Granite Point Mortgage Trust Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. The company is an externally managed mortgage REIT focused primarily on originating and holding senior floating-rate commercial real estate loans. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Interest income | $63.4 | $47.6 | $181.6 | $131.0 |
| Interest expense | $36.4 | $23.4 | $100.7 | $63.0 |
| Net interest income | $27.1 | $24.2 | $80.8 | $68.1 |
| Net income attributable to common stockholders | $17.4 | $16.5 | $52.5 | $46.3 |
| Diluted EPS | $0.32 | $0.37 | $1.00 | $1.04 |
| Common dividend declared per share | $0.42 | $0.42 | $1.26 | $1.20 |
- Net interest spread was 1.9% for Q3 and 2.0% for the first nine months, versus 2.4% and 2.2% in the respective 2018 periods. The filing does not provide a separate net profit margin.
- At September 30, loans held for investment were $3.93 billion, up from $3.17 billion at year-end 2018. The portfolio comprised 116 loans; approximately 98.4% of portfolio carrying value earned floating rates. Unfunded loan commitments were $667.0 million.
- Total assets were $4.31 billion and stockholders’ equity was $1.02 billion. Cash and cash equivalents were $137.4 million; restricted cash was $168.8 million, much of it representing CLO loan paydowns.
- Debt included $1.72 billion of repurchase agreements, $1.12 billion of securitized obligations, $114.1 million of asset-specific financing and $269.2 million of convertible notes. The company reported net debt-to-equity of 3.0:1.0 and indicated its intended company-level leverage would not exceed 3.5:1.0.
- Operating cash flow was $53.7 million for the first nine months; investing activities used $741.0 million and financing activities provided $870.1 million. Cash, cash equivalents and restricted cash totaled $306.2 million at period-end.
Changes versus comparable periods
- Q3 interest income rose 33% year over year, while interest expense rose 56%; net interest income increased 12% and common net income increased 5%. Diluted EPS declined from $0.37 to $0.32.
- For the first nine months, interest income increased to $181.6 million from $131.0 million and net interest income rose to $80.8 million from $68.1 million. Common net income increased, while diluted EPS fell to $1.00 from $1.04.
- Management attributed higher interest income mainly to portfolio expansion. Higher expense reflected financing for originations and acquisitions and additional convertible notes issued in October 2018. Per-share comparisons also reflect the increase in shares outstanding following 2019 equity offerings.
- Loans grew by $759.2 million from December 2018. Securitized debt increased by $470.6 million, and the company added $114.1 million of asset-specific financing; the $75.0 million revolving facility balance at year-end was repaid.
- Common equity was raised through underwritten and at-the-market offerings. The company issued approximately 11.0 million common shares during the first nine months, with net proceeds from common stock issuance of $207.4 million.
Outlook, risks and other notable items
- Management described commercial real estate debt markets as offering investment opportunities and expects most investments to remain directly originated senior floating-rate loans. No earnings or dividend guidance was provided.
- The $0.42 quarterly common dividend was maintained. Management intends to make regular quarterly distributions and comply with REIT distribution requirements; distributions remain subject to operating needs and debt service.
- Liquidity and refinancing risks include collateral margin calls, possible changes in lender funding, and the difficulty of selling illiquid commercial real estate loans quickly. About $1.03 billion of listed borrowings mature within 120 to 364 days; total listed debt maturities were $3.23 billion.
- Leverage-related covenants were close to limits: target asset leverage was 74.9% against a 75.0% maximum, total leverage was 76.2% against an 80.0% maximum, and interest coverage was 1.7:1.0 against a 1.5:1.0 minimum. Unrestricted cash was $137.4 million versus a stated covenant requirement of at least $40.1 million.
- The company reported no non-performing loans, impaired loans, or loan-loss allowance. One loan was rated higher risk; none were rated impaired/loss likely. Management cautioned that borrower, property, market and valuation conditions may change and actual results may differ from estimates.
- Expected credit loss accounting guidance was scheduled for adoption after this reporting period. The company expected adoption to increase its credit-loss allowance and reduce retained earnings; it had no allowance recorded at September 30.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether portfolio growth, loan yields and financing costs sustain net interest income and the common dividend, particularly as spreads narrowed year over year.
- Performance of the $667.0 million in unfunded commitments, the higher-risk loan, and loan exposures by property type and geography.
- Availability and terms of financing at upcoming maturities, the company’s ability to meet leverage and interest-coverage covenants, and exposure to margin calls.
- How the forthcoming expected-credit-loss standard affects reserves, retained earnings and reported results.
- Impact of further equity issuance and potential dilution on per-share earnings and distributions.