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EX-32.2 - EX-32.2 - Blackstone Real Estate Income Trust, Inc.breit-ex322_6.htm
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EX-31.2 - EX-31.2 - Blackstone Real Estate Income Trust, Inc.breit-ex312_9.htm
EX-31.1 - EX-31.1 - Blackstone Real Estate Income Trust, Inc.breit-ex311_7.htm
EX-4.1 - EX-4.1 - Blackstone Real Estate Income Trust, Inc.breit-ex41_871.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2017

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: 333-213043

 

 

Blackstone Real Estate Income Trust, Inc.

(Exact name of Registrant as specified in its charter)

 

 

 

 

Maryland

81-0696966

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

345 Park Avenue

New York, New York 10154

(Address of principal executive offices) (Zip Code)

(212) 583-5000

(Registrant’s telephone number, including area code)

 

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      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      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    Yes      No  

 

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

 

As of August 11, 2017, there were 88,132,022 outstanding shares of Class S common stock, 20,584,019 outstanding shares of Class I common stock, 635,802 outstanding shares of Class D common stock, and 1,117,944 outstanding shares of Class T common stock.

 

 


TABLE OF CONTENTS

 

PART I.

FINANCIAL INFORMATION

1

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

1

 

 

 

 

Consolidated Financial Statements (Unaudited):

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016

1

 

 

 

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2017 and for the Three Months ended June 30, 2016 and the Period March 2, 2016 (date of initial capitalization) through June 30, 2016

2

 

 

 

 

Consolidated Statement of Changes in Equity for the Six Months Ended June 30, 2017

3

 

 

 

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and for The Period March 2, 2016 (date of initial capitalization) through June 30, 2016

4

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

22

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

34

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

35

 

 

 

PART II.

OTHER INFORMATION

36

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

36

 

 

 

ITEM 1A.

RISK FACTORS

36

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

36

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

37

 

 

 

ITEM 4.

MINE SAFETY DISCLOSURES

37

 

 

 

ITEM 5.

OTHER INFORMATION

37

 

 

 

ITEM 6.

EXHIBITS

37

 

 

 

SIGNATURES

38

 

 

 


 

PART I. FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS

Blackstone Real Estate Income Trust, Inc.

Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2017

 

 

2016

 

Assets

 

 

 

 

 

 

 

 

Investments in real estate, net

 

$

1,430,515

 

 

$

 

Investments in real estate-related securities

 

 

291,549

 

 

 

 

Cash and cash equivalents

 

 

31,296

 

 

 

200

 

Restricted cash

 

 

92,861

 

 

 

 

Intangible assets, net

 

 

77,596

 

 

 

 

Other assets

 

 

10,781

 

 

 

 

Total assets

 

$

1,934,598

 

 

$

200

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Mortgage notes, term loan, and revolving credit facility, net

 

$

717,072

 

 

$

 

Repurchase agreements

 

 

169,583

 

 

 

 

Affiliate line of credit

 

 

43,708

 

 

 

 

Subscriptions received in advance

 

 

88,657

 

 

 

 

Due to affiliates

 

 

68,492

 

 

 

86

 

Accounts payable, accrued expenses, and other liabilities

 

 

46,636

 

 

 

29

 

Total liabilities

 

$

1,134,148

 

 

$

115

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value per share, 100,000,000 shares authorized; none issued and

   outstanding as of June 30, 2017 and December 31, 2016

 

 

 

 

 

 

Common stock — Class S shares, $0.01 par value per share, 500,000,000 shares authorized;

   71,382,151 and no shares issued and outstanding as of June 30, 2017 and December 31,

   2016, respectively

 

 

714

 

 

 

 

Common stock — Class T shares, $0.01 par value per share, 500,000,000 shares authorized;

   13,460 and no shares issued and outstanding as of June 30, 2017 and December 31,

   2016, respectively

 

 

 

 

 

 

Common stock — Class D shares, $0.01 par value per share, 500,000,000 shares authorized;

   216,570 and no shares issued and outstanding as of June 30, 2017 and December 31,

   2016, respectively

 

 

2

 

 

 

 

Common stock — Class I shares, $0.01 par value per share, 500,000,000 shares authorized;

   17,318,240 and 20,000 shares issued and outstanding as of June 30, 2017 and December 31,

   2016, respectively

 

 

173

 

 

 

 

Additional paid-in capital

 

 

827,914

 

 

 

200

 

Accumulated deficit and cumulative distributions

 

 

(28,353

)

 

 

(115

)

Total equity

 

 

800,450

 

 

 

85

 

Total liabilities and equity

 

$

1,934,598

 

 

$

200

 

 

See accompanying notes to consolidated financial statements.

