Granite Point Mortgage Trust Inc. — Q1 2020 10-Q
Reporting period: Three months ended March 31, 2020; 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 position
| Metric | Q1 2020 | Comparable / prior-period value |
|---|---|---|
| Interest income | $64.2 million | $58.1 million, Q1 2019 |
| Interest expense | $35.0 million | $32.0 million, Q1 2019 |
| Net interest income | $29.2 million | $26.1 million, Q1 2019 |
| Net income (loss) attributable to common stockholders | $(37.2) million; $(0.68) per diluted share | $16.9 million; $0.34 per diluted share, Q1 2019 |
| Net interest spread | 1.8% | 2.0%, Q1 2019 |
| Operating cash flow | $(39.3) million | $18.5 million, Q1 2019 |
| Cash and cash equivalents | $99.3 million | $80.3 million at December 31, 2019 |
| Total stockholders’ equity | $961.1 million | $1,019.1 million at December 31, 2019 |
At quarter-end, loans held for investment were $4.251 billion net of a $62.6 million allowance. Total debt was approximately $3.482 billion, including repurchase agreements of $2.072 billion, securitized debt of $982.3 million, asset-specific financing of $119.1 million, revolving facilities of $38.4 million and convertible notes of $270.0 million. The company reported a 3.5-to-1 debt-to-equity ratio, defined as total debt less cash divided by equity. Cash, cash equivalents and restricted cash together totaled $107.9 million.
Material changes and unusual items
- The company adopted the CECL credit-loss standard on January 1, 2020, recording an $18.5 million opening-equity charge. It then recorded a $53.3 million Q1 provision, largely reflecting revised COVID-19 economic forecasts; management described the combined CECL impact as approximately $71.8 million, or $1.31 per share.
- Net interest income increased year over year as the loan portfolio grew, but asset yields and financing costs declined with short-term interest rates; the reported net interest spread narrowed.
- Common stockholders’ equity declined from year-end, reflecting the CECL adoption, quarterly net loss and other comprehensive loss. The company declared no Q1 2020 common dividend and announced its suspension on March 25 to conserve liquidity; the Q1 2019 dividend was $0.42 per share.
- The portfolio comprised 122 loans with $4.342 billion unpaid principal; office represented 42.0% of carrying value, multifamily 25.0%, hotels 15.6% and retail 9.3%. Four loans were rated higher risk, with $104.5 million carrying value; none were rated loss likely. The filing reported no loans past due, on nonaccrual or in maturity default at quarter-end.
Outlook, risks and contingencies
Management provided no specific earnings or dividend guidance. It said COVID-19’s effects on borrowers, collateral values, repayment activity, financing markets and liquidity were highly uncertain. Management anticipated slower loan repayments and prepayments and potentially lower operating cash flow, including if interest payments are deferred or capitalized. It said it was focused on liquidity and balance-sheet strength and might raise capital, borrow, sell assets or adjust dividends. Management also expressed a long-term view that commercial real estate may again offer investment opportunities as markets normalize.
- Repurchase lenders may mark collateral to market and make margin calls. The company reported transferring cash or unencumbered assets to reduce advance rates on certain assets; further calls could pressure liquidity, and facility defaults could lead to acceleration, cross-defaults or loss of collateral.
- Unfunded loan commitments were $762.8 million, expected to be funded over time, subject to conditions. Financing counterparties generally were not obligated to fund their share of future commitments, and COVID-19 could constrain financing availability.
- COVID-19-related tenant closures, rent relief, lower occupancy and rents, and weaker property values could impair borrowers’ ability to pay. Borrowers had requested or were discussing deferrals, forbearance or other changes; no such modifications had closed by March 31.
- The company had agreed with its external manager to a process to internalize management, but definitive documentation, fees and completion timing were unresolved; completion was not assured. No related contingency liability was recorded because the amount was not reasonably estimable.
- Management reported compliance with the disclosed financial covenants at quarter-end, including unrestricted cash of $99.3 million against a stated minimum of $45.9 million, and interest coverage of 1.8-to-1 against a 1.5-to-1 minimum.
- Approximately 99.5% of loans and all borrowings other than convertible notes were LIBOR-indexed; LIBOR was expected to be discontinued after 2021. Alternative-rate outcomes remained uncertain.
Important facts for investors to verify
- Subsequent CECL allowances, loan risk ratings and borrower payment or modification activity, particularly in hotel, retail and other COVID-affected exposures.
- Liquidity, margin-call activity, collateral transfers, financing availability and the ability to meet $762.8 million of unfunded commitments.
- Whether the common dividend remains suspended and how capital needs affect leverage and shareholder dilution.
- Progress, cost and terms of the proposed manager internalization, including any termination-related obligations.
- Changes in portfolio cash yields, funding costs and the company’s net interest spread as rates and loan balances change.