Q4 2019 Earnings Call

March 3, 2020

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Pardon me ladies and gentlemen, the granite conference will begin in a few moments. Please continue to hold again. The granite Pointe conference will begin momentarily. Please continue to hold.

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good morning. My name is Kate and I will be the conference facilitator at this time. I would like to welcome everyone to Granite Point mortgage trust fourth quarter 2019 Financial results conference call. All participants will be in listen-only mode after the speakers remark. They'll be a question-and-answer. I would now like to turn the call to crispy de with investor relations for granted point.

Thank you and good morning everyone. Thank you for joining our call to discuss Granite points. Fourth quarter 2019 Financial results with me on the call. This morning are Jack Taylor our president and CEO dead mercenary bassic our CFO Steve Alford our CIO and Steve plus our Co after my introductory comments, Jack will review our business activities and a free cap of market conditions leave a part will discuss our fourth-quarter origination our portfolio and Pipeline and Martian will highlight key items from our financial results.

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press release

So Financial tables associated with today's call as well as our form 10-q will follow yesterday with the SEC. We do not have a copy. You may find them on our website or on the wrong website at sec.gov in our earnings release and slide which are now posted in the investor relations section of our website. We have provided a Reconciliation of gaap to non-gaap financial measures.

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We urge you to review this information in conjunction with today's call. I would also like to mention that this call is being webcast and may be accessed on our website in the same location.

Watching the call over to Jack. I would like to remind you that remarks made by management during this conference call and the supporting slide may include forward-looking statements forward-looking statements reflects our views regarding future events, and it's typically associated with the use of words such as anticipate expect estimate and believe or other such words. We caution investors not to rely on Dually on forward-looking statements. They apply risks and uncertainties and actual results May differ materially from expectations. We urge you to carefully consider the risks described. I'm filing with the SEC which may be obtained in the fcc's website at sec.gov. We do not undertake any obligation to update or correct any forward-looking statement if later events proved to be inaccurate. I will now turn the call over to Jack.

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Thank you, Chris, and good morning everyone. We would like to welcome you all and thank you for joining our fourth quarter and full-year.

2019 earnings call 2019 was a very successful year for granted point. We had strong growth across the board as we capitalized on attractive Market opportunities. We grew our direct loan origination to a record two billion of total commitments, which was 27% higher than the prior-year while maintaining our emphasis on credit underwriting and Loan structuring our portfolio the outstanding principal balance increased to 4.3 billion or 33% higher than a year end 2018 our total portfolio commitments inclusive a future fundings. We're over a year rent the support the growth of our Investment Portfolio. We expanded our funding sources increased our financing capacity extended the majority of our liabilities lowered are all in, funds restructured our covenants and strategically grew our Equity Capital base.

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Over the course of the year. We raised over two hundred million of common Equity above Book value. We issued our second commercial real estate Cielo financing $825 million of loans, am attractive terms and secured additional match term non-recourse and not marked Market financing with a two-year reinvestment.

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We added a new 150 million dollar non mark-to-market financing facility carrying favorable structure cost of funds in advance rates. We generated higher overall earnings in 2018, despite a significant decline in short-term interest rates and lower lending spreads.

Our net income for the year increased to $70 billion or 7% above 2018 and our core earnings grew to $74 billion or 13% from last year.

We closed our robots 2019 performance with a record level of origination activity and pays the capital deployment in the fourth quarter in the quarter. We closed 11:00 new loans with total commitments of over six hundred and seventy million again, illustrating the strong capabilities of our direct origination platform.

We found it over six hundred million of loan balances in the fourth quarter, which more than offsets a 300 million of loan prepayments and resulted in strong portfolio growth of over 17% versus the prior quarter.

With our record fourth-quarter loan fundings and our forward pipeline of about two hundred million of new loans. We have committed the majority of our investable Capital going forward. We intend to maintain an appropriate level of liquid providing us with operational and funding flexibility as we close new loans and reinvest capital from loan repayment. We believe that the commercial real estate lending environment remains attractive. We continue to see a healthy flow of attractive investment opportunities meeting our credit quality and return thresholds. We fully intend to remain disciplined and accessing Capital markets rashly and with a big focus on generating attractive risk-adjusted returns to our shareholders over the long term.

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We are pleased with this phone going credit performance of our portfolio which at the end of 2019 consisted of 122 Investments since the Inception of our business in 2015. We have not realized any credit losses nor have we created any specific loan loss Reserves.

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I need to emphasize the phone Capital into loan Investments with attractive credit characteristics that are collateralized by high-quality properties located at attractive markets with strong sponsors are investing strategies revolves around building a portfolio of it as well Diversified and with an overall guiding philosophy of protecting investors Capital across Market Cycles.

The vast majority of our loans incorporate live our floors as a partial offset the decline in short-term rates as we discussed on our last call a significant portion of our portfolio was an older vintage investment banker with much lower Libor floors and less than 10% of our portfolio headlight were floors that were in the money going into the fourth quarter.

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As a result further declines in short-term rates over the course of the quarter put pressure on our financial performance despite record loan funding activity and strong portfolio growth currently bout half of our library floors are in the money which for the time being significantly Alters our portfolio sensitivity to further potential declines in short-term rates.

Good morning. My name is Kate and I will be the conference facilitator at this time. I would like to welcome everyone to Granite Point mortgage trust fourth quarter 2019 Financial results conference calls. All participants will be in listen-only mode after the speakers remarks. There will be a question-and-answer. I would now like to turn over the call to cross with investor relations for granted point.

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We have a strong 2019 making significant progress and executing our business plan while generating a record volume of direct loan origination further improving the profile of our liabilities wage strategic Lee growing our company. We are excited about the future of our business and look forward to further successes in 2020 while focusing on generating attractive risk-adjusted returns for our shareholders. I know I will turn the call over to Steve South Park to discuss our investment activity in more detail.

Thank you and good morning everyone. Thank you for joining our call to discuss Granite points. Fourth quarter 2019 Financial results with me on the call this morning are Jack Taylor our president and CEO dead Morrison our basic our CFO Steve Alpert our CIO. It's Steve plus our clo after my introductory comments, Jack will review our business activities and a free cap of market conditions leave a part will discuss our fourth-quarter origination our portfolio and Pipeline and Martian will highlight key items from our financial results.

