in an amount equivalent to the cash dividends paid to holders of shares of class A common stock.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

The following table details the movement in our outstanding shares of class A common stock, restricted class A common stock, and deferred stock units for the six months ended June 30, 2013 and June 30, 2012:

 

     Six Months Ended June 30,  

Common Stock Outstanding (1)(2)(3)

   2013      2012  

Beginning balance

     3,016,407         2,277,344   

Issuance of class A common stock

     25,875,000         —     

Transactions related to stock-based incentive plans

     

Issuance of restricted class A common stock, net

     —           36,400   

Issuance of deferred stock units

     3,068         3,578   
  

 

 

    

 

 

 

Ending balance

     28,894,475         2,317,322   
  

 

 

    

 

 

 

 

(1) Includes shares of our class A common stock, restricted class A common stock, and deferred stock units.
(2) Total class A common stock includes deferred stock units held by members of our board of directors of 93,000, and 66,000 as of June 30, 2013 and 2012, respectively.
(3) Share amounts have been retroactively updated to reflect the one-for-ten reverse stock split which we effected as of May 6, 2013. See above for further discussion.

Preferred Stock

We have not issued any shares of preferred stock since we repurchased all of our previously issued and outstanding preferred stock in 2001.

Dividends

We generally intend to distribute each year substantially all of our taxable income (which does not necessarily equal net income as calculated in accordance with GAAP) to our stockholders to comply with the REIT provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code.

Our dividend policy remains subject to revision at the discretion of our board of directors. All distributions will be made at the discretion of our board of directors and will depend upon our taxable income, our financial condition, our maintenance of REIT status, applicable law, and other factors as our board of directors deems relevant.

No dividends were declared during the six months ended June 30, 2013 or 2012.

Earnings Per Share

The following table sets forth the calculation of basic and diluted net income per share of class A common stock based on the weighted average of both restricted and unrestricted class A common stock outstanding, for the three and six months ended June 30, 2013 and 2012 ($ in thousands, except share and per share amounts):

 

     Net Income (Loss) per Share of Common Stock (1)  
     Three Months Ended June 30,      Six Months Ended June 30,  
     2013      2012      2013     2012  

Net income (loss)

   $ 2,748       $ 2,283       ($ 367   $ 68,836   

Weighted average shares outstanding

     12,401,274         2,289,352         7,734,774        2,286,582   

Warrants and options outstanding for the purchase of class A common stock

     —           153,334         —          148,757   
  

 

 

    

 

 

    

 

 

   

 

 

 

Weighted average shares outstanding, diluted

     12,401,274         2,442,686         7,734,774        2,435,339   

Per share amount, basic

   $ 0.22       $ 1.00       ($ 0.05   $ 30.10   
  

 

 

    

 

 

    

 

 

   

 

 

 

Per share amount, diluted

   $ 0.22       $ 0.93       ($ 0.05   $ 28.27   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

(1) Share and per share amounts have been retroactively updated to reflect the one-for-ten reverse stock split which we effected as of May 6, 2013. See above for further discussion.

Refer to Note 19 for a breakdown of our results of operations for each of our operating segments.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

The following table sets forth the calculation of basic and diluted income from continuing operations per share of class A common stock based on the weighted average of both restricted and unrestricted class A common stock outstanding, for the three and six months ended June 30, 2013 and 2012 ($ in thousands, except share and per share amounts):

 

    Income (Loss) from Continuing Operations per Share of Common Stock (1)  
    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2013     2012     2013     2012  

Income from continuing operations

  $ 6,768      $ 3,692      $ 5,170      $ 144,887   

Net income attributable to non-controlling interests

    (4,020     (1,068     (5,537     (75,137
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations attributable to Blackstone Mortgage Trust, Inc.

  $ 2,748      $ 2,624      ($ 367   $ 69,750   

Weighted average shares outstanding

    12,401,274        2,289,352        7,734,774        2,286,582   

Warrants and options outstanding for the purchase of class A common stock

    —          153,334        —          148,757   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares outstanding, diluted

    12,401,274        2,442,686        7,734,774        2,435,339   

Per share amount, basic

  $ 0.22      $ 1.15      ($ 0.05   $ 30.50   
 

 

 

   

 

 

   

 

 

   

 

 

 

Per share amount, diluted

  $ 0.22      $ 1.08      ($ 0.05   $ 28.67   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Share and per share amounts have been retroactively updated to reflect the one-for-ten reverse stock split which we effected as of May 6, 2013. See above for further discussion.

Refer to Note 19 for a breakdown of our results of operations for each of our operating segments.

Note 13. General and Administrative Expenses

General and administrative expenses for the six months ended June 30, 2013 and 2012 consisted of the following ($ in thousands):

 

     Six Months Ended June 30,  

General and Administrative Expenses

   2013      2012  

Management fees to affiliates

   $ 983       $ —     

Professional services

     1,267         802   

Operating and other costs

     975         954   
  

 

 

    

 

 

 

Subtotal

     3,225         1,756   
  

 

 

    

 

 

 

Non-cash compensation expenses

     

Management incentive awards plan - CT Legacy Partners (1)

     1,511         181   

Director stock-based compensation

     75         112   

Employee stock-based compensation

     —           210   
  

 

 

    

 

 

 

Subtotal

     1,586         503   
  

 

 

    

 

 

 

Expenses of consolidated securitization vehicles

     654         64   
  

 

 

    

 

 

 

Total

   $ 5,465       $ 2,323   
  

 

 

    

 

 

 

 

(1) Represents the accrual of amounts payable under the CT Legacy Partners management incentive awards during the period. See below for discussion of the CT Legacy Partners management incentive awards plan.

As a result of our Investment Management Business Sale, the operating expenses related to our investment management business have been reclassified to income (loss) from discontinued operations on our consolidated statements of operations. See Note 3 for further discussion of the Investment Management Business Sale.

In conjunction with the Investment Management Business Sale, we entered into a new management agreement with our Manager, which was amended and restated as of March 26, 2013, pursuant to which our Manager earns a base management fee in an amount equal to the greater of (a) $250,000 per annum and (b) 1.50% per annum multiplied by our outstanding Equity balance, as defined in the management agreement with our Manager. In addition, our Manager is entitled to an incentive fee in an amount equal to the product of (a) 20% and (b) the excess of (i) our Core Earnings (as defined in the management agreement) for the previous 12-month period (or the period since January 1, 2013, whichever is shorter) over (ii) an amount equal to 7.00% per annum multiplied by our outstanding Equity, provided that our Core Earnings over the prior three-year period (or the period since the date of the first

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

offering of our class A common stock following December 19, 2012, whichever is shorter) is greater than zero. Core Earnings is generally equal to our net income (loss) prepared in accordance with GAAP, excluding (i) certain non-cash items and (ii) the net income (loss) related to our legacy portfolio.

During the six months ended June 30, 2013, we incurred $982,500 of management fees payable to our Manager, which are included in general and administrative expenses. We did not incur any incentive fees payable to our Manager during the six months ended June 30, 2013.

