Granite Point Mortgage Trust Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Financial statements are unaudited. Granite Point is an externally managed REIT focused primarily on originating and investing in senior floating-rate commercial real estate loans.
Financial performance and condition
- Q3 results: Interest income was $47.6 million, interest expense $23.4 million, and net interest income $24.2 million. Net income attributable to common stockholders was $16.5 million; diluted EPS was $0.37. Common dividends declared were $0.42 per share.
- Nine-month results: Interest income was $131.0 million, net interest income $68.1 million, and net income attributable to common stockholders $46.3 million. Diluted EPS was $1.04; common dividends declared were $1.20 per share.
- Net interest spread: 2.3% in Q3 and 2.4% year to date, versus 2.4% and 3.3% in the respective 2017 periods. Q3 asset yield was 7.1% and cost of funds 4.8%; for the first nine months, 6.9% and 4.5%.
- Portfolio: 75 commercial real estate loans with $2.7 billion carrying value, plus $43.3 million of CMBS. Loans increased from $2.30 billion at year-end 2017. Office loans represented 50.1% of loan carrying value. Weighted-average loan coupon was 6.3%; approximately 98.1% of the portfolio earned floating rates. No loans were reported non-performing, and no loan-loss allowance was recorded.
- Cash flow, first nine months: Operating activities provided $43.6 million; investing activities used $383.1 million; financing activities provided $382.3 million. Cash, cash equivalents and restricted cash ended at $153.5 million.
- Debt and leverage: At September 30, repurchase agreements were $1.28 billion, CLO securitized debt $653.2 million, and convertible notes $140.1 million, for about $2.07 billion total. Repurchase agreements had a 4.36% weighted-average borrowing rate and 1.2-year remaining maturity; CLO debt had a 3.35% rate and 2.0-year remaining maturity. Reported debt-to-equity ratio was 2.5:1, compared with 2.2:1 at the start of the year. Management said it currently expects company leverage not to exceed 3:1.
- Liquidity and equity: Cash and cash equivalents were $148.2 million; total assets $2.93 billion and stockholders’ equity $825.7 million. Unused capacity under listed repurchase and revolving facilities totaled approximately $872 million, subject to facility terms and lender availability. The company reported compliance with its most restrictive financial covenants.
Changes versus comparable periods
- Q3 common-stockholder net income increased to $16.5 million from $11.5 million; nine-month net income increased to $46.3 million from $39.1 million. Interest income rose, reflecting portfolio growth and higher floating rates.
- Interest expense also increased substantially: to $23.4 million from $12.5 million for Q3, and to $63.0 million from $26.4 million year to date. Management attributed the increase to higher balances and rates, a different financing mix, and convertible-note issuance.
- The loan portfolio expanded, while the company repaid $444.9 million of loans during the first nine months. Unfunded loan commitments increased to $441.5 million from $339.2 million at year-end 2017.
- A first CLO securitization in Q2 2018 added $653.2 million of securitized debt and helped repay some repurchase financing. Repurchase-agreement balances declined from $1.52 billion at year-end 2017.
Outlook, risks and notable items
- No specific earnings or dividend guidance was provided. Management described commercial real estate lending as an opportunity, citing refinancing and borrower financing demand, while stating that results depend on credit performance, investment opportunities, financing access and market conditions.
- Key risks include borrower and property deterioration, rising debt-service burdens, changes in interest rates and credit spreads, refinancing and counterparty risk, and potential repurchase-agreement margin calls. Loan assets may be illiquid or sell for less than recorded value. Management also noted tighter counterparty balance-sheet capacity.
- Interest-rate sensitivity analysis estimated that an immediate 100-basis-point increase would raise annualized net interest income by $7.5 million; a 100-basis-point decrease would reduce it by $6.4 million. These are model estimates, not forecasts. The filing says higher rates may also impair borrower performance.
- Unfunded borrower commitments totaled $441.5 million, with expirations within three years. Management reported no material legal proceedings or claims requiring accrual.
- Beginning in Q4 2018, the external manager may earn an incentive fee if contractual earnings and other conditions are met. The manager also receives a base fee generally equal to 1.5% annually of contractually defined equity.
- Subsequent event: The company issued $125 million of 6.375% convertible notes due 2023 on October 12, 2018, and closed a further $6.6 million from the underwriters’ option on October 24.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How portfolio credit quality, collateral values and the $441.5 million of future funding obligations evolve, particularly in the concentrated office exposure.
- Whether asset yields continue to exceed rising funding costs and how the lower year-to-date spread affects earnings and dividend capacity.
- Availability and terms of short-term repurchase financing, margin-call exposure, counterparty concentration and the company’s ability to maintain liquidity under stress.
- Actual leverage after the October 2023-note issuance and any further financing, relative to management’s stated 3:1 expectation and covenant limits.
- Dividend sustainability: declared common dividends exceeded reported diluted EPS in both the quarter and first nine months; confirm coverage using the company’s applicable taxable-income and cash-flow measures.
- Potential dilution from convertible notes and the conditions for any external-manager incentive fee.