Granite Point Mortgage Trust Inc. — Q1 2019 10-Q
Reporting period: Three months ended March 31, 2019. Granite Point is an externally managed mortgage REIT focused primarily on originating and investing in senior floating-rate commercial real estate loans.
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $58.1 million | $40.0 million in Q1 2018 |
| Interest expense | $32.0 million | $18.4 million in Q1 2018 |
| Net interest income | $26.1 million; 2.0% annualized net interest spread | $21.6 million; 2.2% spread in Q1 2018 |
| Net income attributable to common stockholders | $16.9 million; diluted EPS $0.34 | $14.6 million; diluted EPS $0.33 in Q1 2018 |
| Common dividend declared per share | $0.42 | $0.38 in Q1 2018 |
| Loans held for investment | $3.293 billion | $3.168 billion at December 31, 2018 |
| Total assets / stockholders’ equity | $3.487 billion / $981.1 million | $3.362 billion / $827.5 million at December 31, 2018 |
| Debt | $2.460 billion total: $993.6 million repurchase agreements, $1.198 billion securitized debt, no revolving facility borrowings, and $268.5 million convertible notes | $2.498 billion total at December 31, 2018 |
| Cash and liquidity | $65.4 million cash and equivalents; $120.4 million including restricted cash | $91.7 million cash and equivalents; $123.4 million including restricted cash at December 31, 2018 |
| Operating cash flow | $17.0 million | $13.1 million in Q1 2018 |
Material changes and business developments
- Interest income rose 45% year over year, reflecting portfolio growth, higher LIBOR and new originations. Interest expense also rose substantially, with higher borrowings, borrowing rates and convertible-note costs. Net interest income increased, but the reported spread narrowed from 2.2% to 2.0%.
- The loan portfolio grew to 98 loans with $3.318 billion unpaid principal and $3.293 billion carrying value. Senior loans were the predominant exposure; office properties represented 47.0% of loan carrying value. The portfolio’s weighted-average coupon was 6.4% and weighted-average contractual maturity was 1.9 years.
- The company completed a common-stock offering and underwriters’ option exercise, issuing 8.29 million shares and raising approximately $157.2 million net. Debt-to-equity declined from 3.0x to 2.5x, primarily due to equity issuance.
- A CLO transaction increased securitized debt to $1.198 billion from $654.3 million at year-end. Repurchase agreements fell to $993.6 million from $1.501 billion; the $75 million revolving facility was repaid.
- Quarter-end portfolio risk ratings included two loans rated 4 (“higher risk”); no loans were rated 5, and management reported no impaired or nonperforming loans and no loan-loss allowance.
Outlook, risks and unusual items
- No specific earnings or dividend guidance was provided. Management expects to continue financing investments through repurchase agreements, securitizations and debt and equity offerings. It currently expects company leverage not to exceed 3.5x debt-to-equity, subject to market conditions and other factors.
- Management views commercial real estate lending as an attractive opportunity, citing refinancing needs and constraints on traditional lenders. Results remain sensitive to borrower/property performance, credit spreads, rates, financing availability and investment opportunities.
- Liquidity and refinancing risks include short-term repurchase maturities, lenders’ collateral mark-to-market and margin-call rights, and potential difficulty renewing funding. The company reported tightened counterparty balance-sheet capacity, though no funding restrictions during the quarter.
- Unfunded loan commitments were $624.2 million, generally for lease-related or capital expenditures. Most portfolio investments and financing are floating-rate; approximately 98.4% of portfolio carrying value earned floating rates. Management’s model estimates a 100-basis-point rate increase would raise annualized net interest income by $10.6 million, while a 100-basis-point decrease would lower it by $6.6 million; actual results may differ.
- Other items to monitor include a new $0.2 million incentive fee, increased operating expenses, and related-party costs: the company is externally managed and reimbursed $6.6 million of manager costs in Q1. Management reported no material legal proceedings, and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether portfolio growth and higher asset yields can sustain earnings as funding costs rise and net interest spread compresses.
- Loan-level credit quality, property performance and the capacity to fund $624.2 million of commitments without weakening liquidity.
- Repurchase-facility renewal terms, collateral haircuts, margin-call exposure and the concentration of funding counterparties.
- The sustainability of the $0.42 quarterly common dividend relative to taxable income, cash generation and financing needs.
- The company’s reported leverage definitions and covenant headroom; quarter-end unrestricted cash was $65.4 million and the reported debt-to-equity ratio was 2.5x.