CT Legacy Partners Management Incentive Awards Plan

In conjunction with our March 2011 Restructuring, we created an employee pool for up to 6.75% of the distributions paid to the common equity holders of CT Legacy Partners (subject to certain caps and priority distributions). As of June 30, 2013, incentive awards for 92% of the pool were granted to our former employees, and the remainder remains unallocated. If any awards remain unallocated at the time distributions are paid, any amounts otherwise payable to the unallocated awards will be distributed pro-rata to the plan participants then employed by an affiliate of our Manager.

Approximately 82% of these grants have the following vesting schedule, which is contingent on continued employment with an affiliate of our Manager: (i) 25% vests on the date of grant, (ii) 25% vests in March 2013, (iii) 25% vests in March 2014, and (iv) the remainder vests upon our receipt of distributions from CT Legacy Partners. The remaining 18% of these grants vest upon our receipt of distributions from CT Legacy Partners.

We accrue a liability for the amounts due under these grants based on the value of CT Legacy Partners and the periodic vesting of the awards granted. Accrued payables for these awards were $6.8 million and $5.3 million as of June 30, 2013 and December 31, 2012, respectively.

Note 14. Discontinued Operations

As more fully described in Note 3, we sold our investment management business, CTIMCO, to an affiliate of Blackstone in December 2012. As a result, the income and expense items related to our investment management business have been reclassified to loss from discontinued operations on our consolidated statement of operations.

The following table provides additional information on the components of discontinued operations for the six months ended June 30, 2013 and 2012 ($ in thousands):

 

     Three Months Ended June 30,     Six Months Ended June 30,  

Discontinued Operations

   2013      2012     2013      2012  

Servicing fees

   $ —         $ 1,365      $ —         $ 3,385   

Management fees from affiliates

     —           1,610        —           3,195   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenues

     —           2,975        —           6,580   

General and administrative expenses

     —           3,173        —           6,729   
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss from discontinued operations before income taxes

     —           (199     —           (149
  

 

 

    

 

 

   

 

 

    

 

 

 

Income tax provision

     —           (143     —           (766
  

 

 

    

 

 

   

 

 

    

 

 

 

Loss from discontinued operations

   $ —         ($ 341   $ —         ($ 914
  

 

 

    

 

 

   

 

 

    

 

 

 

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements

(unaudited)

 

Note 15. Income Taxes

We made an election to be taxed as a REIT, effective January 1, 2003, under the Internal Revenue Code for U.S. federal income tax purposes. We generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal income tax not to apply to our earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our net taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws.

Our qualification as a REIT also depends on our ability to meet various other requirements imposed by the Internal Revenue Code, which relate to organizational structure, diversity of stock ownership and certain restrictions with regard to the nature of our assets and the sources of our income. Even if we qualify as a REIT, we may be subject to certain U.S. federal income and excise taxes and state and local taxes on our income and assets. If we fail to maintain our qualification as a REIT for any taxable year, we may be subject to material penalties as well as federal, state and local income tax on our taxable income at regular corporate rates and we would not be able to qualify as a REIT for the subsequent four full taxable years. As of June 30, 2013 and December 31, 2012, we were in compliance with all REIT requirements.

During the six months ended June 30, 2013, we recorded a current income tax provision of $593,000. Of the total current income tax provision, $554,000 was due to activities of taxable REIT subsidiaries. As a result of our sale of CTIMCO we no longer have any deferred tax assets or liabilities as of December 31, 2012.

As a result of our issuance of 25,875,000 shares of class A common stock in May 2013, the availability of our net operating losses, or NOLs, and net capital losses, or NCLs, is significantly limited by change of control provisions promulgated by the Internal Revenue Service with respect to the ownership of Blackstone Mortgage Trust, Inc. As of December 31, 2012, we had net operating losses, or NOLs, of $161.5 million and net capital losses, or NCLs, of $121.4 million available to be carried forward and utilized in current or future periods. If we are unable to utilize our NOLs, they will expire in 2029. If we are unable to utilize our NCLs, $2.0 million will expire in 2013, $87.4 million will expire in 2014, $31.4 million will expire in 2015, and $618,000 will expire in 2017.

As of June 30, 2013, tax years 2009 through 2012 remain subject to examination by taxing authorities.

Note 16. Stock-Based Incentive Plans

We do not have any employees following the consummation of the Investment Management Business Sale on December 19, 2012, as described in Note 1. However, as of June 30, 2013, our Manager, certain individuals employed by an affiliate of our Manager, and certain members of our board of directors are compensated, in part, through the issuance of stock-based instruments. In addition, certain of our former employees continue to participate in the CTOPI incentive management fee grants and the CT Legacy Partners management incentive awards plan.

We had stock-based incentive awards outstanding under four benefit plans as of June 30, 2013: (i) our amended and restated 1997 non-employee director stock plan, or 1997 Plan, (ii) our 2007 long-term incentive plan, or 2007 Plan, (iii) our 2011 long-term incentive plan, or 2011 Plan, and (iv) our 2013 stock incentive plan, or 2013 Plan. No awards have been granted under our 2013 manager incentive plan, or 2013 Manager Plan, as of June 30, 2013. We refer to our 1997 Plan, our 2007 Plan, and our 2011 Plan as our Expired Plans and we refer to our 2013 Plan and 2013 Manager Plan as our Current Plans.

Our Expired Plans have expired and no new awards may be issued under them. Under our Current Plans, a maximum of 2,160,106 shares of our class A common stock may be issued to our Manager, our directors and officers, and certain employees of affiliates of our Manager. As of June 30, 2013, there were 2,158,646 shares available under the Current Plans.

Awards outstanding under these plans as of June 30, 2013 was comprised entirely of 93,000 deferred stock units granted to certain members of our board of directors in lieu of cash compensation for services and in lieu of dividends earned on previously granted stock units. Awards outstanding under Expired Plans have been adjusted to reflect the one-for-ten reverse stock split which we effected as of May 6, 2013. See Note 12 for further discussion of our reverse stock split.

See Notes 9 and 13 for additional discussion of the CTOPI incentive management fee grants and the CT Legacy Partners management incentive awards plan, respectively.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

Note 17. Fair Values

Assets Recorded at Fair Value

The following table summarizes our assets that are recorded at fair value as of June 30, 2013 ($ in thousands):

 

            Fair Value Measurements Using  
     Total
Fair Value  at
June 30, 2013
     Quoted Prices
in Active
Markets
(Level 1)
     Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Measured on a recurring basis:

           

Loans held-for-sale, net

   $ 3,800       $ —         $ —         $ 3,800   

Loans receivable, at fair value

   $ 117,549       $ —         $ —         $ 117,549   

Securities, at fair value (1)

   $ 15,461       $ —         $ 1,925       $ 13,536   

Measured on a non-recurring basis:

           

Impaired loans receivable (2)

   $ —         $ —         $ —         $ —     

 

(1) Other assets, at fair value include securities and other assets carried at fair value.
(2) All impaired loans receivable have a 100% loan loss reserve and are held by consolidated securitization vehicles as of June 30, 2013.

