Granite Point Mortgage Trust Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. Granite Point is an externally managed REIT focused on originating and investing in commercial real estate debt, primarily senior floating-rate mortgage loans.
Financial performance and position
| Metric | Q3 2020 | Nine months 2020 | Comparable 2019 |
|---|---|---|---|
| Interest income | $57.8 million | $183.0 million | $63.4 million and $181.6 million |
| Net interest income | $33.8 million | $97.4 million | $27.1 million and $80.8 million |
| Net loss attributable to common stockholders | $24.7 million; $0.45 per share | $63.7 million; $1.15 per share | Net income of $17.4 million and $52.5 million; $0.32 and $1.00 per share |
| Core Earnings, a non-GAAP measure | $15.0 million; $0.27 per share | Not stated in the supplied filing text | Not stated for comparable periods |
| Common dividend declared per share | $0.20 | $0.20 | $0.42 and $1.26 |
Net interest spread was 2.7% for Q3 and 2.3% for the nine-month period, compared with 1.9% and 2.0% in 2019. Lower short-term rates reduced asset yields but also lowered funding costs; the filing attributes higher net interest income mainly to lower interest expense.
At September 30, loans held-for-investment, net of allowance, were $4.0 billion; total assets were $4.4 billion and stockholders’ equity was $934.5 million. Cash and cash equivalents were $353.7 million, with total cash, cash equivalents and restricted cash of $359.0 million. The company reported $3.38 billion of debt carrying value and a 3.2:1.0 debt-to-equity ratio as defined by management. Book value was $16.93 per common share.
For the first nine months, operating cash flow was $36.0 million, investing cash flow was $200.5 million and financing cash flow was negative $37.3 million. Cash, cash equivalents and restricted cash increased by $199.2 million from year-end 2019.
Material changes versus prior periods
- GAAP results swung from profit in 2019 to loss in 2020, reflecting the new expected-credit-loss standard, loan-sale losses and a one-time internalization charge.
- The company adopted CECL on January 1, 2020, recording an $18.5 million opening-equity reduction. It recorded $62.2 million of credit-loss provision expense for the first nine months; at September 30, the loan allowance was $73.3 million and the allowance on unfunded commitments was $7.4 million. Management reported a $5.3 million reduction in the allowance during Q3.
- Six loans with $191.4 million unpaid principal balance were sold during Q3 for approximately $180.7 million, producing a $10.0 million realized loss. Nine-month realized losses on loan sales were $16.9 million.
- Management reported $43.7 million of Q3 restructuring expense associated with the planned internalization. The filing also records a $44.5 million liability for the one-time payment to the Manager.
- Repurchase agreements declined to $1.85 billion from $1.92 billion at year-end 2019; securitized debt declined to $928.6 million from $1.04 billion. The company added a $225 million senior secured term loan, recorded at $205.6 million net of discount and issuance costs, and terminated its short-term revolving credit facility.
- The loan portfolio had 110 loans and a $4.0 billion carrying value, down from 120 loans and $4.23 billion at year-end 2019. Office represented 44.2% of portfolio carrying value, hotels 16.2%, and retail 8.4%.
Outlook, management commentary and risks
- COVID-19 and credit: Management cited continuing uncertainty around property cash flows, collateral values, borrower performance and economic forecasts. Hotels and retail were particularly affected; office leasing activity had slowed. No loans were on nonaccrual at quarter-end. The company collected 99% of contractual interest due in Q3 after taking account of modifications.
- Modifications and commitments: The company modified 12 loans totaling $319.6 million in Q3, following 33 loans totaling approximately $1.3 billion in Q2. It reported $596.4 million of unfunded loan commitments and cautioned that financing counterparties are generally not required to fund their share of future commitments.
- Liquidity and leverage: Management said it was focused on strengthening liquidity and anticipated company-level leverage generally within 3.0:1.0 to 3.5:1.0, subject to market conditions. Repurchase lenders may make margin calls, and asset sales or new financing may be difficult or costly in stressed markets. The company reported compliance with its financial covenants at quarter-end.
- Dividend: Common dividends were temporarily suspended in Q1 and reinstated at $0.20 per share in Q3. Management said future dividends would be evaluated based on market conditions, financial condition and REIT requirements; no earnings or dividend guidance was provided.
- Internalization: After quarter-end, the company agreed to terminate its external management arrangement effective December 31, 2020, pay the Manager $44.5 million and become internally managed. Management expects lower operating costs over time and fewer external-management conflicts, while noting transition, staffing and cost-savings risks.
- Funding and rates: Approximately 98.4% of the portfolio earned floating rates indexed to LIBOR, and all borrowings other than convertible notes were LIBOR-indexed. LIBOR discontinuation, interest-rate movements, refinancing, collateral requirements and counterparty availability may affect earnings and liquidity.
Important facts for investors to verify
- Whether borrower performance, modifications, delinquencies and collateral values support the $80.7 million combined loan and unfunded-commitment credit allowance, given the uncertainty in CECL forecasts.
- Whether the $44.5 million internalization payment and transition costs are completed as expected, and whether ongoing internal operating costs achieve the anticipated savings.
- Whether the $596.4 million of unfunded loan commitments can be funded on schedule, including if financing counterparties reduce advances or make margin calls.
- How the reinstated $0.20 quarterly dividend is supported by taxable income, liquidity and financing needs; the filing provides no forward dividend commitment.
- Whether leverage, covenant headroom and refinancing capacity remain adequate amid property-market stress, LIBOR transition and debt maturities.