Thank you, Jack. And thank you all for joining your call this morning.

2019 represented a record year for our business in terms of Loan Production volume. We directly originated two billion dollars of total loan commitments across 45 new Investments with an average loan size of about forty-five million compared to an average size of 36 million in 2018. We would expect that our average loan size will continue to increase as we further grow our business allowing us realize efficiencies and additional benefits of larger-scale.

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pressure

Please for financial tables associated with today's call as well. As our form 10-q will follow yesterday with the SEC. We do not have a copy. You may find them on our website or on the Xbox website at sec.gov in our earnings release and slide which are now posted in the investor relations section of our website. We have provided a Reconciliation of gaap to non-gaap financial measures.

We funded.

Full of over one point eight billion of loan balances in 2019 comprised of about 1.6 billion of initial fundings of the new loans and an additional $238 million of funding some more pre-existing.

I won't be payments for the year totaled about $778 million or about 24% of the outstanding principal balance of our portfolio at the end of 2018, which was largely in line wage expectations considering the composition and seasoning of our lungs.

The urge you to review this information in conjunction with today's call. I would also like to mention that this call is being webcast and may be accessed on our website in the same location.

Watching the call over to Jack. I would like to remind you that remarks made by management during this conference call and the supporting slide may include forward-looking statements forward-looking statements reflects our views regarding future events, and it's typically associated with the use of words such as anticipate expect estimate and believe or other such Words Be caution investors not to rely on Dually on forward-looking statements say apply risks and uncertainties and actual results May differ materially from expectations urge you to carefully consider the risks described. I'm filing with the SEC which may be obtained in the fcc's website at sec.gov. We do not undertake any obligation to update or correct any forward-looking statement if later events proved to be inaccurate. I will now turn the call over to Jack.

Driven by record low on funding and manageable prepayments our portfolio balance increased by about 33% year-over-year to 4.3 billion and 5 billion inclusive of our future funding commitment.

Over the course of the year the aggregate credit spread on our portfolio declined by about sixty basis points to Libor plus 426 driven by the spread compression on new Investments combined with three packs of loans with his higher historical yields.

During 2019. We continue to see new loan spreads Titan with a significant decline in short-term rates. We saw a leveling off of the spread compression and the latter part of the year off portfolio continues to exhibit strong credit characteristics and is well Diversified across property types markets and sponsors the weighted-average stabilized LTV across our portfolio is 64% off and Senior loans comprise over 98% of our investments.

Thank you, Chris, and good morning everyone. We would like to welcome you all and thank you for joining our fourth quarter and full-year.

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2019 earnings call 2019 was a very successful year for granted point. We had strong growth across the board as we capitalized on attractive Market opportunities. We grew our direct loan origination to a record two billion of total commitments, which was 27% higher than the prior-year while maintaining our emphasis on credit underwriting and Loan structuring our portfolio the outstanding principal balance increased to 4.3 billion or 33% higher than a year end 2018 our total portfolio commitments inclusive a future fundings. We're over five billion a year rent the support the growth of our Investment Portfolio. We expanded our funding sources increased our financing capacity extended the majority of our liabilities lowered. Our all-in cost of funds restructured our covenants and strategically grew our Equity Capital base.

Over the last three months of 2019. We continued our strong momentum and had another record quarter in terms of loan originations and findings. We close 11:00 new loans with total commitments of overt 670g refunded over six hundred million of loan balances which consisted of $560 million of initial fundings of new loans and about eighty six million of fundings of our pre existing loan commitments month.

Is this thing with the theme for the full year the newly originated loans are secured by high-quality properties mainly in the office and multifamily sectors which comprise over 77% of queue for reservations and have a well-balanced geographical exposure.

Pardon me ladies and gentlemen, the granite conference will begin in a few moments. Please continue to hold again. The granite Pointe conference will begin momentarily. Please continue to hold.

our fourth quarter origination have attractive credit characteristics which with experience sponsors a weighted-average stabilized LTV of 67% and a weighted average yield of Libor plus 349

Over the course of the year. We raised over two hundred million of common Equity above Book value. We issued our second commercial real estate Cielo financing $825 million of loans thousand active terms as secured additional match term non-recourse amount mark-to-market financing with a two-year reinvestment.

during the fourth quarter. We realized about three hundred million of prepayments and principal amortization driven primarily by the further seasoning of our portfolio.

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Ford pipeline today, we have generated aggregate new loan commitments of about two hundred million, which carry over $125 million of initial fundings. We expect these loans to close by the end of the first quarter that's typical closing conditions so far. We have funded over $125 million of loan balances which includes funding of about forty million from a prior commitments. Our pipeline includes loan collateralized by office industrial and hotel properties with strong credit profiles and an estimated weighted average yield in the low to mid-30s over Libor and a weighted average stabilize LT below 60%

Saturday new 150 million dollar non mark-to-market financing facility carrying favorable structure cost of funds in advance rates. We generated higher overall earnings in 2015, despite a significant decline in short-term interest rates and lower lending spreads.

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Our net income for the year increased to $70 billion or 7% above 2018 and our core earnings grew to $74 billion or 13% from last year.

Additionally we anticipate Loan repayments in the first quarter of over two hundred million since the end of the year. We have realized about 45 million of loan prepayments.

Looking further into twenty-twenty. We continue to see strong flow of attractive lending opportunities considering our current balance sheet. Our annual volume origination will largely depend on the availability of capital as well as the overall economic environment and lending market conditions consistent with our prior experience as our portfolio continues to season we anticipated pace of loan repayments of about 25% plus or minus of our portfolios outstanding principal balance or over 1 billion in 2020. However, the actual timing and volume would be payments are difficult to predict as they will vary over time.

We found it over six hundred million of loan balances in the fourth quarter, which more than offsets the three hundred million of loan prepayments and resulted in strong portfolio growth of over 17% versus the prior quarter.