The following table summarizes our assets that are recorded at fair value as of December 31, 2012 ($ in thousands):

 

            Fair Value Measurements Using  
     Total
Fair Value at
December 31, 2012
     Quoted Prices
in Active
Markets
(Level 1)
     Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Measured on a recurring basis:

           

Investment in CT Legacy Asset

   $ 132,000       $ —         $ —         $ 132,000   

Measured on a non-recurring basis:

           

Impaired loans receivable (1)

   $ 2,000       $ —         $ —         $ 2,000   

 

(1) Impaired loans receivable have a 92% loan loss reserve and are held by consolidated securitization vehicles as of December 31, 2013.

The following table reconciles the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs ($ in thousands):

 

    Loans
Held-for-Sale, net
    Loans Receivable,
at fair value
    Other assets,
at  fair value (1)
    Investment in
CT  Legacy Assets
 

December 31, 2012

  $ —        $ —        $ —        $ 132,000   

Consolidation of CT Legacy Partners

    —          150,332        15,761        (132,000

Transfer from loans receivable, net

    2,000        —          —          —     

Principal paydowns

    —          (36,930     (349     —     

Deferred interest

    —          195        —          —     

Adjustments to fair value included in earnings:

       

Valuation allowance on loans held-for-sale

    1,800        —          —          —     

Unrealized gain on investments at fair value

    —          3,951        49        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

June 30, 2013

  $ 3,800      $ 117,549      $ 15,461      $ —     
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Other assets include securities and other assets carried at fair value.

The following describes the key assumptions used in arriving at the fair value of each type of asset that was recorded at fair value as of June 30, 2013 and December 31, 2012. There were no liabilities recorded at fair value as of June 30, 2013 or December 31, 2012. See Note 2 for further discussion regarding fair value measurement.

Loans held-for-sale - Loans held-for-sale are valued based on expected net proceeds from a sale of the asset.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

Loans receivable, at fair value - The following table lists the range of key assumptions for each type of loans receivable as of June 30, 2013 ($ in millions):

 

     Assumption Ranges for Significant           Book Value  
     Unobservable Inputs (Level 3) (1)           Sensitivity to a  
          Recovery           100bps Discount  

Collateral Type

   Discount Rate    Percentage (2)    Book Value      Rate Increase  

Hotel

   8% -12%    84%- 100%    $ 51.7         (0.3%

Mixed Use / Other

   10%    100%      24.1         (0.1%

Office

   7%- 20%    69%- 100%      41.7         0.05
        

 

 

    
         $ 117.5      
        

 

 

    

 

(1) Excludes loans for which there is no expectation of future cash flows.
(2) Represents the proportion of the principal expected to be collected relative to the loan balance as of June 30, 2013.

Other assets, at fair value - Other assets include securities and other assets carried at fair value. As of June 30, 2013, all other assets were valued by obtaining assessments from third-party dealers.

Impaired loans receivable - Our impaired loans receivables, which are held by our consolidated securitization vehicles, include two subordinate interests in mortgage loans with an aggregate principal balance of $18.1 million. These hotel loans are in maturity default as of June 30, 2013. The range of key assumptions used for arriving at the fair value of these loans included capitalization rates between 9% and 15% and assumed occupancy rates between 75% and 83%.

Investment in CT Legacy Asset - We elected the fair value option of accounting for CT Legacy REIT’s investment in CT Legacy Asset, at December 31, 2012. We arrived at the fair value of our Investment in CT Legacy Asset by discounting the net cash flows expected to be distributed to its equity holders after the repayment of the repurchase facility. The key assumptions for significant unobservable inputs were: (i) a discount rate of 15% and (ii) loss severities applied to the underlying assets.

Fair Value of Financial Instruments

As discussed in Note 2, GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial position, for which it is practicable to estimate that value. The following table details the carrying amount, face amount, and approximate fair value of the financial instruments described in Note 2. All fair value estimates, except for cash and cash equivalents, are measured using significant unobservable inputs, or Level 3 inputs, as further described above. ($ in thousands):

 

     June 30, 2013      December 31, 2012  
     Carrying
Amount
     Face
Amount
     Fair
Value
     Carrying
Amount
     Face
Amount
     Fair
Value
 

Financial assets:

                 

Cash and cash equivalents

   $ 59,746       $ 59,746       $ 59,746       $ 15,423       $ 15,423       $ 15,423   

Restricted cash

     21,972         21,972         21,972         14,246         14,246         14,246   

Loans receivable, net

     830,101         851,716         827,152         141,500         164,180         133,682   

Financial liabilities:

                 

Secured notes

     8,848         8,848         7,827         8,497         8,497         7,374   

Repurchase obligations

     165,239         165,239         165,239         —           —           —     

Securitized debt obligations

     74,472         74,472         51,454         139,184         139,184         89,880   

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

Note 18. Transactions with Related Parties

Transactions Related to Our Manager

As further described in Note 3, in December 2012 we concluded multiple, related transactions with Blackstone and its affiliates, including: (i) the Investment Management Business Sale, (ii) the sale of 500,000 shares of our class A common stock for $20.00 per share, and (iii) the execution of a new external management agreement with our Manager. In addition, Blackstone received the right to designate two members of our board of directors, and exercised that right by designating an employee and one of its senior advisors to replace two former members of our board of directors who resigned effective December 19, 2012.

On March 26, 2013, we amended the external management agreement with our Manager to, among other things, amend our investment guidelines to permit the investment risk management committee of our board of directors, which consists of only independent directors, to approve any proposed investment by our Manager.

As of June 30, 2013, our consolidated balance sheet included $920,000 of accrued management fees payable to our Manager. During the six months ended June 30, 2013, we paid $71,000 of management fees to our Manager. In addition, as of June 30, 2013, our consolidated balance sheet includes $382,000 of preferred distributions payable by CT Legacy Partners to an affiliate of our Manager. During the six months ended June 30, 2013, CT Legacy Partners made aggregate preferred distributions of $2.3 million to an affiliate of our Manager.

During the six months ended June 30, 2013, our consolidated securitization vehicles paid $651,000 of special servicing fees to CTIMCO, which is an affiliate of our Manager.

There may be conflicts between us and our Manager with respect to certain of the investments in the CT Legacy Partners and CTOPI portfolios where an affiliate of our Manager holds a related investment that is senior, junior, or pari passu to the investments held by these portfolios.

The management agreement with our Manager excludes from the management fee calculation our interests in CT Legacy Partners, CTOPI, and our CT CDOs, which may result in further conflicts between the economic interests of us and our Manager. Certain of our former employees are now employed by an affiliate of our Manager. See Note 13 for further discussion of the management agreement with our Manager.

