Granite Point Mortgage Trust Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter ended September 30, 2017. The company began operating as a publicly traded REIT on June 28, 2017, following its IPO and formation transaction with Two Harbors. Financial statements include the predecessor’s historical business; reported EPS covers only the 95-day post-formation period.
Business context
Granite Point originates, invests in and manages commercial real estate debt, with a focus on senior floating-rate mortgage loans. It is externally managed by Pine River Capital Management and has no employees of its own. At quarter-end, the portfolio included 56 commercial mortgage loans and CMBS, with $2.2 billion of principal balance in total and $272.2 million of unfunded loan commitments.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Interest income | $30.9m | $16.2m | $80.8m | $41.0m |
| Net interest income | $18.4m | $13.1m | $54.4m | $34.0m |
| Net income attributable to common stockholders | $11.5m | $9.6m | $39.1m | $23.4m |
| EPS | $0.27 | Not applicable | $0.27 | Not applicable |
Q3 net interest margin spread was 2.4%, versus 4.4% a year earlier; for the first nine months it was 3.3%, versus 4.5%. In Q3, average asset yield was 6.4% and average cost of funds was 4.0%. Higher LIBOR supported floating-rate asset yields, while increased use of repurchase financing and higher borrowing rates raised funding costs.
- Balance sheet: Assets were $2.36 billion, including $2.13 billion of loans held for investment; stockholders’ equity was $830.8 million. Common book value was $19.22 per share.
- Debt and leverage: Repurchase agreements were $1.48 billion and the affiliate note payable was $27.5 million, for $1.50 billion total borrowings. Debt-to-equity for the investment portfolio was 1.8:1.0. Repo weighted-average borrowing rate was 3.56%.
- Liquidity: Cash and cash equivalents were $142.4 million, plus $2.3 million restricted cash. Management stated cash and anticipated financing and operating sources should cover business needs and required distributions for at least 12 months.
- Cash flow, nine months: Operating cash flow was $6.9 million, investing cash outflow was $753.0 million, and financing cash inflow was $834.6 million. Cash, cash equivalents and restricted cash increased by $88.4 million.
- Credit and distributions: No loans were past due or rated impaired/loss likely, and no loan-loss allowance or securities impairment was recorded. The company declared a $0.32-per-share common dividend, payable October 18, 2017.
Material changes and unusual items
- Loans held for investment increased to $2.13 billion from $1.36 billion at year-end 2016, reflecting portfolio growth; 29 investments totaling $1.0 billion were originated or acquired between September 2016 and September 2017, with additional fundings on existing loans.
- The June IPO raised $195.0 million gross and approximately $181.9 million net. The formation transaction transferred the predecessor business to Granite Point in exchange for common and preferred shares. Two Harbors distributed its 33.1 million Granite Point shares to its stockholders on November 1, 2017.
- The affiliate note payable fell from $593.6 million at year-end to $27.5 million at quarter-end and matured October 27, 2017, as collateral and financing transitioned to repo facilities. Management expected borrowing costs to rise after the FHLB-linked arrangement ended.
- Portfolio composition was concentrated in office properties (51.2% of loan carrying value) and the Northeast (42.4%). Approximately 97.5% of the portfolio earned floating rates.
- Q3 and nine-month results are not necessarily indicative of future periods. Reported earnings comparisons include predecessor operations, while EPS is calculated only from the public-company launch date.
Outlook, risks and contingencies
No numerical earnings or revenue guidance was provided. Management expects to focus mainly on directly originated floating-rate senior commercial mortgage loans and described commercial real estate debt demand as supported by refinancing needs and constrained traditional lending. It intends to use leverage, currently expecting company debt-to-equity not to exceed 3:1, subject to market conditions and other factors.
- Repo funding is generally uncommitted and secured by assets subject to lender mark-to-market and margin calls. Financing rollover, counterparty capacity and collateral values could pressure liquidity; commercial mortgage loans may be difficult to sell quickly.
- Rising rates may increase borrower debt-service burdens, even as they can raise net interest income. The filing’s modeled annualized NII impact was +$6.2 million for a 100-basis-point rate increase and -$2.0 million for a 100-basis-point decrease; results depend on assumptions and are not forecasts.
- Other material exposures include borrower defaults, real estate and geographic conditions, asset illiquidity, financing availability, and maintaining REIT and Investment Company Act status. Management reported no material portfolio impact expected from recent natural disasters.
- The company had $272.2 million of future loan funding obligations. Management reported no legal or regulatory claims expected to materially affect the financial statements and no material change in previously disclosed risk factors.
- PRCM receives a base management fee of 1.5% of defined equity; incentive fees, if earned, begin in Q4 2018. Preferred shares carry a cumulative 10% dividend and seniority over common stock.
Investor verification priorities
- Track repo funding terms, post-October 27 refinancing costs, collateral haircuts, covenant headroom and liquidity available for margin calls and unfunded commitments.
- Monitor loan performance, property cash flows, office and Northeast concentration, LTV assumptions, and whether any loans become delinquent or impaired.
- Reconcile dividend coverage and REIT taxable income with reported GAAP earnings and cash available for distribution.
- Assess net interest spread as LIBOR and borrowing costs change, including the assumptions behind management’s rate-sensitivity estimates.
- Review related-party management fees, expense allocations, and the transition to stand-alone operations following Two Harbors’ share distribution.