Granite Point Mortgage Trust Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. The company is an externally managed REIT focused mainly on originating and holding senior floating-rate commercial real estate loans.
Financial and operating results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $60.0 million | $43.5 million | $118.1 million | $83.5 million |
| Interest expense | $32.3 million | $21.2 million | $64.3 million | $39.6 million |
| Net interest income | $27.6 million | $22.3 million | $53.8 million | $43.9 million |
| Net income attributable to common stockholders | $18.2 million | $15.2 million | $35.1 million | $29.8 million |
| Diluted earnings per share | $0.33 | $0.34 | $0.68 | $0.67 |
| Common dividend declared per share | $0.42 | $0.40 | $0.84 | $0.78 |
For Q2, average annualized net asset yield was 7.1%, cost of funds was 5.1%, and net interest spread was 2.0%; the comparable 2018 spread was also 2.0%. Six-month spread was 2.1% in both years. Operating cash flow for the six months was $30.8 million; investing cash use was $379.6 million and financing cash provided was $394.4 million. Cash, cash equivalents and restricted cash totaled $169.0 million at June 30, including $92.8 million of cash and cash equivalents.
Balance sheet, portfolio and financing
- Total assets were $3.80 billion and stockholders’ equity was $1.03 billion at June 30, 2019, versus $3.36 billion and $827.5 million at December 31, 2018.
- Loans held for investment were $3.56 billion across 106 loans, up from $3.17 billion and 92 loans at year-end. The portfolio was predominantly senior loans; weighted-average senior-loan coupon was 6.2%. Office was the largest property exposure at 42.7% of loan carrying value.
- Debt outstanding included $1.25 billion of repurchase agreements, $1.13 billion of securitized debt, $75.1 million of asset-specific financing and $268.9 million of convertible notes. The revolving facility had no balance at quarter-end, compared with $75.0 million at year-end.
- Management reported debt-to-equity of 2.6:1, defined as total debt net of cash divided by equity, and said it currently expects company leverage not to exceed 3.5:1. Unrestricted cash of $92.8 million exceeded the stated minimum covenant requirement; the company reported compliance with its financial covenants.
Material changes, outlook and risks
- Year-over-year growth in interest income and net interest income reflected a larger loan portfolio and higher floating-rate yields. Interest expense also increased, as the company added financing and LIBOR-related borrowing costs rose. Despite higher common-stockholder income, Q2 diluted EPS declined to $0.33 from $0.34, with a substantially larger weighted-average share count.
- The company issued common stock in early 2019 and through its at-the-market program. Six-month net proceeds from common-stock issuance were $207.4 million; 54.9 million shares were outstanding at June 30, versus 43.6 million at year-end. The manager also agreed to reimburse certain underwriting costs.
- Management described commercial real estate lending as an attractive opportunity, citing borrower demand and constraints on traditional lenders. No specific earnings or dividend guidance was provided. The company intends to make regular quarterly distributions and declared a $0.42-per-share dividend payable July 19, 2019.
- There were no nonperforming loans, impaired loans or loan-loss allowance at June 30; two loans were rated higher risk and none were rated impaired/loss likely. The company had $588.7 million of unfunded loan commitments, generally for lease-related or capital expenditures.
- Key risks include borrower/property deterioration and credit losses; higher rates increasing borrowers’ debt-service burdens and the company’s financing costs; margin calls and dependence on periodically renewed short-term funding; counterparty risk; and illiquidity or reduced value if assets must be sold quickly. Management’s rate-sensitivity analysis estimated a $5.2 million increase in annualized net interest income for an immediate 50-basis-point rise, but a $4.2 million decrease for a 50-basis-point decline; these are model-based estimates, not forecasts.
- The filing reported no material legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether portfolio growth and increased financing costs sustain net interest income and per-share earnings, considering the substantial rise in share count.
- Loan credit quality, property and geographic concentrations, and the performance of the two higher-risk loans; reported absence of an allowance is management’s assessment as of June 30.
- Ability to fund the $588.7 million of commitments while maintaining liquidity and meeting debt covenants, including in a margin-call or refinancing stress scenario.
- Repurchase and securitized-debt maturities, lender concentration, and the effects of changes in LIBOR, credit spreads and collateral values.
- Dividend sustainability relative to taxable income, operating cash generation, funding needs and the REIT distribution requirement.