On May 13, 2013, we entered into a joint venture, 42-16 Partners, with an affiliate of our Manager to originate and warehouse loans prior to the completion of our class A common stock offering on May 29, 2013. 42-16 Partners was owned 16.7% by us and 83.3% by an affiliate of our Manager, and originated one senior mortgage loan on May 21, 2013. On May 30, 2013, we ended this relationship with the affiliate of our Manager and purchased 100% of the equity interests in 42-16 Partners held by the affiliate our Manager using proceeds from the sale of our class A common stock and, as a result, 42-16 Partners became a 100% owned and consolidated subsidiary. We recorded a $193,000 charge to non-controlling interest as a result of the purchase of these equity interests at their fair value, rather than GAAP book value.

An affiliate of our Manager purchased 1,960,784 shares of our class A common stock as part of our stock offering on May 22, 2013. These shares were purchased for $25.50 each, the same price offered to non-affiliated purchasers. This affiliate owned class A common stock representing 8.5% of outstanding class A common stock and stock units as of July 25, 2013.

Other Related Party Transactions

In conjunction with the Investment Management Business Sale, we entered into a letter agreement with W.R. Berkley Corporation, or WRBC, pursuant to which we agreed not to undertake any offering of our class A common stock, or other equity securities, in an aggregate amount greater than $30.0 million without prior approval of a majority of the independent members of our board of directors. This approval was obtained in conjunction with our May 2013 offering of Class A common stock, and no further approval requirement remains. WRBC beneficially owned class A common stock representing approximately 1.3% of our outstanding class A common stock and stock units as of July 25, 2013, and a member of our board of directors is an employee of WRBC.

Note 19. Segment Reporting

We operate our real estate finance business through a Loan Origination segment and a CT Legacy Portfolio segment. The Loan Origination segment includes our activities associated with the origination and acquisition of mortgage loans, the capitalization of our loan portfolio, and the costs associated with operating our business generally. The CT Legacy Portfolio segment includes our activities specifically related to CT Legacy Partners, CT

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

CDO I, and our equity investment in CTOPI. Our Manager identifies, makes operating decisions, and assesses the performance of each of our business segments based on financial and operating data and metrics generated from our internal information systems.

Our Loan Origination business commenced during 2013. Accordingly, no comparable segment data exists for 2012 or any other prior period, and we have therefore not retrospectively restated our previously reported information.

The following table presents our results of operations for each segment for the three months ended June 30, 2013 ($ in thousands):

 

     Loan
Origination
    CT Legacy
Portfolio
    Total  

Income from loans and other investments:

      

Interest and related income

   $ 1,908      $ 4,109      $ 6,017   

Less: Interest and related expenses

     168        1,138        1,306   
  

 

 

   

 

 

   

 

 

 

Income from loans and other investments, net

     1,740        2,971        4,711   

Other expenses:

      

General and administrative

     2,153        1,274        3,427   
  

 

 

   

 

 

   

 

 

 

Total other expenses

     2,153        1,274        3,427   

Valuation allowance on loans held-for-sale

     —          2,000        2,000   

Unrealized gain on investments at fair value

     —          4,000        4,000   

Gain on extinguishment of debt

     —          38        38   
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (413     7,735        7,322   

Income tax provision

     2        552        554   
  

 

 

   

 

 

   

 

 

 

Net (loss) income

   ($ 415   $ 7,183      $ 6,768   
  

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interests

     —          (4,020     (4,020
  

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Blackstone Mortgage Trust, Inc.

   ($ 415   $ 3,163      $ 2,748   
  

 

 

   

 

 

   

 

 

 

All consolidated revenues for the three months ended June 30, 2013 were generated from external domestic sources. There were no transactions between our operating segments during the six months ended June 30, 2013.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

The following table presents the key components of our results of operations for each segment for the six months ended June 30, 2013 ($ in thousands):

 

     Loan     Legacy        
     Origination     Portfolio     Total  

Income from loans and other investments:

      

Interest and related income

   $ 1,908      $ 5,565      $ 7,473   

Less: Interest and related expenses

     168        1,915        2,083   
  

 

 

   

 

 

   

 

 

 

Income from loans and other investments, net

     1,740        3,650        5,390   

Other expenses:

      

General and administrative

     2,883        2,582        5,465   
  

 

 

   

 

 

   

 

 

 

Total other expenses

     2,883        2,582        5,465   

Valuation allowance on loans held-for-sale

     —          1,800        1,800   

Unrealized gain on investments at fair value

     —          4,000        4,000   

Gain on extinguishment of debt

     —          38        38   
  

 

 

   

 

 

   

 

 

 

(Loss) income before income taxes

     (1,143     6,906        5,763   

Income tax provision

     40        553        593   
  

 

 

   

 

 

   

 

 

 

Net (loss) income

   ($ 1,183   $ 6,353      $ 5,170   
  

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interests

     —          (5,537     (5,537
  

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to Blackstone Mortgage Trust, Inc.

   ($ 1,183   $ 816      ($ 367
  

 

 

   

 

 

   

 

 

 

All consolidated revenues for the six months ended June 30, 2013 were generated from external domestic sources. There were no transactions between our operating segments during the six months ended June 30, 2013.

 

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Table of Contents

Blackstone Mortgage Trust, Inc. and Subsidiaries

Notes to Consolidated Financial Statements (continued)

(unaudited)

 

The following table presents our consolidated statement of financial condition for each segment as of June 30, 2013 ($ in thousands):

 

     Loan
Origination
     Legacy
Portfolio
     Total  
Assets         

Assets:

        

Cash and cash equivalents

   $ 59,746       $ —         $ 59,746   

Restricted cash

     —           21,972         21,972   

Loans receivable, net

     753,101         77,000         830,101   

Loans held-for-sale, net

     —           3,800         3,800   

Loans receivable, at fair value

     —           117,549         117,549   

Equity investments in unconsolidated subsidiaries

     —           23,240         23,240   

Accrued interest receivable, prepaid expenses, and other assets

     5,912         24,785         30,697   
  

 

 

    

 

 

    

 

 

 

Total assets

   $ 818,759       $ 268,346       $ 1,087,105   
  

 

 

    

 

 

    

 

 

 
Liabilities & Equity         

Liabilities:

        

Accounts payable, accrued expenses and other liabilities

   $ 4,827       $ 32,052       $ 36,879   

Secured notes

     —           8,848         8,848   

Repurchase obligations

     165,239         —           165,239   

Securitized debt obligations

     —           74,472         74,472   
  

 

 

    

 

 

    

 

 

 

Total liabilities

     170,066         115,372         285,438   
  

 

 

    

 

 

    

 

 

 

Equity:

        

Total Blackstone Mortgage Trust, Inc. stockholders’ equity

     648,693         63,996         712,689   

Non-controlling interests

     —           88,978         88,978   
  

 

 

    

 

 

    

 

 

 

Total equity

     648,693         152,974         801,667   
  

 

 

    

 

 

    

 

 

 

Total liabilities and equity

   $ 818,759       $ 268,346       $ 1,087,105   
  

 

 

    

 

 

    

 

 

 

Note 20. Subsequent Events

Subsequent to quarter-end, we originated an additional five loans with total commitments of $289.1 million, of which an aggregate $233.3 million was funded at closing, and we borrowed $254.0 million under existing repurchase facilities.

