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CT Legacy Partners

3 Months Ended

Mar. 31, 2013

Note 3. CT Legacy Partners

As discussed in Note 1, CT Legacy Partners holds the remaining assets and liabilities 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.

As of March 31, 2013, CT Legacy Partners had not made any distribution payments to its common equity holders.

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 noncontrolling interests on our consolidated balance sheet.

Net Investment in CT Legacy Partners

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 March 31, 2013 ($ in thousands):


Blackstone Mortgage Trust’s Investment in CT Legacy Partners as of March 31, 2013

Gross investment in CT Legacy Partners:
Restricted cash	$	12,719
Securities, at fair value		11,702
Loans receivable, at fair value		150,332
Accrued interest receivable, prepaid expenses, and other assets		8,879
Accounts payable, accrued expenses and other liabilities		(815	)
Repurchase obligations		(20,214	)
Interest rate swap liabilities		(6,119	)
Noncontrolling interests		(86,350	)

	$	70,134


Secured notes, including prepayment premium ⁽¹⁾		(11,059	)
Management incentive awards plan, fully vested ⁽²⁾		(10,563	)

Net investment in CT Legacy Partners	$	48,512

(1)

Includes the full potential prepayment premium on secured notes, as described below. We carry this liability at its amortized basis of $8.7 million on our balance sheet as of March 31, 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 March 31, 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 March 31, 2013, our balance sheet includes $6.3 million in accounts payable and accrued expenses for the management incentive awards plan.

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 $8.7 million and $8.5 million as of March 31, 2013 and December 31, 2012, respectively.

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 December 31, 2012, 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 $6.3 million and $5.3 million as of March 31, 2013 and December 31, 2012, respectively.

A. Securities, at Fair Value – CT Legacy Partners

CT Legacy Partners’ securities portfolio consists of CMBS and CDO securities. These securities had an aggregate principal balance of $135.3 million and are reported at their aggregate fair value of $11.7 million as of March 31, 2013. The following table details overall statistics for CT Legacy Partners’ securities portfolio as of March 31, 2013:


	March 31, 2013
Number of securities		12
Number of issues		6
Rating ⁽¹⁾⁽²⁾		CCC
Coupon ⁽¹⁾⁽³⁾		6.30	%
Yield ⁽¹⁾⁽³⁾		5.67	%
Life (years) ⁽¹⁾⁽⁴⁾		4.2

(1)	Represents a weighted average as of March 31, 2013.

(2)	Weighted average ratings are based on the lowest rating published by Fitch Ratings, Standard & Poor’s or Moody’s Investors Service for each security.

(3)	Coupon is based on the securities’ contractual interest rates, while yield is based on expected cash flows for each security, and considers discounts/premiums and asset non-performance. Calculations for floating rate securities are based on LIBOR of 0.20% as of March 31, 2013.

(4)	Weighted average life is based on the timing and amount of future expected principal payments through the expected repayment date of each respective investment.

We record CT Legacy Partners’ securities investments at fair value, which is determined using third party dealer assessments of value and our own internal financial model-based estimations. See Note 11 for further discussion of fair value.

B. Loans Receivable, at Fair Value – CT Legacy Partners

CT Legacy Partners’ loans receivable portfolio consisted of loans with an aggregate principal balance of $257.4 million, which are reported at their aggregate fair value of $150.3 million as of March 31, 2013. The following table details overall statistics for CT Legacy Partners’ loans receivable portfolio as of March 31, 2013 ($ in millions):


	March 31, 2013
Number of investments		12
Fixed / Floating ⁽¹⁾	$	24 / $126
Coupon ⁽²⁾⁽³⁾		6.48	%
Yield ⁽²⁾⁽³⁾		5.58	%
Maturity (years) ⁽²⁾⁽⁴⁾		1.2

(1)	Represents the aggregate net book value of the portfolio allocated between fixed rate and floating rate loans

(2)	Represents a weighted average as of March 31, 2013.

(3)	Calculations for floating rate loans are based on LIBOR of 0.20% as of March 31, 2013.

(4)	For loans in CT CDO I, assumes all extension options are executed. For loans in GSMS 2006-FL8A, maturity is based on information provided by its trustee.

We record CT Legacy Partners’ loans receivable investments at fair value, which is determined using our own internal financial model-based estimations. See Note 11 for further discussion of fair value.

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 March 31, 2013 ($ in thousands):


	March 31, 2013
Asset Type	Book Value		Percentage
Subordinate interests in mortgages	$	80,853		54	%
Mezzanine loans		43,265		29
Senior mortgages		26,214		17

Total	$	150,332		100	%


Property Type	Book Value		Percentage
Hotel	$	50,653		34	%
Office		43,844		29
Multifamily		12,814		9
Other		43,021		28

Total	$	150,332		100	%


Geographic Location	Book Value		Percentage
Northeast	$	56,658		38	%
Northwest		43,022		29
West		13,705		9
Southeast		11,931		8
International		25,016		16

Total	$	150,332		100	%

Loan risk ratings

Quarterly, our Manager evaluates CT Legacy Partners’ 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, 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 CT Legacy Partners’ loans receivable based on our internal risk ratings as of March 31, 2013 ($ in thousands):


	Loans Receivable as of March 31, 2013
Risk Rating	Number of Loans		Principal Balance		Net Book Value
1 - 3		2	$	32,683	$	32,874
4 - 5		4		41,754		36,910
6 - 8		6		182,961		80,548

Total		12	$	257,398	$	150,332

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 CT Legacy Partners’ loans receivable by both loan type and our internal risk ratings as of March 31, 2013 ($ in thousands):


	Senior Mortgage Loans
	as of March 31, 2013
Risk Rating	Number of Loans		Principal Balance		Net Book Value
1 - 3		—	$	—	$	—
4 - 5		1		15,000		13,705
6 - 8		1		17,869		12,509

Total		2	$	32,869	$	26,214


	Subordinate Interests in Mortgages
	as of March 31, 2013
Risk Rating	Number of Loans		Principal Balance		Net Book Value
1 - 3		1	$	12,814	$	12,814
4 - 5		—		—		—
6 - 8		4		110,268		68,039

Total		5	$	123,082	$	80,853


	Mezzanine & Other Loans
	as of March 31, 2013
Risk Rating	Number of Loans		Principal Balance		Net Book Value
1 - 3		1	$	19,869	$	20,060
4 - 5		3		26,754		23,205
6 - 8		1		54,824		—

Total		5	$	101,447	$	43,265

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. Accordingly, we do not have any material interest receivable accrued on nonperforming loans as of March 31, 2013.

The following table details CT Legacy Partners’ loans receivable which are on nonaccrual status as of March 31, 2013 ($ in thousands):


Non-Accrual Loans Receivable as of March 31, 2013
Asset Type	Principal Balance		Net Book Value
Senior Mortgage Loans	$	—	$	—
Subordinate Interests in Mortgages		43,448		—
Mezzanine & Other Loans		69,146		11,931

Total	$	112,594	$	11,931

C. Repurchase Obligations – CT Legacy Partners

As of March 31, 2013, CT Legacy Partners was party to a repurchase facility with JPMorgan with an outstanding balance of $20.2 million. The facility matures on December 15, 2014, and carries a rate of LIBOR+6.00% as of March 31, 2013.

The following table details the aggregate outstanding principal balance and fair value of CT Legacy Partners’ assets, primarily loans receivable, which were pledged as collateral under the JPMorgan repurchase facility as of March 31, 2013, as well as the amount at risk under the facility ($ in thousands). The amount at risk is generally equal to the book value of the collateral less the outstanding principal balance of the repurchase facility.


			Loans and Securities Collateral
				Balances,
Repurchase Lender	Facility Balance		Principal Balance		Fair Value ⁽¹⁾		Amount at Risk ⁽²⁾
JP Morgan	$	20,214	$	323,736	$	162,034	$	141,820

(1)	Fair values represent the amount at which an asset could be sold in an orderly transaction between a willing buyer and willing seller. The immediate liquidation value of these assets would likely be substantially lower.

(2)	Amount at risk is calculated on an asset-by-asset basis for the facility and considers the greater of (a) the book value of an asset and (b) the fair value of an asset, in determining the total risk.

D. Derivative Financial Instruments – CT Legacy Partners

The following table summarizes the notional amounts and fair values of CT Legacy Partners’ interest rate swaps as of March 31, 2013 ($ in thousands). The notional amount provides an indication of the extent of CT Legacy Partners’ involvement in the instruments at that time, but it does not represent exposure to credit or interest rate risk.


Counterparty	March 31, 2013 Notional Amount		Interest Rate ⁽¹⁾			Maturity		March 31, 2013 Fair Value
JPMorgan Chase	$	17,317		5.14	%		2014	($	990	)
JPMorgan Chase		17,057		5.52	%		2018		(2,672	)
JPMorgan Chase		16,184		4.83	%		2014		(1,146	)
JPMorgan Chase		7,062		5.11	%		2016		(921	)
JPMorgan Chase		3,103		5.45	%		2015		(390	)

Total/Weighted Average	$	60,723		5.17	%		2015	($	6,119	)

(1)	Represents the gross fixed interest rate CT Legacy Partners pays to its counterparties under these derivative instruments. CT Legacy Partners receives an amount of interest indexed to one-month LIBOR on all of its interest rate swaps.

These interest rate swaps do not qualify as cash flow hedges, and any change in the fair values of these instruments is recorded as a non-cash component of interest expense.

Net payments under these interest rate swaps during the three months ended March 31, 2013 totaled $755,000, and were recorded as a component of interest expense.

As of March 31, 2013 CT Legacy Partners had not posted any assets as collateral under derivative agreements.