Granite Point Mortgage Trust Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Granite Point is an externally managed commercial real estate lender focused primarily on originating and holding senior floating-rate mortgage loans. The company began public operations in June 2017; comparative Q1 2017 results include its predecessor’s operations, while common-share EPS is not comparable because common shares were not then outstanding.
Financial results and position
| Metric | Q1 2018 / March 31, 2018 | Prior comparable / December 31, 2017 |
|---|---|---|
| Interest income | $40.0 million | $23.8 million |
| Net interest income | $21.6 million | $17.7 million |
| Net income attributable to common stockholders | $14.6 million | $13.5 million |
| Diluted EPS | $0.33 | Not presented for Q1 2017 |
| Common dividend declared per share | $0.38 | Not presented for Q1 2017 |
| Total assets | $2.521 billion | $2.499 billion |
| Loans held for investment | $2.365 billion | $2.304 billion |
| Repurchase agreements | $1.524 billion | $1.522 billion |
| Convertible notes, net | $139.7 million | $121.3 million |
| Stockholders’ equity | $827.4 million | $828.6 million |
Q1 operating cash flow was $13.1 million; investing cash flow was negative $52.9 million and financing cash flow was positive $6.1 million. Cash, cash equivalents and restricted cash ended the quarter at $77.1 million, including $72.1 million of unrestricted cash. The weighted average asset yield was 6.7%, funding cost 4.5%, and net interest rate spread 2.2%, compared with 6.2%, 2.2% and 4.0%, respectively, in Q1 2017.
The portfolio comprised 61 commercial mortgage loans with $2.384 billion principal balance and two CMBS positions with $50.2 million principal balance; loan carrying value was $2.365 billion. Unfunded loan commitments were $315.2 million. Office properties represented 55.4% of loan carrying value. Debt-to-equity was approximately 2.0:1.0.
Changes and management commentary
- Interest income rose to $40.0 million from $23.8 million, reflecting portfolio growth and higher floating-rate yields. Interest expense increased to $18.4 million from $6.1 million, due to higher borrowings, increased LIBOR, greater reliance on repurchase financing and convertible-note interest.
- Net interest income increased, but the net interest spread narrowed to 2.2% from 4.0% as funding costs rose faster than portfolio yields.
- The company reported $0.9 million of fee income from early loan prepayment penalties. No loan-loss allowance was recorded; all loans were rated in risk categories 1–3, with none rated 4 or 5, and no commercial mortgage loans were non-performing.
- On May 9, 2018, after quarter-end, the company closed an $826 million CLO financing 25 senior floating-rate investments. It cited proceeds for repaying repurchase balances, reinvestment and general corporate purposes. The CLO’s initial advance rate was approximately 80%, with a weighted average issuance rate of LIBOR + 1.27%.
Outlook, risks and contingencies
- No specific earnings or dividend guidance was provided. Management said it expects to focus mainly on directly originated senior floating-rate loans and intends to keep company-wide leverage at or below 3:1, subject to market conditions and other considerations.
- Management described commercial real estate lending opportunities as supported by refinancing and property-transition financing demand, while noting competition and uncertainty in financing availability and market conditions.
- Key risks include borrower defaults and property performance, rising interest rates and borrower debt-service costs, increased funding costs, repurchase-agreement margin calls or non-renewal, lender and counterparty concentration, and the potential illiquidity of commercial mortgage loans. Approximately 97.8% of the portfolio by carrying value earned floating rates. The filing’s sensitivity analysis estimates annualized net interest income would change by approximately negative $4.1 million with a 50-basis-point rate decline and positive $4.1 million with a 50-basis-point increase, subject to assumptions.
- Repurchase agreements were $1.524 billion, at a 4.07% weighted average borrowing rate and 1.6-year weighted average remaining maturity. The company reported compliance with stated financial covenants at quarter-end, including $72.1 million unrestricted cash against a $30.0 million minimum, and a 2.2:1.0 interest coverage ratio against a 1.5:1.0 minimum.
- Unfunded loan commitments of $315.2 million require future funding, generally for property leasing or capital expenditures. Management reported no material pending legal claims and no defaults upon senior securities.
- The company pays its external manager a base fee equal to 1.5% of defined equity annually; incentive fees, if earned, were to become payable beginning in Q4 2018. REIT qualification and required distributions are important to its tax status and capital flexibility.
Investor verification priorities
- Assess whether portfolio yield growth can keep pace with borrowing costs and preserve net interest spread as LIBOR and funding conditions change.
- Review the $826 million CLO’s final terms, collateral, impact on repurchase borrowing and available liquidity.
- Evaluate office-property concentration, loan-level collateral and borrower performance, as well as the $315.2 million in unfunded commitments.
- Verify headroom under financing covenants, exposure to repurchase counterparties and potential collateral calls or facility non-renewals.
- Review dividend sustainability against taxable income, cash generation, funding needs and REIT distribution requirements; also assess external-management fees and potential incentive fees.