Also subsequent to quarter-end, we closed two additional asset-specific repurchase agreements with Wells Fargo, which provide an aggregate $91.8 million of credit. Borrowings under these agreements are not recourse to us, and are term-matched to their collateral assets.

On July 26, 2013, we amended our master repurchase agreement with Citibank to provide for a second $250.0 million tranche of potential advances. The second tranche is subject to a one year ‘availability period,’ during which new financing transactions can be initiated. All other terms, including the maturity dates, for the second tranche advances are the same as the original $250 million tranche.

Also on July 26, 2013, we filed an S-3 universal shelf registration statement with the SEC, which permits us to periodically offer various debt and equity securities to the public. Any offerings of common stock or securities convertible into common stock remain subject to the 180-day lock-up agreement we executed in conjunction with our May 2013 offering of class A common stock.

 

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Table of Contents
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

References herein to “Blackstone Mortgage Trust,” “Company,” “we,” “us” or “our” refer to Blackstone Mortgage Trust, Inc. and its subsidiaries unless the context specifically requires otherwise.

The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those in this discussion as a result of various factors, including but not limited to those discussed in Item 1A. Risk Factors in our annual report on Form 10-K for the year ended December 31, 2012 and elsewhere in this quarterly report on Form 10-Q.

Introduction

We are a real estate finance company that primarily originates and purchases senior mortgage loans collateralized by properties in the United States and Europe. We are externally managed by BXMT Advisors L.L.C., which we refer to as our Manager, a subsidiary of The Blackstone Group L.P., or Blackstone, and are a real estate investment trust traded on the NYSE under the symbol “BXMT.” We are headquartered in New York City. Further information is available at www.bxmt.com.

We conduct our operations as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders and maintain our qualification as a REIT. We also operate our business in a manner that permits us to maintain our exemption from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act. We are organized as a holding company and conduct our business primarily through our various subsidiaries. Our business is organized into two operating segments; the Loan Origination segment and the CT Legacy Portfolio segment.

Recent Developments

Stock Offering, Name Change, and Reverse Stock Split

On May 29, 2013, we issued 25,875,000 shares of class A common stock for a public offering price of $25.50 per share. We generated net proceeds from the issuance of $633.8 million after underwriting discounts and other offering expenses. The Blackstone Group L.P., or Blackstone, purchased 1,960,784 shares of our class A common stock as part of the offering, resulting in ownership of 2,460,784 shares, or 8.5% of our class A common stock and stock units as of June 30, 2013. In addition, certain members of our board of directors, our officers, and other employees of an affiliate of our Manager purchased an aggregate of 300,688 shares our class A common stock as part of the offering under a directed share program. These shares were purchased for $25.50 each, the same price offered to non-affiliated purchasers.

On April 26, 2013, our board of directors approved the change of our name from Capital Trust, Inc. to Blackstone Mortgage Trust, Inc., which we effected on May 6, 2013 concurrently with a one-for-ten reverse stock split of our class A common stock. Except where the context indicates otherwise, all class A common stock numbers herein have been adjusted to give retroactive effect to the reverse stock split.

Blackstone Transaction

On December 19, 2012, we consummated a strategic transaction that included, among other things, disposition of our investment management and special servicing business, including CT Investment Management Co., LLC, or CTIMCO, and our related fund co-investments to an affiliate of Blackstone. In conjunction with the sale, we entered into a management agreement with an affiliate of Blackstone, which we refer to as our Manager. We refer the entire transaction as our Investment Management Business Sale. We received proceeds of $21.4 million from the Investment Management Business Sale and, in conjunction with the transaction, issued 500,000 shares of our class A common stock to an affiliate of Blackstone for a purchase price of $10.0 million.

In connection with the consummation of the Investment Management Business Sale and the closing of our sale of 500,000 shares of class A common stock to an affiliate of Blackstone, we paid a $20.00 per share special cash dividend on December 20, 2012 to holders of record of our class A common stock at the close of business on November 12, 2012.

Following the Investment Management Business Sale, we no longer have any employees and are externally managed by our Manager, an affiliate of Blackstone.

 

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Table of Contents

Book Value per Share

The following table calculates our book value per share as of June 30, 2013 and December 31, 2012 ($ in thousands, except per share amounts):

 

Book Value per Share (1)

             
     June 30, 2013      December 31, 2012  

Shareholders’ equity

     712,689       $ 73,444   

Shares:

     

Class A common stock

     28,801,651         2,926,651   

Restricted class A common stock

     —           —     

Stock units

     92,824         89,756   
  

 

 

    

 

 

 

Total

     28,894,475         3,016,407   
  

 

 

    

 

 

 

Book value per share

   $ 24.67       $ 24.35   
  

 

 

    

 

 

 

 

(1) Share and per share amounts have been retroactively updated to reflect the one-for-ten reverse stock split which we effected as of May 6, 2013. See Note 12 to our consolidated financial statements for further discussion.

We operate our real estate finance business through a Loan Origination segment and a CT Legacy Portfolio segment. The Loan Origination segment includes our activities associated with the origination and acquisition of mortgage loans, the capitalization of our loan portfolio, and the costs associated with operating our business generally. The CT Legacy Portfolio segment includes our activities specifically related to our CT Legacy Partners, LLC, or CT Legacy Partners, subsidiary, CT CDO I, and our equity investment in CT Opportunity Partners I, LP, or CTOPI.

The following table calculates our book value per share allocated between our two reportable segments as of June 30, 2013 ($ in thousands, except per share amounts):

 

Book Value per Share - Segment Allocation

                    
     Loan Origination      Legacy Portfolio      Total  

Shareholders’ equity

   $ 648,693       $ 63,996       $ 712,689   

Shares:

        

Class A common stock

     28,801,651         28,801,651         28,801,651   

Stock units

     92,824         92,824         92,824   
  

 

 

    

 

 

    

 

 

 

Total

     28,894,475         28,894,475         28,894,475   
  

 

 

    

 

 

    

 

 

 

Book value per share

   $ 22.45       $ 2.22       $ 24.67   
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

I. Loan Origination

 

During the three months ended June 30, 2013, our Loan Origination segment originated $756.6 million of new loans. The majority of these loan originations, however, closed in late June, resulting in interest income of only $1.9 million during the period. Similarly, the majority of our loan portfolio was capitalized by equity capital with only $165.2 million of borrowings outstanding under repurchase facilities as of June 30, 2013. The majority of these facilities also closed in late June, resulting in interest expense of only $168,000 during the period. In the aggregate, our Loan Origination segment incurred a net loss of $415,000 driven primarily by the concentration of its loan origination activity in June, as well as general and administrative expenses.