With our record fourth-quarter loan fundings and our forward pipeline of about two hundred million of new loans. We have committed the majority of our investable Capital going forward. We intend to maintain an appropriate level of liquid providing us with operational and funding flexibility as we close new loans and reinvest capital from loan repayment. We believe that the commercial real estate lending environment remains attractive. We continue to see a healthy flow of attractive investment opportunities leading our credit quality in return thresholds. We fully intend to remain disciplined in accessing Capital markets rationally and with a big focus on generating attractive risk-adjusted returns to our shareholders over the long term.

We are fortunate that.

After several years in business is a public company and following our record year of production volume. Random Point has a well-established presence in the commercial real estate lending Market as a reliable lending counterparty to a strong roster of repeat Bowers and Brokers with a direct origination platform that can efficiently deploy significant amounts of capital into attractive lending opportunities to continue to execute on our strategy and not a business in the future. We are confident that the franchise value we have created will accrue to our shareholders benefit over time and will now turn the call over to Mark's in for a more detailed review of our financial results.

We are pleased with the strong ongoing credit performance of our portfolio which at the end of 2019 consisted of 122 Investments since the Inception of our business in 2015. We have not realized any credit losses nor have we created any specific loan loss Reserves.

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Thank you, Stephen. Good morning, everyone. Thank you for joining us this morning.

Origination and that loan funding in the fourth quarter of continue to a strong portfolio growth and it resulted in a healthy increase in net interest income over about 5% versus last quarter.

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Send you to emphasize deploying Capital into loan Investments with attractive credit characteristics that are collateralized by high-quality properties located and attractive markets with strong sponsors. Our vets instead of revolves around building a portfolio. That is well Diversified and with an overall guiding philosophy of protecting investors Capital across Market Cycles.

Lower labor and larger volume of loan repayments with higher historical spreads versus those on our newly originated loans resulted in our top-line growth trailing that of our portfolio balances off the point of reference the three hundred million dollars of loan repayments. We realize during the fourth quarter carried credit spreads of about 100 basis points wider than the loans. We originated during the quarter.

The vast majority of our loans incorporate Library floors as a partial offset the decline in short-term rates as we discussed on our last call a significant portion of our portfolio was in older vintage investment banker with much lower Libor floors and less than 10% of our portfolio has live or floors that were in the money going into the fourth quarter.

find the fact that

Overall realize deal in our portfolio declined by about forty basis when versus Q3 that interest margin remained relatively stable as our cost of funds also declined driven by short-term rates and financing spreads on new assets.

Increase in the net interest income of about $0.02 for sure was largely offset by higher expenses resulting in our net income of 17.7 million or 32 cents per share and our corner of 18.7 million or 34 cents per share remaining relatively unchanged versus a third-quarter the increase in our other operating expenses in Q4 was related to certain professional fees and slightly higher compensation costs a book value of December 31st was $18.58 per common share.

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Turning to our liabilities along with the growth of our portfolio the outstanding balance on our credit facilities increased from 1.8 billion to over two billion our total borrowing capacity inclusive of our option to upsize one of our facilities remains relatively unchanged that are out 2.6 billion.

Thank you, Jack. And thank you all for joining your call this morning.

So the fourth quarter, we deployed our excess liquidity from the prior. Which allowed us to grow the portfolio.

I'm told leverage including the non-recourse non, mark-to-market. Clo debt increased around three point three times debt-to-equity and our recourse leverage was at 2.2 * 6 * total leverage to remain above three times, but not to significantly exceed 3 and 1/2 * then two Equity as we originated new loans and redeploy our capital from repayments during the 4th, We moved a forty million dollar loan into a risk category rating of four this and the other loan that we have created for account for only a little over 1% of our life. We have total committed balance movements up and down in our Rich rankings from quarter-to-quarter and overtime our regular part of the traditional lending business.

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We found it.

Full of over 1.8 billion of loan balances in 2019 comprised of about 1.6 billion of initial fundings of the new loans and an additional $238 million of funding some more pre-existing.

I won't be payments for the year totaled about $778 million or about 24% of the outstanding principal balance of our portfolio at the end of 2018, which was largely in line with expectations considering the composition and seasoning of our lungs.

Like to end my remarks by briefly discussing the new accounting standards on current expected credit losses or Cecil as you may know Cecil became effective for granted Point wage other similar public companies in January 1st, 2020 and requires lenders to report upfront a loss Reserve that is an estimate of Lifetime losses and all of our loans. This reserved cannot be zero a few exceptions.

Driven by record low on funding and manageable prepayments our portfolio balance increased by about 33% year-over-year to 4.3 billion and 5 billion inclusive of our future funding commitment.

given the lack of

A long-lost says are specific loss reserves since the Inception of our business who we liked it to use a loss given default analytical model combined with a subset of historical download data license from Trap to help us estimate our initial Cecil Reserve.

I was this close in our 10-K we expect to record an initial Cecil reserve of approximately 18 and 1/2 million dollars or thirty seven basis points of our aggregate loan commitments which equals to about $0.04 per share impact on Book value.

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Beginning with the first quarter of 2020 any additional adjustments to the Cecil Reserve will be reflected in our gaap. Net income.

further discussion of the Cecil topic, please refer to our ten k

Thank you again for joining us today. And now I will turn the call back to jack for some additional remarks.

Thank you Martin. I want to address one additional topic related to our business as you may have seen in our press release. We also announced yesterday that granted Point has agreed to a process with this external Pine River Capital Management LP to internalise, the company's management function an independent Committee of our board of directors has been negotiating the internalization of the half of the company connected with the completion of the internalization the company's next to continue to be managed by the current strong senior management team along with other personnel providing services to Grant a point who are currently employed by Pine River Palm to whom the independent committee expects to extend offers of employment.

our fourth quarter origination have attractive credit characteristics which with experience sponsors a weighted-average stabilized LTV of 67% and a weighted average yield of Libor plus 349

during the fourth quarter. We realized about three hundred million of prepayments and principal amortization driven primarily by the further seasoning of our portfolio.

details are expected to be announced was finalized in several months and a final agreement in definitive documentation, or

To be delivered and executed at that time. There was no further information. We can provide at this time regarding the internalization process and as directed by legal counsel. We are not in a position to respond to any questions related to this process.

turning to

For type line today, we have generated aggregate new loan commitments of about two hundred million, which carry over $125 million of initial fundings. We expect these loans to close by the end of the first quarter back to typical closing conditions so far. We have funded over 125 million of loan balances which includes funding of about forty million from our prior commitments. Our pipeline includes a collateralized by office industrial and hotel properties with strong credit profiles and an estimated weighted average yield in the low to mid-30s over Libor and a weighted-average stabilized LT bulb 60%

Also, there can be no assurance that the internalization will be consummated. Thank you again for joining us today. And now I will ask the operator to open the call to questions.