1


 

Blackstone Real Estate Income Trust, Inc.

Consolidated Statements of Operations (Unaudited)

(in thousands, except share and per share data)

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

For the Period

March 2, 2016 (date

of initial

capitalization)

through

June 30,

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental revenue

$

21,230

 

 

$

 

 

$

22,128

 

 

$

 

Tenant reimbursement income

 

2,206

 

 

 

 

 

 

2,273

 

 

 

 

Hotel revenue

 

3,748

 

 

 

 

 

 

5,174

 

 

 

 

Other revenue

 

1,155

 

 

 

 

 

 

1,208

 

 

 

 

Total revenues

 

28,339

 

 

 

 

 

 

30,783

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental property operating

 

9,389

 

 

 

 

 

 

9,694

 

 

 

 

Hotel operating

 

2,109

 

 

 

 

 

 

2,949

 

 

 

 

General and administrative

 

1,567

 

 

 

 

 

 

4,253

 

 

 

 

Performance participation allocation

 

5,241

 

 

 

 

 

 

5,241

 

 

 

 

Depreciation and amortization

 

23,696

 

 

 

 

 

 

24,786

 

 

 

 

Total expenses

 

42,002

 

 

 

 

 

 

46,923

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from real estate-related securities

 

2,543

 

 

 

 

 

 

3,409

 

 

 

 

Interest income

 

117

 

 

 

 

 

 

382

 

 

 

 

Interest expense

 

(5,541

)

 

 

 

 

 

(5,547

)

 

 

 

Other expenses

 

(28

)

 

 

 

 

 

 

(28

)

 

 

 

 

Total other (expense) income

 

(2,909

)

 

 

 

 

 

(1,784

)

 

 

 

Net loss before income tax

 

(16,572

)

 

 

 

 

 

(17,924

)

 

 

 

Income tax expense

 

(129

)

 

 

 

 

 

(44

)

 

 

 

Net loss

$

(16,701

)

 

$

 

 

$

(17,968

)

 

$

 

Net loss per share of common stock — basic and diluted

$

(0.22

)

 

$

 

 

$

(0.31

)

 

$

 

Weighted-average shares of common stock outstanding, basic and diluted

 

76,595,994

 

 

 

20,000

 

 

 

57,060,077

 

 

 

20,000

 

 

See accompanying notes to consolidated financial statements.

 

 

2


 

Blackstone Real Estate Income Trust, Inc.

Consolidated Statement of Changes in Equity (Unaudited)

(in thousands)

 

 

 

Par Value

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Common

 

 

Common

 

 

Common

 

 

Common

 

 

Additional

 

 

Deficit and

 

 

 

 

 

 

 

Stock

 

 

Stock

 

 

Stock

 

 

Stock

 

 

Paid-In

 

 

Cumulative

 

 

Total

 

 

 

Class S

 

 

Class T

 

 

Class D

 

 

Class I

 

 

Capital

 

 

Distributions

 

 

Equity

 

Balance at December 31, 2016

 

$

 

 

$

 

 

$

 

 

$

 

 

$

200

 

 

$

(115

)

 

$

85

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock issued

 

 

711

 

 

 

 

 

 

2

 

 

 

172

 

 

 

893,765

 

 

 

 

 

 

894,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distribution reinvestment

 

 

3

 

 

 

 

 

 

 

 

 

1

 

 

 

4,266

 

 

 

 

 

 

4,270

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offering costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(70,369

)

 

 

 

 

 

(70,369

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of restricted stock grant

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52

 

 

 

 

 

 

52

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(17,968

)

 

 

(17,968

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Distributions declared on common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,270

)

 

 

(10,270

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2017

 

$

714

 

 

$

 

 

$

2

 

 

$

173

 

 

$

827,914

 

 

$

(28,353

)

 

$

800,450

 

 

See accompanying notes to consolidated financial statements.

 

 

3


 

Blackstone Real Estate Income Trust, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(in thousands)

 

 

 

Six Months

Ended

June 30, 2017

 

 

For the Period

March 2, 2016 (date

of initial

capitalization)

through June 30,

2016

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(17,968

)

 

 

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

24,786

 

 

 

 

Unrealized gain on changes in fair value of real estate-related securities

 

 

(1,635

)

 

 

 

Realized loss on settlement of real estate-related securities

 

 

177

 

 

 

 

 

Straight-line rent adjustment

 

 

(567

)

 

 

 

Amortization of above- and below-market lease intangibles

 

 

(365

)

 

 

 

Amortization of below-market and prepaid ground lease intangible

 

 

77

 

 

 

 

 

Amortization of deferred financing costs

 

 

269

 

 

 

 

Amortization of restricted stock grant

 

 

52

 

 

 

 

Bad debt expense

 

 

154

 

 

 

 

 

Change in assets and liabilities:

 

 

 

 

 

 

 

 

(Increase) / decrease in other assets

 

 

(6,277

)

 

 

 

Increase / (decrease) in due to affiliates

 

 

7,634

 

 

 

 

Increase / (decrease) in accounts payable, accrued expenses, and other liabilities

 

 

13,147

 

 

 

 

Net cash provided by operating activities

 

 

19,484

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Acquisitions of real estate

 

 

(1,509,640

)

 

 

 

Capital improvements to real estate

 

 

(461

)

 

 

 

Pre-acquisition costs

 

 

(1,123

)

 

 

 

Purchase of real estate-related securities

 

 

(300,040

)

 

 

 

Proceeds from settlement of real estate-related securities

 

 

16,596

 

 

 

 

Net cash used in investing activities

 

 

(1,794,668

)

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock

 

 

894,650

 

 

 

 

Offering costs paid

 

 

(10,102

)

 

 

 

Subscriptions received in advance

 

 

88,657

 

 

 

 

Borrowings from mortgage notes, term loan, and revolving credit facility

 

 

723,304

 

 

 

 

Borrowings under repurchase agreements

 

 

182,154

 

 

 

 

Settlement of repurchase agreements

 

 

(12,571

)

 

 

 

Borrowings from affiliate line of credit

 

 

178,208

 

 

 

 

Repayments on affiliate line of credit

 

 

(134,500

)

 

 

 

Payment of deferred financing costs

 

 

(8,742

)

 

 

 

Distributions

 

 

(1,917

)

 

 

 

Net cash provided by financing activities

 

 

1,899,141

 

 

 

 

Net change in cash and cash equivalents and restricted cash

 

 

123,957

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents and restricted cash, beginning of period

 

$

200

 

 

$

200

 

Cash and cash equivalents and restricted cash, end of period

 

$

124,157

 

 

$

200

 

 

 

 

 

 

 

 

 

 

Reconciliation of cash and cash equivalents and restricted cash to the consolidated

   balance sheet:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

31,296

 

 

$

200

 

Restricted cash

 

 

92,861

 

 

 

 

Total cash and cash equivalents and restricted cash

 

$

124,157

 

 

$

200

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Assumption of other liabilities in conjunction with acquisitions of real estate

 

$

10,459

 

 

 

 

Accrued capital expenditures and acquisition related costs

 

$

1,003

 

 

 

 

Accrued pre-acquisition costs

 

$

585

 

 

 

 

4


 

Accrued distributions

 

$

4,083

 

 

 

 

Accrued stockholder servicing fee due to affiliate

 

$

53,385

 

 

 

 

Accrued offering costs due to affiliate

 

$

6,882

 

 

 

 

Distribution reinvestment

 

$

4,270

 

 

 

 

Payable for real-estate related securities

 

$

6,647

 

 

 

 

Accrued deferred financing costs

 

$

142

 

 

 

 

 

See accompanying notes to consolidated financial statements.

5


 

Blackstone Real Estate Income Trust, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1. Organization and Business Purpose

Blackstone Real Estate Income Trust, Inc. (the “Company”) was formed on November 16, 2015 as a Maryland corporation and intends to qualify as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with the taxable year ending December 31, 2017. The Company was organized to invest primarily in stabilized income-oriented commercial real estate in the United States and to a lesser extent, invest in real estate-related securities. The Company is the sole general partner of BREIT Operating Partnership, L.P., a Delaware limited partnership (“BREIT OP”). BREIT Special Limited Partner L.L.C. (the “Special Limited Partner”), a wholly-owned subsidiary of The Blackstone Group L.P. (together with its affiliates, “Blackstone”), owns a special limited partner interest in BREIT OP. Substantially all of the Company’s business is conducted through BREIT OP. The Company and BREIT OP are externally managed by BX REIT Advisors L.L.C. (the “Adviser”), an affiliate of Blackstone.

The Company has registered with the Securities and Exchange Commission (the “SEC”) an offering of up to $5.0 billion in shares of common stock, consisting of up to $4.0 billion in shares in its primary offering and up to $1.0 billion in shares pursuant to its distribution reinvestment plan (the “Offering”). The Company intends to sell any combination of four classes of shares of its common stock, with a dollar value up to the maximum aggregate amount of the Offering. The share classes have different upfront selling commissions, dealer manager fees and ongoing stockholder servicing fees. As of January 1, 2017, the Company had satisfied the minimum offering requirement and the Company’s board of directors authorized the release of proceeds from escrow. As of June 30, 2017, the Company issued and sold 88,930,421 shares of the Company’s common stock (consisting of 71,382,151 Class S shares, 17,318,240 Class I shares, 216,570 Class D shares, and 13,460 Class T shares). The Company intends to continue selling shares on a monthly basis.

As of June 30, 2017, the Company owned ten investments in real estate and had twelve positions in commercial mortgage-backed securities (“CMBS”). The Company currently operates in five reportable segments: Multifamily, Industrial, Hotel, and Retail Properties, and investments in Real Estate-Related Securities. Financial results by segment are reported in Note 14 — Segment Reporting.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. All intercompany transactions have been eliminated in consolidation. The consolidated financial statements, including the notes thereto, 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 accompanying unaudited consolidated interim financial statements should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016 filed with the SEC.

The preparation of the financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.

Cash and Cash Equivalents

Cash and cash equivalents represent cash held in banks, cash on hand, and liquid investments with original maturities of three months or less. The Company may have bank balances in excess of federally insured amounts; however, the Company deposits its cash and cash equivalents with high credit-quality institutions to minimize credit risk.

Restricted Cash

Restricted cash primarily consists of cash received for subscriptions prior to the date in which the subscriptions are effective. The Company’s restricted cash is held primarily in a bank account controlled by the Company’s transfer agent but in the name of the Company. The amount of $88.7 million as of June 30, 2017 represents proceeds from subscriptions received in advance and is classified as restricted cash.

6


 

Investments in Real Estate

In accordance with the guidance for business combinations, the Company determines whether the acquisition of a property qualifies as a business combination, which requires that the assets acquired and liabilities assumed constitute a business. If the property acquired is not a business, the Company accounts for the transaction as an asset acquisition. The Company has early adopted Accounting Standards Update 2017-01 — Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 states that when substantially all of the fair value of the gross assets to be acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the asset or set of assets is not a business. All property acquisitions to date have been accounted for as asset acquisitions.

Whether the acquisition of a property acquired is considered a business combination or asset acquisition, the Company recognizes the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquired entity. In addition, for transactions that are business combinations, the Company evaluates the existence of goodwill or a gain from a bargain purchase. The Company expenses acquisition-related costs associated with business combinations as they are incurred. The Company capitalizes acquisition-related costs associated with asset acquisitions.

Upon acquisition of a property, the Company assesses the fair value of acquired tangible and intangible assets (including land, buildings, tenant improvements, “above-market” and “below-market” leases, acquired in-place leases, other identified intangible assets and assumed liabilities) and allocates the purchase price to the acquired assets and assumed liabilities. The Company assesses and considers fair value based on estimated cash flow projections that utilize discount and/or capitalization rates that it deems appropriate, as well as other available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known and anticipated trends, and market and economic conditions.

The fair value of the tangible assets of an acquired property considers the value of the property as if it were vacant. The Company also considers an allocation of purchase price of other acquired intangibles, including acquired in-place leases that may have a customer relationship intangible value, including (but not limited to) the nature and extent of the existing relationship with the tenants, the tenants’ credit quality and expectations of lease renewals. Based on its acquisitions to date, the Company’s allocation to customer relationship intangible assets has not been material.

The Company records acquired above-market and below-market leases at their fair values (using a discount rate which reflects the risks associated with the leases acquired) equal to the difference between (1) the contractual amounts to be paid pursuant to each in-place lease and (2) management’s estimate of fair market lease rates for each corresponding in-place lease, measured over a period equal to the remaining term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases. Other intangible assets acquired include amounts for in-place lease values that are based on the Company’s evaluation of the specific characteristics of each tenant’s lease. Factors to be considered include estimates of carrying costs during hypothetical expected lease-up periods considering current market conditions, and costs to execute similar leases. In estimating carrying costs, the Company includes real estate taxes, insurance and other operating expenses and estimates of lost rentals at market rates during the expected lease-up periods, depending on local market conditions. In estimating costs to execute similar leases, the Company considers leasing commissions, legal and other related expenses.

The amortization of acquired above-market and below-market leases is recorded as an adjustment to rental revenue on the consolidated statements of operations. The amortization of in-place leases is recorded as an adjustment to depreciation and amortization expense on the consolidated statements of operations. The amortization of below-market and pre-paid ground leases are recorded as an adjustment to hotel or rental property operating expenses, as applicable, on the consolidated statements of operations.