Portfolio Overview

The following table details our loan originations activity during the three months ended June 30, 2013 ($ in thousands):

 

Loan Origination Activity for Three Months Ended June 30, 2013

 
     Number
of Loans
     Total
Commitments
     Funded
Commitments
     Net
Book Value
 

Senior mortgage loans (1)

     8       $ 765,188       $ 756,638       $ 753,101   

 

(1) Senior mortgage loans include two pari passu participations with aggregate total commitments, funded commitments, and net book value of $91.1 million.

The following table details overall statistics for our loans receivable portfolio within the Loan Origination segment as of June 30, 2013 ($ in thousands):

 

     June 30, 2013  

Number of loans

     8   

Principal balance

   $ 756,638   

Net book value

   $ 753,101   

Wtd. Avg. cash coupon (1)

     L+4.44

Wtd. Avg. all-in yield (1)

     L+5.26

Wtd. Avg. maximum maturity (years) (2)

     4.0   

 

(1) All loans are floating rate loans indexed to LIBOR as of June 30, 2013. LIBOR was 0.19% as of June 30, 2013; however, certain of our loans receivable earn interest based on a minimum LIBOR ranging from 0.20% to 1.00%.
(2) Maximum maturity date assumes all extension options are executed.

The charts below detail the geographic distribution and types of properties securing these loans, as of June 30, 2013:

 

LOGO

Refer to section IV of this Item 2 for details of our loan portfolio, on a loan-by-loan basis.

 

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Table of Contents

Our Loan Origination portfolio as of June 30, 2013 was comprised entirely of floating rate mortgage loans and all of our debt financing was also floating rate, which results in a return on equity that is correlated to one-month LIBOR. Generally, our business model is such that rising interest rates will increase our net income, while declining interest rates will decrease net income. For instance, all other things being equal, as of June 30, 2013, a 100 basis point increase in LIBOR would increase our net income by $5.9 million per annum. The following table details our Loan Origination segment’s sensitivity to interest rates as of June 30, 2013 ($ in thousands):

 

Interest Rate Sensitivity - Loan Origination Segment

      
     June 30, 2013  

Floating rate loans (1)

   $ 756,638   

Floating rate debt (1)

     (165,239
  

 

 

 

Net floating rate exposure

   $ 591,399   
  

 

 

 

Net income impact from 100 bps increase in LIBOR

   $ 5,914   
  

 

 

 

 

(1) All of our loans and credit facilities were indexed to one-month LIBOR as of June 30, 2013.

Asset Management and Performance

We actively manage the investments in our Loan Origination portfolio. While these investments are generally in the form of debt, we are aggressive in exercising the rights afforded to us as a lender. These rights may include collateral level budget approvals, lease approvals, loan covenant enforcement, escrow/reserve management/collection, collateral release approvals and other rights that we may negotiate.

As discussed in Note 2 to our consolidated financial statements, our Manager performs a quarterly review of our loan portfolio, assesses the performance of each loan, and assigns it a risk rating between “1” (lowest risk) to “8” (highest risk). Loans that pose a higher risk of non-performance and / or loss are place on our Watch List. Watch list loans are those with an internal risk rating of “4” or higher.

As of June 30, 2013, all of the investments in the loan origination segment are performing as expected and the weighted-average risk rating of our loan portfolio is “2.3”.

Repurchase Obligations

During the second quarter of 2013, we entered into $1.0 billion of master repurchase agreements with four counterparties. As of June 30, 2013, we had aggregate borrowings of $165.2 million outstanding under these facilities, with a weighted-average cash coupon, excluding associated fees and expenses, of LIBOR plus 1.98% per annum and a weighted-average initial maturity, excluding extension options and term-out provisions, of 2.5 years. The following table details the repurchase obligations outstanding as of June 30, 2013 ($ in thousands):

 

            Collateral Assets      Repurchase Balances  

Repurchase Lender

   Facility
Size
     Principal
Balance
     Net Book
Value
     Maximum
Borrowings
     Current
Borrowings
     Available
Borrowings  (1)
 

Bank of America

   $ 250,000       $ 126,300       $ 125,557       $ 101,040       $ 46,400       $ 54,640   

Wells Fargo

     250,000         300,000         298,533         250,000         —           250,000   

Citibank

     250,000         156,438         156,039         118,839         118,839         —     

JP Morgan

     250,000         —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,000,000       $ 582,738       $ 580,129       $ 469,879       $ 165,239       $ 304,640   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Available borrowings is based on assets pledged as collateral under credit facilities as of June 30, 2013. There were two loans with an aggregate principal balance of $173.8 million as of June 30, 2013 that were not pledged under repurchase agreements, and therefore are available to be pledged as collateral in the future.

Refer to Note 10 to our consolidated financial statements for additional terms and details of our repurchase facilities.

 

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Table of Contents

II. CT Legacy Portfolio

 

Our CT Legacy Portfolio consists primarily of: (i) our interests in CT Legacy Partners; (ii) our carried interest in CTOPI, a private investment fund that was previously under our management and is now managed by an affiliate of our Manager; and (iii) our subordinated interests in CT CDO I.

During the three months ended June 30, 2013, our CT Legacy Portfolio segment generated net income of $3.2 million, driven primarily by $6.0 million of positive valuation and mark-to-market adjustments on the CT Legacy Partners and CT CDO I loan portfolios. We collected $99.4 million of principal repayments on investments in our CT Legacy Portfolio Segment, which proceeds were used to (i) repay the remaining $20.2 million of CT Legacy Partners repurchase obligations, (ii) terminate all outstanding CT Legacy Partners interest rate swaps, and (iii) pay down $76.6 million of securitized debt obligations. In addition, our net investment in the CTOPI carried interest increased by $1.7 million during the three months ended June 30, 2013.

CT Legacy Partners

Portfolio Overview

Our investment in CT Legacy Partners represents our 52% equity interest in a vehicle we formed to own and finance certain assets that we retained in connection with a comprehensive debt restructuring in 2011. As of June 30, 2013, the CT Legacy Partners portfolio included loans with an aggregate principal balance of $220.7 million and securities with an aggregate face value of $117.5 million. See section IV of this Item 2 for details of the CT Legacy Partners’ loan portfolio, on a loan-by-loan basis.

The following table details the components of our gross investment in CT Legacy Partners included in our consolidated balance sheet, as well as our net investment in CT Legacy Partners after the future payments under the secured notes and management incentive awards plan as of June 30, 2013 ($ in thousands):

 

Blackstone Mortgage Trust’s Investment in CT Legacy Partners as of June 30, 2013

 

Gross investment in CT Legacy Partners:

  

Restricted cash

   $ 21,972   

Loans receivable, at fair value

     117,549   

Accrued interest receivable, prepaid expenses, and other assets

     21,948   

Accounts payable, accrued expenses and other liabilities

     (485

Noncontrolling interests

     (88,978
  

 

 

 
   $ 72,006   
  

 

 

 

Secured notes, including prepayment premium (1)

     (11,059

Management incentive awards plan, fully vested (2)

     (10,867
  

 

 

 

Net investment in CT Legacy Partners

   $ 50,080   
  

 

 

 

 

(1) Includes the full potential prepayment premium on secured notes, as described below. We carry this liability at its amortized basis of $8.8 million on our balance sheet as of June 30, 2013. The remaining interest and prepayment premium will be recognized, as applicable, over the term of the secured notes as a component of interest expense.
(2) Assumes full payment of the management incentive awards plan, as described below, based on the hypothetical GAAP liquidation value of CT Legacy Partners as of June 30, 2013. We periodically accrue a payable for the management incentive awards plan based on the vesting schedule for the awards and continued employment with an affiliate of our Manager of the award recipients. As of June 30, 2013, our balance sheet includes $6.8 million in accounts payable and accrued expenses for the management incentive awards plan.

Asset Management and Performance

The CT Legacy Partners portfolio is primarily comprised of investments which were originated in 2006 and 2007, a substantial portion of which are distressed and not expected to repay in full or, in certain cases, at all. As discussed in the loan origination section in this Item 2, our Manager performs a quarterly review of our loan portfolio and higher risk assets on our Watch List. Watch List Loans include those which are risk rated “4” or higher.

 

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The table below details the Watch List Loans held in CT Legacy Partners as of June 30, 2013 ($ in millions):

 

Watch List Loans - CT Legacy Partners (1)

      
     June 30, 2013  

CT Legacy Partners’ loans receivables ($ / #)

   $ 118 / 11   

Watch list loans ($ / #)

   $ 98 / 10   
  

 

 

 

Percentage of loans on Watch List

     82.9

 

(1) All values are in terms of net book value.

Repurchase Obligations

As of March 31, 2013, CT Legacy Partners was party to a repurchase facility with JP Morgan with an outstanding balance of $20.2 million. On June 5, 2013, CT Legacy Partners repaid the outstanding balance and terminated the repurchase facility. CT Legacy Partners has no outstanding debt obligations as of June 30, 2013.

Interest Rate Swap Liabilities

CT Legacy Partners was party to five interest rate swaps which it terminated in June 2013. A gain of $136,000 resulting from the termination is included as a component of interest expense on our consolidated statement of operations for the six months ended June 30, 2013. CT Legacy Partners is no longer party to any derivative financial instruments as of June 30, 2013.

Secured Notes

In conjunction with our comprehensive debt restructuring on March 31, 2011, which we refer to as our March 2011 Restructuring, and the corresponding satisfaction of our senior credit facility and junior subordinated notes, certain wholly-owned subsidiaries of ours issued secured notes to these former creditors, which secured notes are non-recourse to us. Any prepayment, or partial prepayment, of the secured notes will incur a prepayment premium resulting in a total payment of principal and interest under the secured notes of $11.1 million. Refer to Note 10 of our consolidated financial statements for further discussion of the secured notes.

CT Legacy Partners Management Incentive Awards Plan

In conjunction with our March 2011 Restructuring, we created an employee pool for up to 6.75% of the distributions paid to the common equity holders of CT Legacy Partners (subject to certain caps and priority distributions).

We accrue a liability for the amounts due under these grants based on the value of CT Legacy Partners and the periodic vesting of the awards granted. Accrued payables for these awards were $6.8 million and $5.3 million as of June 30, 2013 and December 31, 2012, respectively. Refer to Note 13 of our consolidated financial statements for further details.

CT Legacy Partners Background

On March 31, 2011, we restructured, amended, or extinguished all of our outstanding recourse debt obligations, which we refer to as our March 2011 Restructuring. Our March 2011 Restructuring involved: (i) the contribution of certain of our legacy assets to a newly formed subsidiary, CT Legacy REIT Mezz Borrower, Inc., or CT Legacy REIT, (the predecessor of CT Legacy Partners); (ii) the assumption of our legacy repurchase obligations by CT Legacy REIT; and (iii) the extinguishment of the remainder of our recourse obligations, our senior credit facility and junior subordinated notes. CT Legacy Partners is beneficially owned 52% by us and 48% by our former lenders. In addition, CT Legacy Partners has issued class B common shares, a subordinate class of equity which entitles its holders to receive approximately 25% of the dividends that would otherwise be payable to us on our equity interest in CT Legacy Partners, after aggregate cash distributions of $50.0 million have been paid to all other classes of common equity. Further, CT Legacy Partners has issued class A preferred shares which entitle its holder to cumulative preferred distributions in an amount generally equal to the greater of (i) 2.5% of certain of CT Legacy Partners’ assets, and (ii) $1.0 million per annum. Refer to Note 8 to our consolidated financial statements for additional details on CT Legacy Partners.

To maintain its tax efficiency, on March 20, 2013, a majority of the stockholders CT Legacy REIT voted in favor of a plan of merger, dated March 22, 2013, or the Merger, whereby CT Legacy REIT merged with and into CT Legacy Partners, effective as of March 22, 2013. Refer to Note 3 to our consolidated financial statements for further details on the Merger.

 

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Our economic interest in CT Legacy Partners is subject to (i) the secured notes, which are non-recourse obligations that are collateralized by certain of our equity interests in the common shares of CT Legacy Partners, (ii) incentive awards that provide for the participation in amounts earned from our retained equity interests in CT Legacy Partners, and (iii) the subordinate class B common stock of CT Legacy Partners.

Carried Interest in CTOPI

CTOPI is a private equity real estate fund that we sponsored and formed in 2007. The fund invested $491.5 million in 39 transactions between 2007 and the end of its investment period in 2012. To date, $291.8 million of these investments have been realized and $199.7 million remain outstanding (carried at 136.7% of cost) as of June 30, 2013. In conjunction with our Investment Management Business Sale, we transferred our management of CTOPI and sold our 4.6% co-investment to Blackstone. However, we retained our carried interest in CTOPI following the sale.

Our carried interest in CTOPI entitles us to earn incentive compensation in an amount equal to 17.7% of the fund’s profits, after a 9% preferred return and 100% return of capital to the CTOPI partners. We own a net 55% of the carried interest of CTOPI’s general partner; the remaining 45% is payable under incentive awards to our former employees.

As of June 30, 2013, we have been allocated a net $13.5 million of incentive compensation from CTOPI based on a hypothetical liquidation of the fund at its net asset value, and after payment of the related incentive awards. The CTOPI partnership agreement provides for advance distributions in respect of our incentive compensation to allow us to pay any income taxes owed on phantom taxable income allocated to us from the partnership. We refer to these distributions as CTOPI Tax Advances. During 2012, we received one such CTOPI Tax Advance of $1.4 million, resulting in a net asset value for our investment in CTOPI of $12.1 million as of June 30, 2013. In the event the performance of CTOPI does not ultimately result in an allocation of incentive compensation to us, we would be required to refund these CTOPI Tax Advances to the fund.

We have elected to defer the recognition of income on our carried interest in CTOPI until cash is collected or appropriate contingencies have been eliminated. As a result, our net investment in the CTOPI carried interest has a book value of zero as of June 30, 2013.

Refer to Note 9 of our consolidated financial statements for additional discussion on the CTOPI incentive management fee awards to our former employees.

Consolidated Securitization Vehicles - CT CDO I

Portfolio Overview

As of June 30, 2013, our consolidated balance sheet included an aggregate $83.6 million of assets and $74.6 million of liabilities related to CT CDO I, a highly-levered securitization vehicle that we formed in 2004.

Specifically, we own the residual debt and equity positions of CT CDO I. As a result of consolidation, our subordinate debt and equity ownership interests in these entities are not included on our balance sheet, which instead reflects both the assets held and debt issued by these entities to third-parties. Similarly, our operating results and cash flows include the gross amounts related to the assets and liabilities of these securitization vehicles, as opposed to our net economic interests in these entities.

Our economic interest in the loans receivable assets held by these entities, which are consolidated on our balance sheet, is restricted by the structural provisions of these entities, and our recovery of these assets will be limited by the entities’ distribution provisions. The liabilities of the securitization vehicles, which are also consolidated on our balance sheet, are non-recourse to us, and can only be satisfied by proceeds from each entity’s respective asset pool.

We are not obligated to provide, nor have we provided, any financial support to CT CDO I.

 

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The following table details the components of consolidated securitization vehicles included in our consolidated balance sheet as of June 30, 2013 ($ in thousands):

 

Investment in CT CDO I

   June 30, 2013  

Loans receivable, net

   $ 77,000   

Loans held-for-sale, net

     3,800   

Accrued interest receivable, prepaid expenses, and other assets

     2,838   
  

 

 

 

Total assets

   $ 83,638   

Accounts payable, accrued expenses and other liabilities

   $ 155   

Securitized debt obligations

     74,472   
  

 

 

 

Total liabilities

   $ 74,627   
  

 

 

 

Net investment in CT CDO I

   $ 9,011   
  

 

 

 

Refer to section IV of this Item 2 for details of CT CDO I loan portfolio, on a loan-by-loan basis.

Asset Management

As discussed in the loan origination section in this Item 2, our Manager performs a quarterly review of our loan portfolio and places higher risk assets on our Watch List. Watch List Loans include those with an internal risk rating of “4” or higher.

The table below details the Watch List Loans held in consolidated securitization vehicles as of June 30, 2013 and December 31, 2012 ($ in millions):

 

Watch List Loans - Consolidated Securitization Vehicle (1)

            
     June 30, 2013     December 31, 2012  

Loans in consolidated securitization vehicle ($ / #)

   $ 81 / 6      $ 142 / 8   

Watch list loans ($ / #)

   $ 61 / 5      $ 65 / 4   

Percentage loans on Watch List

     75.2     45.6

 

(1) All values are in terms of net book value.

 

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III. Our Results of Operations and Liquidity

 

Results of Operations

 

Comparison of Results of Operations: Three Months Ended June 30, 2013 vs. June 30, 2012

             
($ in thousands, except per share amounts)                         
     2013     2012     $ Change     % Change  

Income from loans and other investments:

        

Interest and related income

   $ 6,017      $ 6,763      ($ 746     (11.0 %) 

Less: Interest and related expenses

     1,306        5,413        (4,107     (75.9 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from loans and other investments, net

     4,711        1,350        3,361        249.0

Other expenses:

        

General and administrative

     3,427        1,567        1,860        118.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other expenses

     3,427        1,567        1,860        118.7

Impairments, provisions, and valuation adjustments

     6,000        3,704        2,296        62.0

Gain on extinguishment of debt

     38        —          38        100.0

Income from equity investments in unconsolidated subsidiaries

     —          205        (205     (100.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     7,322        3,692        3,630        98.3

Income tax provision

     554        —          554        100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

   $ 6,768      $ 3,692      $ 3,076        83.3
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss from discontinued operations, net of tax

     —          (341     341        (100.0 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 6,768      $ 3,351      $ 3,417        102.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to non-controlling interests

     (4,020     (1,068     (2,952     276.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Blackstone Mortgage Trust, Inc.

   $ 2,748      $ 2,283      $ 465        20.4
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income from continuing operations per share - diluted

   $ 0.22      $ 1.15      ($ 0.93     N/A   

Net income per share - diluted

   $ 0.22      $ 1.00      ($ 0.78     N/A   

Dividend per share

   $ 0.00      $ 0.00      $ 0.00        N/A   

Average LIBOR

     0.20     0.24     (0.0 %)      (18.3 %) 

Income from loans and other investments, net

As discussed in Note 3 to our consolidated financial statements, we deconsolidated the assets and liabilities of CT CDOs II and IV in 2012. As a result of this deconsolidation and significant repayments in our CT Legacy Portfolio, interest income decreased $746,000, or 11%, and interest expense decreased by $4.1 million, or 76%, during the second quarter of 2013 compared to the second quarter of 2012. On a net basis, net interest income increased by $3.4 million as the decrease in interest income was less than the reduction in interest expense.

General and administrative expenses

General and administrative expenses primarily include our management fees, operating expenses, and various professional fees. General and administrative expenses increased by $1.9 million during the second quarter of 2013 compared to the second quarter of 2012 primarily due to (i) $920,000 of management fees to our Manager, (ii) $514,000 of special servicing fees, and (iii) various additional professional fees incurred during the second quarter of 2013. All general and administrative expenses incurred during the second quarter of 2012 related to our former investment management business have been reclassified to loss from discontinued operations.

Impairments, provisions, and valuation adjustments

During the second quarter of 2013, we recognized (i) $4.0 million of net unrealized gains on investments held by CT Legacy Partners and (ii) a $2.0 million positive valuation adjustment on CT CDO I’s loan classified as held-for-sale. During the second quarter of 2012, we recognized a $3.7 million positive fair value adjustment on our net investment in CT Legacy Asset, LLC, or CT Legacy Asset, a subsidiary of CT Legacy Partners.

 

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Other significant items

In December 2012, we sold our investment management business, including CTIMCO and our co-investments in CTOPI and CT High Grade Partners II, LLC. As a result, our 2013 operating results do not include any income or expense items related to our former investment management business, and the income and expense items related to our investment management business in 2012 have been reclassified to loss from discontinued operations.

During the second quarter of 2013, we recorded an income tax provision related to income generated by investments held by taxable REIT subsidiaries. We did not record any such income tax provisions during the second quarter of 2012; all income taxes related to our former investment management business have been reclassified to loss from discontinued operations.

Dividends

We did not pay any dividends on our class A common stock during the second quarter of 2013 or 2012.

 

Comparison of Results of Operations: Six Months Ended June 30, 2013 vs. June 30, 2012

                   
($ in thousands, except per share amounts)                         
     2013     2012     $ Change     % Change  

Income from loans and other investments:

        

Interest and related income

   $ 7,473      $ 21,479      ($ 14,006     (65.2 %) 

Less: Interest and related expenses

     2,083        28,754        (26,671     (92.8 %) 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss)