Granite Point Mortgage Trust Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Granite Point is an externally managed REIT focused primarily on originating and investing in senior floating-rate commercial real estate loans. This unaudited filing covers the quarter and six months ended June 30, 2020; balance-sheet comparisons are with December 31, 2019. The period was substantially affected by COVID-19 and related commercial real estate and capital-market disruption.
Key financial metrics
| Metric | Q2 2020 / June 30, 2020 | Prior comparable period / prior year-end |
|---|---|---|
| Interest income | $60.9 million for Q2; $125.1 million for the first half | $60.0 million for Q2 2019; $118.1 million for first-half 2019 |
| Net interest income | $34.4 million for Q2; $63.6 million for the first half | $27.6 million for Q2 2019; $53.8 million for first-half 2019 |
| Net loss attributable to common stockholders | $1.8 million for Q2 ($0.03 per diluted share); $39.0 million for the first half ($0.71 per diluted share) | Net income of $18.2 million for Q2 2019 ($0.33 diluted EPS); $35.1 million for first-half 2019 ($0.68 diluted EPS) |
| Annualized yield, cost of funds and net interest spread | Q2: 5.6%, 3.1% and 2.5%; first half: 5.8%, 3.6% and 2.2% | Q2 2019: 7.1%, 5.1% and 2.0%; first-half 2019: 7.2%, 5.2% and 2.0% |
| Credit-loss provision and allowance | First-half provision: $67.5 million; June 30 loan allowance: $76.7 million, plus $8.1 million for unfunded commitments | No comparable provision was recorded in 2019; $18.5 million opening CECL adjustment on January 1, 2020 |
| Cash flow, first half | Operating cash flow $32.3 million; investing cash flow $(131.8) million; financing cash flow $(0.8) million | Cash, cash equivalents and restricted cash declined $100.3 million to $59.5 million |
| Assets, debt and equity | Total assets $4.42 billion; total stockholders’ equity $964.3 million; cash and cash equivalents $56.0 million | At December 31, 2019: assets $4.46 billion; equity $1.02 billion; cash and cash equivalents $80.3 million |
| Debt and leverage | Total debt, net of deferred issuance costs, approximately $3.42 billion; debt-to-equity ratio, net of cash, 3.5:1 | Debt maturity schedule shows $1.67 billion due within one year |
Loans held-for-investment, net of allowance, were $4.29 billion. The portfolio comprised 121 loans with a 5.1% weighted-average coupon and 1.4-year weighted-average contractual maturity. Office, multifamily and hotel loans represented 42.5%, 25.2% and 15.0% of carrying value, respectively.
Material changes versus prior periods
- Net interest income increased year over year as interest expense fell with short-term rates, despite lower asset yields. Q2 net asset yield declined to 5.6% from 7.1%, while average cost of funds fell to 3.1% from 5.1%.
- The new CECL standard was adopted January 1, 2020, reducing opening cumulative earnings by $18.5 million. First-half credit-loss provisions were $67.5 million, reflecting sharply deteriorated economic forecasts associated with COVID-19.
- Management downgraded 35 loans totaling $1.5 billion during Q2. At June 30, 18 loans were rated higher risk, compared with two at year-end 2019. The filing reported no loans past due, in nonaccrual status or in maturity default at quarter-end.
- General and administrative expenses rose: total expenses were $15.0 million in Q2 versus $9.7 million in Q2 2019. The company also recorded $6.9 million of realized losses on loan sales in Q2; it reported no such sales in the comparable 2019 period.
- Common dividends were suspended in March 2020. No common dividend was declared for Q2 or the first half, versus $0.42 per share for Q2 2019 and $0.84 per share for first-half 2019.
- Common equity declined to $964.3 million from $1.02 billion at year-end 2019. The filing attributes the period’s results principally to credit-loss accounting and pandemic-driven changes, and also reports other comprehensive losses in the first quarter.
Outlook, risks and unusual items
- COVID-19 and credit: Management said the severity and duration of the pandemic and its effect on borrowers, tenants, collateral values and the economy were highly uncertain. Borrowers requested modifications, including interest deferrals, forbearance and covenant waivers; management anticipated further requests and possible defaults or foreclosures. No COVID-19 contingency liability was recorded at June 30.
- Liquidity and financing: Management expected repayments and prepayments to slow and cash flows to be pressured by modifications and financing repayments. Repurchase lenders can mark collateral and require margin calls. The company reported transferring cash and/or unencumbered assets to reduce advance rates on certain collateral. Disclosed covenant measures remained within stated thresholds, but financing facilities are generally uncommitted and some funding remains subject to lender discretion.
- Capital and distributions: The company said it may raise capital, borrow, sell assets or change dividend practices to preserve liquidity. It intended to distribute 100% of 2020 REIT taxable income, subject to ongoing evaluation of capital and liquidity needs; actual taxable income and future common distributions were not assured.
- Management internalization: Granite Point and its manager agreed to a process to internalize management, but completion was uncertain. A confidential arbitration to determine amounts payable was delayed, with a hearing expected in Q3 or Q4 2020. No contingency liability was recorded because the amount was not reasonably estimable.
- Subsequent events: On July 30, 2020, the company sold loans with $190.9 million unpaid principal for $181.4 million; their June 30 amortized cost, net of allowance, was $188.8 million. On July 2 it amended a JPMorgan repurchase facility, temporarily increasing its maximum capacity by approximately $54.1 million, subject to terms.
- Other exposures: Approximately 98.5% of the portfolio earned floating rates, and all borrowings other than convertible notes were LIBOR-indexed; LIBOR was expected to be discontinued after 2021. The portfolio also had geographic and property-type exposure, including hotel and retail assets. Internalization costs, future credit-loss estimates and asset-sale values remained uncertain.
Important facts for investors to verify
- How the $76.7 million loan allowance, the $8.1 million unfunded-commitment allowance and elevated risk ratings evolve, including whether any loans enter nonaccrual or default.
- The realized outcome and accounting impact of the July loan sale, and whether additional asset sales or borrower modifications are needed.
- Available liquidity after potential margin calls, future loan fundings and debt maturities, including the practical availability of unused borrowing capacity.
- The arbitration outcome, total cost and timing of any management internalization; no amount payable had been determined in this filing.
- Future common-dividend decisions and the company’s ability to meet REIT distribution requirements while preserving liquidity.