The cost of buildings and improvements includes the purchase price of the Company’s properties and any acquisition-related costs, along with any subsequent improvements to such properties. The Company’s investments in real estate are stated at cost and are generally depreciated on a straight-line basis over the estimated useful lives of the assets as follows:

 

Description

 

Depreciable Life

Building

 

30 - 40 years

Building- and land-improvements

 

10 years

Furniture, fixtures and equipment

 

1 - 7 years

Lease intangibles

 

Over lease term

 

Significant improvements to properties are capitalized. When assets are sold or retired, their costs and related accumulated depreciation are removed from the accounts with the resulting gains or losses reflected in net income or loss for the period.

 

Repairs and maintenance are expensed to operations as incurred and are included in property and hotel operating expenses on the Company’s consolidated statements of operations.

7


 

The Company’s management reviews its real estate properties for impairment each quarter or when there is an event or change in circumstances that indicates an impaired value. If the carrying amount of the real estate investment is no longer recoverable and exceeds the fair value such investment, an impairment loss is recognized. The impairment loss is recognized based on the excess of the carrying amount of the asset over its fair value. The evaluation of anticipated future cash flows is highly subjective and is based in part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Since cash flows on real estate properties considered to be “long-lived assets to be held and used” are considered on an undiscounted basis to determine whether an asset has been impaired, the Company’s strategy of holding properties over the long term directly decreases the likelihood of recording an impairment loss. If the Company’s strategy changes or market conditions otherwise dictate an earlier sale date, an impairment loss may be recognized and such loss could be material to the Company’s results. If the Company determines that an impairment has occurred, the affected assets must be reduced to their fair value, less cost to sell. During the period presented, no such impairment occurred.

Deferred Charges

The Company’s deferred charges include financing and leasing costs. Deferred financing costs include legal, structuring, and other loan costs incurred by the Company for its financing agreements. Deferred financing costs related to the Company’s mortgage notes and term loan are recorded as an offset to the related liability and amortized over the term of the financing instrument. Deferred financing costs related to the Company’s revolving credit facility and affiliate line of credit are recorded as a component of other assets and amortized over the term of the financing agreement. Deferred leasing costs incurred in connection with new leases, which consist primarily of brokerage and legal fees, are recorded as a component of other assets and amortized over the life of the related lease.

Investments in Real Estate-Related Securities

The Company has elected to classify its investment in real estate-related securities as trading securities and carry such investments at estimated fair value. As such, the resulting gains and losses are recorded as a component of income from real estate-related securities on the consolidated statements of operations.

Fair Value Measurement

Under normal market conditions, the fair value of an investment is the amount that would be received to sell an asset or transfer a liability in an orderly transaction between market participants at the measurement date (i.e., the exit price). Additionally, there is a hierarchal framework that prioritizes and ranks the level of market price observability used in measuring investments at fair value. Market price observability is impacted by a number of factors, including the type of investment and the characteristics specific to the investment and the state of the market place, including the existence and transparency of transactions between market participants. Investments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.

Investments measured and reported at fair value are classified and disclosed in one of the following levels within the fair value hierarchy:

Level 1 — quoted prices are available in active markets for identical investments as of the measurement date. The Company does not adjust the quoted price for these investments.

Level 2 — quoted prices are available in markets that are not active or model inputs are based on inputs that are either directly or indirectly observable as of the measurement date.

Level 3 — pricing inputs are unobservable and include instances where there is minimal, if any, market activity for the investment. These inputs require significant judgment or estimation by management or third parties when determining fair value and generally represent anything that does not meet the criteria of Levels 1 and 2. Due to the inherent uncertainty of these estimates, these values may differ materially from the values that would have been used had a ready market for these investments existed.

As of June 30, 2017, the Company’s $291.5 million of investments in real estate-related securities were classified as Level 2.

Valuation

The Company’s investments in real estate-related securities are reported at estimated fair value.

8


 

As of June 30, 2017, the Company’s investments in real estate-related securities consisted of CMBS, which are fixed income securities. The Company generally values its CMBS by utilizing third-party pricing service providers and broker-dealer quotations on the basis of last available bid price.

In determining the value of a particular investment, pricing service providers may use broker-dealer quotations, reported trades or valuation estimates from their internal pricing models to determine the reported price. The pricing service providers’ internal models use observable inputs such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar assets.

The fair value of the Company’s mortgage notes, term loan, and revolving credit facility, repurchase agreements, and affiliate line of credit all approximate their carrying value.

Revenue Recognition

The Company’s sources of revenue and the related revenue recognition policies are as follows:

Rental revenue — primarily consists of base rent arising from tenant leases at the Company’s industrial, multifamily, and retail properties. Rental revenue is recognized on a straight-line basis over the life of the lease, including any rent steps or abatement provisions. The Company begins to recognize revenue upon the acquisition of the related property or when a tenant takes possession of leased space.

Tenant reimbursement income — consists primarily of amounts due from tenants for costs related to common area maintenance, real estate taxes, and other recoverable costs included in lease agreements. The Company recognizes the reimbursement of such costs incurred as tenant reimbursement income.

Hotel revenue — consists of income from the Company’s hotel properties. Hotel revenue consists primarily of room revenue and food and beverage revenue. Room revenue is recognized when the related room is occupied and other hotel revenue is recognized when the service is rendered.

Income Taxes

The Company intends to make an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, commencing with its taxable year ending December 31, 2017. If the Company qualifies for taxation as a REIT, the Company generally will not be subject to federal corporate income tax to the extent it distributes 90% of its taxable income to its stockholders. REITs are subject to a number of other organization and operational requirements. Even if the Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income and property, and federal income and excise taxes on its undistributed income.

The Company leases its hotel investments to wholly-owned taxable REIT subsidiaries (“TRSs”). The TRSs are subject to taxation at the federal, state and local levels, as applicable. Revenues related to the hotels’ operations such as room revenue, food and beverage revenue and other revenue are recorded in the TRS along with corresponding expenses. The Company accounts for applicable income taxes by utilizing the asset and liability method. As such, the Company records deferred tax assets and liabilities for the future tax consequences resulting from the difference between the carrying value of existing assets and liabilities and their respective tax basis. As of June 30, 2017, the Company recorded a deferred tax asset of $317 thousand due to its hotel investments and recorded such amount as a tax benefit within income tax expense on the consolidated statements of operations.

Organization and Offering Costs

Organization costs are expensed as incurred and recorded as a component of general and administrative on the Company’s consolidated statement of operations and offering costs are charged to equity as such amounts are incurred.

The Adviser has agreed to advance certain organization and offering costs on behalf of the Company interest free (including legal, accounting, and other expenses attributable to the Company’s organization, but excluding upfront selling commissions, dealer manager fees and stockholder servicing fees) through December 31, 2017, the day before the first anniversary of the date as of which escrow for the Offering was released. The Company will reimburse the Adviser for all such advanced expenses ratably over a 60 month period following December 31, 2017.

As of June 30, 2017, the Adviser and its affiliates had incurred organization and offering costs on the Company’s behalf of $8.7 million, consisting of offering costs of $6.9 million and organization costs of $1.8 million. These organization and offering costs were

9


 

recorded as a component of due to affiliates in the accompanying consolidated balance sheet as of June 30, 2017. Such costs became the Company’s liability on January 1, 2017, the date as of which the proceeds from the Offering were released from escrow.

Blackstone Advisory Partners L.P. (the “Dealer Manager”), a registered broker-dealer affiliated with the Adviser, serves as the dealer manager for the Offering. The Dealer Manager is entitled to receive selling commissions and dealer manager fees based on the transaction price of each applicable class of shares sold in the Offering. The Dealer Manager is also entitled to receive a stockholder servicing fee of 0.85%, 0.85% and 0.25% per annum of the aggregate net asset value (“NAV”) of the Company’s outstanding Class S shares, Class T shares, and Class D shares, respectively.

The following table details the selling commissions, dealer manager fees, and stockholder servicing fees for each applicable share class:

 

 

 

Class S

 

 

Class T

 

 

Class D

 

 

Class I

Selling commissions and dealer manager fees (% of transaction price)

 

up to 3.5%

 

 

up to 3.5%

 

 

 

 

Stockholder servicing fee (% of NAV)

 

 

0.85%

 

 

 

0.85%

 

 

 

0.25%

 

 

 

There is no stockholder servicing fee with respect to Class I shares. The Dealer Manager has entered into agreements with the selected dealers distributing the Company’s shares in the Offering, which provide, among other things, for the re-allowance of the full amount of the selling commissions and dealer manager fees received and all or a portion of the stockholder servicing fees to such selected dealers. The Company will cease paying the stockholder servicing fee with respect to any Class S share, Class T share or Class D share held in a stockholder’s account at the end of the month in which the total selling commissions, dealer manager fees and stockholder servicing fees paid with respect to the shares held by such stockholder within such account would exceed, in the aggregate, 8.75% (or, in the case of Class T shares sold through certain participating broker-dealers, a lower limit as set forth in any applicable agreement between the Dealer Manager and a participating broker-dealer) of the gross proceeds from the sale of such shares (including the gross proceeds of any shares issued under the Company’s distribution reinvestment plan with respect thereto). The Company will accrue the full cost of the stockholder servicing fee as an offering cost at the time each Class S, Class T, and Class D share is sold during the Offering. As of June 30, 2017, the Company had accrued $53.4 million of stockholder servicing fees related to Class S shares, Class D shares and Class T shares sold and recorded such amount as a component of due to affiliate on the Company’s consolidated balance sheets.

Earnings Per Share

Basic net loss per share of common stock is determined by dividing net loss attributable to common stockholders by the weighted average number of common shares outstanding during the period. All classes of common stock are allocated net income/(loss) at the same rate per share.

The restricted stock grants of Class I shares held by our directors and issued on January 1, 2017 are considered to be participating securities because they contain non-forfeitable rights to distributions. The impact of these restricted stock grants on basic and diluted earnings per common share (“EPS”) has been calculated using the two-class method whereby earnings are allocated to the restricted stock grants based on dividends declared and the restricted stocks’ participation rights in undistributed earnings. As of June 30, 2017, the effects of the two-class method on basic and diluted EPS were not material to the consolidated financial statements.

Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09 “Revenue from Contracts with Customers (Topic 606).” Beginning January 1, 2018, companies will be required to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services and also includes additional disclosure requirements. The new standard can be adopted either retrospectively to prior reporting periods presented or as a cumulative effect adjustment as of the date of adoption. The Company is taking inventory of its revenue streams and performing a detailed review of the related contracts to determine the impact of this standard on the Company’s consolidated financial statements. The majority of the Company’s revenue is derived from tenant leases at multifamily, industrial and retail properties. As such the Company does not expect the adoption of ASU 2014-09 to have a material impact on its consolidated financial statements. However, upon adoption of the new leasing standard, ASU 2014-09 will impact the presentation of certain lease and non-lease components of revenue. See below for a further description of the expected impact the new leasing standard will have on the Company. The Company is currently assessing the expected impact ASU 2014-09 will have on its performance obligations related to the revenue components at the Company’s hotel properties.

In February 2016, the FASB issued ASU 2016-02, “Leases,” which will require organizations that lease assets to recognize the assets and liabilities for the rights and obligations created by those leases on their balance sheet. Additional disclosure regarding a

10


 

company’s leasing activities will also be expanded under the new guidance. For public entities, ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and requires a modified retrospective transition. The Company is currently evaluating the potential impact of this pronouncement on its consolidated financial statements from both a lessor and lessee standpoint. Under the new leasing standard lessor accounting remains substantially the same as current GAAP. However, the classification of certain lease and non-lease components, such as tenant reimbursement income for real estate taxes and insurance, will change but will not impact total revenue. The new lease standard will have a significant impact on lessee accounting. As such, the Company will be required to recognize a right of use asset on its consolidated balance sheet along with a lease liability equal to the present value of the remaining minimum lease payments for the Company’s ground leases.

3. Investments in Real Estate

Investments in real estate, net consisted of the following ($ in thousands):

 

 

 

June 30, 2017

 

Building and building improvements

 

$

1,225,356

 

Land and land improvements

 

 

194,741

 

Furniture, fixtures and equipment

 

 

19,771

 

Total

 

 

1,439,868

 

Accumulated depreciation

 

 

(9,353

)

Investments in real estate, net

 

$

1,430,515

 

 

During the six months ended June 30, 2017, the Company acquired wholly-owned interests in 10 real estate investments, which were comprised of 39 industrial, 13 multifamily, two hotel, and one retail property. As of December 31, 2016, the Company had not commenced its principal operations and had not acquired any real estate investment properties.

The following table provides further details of the properties acquired during the six months ended June 30, 2017 ($ in thousands):

 

Property Name

 

Number of

Properties

 

Location

 

Sector

 

Acquisition

Date

 

Purchase Price(1)

 

Hyatt Place UC Davis(2)

 

1

 

Davis, CA

 

Hotel

 

Jan. 2017

 

$

32,687

 

Sonora Canyon

 

1

 

Mesa, AZ

 

Multifamily

 

Feb. 2017

 

 

40,983

 

Stockton

 

1

 

Stockton, CA

 

Industrial

 

Feb. 2017

 

 

32,751

 

Bakers Centre

 

1

 

Philadelphia, PA

 

Retail

 

Mar. 2017

 

 

54,223

 

TA Multifamily Portfolio

 

6

 

Various(3)

 

Multifamily

 

Apr. 2017

 

 

432,593

 

HS Industrial Portfolio

 

38

 

Various(4)

 

Industrial

 

Apr. 2017

 

 

405,930

 

Emory Point(2)

 

1

 

Atlanta, GA

 

Multifamily(5)

 

May 2017

 

 

201,578

 

Nevada West

 

3

 

Las Vegas, NV

 

Multifamily

 

May 2017

 

 

170,965

 

Hyatt Place San Jose Downtown

 

1

 

San Jose, CA

 

Hotel

 

June 2017

 

 

65,321

 

Mountain Gate & Trails

 

2

 

Las Vegas, NV

 

Multifamily

 

June 2017

 

 

83,572

 

 

 

 

 

 

 

 

 

 

 

$

1,520,603

 

 

(1)

Purchase price is inclusive of acquisition related costs.

(2)

The Hyatt Place UC Davis and Emory Point are subject to a ground lease. The Emory Point ground lease was prepaid by the seller and is recorded as an intangible asset on the Company’s consolidated balance sheet.

(3)

The TA Multifamily Portfolio consists of a 32-floor property in downtown Orlando (“55 West”) and five garden style properties located in the suburbs of Palm Beach Gardens, Orlando, Chicago, Dallas and Kansas City.

(4)

The HS Industrial Portfolio consists of 38 industrial properties located in six submarkets, with the following concentration based on square footage: Atlanta (38%), Chicago (23%), Houston (17%), Harrisburg (10%), Dallas (10%) and Orlando (2%).

(5)  

Emory Point also includes 124,000 square feet of walkable retail space.

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The following table summarizes the purchase price allocation for the properties acquired during the six months ended June 30, 2017 ($ in thousands):

 

 

 

TA Multifamily

Portfolio

 

 

HS Industrial

Portfolio

 

 

Emory Point

 

 

Nevada West

 

 

All Other

 

 

Total

 

Building and building improvements

 

$

337,889

 

 

$

345,391

 

 

$

171,709

 

 

$

145,305

 

 

$

224,576

 

 

$

1,224,870

 

Land and land improvements

 

 

68,456

 

 

 

45,081

 

 

 

 

 

 

17,409

 

 

 

63,746

 

 

 

194,692

 

Furniture, fixtures and equipment

 

 

4,651

 

 

 

 

 

 

3,040

 

 

 

2,833

 

 

 

8,823

 

 

 

19,347

 

In-place lease intangibles

 

 

21,880

 

 

 

20,793

 

 

 

11,207

 

 

 

5,418

 

 

 

10,163

 

 

 

69,461

 

Below-market ground lease intangibles

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,683

 

 

 

4,683

 

Above-market lease intangibles

 

 

24

 

 

 

2,726

 

 

 

84

 

 

 

 

 

 

150

 

 

 

2,984

 

Below-market lease intangibles

 

 

(307

)

 

 

(8,061

)

 

 

(576

)

 

 

 

 

 

(2,604

)

 

 

(11,548

)

Prepaid ground lease rent

 

 

 

 

 

 

 

 

16,114

 

 

 

 

 

 

 

 

 

16,114

 

Total purchase price

 

$

432,593

 

 

$

405,930

 

 

$

201,578

 

 

$

170,965

 

 

$

309,537

 

 

$

1,520,603

 

 

The weighted-average amortization periods for the acquired in-place lease intangibles, below-market ground lease intangibles, above-market lease intangibles, below-market lease intangibles, and prepaid ground lease rent of the properties acquired during the six months ended June 30, 2017 were 3, 52, 6, 7, and 71 years, respectively.

4. Intangibles

The gross carrying amount and accumulated amortization of the Company’s intangible assets and liabilities consisted of the following ($ in thousands):

 

 

 

June 30, 2017

 

Intangible assets:

 

 

 

 

In-place lease intangibles

 

$

69,461

 

Below-market ground lease intangibles

 

 

4,683

 

Above-market lease intangibles

 

 

2,984

 

Prepaid ground lease rent

 

 

16,114

 

Total intangible assets

 

 

93,242

 

Accumulated amortization:

 

 

 

 

In-place lease amortization

 

 

(15,432

)

Below-market ground lease amortization

 

 

(40

)

Above-market lease amortization

 

 

(137

)

Prepaid ground lease rent amortization

 

 

(37

)

Total accumulated amortization

 

 

(15,646

)

Intangible assets, net

 

$

77,596

 

Intangible liabilities: