Granite Point Mortgage Trust Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative results are for Q1 2020 unless otherwise noted. Granite Point is an internally managed commercial real estate finance REIT focused primarily on senior floating-rate mortgage loans.
Financial performance and position
| Metric | Q1 2021 / March 31, 2021 | Comparable / December 31, 2020 |
|---|---|---|
| Interest income | $54.1 million | $64.2 million in Q1 2020 |
| Interest expense | $26.4 million | $35.0 million in Q1 2020 |
| Net interest income | $27.8 million | $29.2 million in Q1 2020 |
| Net income attributable to common stockholders | $28.0 million; $0.51 basic and $0.45 diluted EPS | Loss of $37.2 million; $(0.68) EPS in Q1 2020 |
| Distributable Earnings (non-GAAP) | $20.7 million; $0.38 per basic share | $17.5 million; $0.32 per share in Q1 2020 |
| Net interest spread | 2.3%; average asset yield 5.6%, cost of funds 3.3% | 1.8%; 5.9% yield and 4.1% cost in Q1 2020 |
| Operating cash flow | $17.1 million provided | $39.3 million used in Q1 2020 |
| Cash and cash equivalents | $255.4 million; restricted cash $3.7 million | $261.4 million; restricted cash $67.8 million at year-end |
| Loans held for investment, net | $3.80 billion | $3.85 billion at year-end |
| Total debt, net of cash / equity | 3.0x | 3.2x at year-end |
| Book value per share | $17.22, including $1.14 per share of estimated CECL reserve | $16.92 at year-end |
Total assets were $4.10 billion, total liabilities $3.15 billion, and total equity $948.9 million at quarter-end. Financing included $1.24 billion of repurchase facilities, $925.4 million of securitized debt, a $346.9 million term financing facility, $271.6 million of convertible notes, $207.1 million carrying value of senior secured term loans, and $123.1 million of asset-specific financing. Cash, investing and financing activities decreased cash, cash equivalents and restricted cash by $70.1 million overall; financing activities used $151.6 million, chiefly from net repurchases of debt and CRE CLO reinvestment.
Portfolio and changes from the prior period
- The portfolio comprised 100 loans with $3.87 billion unpaid principal balance. Office represented 45.9% of carrying value, multifamily 23.8%, hotels 17.3%, and retail 8.7%. Weighted-average stabilized LTV at origination was 63.3%.
- Loan repayments were $101.6 million and additional fundings on existing commitments were $37.3 million; no new loans were originated in the quarter. Unfunded commitments stood at $453.5 million.
- Net income improved sharply from the year-earlier loss, mainly because the company recorded a $9.1 million benefit from credit-loss provisions versus a $53.3 million provision in Q1 2020. The 2021 reversal reflected improved macroeconomic forecasts and market conditions, as well as portfolio changes from repayments; it is excluded from Distributable Earnings.
- Net interest income declined despite lower interest expense: interest income fell with lower short-term rates and loan repayments, while loan LIBOR floors partly offset the decline. Net interest spread improved as funding costs fell more than asset yields.
- Expenses declined to $8.9 million from $13.6 million. The company had internalized management effective year-end 2020, eliminating the prior external management fee but adding employee compensation costs; lower advisory and professional fees also reduced expenses.
- Common dividends declared were $0.25 per share, up from $0.20 in the prior quarter. The company paid $25.0 million of common dividends during Q1.
Outlook, risks and notable items
- No specific earnings or revenue guidance was provided. Management’s stated target is total company leverage generally between 3.0x and 3.5x, depending on market conditions and balance-sheet needs. Management intends to distribute substantially all taxable income, but dividends remain subject to board discretion, liquidity, covenants and REIT requirements.
- Management reported collecting 100% of contractual interest due in the quarter, including through modifications and despite one loan being on nonaccrual. Nine loans with aggregate principal of about $395.6 million were modified; $4.5 million of interest was deferred and capitalized. Management cautioned that modifications may not prevent future delinquencies, defaults, foreclosure or losses.
- Credit exposure includes one hotel loan with $67.3 million unpaid principal, risk rating 5, and an $8.3 million allowance; the company is considering resolution options including sale or negotiated deed-in-lieu. One separate $22.3 million senior loan remained on nonaccrual, with a $19.3 million carrying value.
- COVID-19 recovery remained uncertain, particularly for lodging, retail and office collateral. Management cited risks to borrower cash flows, loan repayments, new originations, collateral values and financing availability. Repurchase lenders may make margin calls, and some financing counterparties are not obligated to fund their share of future loan commitments.
- At March 31, approximately 98.4% of the portfolio by carrying value earned floating-rate interest. Management’s sensitivity analysis estimated that an immediate 100-basis-point rate increase would reduce annualized net interest income by $21.5 million; a 100-basis-point decrease would increase it by $2.6 million, with rate declines floored at zero in the analysis. These are model-based estimates, not forecasts.
- LIBOR transition is a material exposure: about 98.5% of loans and all outstanding borrowings other than convertible notes and senior secured financing were LIBOR-indexed. Management noted that some contracts may lack robust fallback language.
- Subsequent to quarter-end, the company priced an $824 million CRE CLO, with an initial advance rate of 83.25% and issuance weighted-average rate of LIBOR plus 1.62%; upon closing, management expected credit non-mark-to-market financing to exceed 70% of loan-level borrowings. The Goldman Sachs repurchase facility entered its amortization period on May 2; the company was negotiating an extension, and reported no outstanding balance on it as of May 6.
- The company was in compliance with financial covenants at March 31. Management reported no material legal proceedings or material control changes; disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether the $9.1 million credit-loss benefit is repeatable, and how credit reserves and risk-rated loans evolve, particularly the hotel loan rated 5 and the nonaccrual loan.
- Performance and resolution of modified loans, the timing and funding of $453.5 million in unfunded commitments, and any further interest deferrals.
- Completion and final economics of the $824 million CRE CLO, the resulting non-mark-to-market funding share, and the outcome of negotiations on the Goldman Sachs facility.
- Liquidity and covenant headroom under market stress, including potential repurchase-facility margin calls, refinancing needs and the company’s ability to fund commitments without lender participation.
- Whether Distributable Earnings can support the $0.25 common dividend; this non-GAAP measure is not cash flow or taxable income and excludes the quarter’s credit-loss benefit.
- LIBOR fallback arrangements, interest-rate sensitivity assumptions, and the effect of rate changes on floating-rate assets and liabilities.