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We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the keys to withdraw your question, please press start then to our first question is from Jake Romani from KBW. Go ahead.

Additionally we anticipate Loan repayments in the first quarter of over two hundred million since the end of the year. We have realized about 45 million of loan prepayments.

Good morning, everyone. This is Ryan on 4J. Thanks for taking the questions was wondering if you could talk about the earnings outlook for 2020 based on the current portfolio the pipeline off your leverage expectations as well as the near-term impact from Libor floors, particularly considering the fed's move this morning. You know, what what is a reasonable assumption for the quarterly run a GPS and then as a follow-up to that, you know, what are the boards current Thoughts with respect to the current dividend relative to your expected level of of run-rate earnings.

Looking further into twenty-twenty. We continue to see strong flow of attractive lending opportunities considering our current balance sheet. Our annual volume origination will largely depend on the availability of capital as well as the overall economic environment and lending market conditions consistent with our prior experience as our portfolio continues to season we anticipated pace of loan repayments of about 25% plus or minus of our portfolios outstanding principal balance or over 1 billion in 2020. However, the actual timing and volume of three payments are difficult to predict as they will vary over time.

Good morning. Thank for joining us and thank you for the question. So there's a few questions here. So I'll take a couple and I'll I'll have Steve Alford address to the library floor question first. Let me just offer like obviously file form 10-K and 10-q as we said earlier. So I apologize for that in terms of the runway to earnings for the year. Look it's it's hard to you know, our policy is not to provide any guidance in our earnings money. It's hard to predict what the exact numbers may or may not be as you can imagine as the portfolio moves around with three payments in new findings, you know with short-term rates off and spreads moving around. It's it's really hard to predict. So, you know, I'm not going to provide any guidance on that in terms of Leverage as you have seen. We ended up with three point three times that to actually roughly on total leverage basis. We expect that our leverage will be between 3 and 3 and 1/2 over the course of the year as we manage our balance sheet and reinvest Capital dead.

We are fortunate that after several.

Years in business is a public company and following our record year of production volume Grant a point has a well-established presence in the commercial real estate lending Market as a reliable lending counterparty to a strong roster of repeat borrowers wage workers with a direct origination platform that can efficiently deploy significant amounts of capital into attractive lending opportunities to continue to execute on our strategy and grow our business in the future. We are confident that the franchise value we have created will accrue to our shareholders benefit over time. I will now turn the call over to Mark's in for a more detailed review of our financial results.

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Thank you, Stephen. Good morning, everyone. Thank you for joining us this morning.

Origination and that loan funding in the fourth quarter of continue to a strong portfolio growth and it resulted in a healthy increase in net interest income over about 5% versus last quarter.

obviously that may vary if we

Need to add additional Capital if we have you know, large volume of three payments, but I I would think about 3 to 3 and 1/2 of the other Target in terms of the dividend life, you know as we discussed our last full obviously there are several factors that affect our profitability and also monthly dividend going forward, you know, our Focus remains and supporting our dividends to a core profitability of the business over long of a long-term and you know, the board obviously has the ultimate decision-making power around around the dividend the available return to normal strategy officer of big factor here, you know, we're not oblivious to the fact that it returns to come down. He's over the last couple of years. So as we look at the forward forward returns and what what we generate today, that's a factor. I mentioned our last call our first clo, you know to static transaction that has significantly be leveraged since we issued it. It's something that we looking at it that closely and we're we're taking off

find the fact that the

Overall real ideal in our portfolio declined by about forty basis when versus Q3 on that interest margin remained relatively stable as our cost of funds also declined driven by short-term rates and financing spreads on new assets.

Increase in the net interest income of about $0.02 for sure was largely offset by higher expenses resulting in our net income of 17.7 million or 32 cents per share and our corner of 18.7 million or 34 cents per share remaining relatively unchanged versus the third quarter the increase in our other operating expenses in Q4 was related to certain professional fees and slightly higher compensation costs a book value of December 31st was $18.58 per common share.

We may take some action to.

To improve the efficiency of that structure additionally as as you as you know, we announced the process to internalize management that will as you can imagine have potentially off the profitability in the dividend of the company. So but when we're in constant discussions with our board regarding the dividend level and we will announce any adjustments as necessary as dead them appropriate. I'll let Steve all apartments answer the liable for question. Hey Rhonda morning and Steve. It's a jacket mentioned in his remarks that going into the month of December about 10% of our portfolio marble floors are in the money. That number was about 36% by year-end and we also mentioned on the quad earlier that were a little over 50% off in the money a lot more floors as of now about 98% of the portfolio have live our floors. So it'll be a positive short for an impact almost live or floors continuing to kick Into the Dead.

So the fourth quarter, we deployed our excess liquidity from the prior. Which allowed us to grow to portfolio.

I told leverage including the non-recourse known mark-to-market clo debt increased to 3.3 * debt-to-equity and our recourse leverage was at 2.2 * life expect our total leverage to remain above three times, but not to significantly exceed 3 and 1/2 * then two Equity as we originated new loans and redeploy our capital from repayments during the fourth grade. We moved a forty million dollar loan into a risk category rating of four this and the other loan that we have created for account for only a little over 1% of our life. We have total committed balance movements up and down in our risk rankings from quarter-to-quarter and overtime our regular part of the traditional lending business.

I don't like work continues to

Obviously new loans that were originating now, we'll have lower Libor floors that law towards coming down but they'll be a positive impact on the portfolio to the extent of like work continues to drop dead. Thanks. Thanks for all that helpful call you guys and then I guess you know looking at the pipeline. I think you mentioned spread in the low to mid-30s over Libor. Can you say where you know pre expense r o eyes are off today for maybe the overall portfolio and that Pipeline and if in general with the recent volatility we've seen if you've seen spreads widened recently.

Like to end my remarks by briefly discussing the new accounting standards on current expected credit losses or Cecil as you may know Cecil became effective for granted points off their similar public companies in January 1st, 2020 and requires lenders to report upfront a loss Reserve that is an estimate of Lifetime losses and all of our loans. This reserved cannot be zero with a few exceptions.

So in terms of returns that we continue to see returns and and that kind of low double-digit leopard are obviously it, you know any specific return assist with depending on a specific leverage in financing they would have on that asset. So as those which returns obviously over the last couple of years to come down a little bit we still see them and kind of low double-digits. I'll let Steve all for the answer to the other bulbs sure. So in in in terms of yield and and I think Morris and discovered some of this but we sit on the floor earlier that for q1. We're looking at home spread in the low-to-mid 30s over Libor plus or minus that's always going to be a function of what specific deals we do in a particular quarter an active obviously very often close about a year and but that's kind of what we're seeing right now as far as predictions for 2020 Pacifica with the with the FED move today. It's it can only hard to predict what might happen birth.

given the lack of

Those are specific lost Reserve since the Inception of our business. We'd like to to use a loss given default analytical model combined with a subset of historical download data license from trap us estimate our initial Cecil Reserve.

I was just closing our 10-K we expect to record an initial Cecil reserve of approximately 18 and 1/2 million dollars or 37 basis points of our aggregate loan commitments which equals to about $0.04 per share impact on Book value.

Beginning with the first quarter of 2020 any additional adjustments to the Cecil Reserve will be reflected in our gaap. Net income.

further discussion of the Cecil topic, please refer to our ten k

Thank you again for joining us today. And now I will turn the call back to jack for some additional remarks.

Thank you Martin. I want to address one additional topic related to our business as you may have seen in our press release. We also announced yesterday that granted Point has agreed to a process with this external Pine River Capital Management LP to internalise, the company's management function an independent Committee of our board of directors has been negotiating the internalization of the half of the company connection with the completion of the internalization the company's next to continue to be managed by the current strong senior management team along with other personnel providing services to Grand Pointe who are currently employed by Pine River Palm to whom the independent committee expects to extend offers of employment.

We could see.

Like fighting over the last couple of years is more than just mentioned some of that not all that was from Libor going up. Now that Libor has been going down what we've seen at that time. It seemed to have stabilized and they're now they've been kind of in a in a range but there's a lot of factors that play it really depends on any particular asset that deal size the after type of location off, you know fundamentals remain strong weather spread will whine out I think we may need to be safe and regarding credit, you know, you highlighted the downgrade of the $4,000 loan to risk for reading any color there on the, you know, the asset the sponsor of the business plan and and how that's evolved in what led to the downgrade.

Details are expected to be announced was finalized in several months and a final agreement in definitive.

Imitation are expected to be delivered and executed at that time. There's no further information. We can provide at this time regarding the internalization process and as directed by legal counsel. We are not in a position to respond to any questions related to this process.

Sure, Ryan Steve again. So just at 12:31, the overall quality of the portfolio is high. We have no loans that are paired or arnaud status. So we still very good about credit quality overall. As far as your question about the specific Loan in Q4. We rich Frank alone that secured by a newer vintage students choosing property in Kentucky to a 4 because the property was behind a business plan and also other issues are related to the property as we always do we're monitoring the asset. We're both options with the borrower too early to go into further detail other than this loan on the other line that marks are referenced earlier. We have no other loans that are rich Frank four or five months has more can also been shaded. This is the nature of this business that some loans will perform according to plan some little see some of the lag, but we're closely monitoring the entire portfolio page.

Also, there can be no assurance that the internalization will be consummated. Thank you again for joining us today. And now I will ask the operator to open the call to questions.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you're using a speaker phone, please pick up your handset before pressing the key to withdraw your question, please press star then to our first question is from Jake Romani from KBW. Go ahead.

Good morning, everyone. This is Ryan on 4J. Thanks for taking the questions was wondering if you could talk about the earnings outlook for 2020 based on the current portfolio. The pipeline your leverage expectations as well as the near-term impact from Libor floors, particularly considering the fed's move this morning. You know, what what is a reasonable assumption for the quarterly run a GPS and then as a follow-up to that, you know, what are the boards current Thoughts with respect to the current dividend relative to your expected level of of run-rate earnings.

high-level, we have no

Major concerns on the credit quality or performance. Thanks for taking the questions guys.

Our next question is from Doug harder from credit sweet. Go ahead.

Thanks Marcin. You mentioned that you had the higher G&A expenses this quarter, you know, just talk about whether we should expect some of that to continue in a you know, in the early parts of 2020 or if this was kind of truly more one-off in nature.

Good morning. Thank for joining us and thank you for the question. So there's a few questions here. So I'll take a couple and I'll I'll have Steve Alford address with the library floor question first. Let me just walk like obviously file form 10-K and 10-q as we said earlier. So I apologize for that in terms of the runway to earnings for the year. Look it's it's hard to you know, our policies not to providing a guy that's in our earnings money. It's hard to predict what the exact numbers may or may not be as you can imagine as the portfolio moves around with three payments in new findings, you know with short-term rates off and spreads moving around. It's it's really hard to predict. So, you know, I'm not going to provide any guidance on that in terms of Leverage as you have seen. We ended up with three point three times that to actually roughly on total leverage basis. We expect that our leverage will be between 3 and 3 and 1/2 over the course of the year as we manage our balance sheet and reinvest Capital dead.

Hey. Good morning. Thanks for joining us. I think you know as as as I said some of the expense increase was related to certain professional fee. They they were associated with the installation process that we announced as well. So it's hard to predict what I would say, we may incur some additional costs related to the process of the next few months, but they you know, they obviously would be more of a non-recurring nature as looking into the future, you know, alcohol overall expense drive-thru obviously depend on on the outcome of the probation office when I would say for the time being for your modeling purposes using Q4. That's kind of a near-term run wait, it's probably a decent decent assumption, but there will be some some variability all the decoder quarterback.

obviously that may vary if we

Additional Capital if we have you know, large volume of three payments what I I would think about 3 to 3 and 1/2 of the other Target in terms of the dividends, you know, as we discussed our last call obviously there are several factors that affect our profitability and ultimately the dividend going forward, you know, our Focus remains and supporting their dividends profitability of the business over long of a long-term and you know, the board obviously has the ultimate decision-making power around around the dividend the available return to normal strategy officer a big factor here, you know, we're not oblivious to the fact that it returns to come down. He's over the last couple of years. So as we look at it forward forward returns and what what we generate today, that's that's a factor. I mentioned our last call our first clo, you know to static transaction that has significantly be leveraged since we issued it. It's something that we looking at it that closely and we're we're taking so long

All right, and then, you know as you look too at the option.

For for the first clo. Can you just talk about you know kind of how you're thinking about the options and you know, whether you know sort of size of magnitude of a potential savings from from those options.

Sure, look I think you know this deal obviously with a static deal when we issued it. We have a 2-year non-health. On it, which we issued a deal in May so long, you know that was potentially come up in May of this year. You know, there are a couple of different options that we can that we can tackle this with. I really don't want to get into all the details around it. But as you can imagine, you know off the loan payoff and and that deal, you know, we've been asked over $800 of loans initially. I would say somewhere around half of those loans. Have we pay, you know, you can be as to how The Leverage profile on those on that portfolio has changed. So there's definitely some Capital that can be potentially released from from those assets which which potentially maybe a creative depending on the Returns on that day after level returns from the new ones that we put on that's probably as far that would go over that into that system.

We may take some action to.

So I guess just on that last.

You know, if you're able to relive or some of those assets with that change that 3 to 3 and 1/2 leverage guidance you gave for the overall company or is that sort of Incorporated in there?

I think it'll depend on the type of Leverage. I think you know considering our current leverage profile. I would say we are confident with the three or three and half and staying around 3 and 1/2. If we are able to, you know, add to our non-recourse no more to Market term of financing which we believe we can as as as a reboot issue and it's yellow market and as a good credit counterparty for lunch, we may potentially go beyond 3 and 1/2, but it will really depend on the on the structure of the leverage. We we're very focused and risk management in managing a liability. So for the time being three or three and half months and you know because of what happens in the future,

I don't like work continues to

Obviously new loans that were originating now, we'll have lower Libor floors that law towards coming down but they'll be a positive impact on the portfolio to the extent of like work continues to drop dead. Thanks. Thanks for all that helpful call you guys and then I guess you know looking at the pipeline. I think you mentioned spread in the low to mid 300s over Libor. Can you say where you know pre expense Roi zorak today for maybe the overall portfolio and that Pipeline and if in general with the recent volatility we've seen if you've seen spreads widened recently.

Right. Thank you Marsha.

Our next question is from Steven laws from Raymond James. Go ahead.

Thank you. Good morning. Number of things have been hit on I appreciate the guidance on on spreads and the portfolio with capital, you know more or less fully invested here off and given the current stock valuation. Can you talk about you know options for for raising additional money? Would you look at another convert offering or or maybe other things you may consider along those lines?

Hi Steven, this is Jack Taylor. Thank you for your question. Yeah, we we are not a hundred percent invested. We still have Capital that we will be using to manage through our loan funding and our timing either we we will as we've sent before and a expectation of about 25% of our portfolio. Now that we're we've ramped up to be pre-paying we have originated about 3.6 billion of loans over the last two years. We were very comfortable to be able to do so 1 and 1/2 to 2 billion of well as per year and it says you are alluding to you know, with with the stable economic conditions and the continuation of the attractive black Department. Our growth will be largely dependent on availability of additional invested investable Capital. We are working things right now. I would say away from the convert Marco.

We could see.

Spike fighting over the last couple of years is Morrison just mentioned some of that not all that was from Libor going up. Now that Libor has been going down. What we've seen is that would spread seem to have stabilized and they're now they've been kind of in a in a range but there's a lot of factors that play it really depends on any particular asset the deal size the appetite the location off, you know fundamentals remain strong weather spread will whine out I think we may need to be fixed and regarding credit, you know, you highlighted the downgrade of the $8,000 loan to risk for rating any color there on the, you know, the asset the sponsor of the business plan and how that's evolved in what led to the downgrade.

that would really

Discount for for us that would allow for portfolio growth but not able to go into any detail on that at this point.

Okay, great and kind of follow up along those lines as we think about the size of the portfolio or company and especially as a I guess a good time to touch on is you're going through the internalization but, you know five billion total commitment, you know for Freedom at 3 or duration. So, you know kind of 1.7 billion kind of annual turnover. I know it's a little lower this year. But as we as we look forward with you know with an internally managed company, what type of annual production do you think you're capable? I realize not much changing from day to day with the the employees. But how do you anticipate growing the company as you look at the Outlook page for managing a larger portfolio?

Sure Steve again. So just at 12:31, the overall quality of the portfolio is high. We have no loans or repaired or on our own status. So we feel very good about credit quality overall. As far as your question about the specific Loan in Q4. We rich Frank alone that secured by a newer vintage students property in Kentucky to a 4 because the property was behind on business plan and also other issues are related to the property as we always do we're monitoring the asset. We're delivery options with the borrower too early to go into further detail other than this loan on the other loan that Marshall reference earlier. We have no other loans that are rich Frank four or five months has more can also mentioned. This is just the nature of this business that some loans will perform according to plan some little see some of the flags that were closely monitoring the entire portfolio and Ed.

The hours there's really two questions. It seems that's in place has been producing this large volume of for richer Nations and and we can continue to do that. That's why I said a little earlier that really the limits are on the availability of investable capital as as as this company grows and we intend to grow it off. We will be incrementally adding Personnel over time to handle a larger portfolio.

Great Marksman on the financials a I really think through the prepared remarks and the the Q&A so far you've hit on most of the the key points moving the model, but I wanted to touch on em, so from a gap standpoint going forward. You know, how should we think about the Cecil Reserve going through the year with the portfolio give or take stable and that kind of you know, low three is leverage, you know, if is it going to increase a little bit just as you as shorter-duration assets from day one pay off and replace it longer duration or what else might drive the the Cecil reserved outside of a deterioration your credit assumption. So going forward.

high-level, we have no

Concerns on the credit quality or performance. Thanks for taking the questions guys.

Our next question is from Doug harder from credit sweet. Go ahead.

Good morning, Stephen. Thank you for the question. Look I think you know as you're well aware, you know see some Reserve depends on a variety of different assumptions, you know loan term and maturity is one of them obviously the overall credit profile of the assets and you know, if there's a major major input into it as well as our expectations for the economic conditions of the projection. So it's it's really hard to say as to what's going to happen. I think you will have offsets happening with you know, new loans coming in all the loan paying off. So I think that you know, the way that I would situation with a portfolio is probably you know, unless we grow it significantly is probably going going going going to be relatively stable. But you know, as of right now, you know barring any massive changes to the market environment, we don't expect to see so the reserves to change significantly, but you know, there will be some variability quarter-to-quarter obviously as long

Hey. Good morning. Thanks for joining us. I think you know as as as I said some of the expense increase was related to certain professional fee. They they were associated with the installation process that we announced as well. So it's hard to predict what I would say, we may incur some additional costs related to the process of the next few months, but they you know, they obviously would be more of a non-recurring nature as looking into the future, you know, alcohol overall expense truck to obviously depend on on the outcome of improvisation office, but I would say for the time being for your modeling purposes using Q4. That's kind of a near-term run wait, it's probably a decent decent assumption, but there will be some some variability all the decoder quarterback.

The total 1818 and 1/2 million dollar estimate for the reserve for the initial Reserve obviously is a combination of loan specific Resource One on every single asset so there will be some movement here and there but not expect it to be significant. I appreciate the comments. Thanks very much.

all right, and then, you know as you look too at the

Options for for the first clo. Can you just talk about you know kind of how you're thinking about the options and you know whether you know sort of size of magnitude of a potential savings from from those options.

Thank you.

Again, if you have a question plus * then 1 our next question is from Rick Schoen from JP Morgan. Go ahead.

Sherlock, I think you know this deal obviously with a static deal when we issued it. We have a two-year-old. On it, which we issued a deal in May so long, you know that was potentially come up in May of this year. You know, there are a couple of different options that we can that we can tackle this with. I really don't want to get into all the details around it. But as you can imagine, you know off the loan payoff and and that deal, you know, we financed over $800 of loans initially. I would say somewhere around half of those loans have we paid you know, you can be as to how The Leverage profile on those on that portfolio has changed. So there's definitely some Capital that can be potentially released from from those assets which which potentially maybe a creative depending on the Returns on that day after level returns from the new ones that we put on that's probably as far that would go over that into that stuff.

Rick Rick Schoen

Our next question is from J. Ami from BW. Go ahead. Hi everyone. This is Ryan again on for Jaden just regarding, you know, the broader business and the potential to add adjacent business lines is management interested in greeting or acquiring other choice is to diversify Capital deployment and the earnings profile. I guess to that would come to mind would be, you know, the cmbs conduit business as well as potentially acquiring a g SE Homme multifamily license.

This is Jack Taylor. Thank you. And as we've discussed in the past, we are open to diversifying our business lines over time of the type that you were just mentioning and others. I would say that we are not currently moving towards anything lights at in the near-term, but it is something that we have that active discussions about over time and will continue to do so, okay and then just regarding coronavirus. Have you run through any liquidity scenarios in the case that this wage leads to a more significant and prolonged Capital markets disruption and how that might impact the business.

So I guess just on that last.

If you're able to relive or some of those assets with that change that 3 to 3 and 1/2 leverage guidance you gave for the overall company or is that sort of Incorporated in there?

I think it all depend on the type of Leverage. I think you know considering our current leverage profile. I would say we are comfortable with the three or three and half and staying around 3 and 1/2. If we are able to, you know, add to our non-recourse no more to Market term of financing which we believe we can as as as a reboot issue and it's yellow market and as a good credit counterparty for lunch, we may potentially go beyond 3 and 1/2, but it will really depend on the on the structure of the leverage. We were very focused on risk management in managing a liability. So for the time being 3 or 3 and 1/2 and you know depends on what happens in the future

Hey Ryan, it's Martin. Obviously. Yes, why we you know, we we manage our risk profile including our life believe in liquidity on a on a conservative basis and we take different considerations into account as out of that, you know, as as it's appropriate, we have not seen any disruptions in the you know, in the market we have we have no issues funding alone's off or lenders or happy to fund off with us. And it says you show they extended their commitments to us. We recently upside the couple of our of our facilities. So I feel free to come back on with the liquidity profile of the company and we obviously look at our covenants, but in in excess of that we look at our near-term and medium-term commitments which may or may not happen in the market. So I wouldn't have any specific concerns related to liquidity at this point.

Right. Thank you Marsha.

Our next question is from Steven laws from Raymond James. Go ahead.

Hi Steven, this is Jack Taylor. Thank you for your question. Yeah, we we are not a hundred percent invested. We still have Capital that we will be using to manage through our loan fundings and our timing the week. We we will as we've sent before and a expectation of about 25% of our portfolio. Now that we're we've ramped up to be pre-paying we have originated about 3.6 billion of loans over the last two years. We were very comfortable to be able to do so 1 and 1/2 to 2 billion of well as per year and it says you are alluding to you know, with with the stable economic conditions and the continuation of the attractive black Department. Our growth will be largely dependent on availability of additional Investments investable Capital. We are working things right now. I would say away from the convert Mark dead.

Okay. Thanks for taking the call.

Our next question is from ricocheting from JP Morgan.

Go ahead.

Good morning. This is Melissa on corrected a quick question about the repayment activity in the quarter. Wondering if there was any prepayment fee related income that wage during the quarter and if you guys have any Outlook as for prepayment income going forward.

I want to say good morning. Thanks for joining us. This is Marshall again. So we

a little bit of repayment incomes over $95,000. I will say that with the elevated level of prepaid that we had last quarter. We definitely recognized some additional Immortal Life of the loan discounts. He's obviously so as they prepare early. We you know, we we are more title fee's fast don't recognize them quicker. I would say the impact of that in our financials in Q4 was probably about fifty one and one and half to $0.02 somewhere in that range that's embedded in the interest income line going forward you have Steve said earlier, you know, we we estimate are pre-baked over billion dollars just looking at our principal balance of the portfolio and assuming the 25% plus or minus one rate. They will obviously be very ability to that number two quarter and it's really hard to predict which particular longer prepay which may have a prepayment fee with it. You know, we initially expected we would have silicone no.

That would release.

For us that would allow for portfolio growth but not able to go into any detail on that at this point.

Okay, great and kind of follow up along those lines as we think about the size of the portfolio or company and especially as a I guess a good time to touch on is you're going through the internalization but, you know five billion total commitment, you know for Freedom at 3 or duration. So, you know kind of 1.7 billion kind of annual turnover. I know it's a little lower this year. But as we as we look forward with you know with an internally managed company what type of of annual production do you think you're you're capable? I realize not much changing from day to day with the the employees. But how do you anticipate growing the company as you look at the Outlook page for managing a larger portfolio?

No prepayment income.

For example, one of the ones that had that had it got delayed and you know as a result that benefit evaporated. So it's really hard to to predict. I would say, you know, it's a part of our business office that we will have prepayment fees here and there but it it's really hard to predict what they're going to be on a quarterly basis.

The hours there's really two questions the team that's in place has been producing this large volume of origination and and we can continue to do that. That's why I said a little earlier that really the limits are on the availability of investable capital as as as this company grows and we intend to grow it off. We will be incrementally adding Personnel over time to handle a larger portfolio.

Okay understood and that is a follow-up question very much understand that you guys can't talk about the process around internal management. I was wondering if you're able to touch on what was driving the decision to internalize the management. Thanks very much.

Marcin on the financials a I really think through the prepared remarks and the the Q&A so far you've hit on most of the the key points moving the model, but I wanted to touch on C ROM. So from a gap standpoint going forward, you know, how should we think about the Cecil Reserve going through the year with the portfolio give or take stable and that kind of, you know current month as leverage, you know, if is it going to increase a little bit just as you as shorter-duration assets from day one pay off and replace it longer duration or what else might drive the the Cecil reserved outside of a deterioration your credit assumption. So going forward.

Hi, this is Jack. Actually we we can't touch on anything having to do with the reasons for or the process. It sucks. So we we've asked you to wait until we're able to speak more later.

Understood. Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to Jack Taylor for closing remarks.

Thank you. We'd like to thank everyone for joining us today and for everyone support of our business, we really appreciate it and we look forward to speaking with you all again soon.

Good morning, Stephen. Thank you for the question. Look I think you know as you're well aware, you know SQL Reserve hands in a variety of different assumptions, you know loan term and maturity is one of them obviously the overall credit profile of the assets and you know, it's is a major major input into it as well. As our expectations for the economic convergence of the projection. So it's it's really hard to say as to what's going to happen. I think you will have offsets happening with you know, new loans coming in all the loan paying off. So I think you know the way that I would situation with a portfolio is probably you know, unless we grow it significantly is probably going going going going to be relatively stable. But you know, as of right now, you know, boring any massive changes to the market environment, we don't expect to see so the reserves to change significantly, but you know, there will be some variability quarter-to-quarter obviously as long

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

The total 18 18 and half a million dollar estimate for the reserve for the initial Reserve obviously is a combination of loan specific resources on every single asset to so there will be some movement here in there, but I wouldn't expect it to be a significant right appreciate the comments. Thanks very much.

Thank you.

Again, if you have a question plus * then 1 our next question is from Rick Schoen from JP Morgan. Go ahead.

Rick Rick Schoen

Our next question is from J. Ami from BW. Go ahead. Hi everyone. This is Ryan again on for Jade Berg just regarding, you know, the broader business and the potential to add adjacent business lines is management interested in greeting or acquiring other job is to diversify Capital deployment and the earnings profile. I guess to that would come to mind would be, you know, the cmbs conduit business as well as potentially acquiring a g SE Homme multifamily license.

This is Jack Taylor. Thank you. And as we've discussed in the past, we are open to diversifying our business lines over time wage of the type that you were just mentioning and others. I would say that we are not currently moving towards anything lights at in the near-term, but it is something that we need active discussions about over time and will continue to do so, okay and then just regarding coronavirus. Have you run through any liquidity scenarios in the case that this wage leads to or more significant in prolonged Capital markets disruption and how that might impact the business.

Okay. Thanks for taking the fall.

Our next question is from ricocheting from

JPMorgan go ahead.

Good morning. This is Melissa on corrected a quick question about the repayment activity in the quarter. Wondering if there was any prepayment fee related income that wage wise during the quarter and if you guys have any Outlook as for prepayment income going forward.

I know it's a good morning. Thanks for joining us. This is Marshall again. So we recognize the little bit of free payment incomes over $95,000. I will say that with the the level of preface that we had last quarter. We definitely recognize some additional amortisation of the loan discounts. He's obviously so I think we pay early. We you know, we we are more size of feedback recognize them quicker. I would say the impact of that in our financials in Q4 was probably within one and one and half to $0.02 somewhere in that range that's embedded in the interest income line wage. Um going forward you have Steve said earlier, you know, we we estimate of rebates for the area of over billion dollars just looking at our principal balance of the portfolio and assuming the 25% off -1 rate. They will always be be very ability to that number quarter-to-quarter. It's really hard to predict which particular longer prepay which may

Have a prepayment fee.

With it, you know, we initially expected we would have to celebrate more than three payment info in the fourth quarter. For example, one of the loans that had that had it got delayed and you know as a result wage benefit evaporated. So it's really hard to to predict. I would say it's a you know, it's a part of our business that we will have prepayment fees here and there but it it's really hard to predict. What's going to be on a quarterly basis.

Hi, this is Jack. Actually we we can't touch on anything having to do with the reasons for or the whole process itself. So we we've asked you to wait until we're able to speak more later.

Understood. Thank you.

Thank you.

This concludes our question-and-answer session. I would now like to turn the conference back over to Jack Taylor for closing remarks.

Thank you. We'd like to thank everyone for joining us today and for everyone support of our business, and we really appreciate it and we look forward to speaking with you all again soon.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

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