Q3 2020 Granite Point Mortgage Trust Inc Earnings Call
Good morning, everyone. My name is Jamie and I will be your conference facilitator.
At this time I would like to welcome everyone to granite point mortgage Trust third quarter 2020 financial results Conference call.
All participants will be listen only mode.
After the speakers remarks, there will be a question and answer period.
At this time I'd like to turn the conference call over to Kris Tuttle with Investor Relations for granted point, Sir please begin.
Thank you and good morning, everyone. Thank you for joining our call to discuss <unk> third quarter 2020 financial results.
With me on the call. This morning are John how our president and CEO Mark in her basket, our CFO, Steve Apart, a CIO and Steve <unk> our COO.
For introductory comments, Jack will review, our current business activities and provide a brief recap of market conditions.
The best part will discuss our portfolio and Marcy will highlight key items from our financial results.
The press release and financial tables associated with todays call as well as the form 10-Q filed yesterday with the FCC.
We do not have a copy you may find them on our website or on the Fccs website FCC docket.
In our earnings release, and slide, which now posted in the Investor Relations section of our website. We have provided a reconciliation of GAAP to non-GAAP financial measures.
Urge you to review this information in conjunction with todays call I.
I would also like to mention that this call is being webcast and maybe accessed on our website in the same location.
Before I turn the call over to Joc I would like to remind you that remarks made by management. During this conference call and the supporting slides may include forward looking statements.
Well were looking statements reflect 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 unduly or forward looking statements.
They imply risks and uncertainties and actual results may differ materially from expectations.
We urge you to carefully consider the risks described in our filings with the FCC, including our most recent 10-K and 10-Q reports, which maybe obtained on the attitude website actually see daqo.
We do not undertake any obligation to update a correct any forward looking statements. If later events prove them to be inaccurate I will now turn the call over to Jack.
Thank you, Chris and good morning, everyone. We would like to welcome you all and thank you for joining her third quarter 2020 earnings call.
We hope everyone continues to stay safe and help.
I'm happy to report that we made substantial progress since we last spoke as we continue to navigate this historic challenges middle market and the broader economy.
With the goal of further bolstering our balance sheet, we secured a $300 million strategic long term financing.
To enhance our liquidity and financial flexibility to take advantage of future growth opportunities as we develop.
With the improved liquidity, our board reinstated our quarterly dividend as our portfolio continues to generate strong burden on cash flows.
As previously disclosed we also entered into a definitive agreement with our manager to neutralize the companys loans.
This process is expected to be completed it would be on your which I will discuss a bit later.
Yeah.
We remain focused on actively managing our portfolio and working with our borrowers who don't want dislocation within the real estate market to preserve value first off.
We firmly believe that we have a lot of embedded value not only about assets, but also in our business given our deep and experienced team and an investment strategy.
We are confident that our time tested experience motion to multiple cycles will ultimately to with respawn returns to our stockholders over the long term.
Our portfolio continues to generate solid returns on overall credit performance remains strong as her sponsors protector property should be business interruption.
During the third quarter into the October payment data, we've collected over 99% of Arkansas soup that service.
And it's important that we did not have any loans risk, we would call I wouldn't need the permits for specific reserves for loan losses.
However, we do think through multiple credit cycles over a wall <unk>, what we've seen good real estate fundamentals on values walking she assuming overall.
We would be to lucky pull up we'll probably go to be honest adoptive mothers unemployment when I'm mindful of the potential for Bose.
That's the multiple parts of the component cost will drop out.
The ultimate cutting about problems all portfolio as well as on some others will significantly but part of the recovery path will be Tom maybe you can talk some commercial real estate owners of.
Property.
As we discussed on prior calls one of our strategic goals has been to bolster liquidity and further stabilize her life.
We are extremely pleased with the $300 million.
Obtained from a well known and respected institutional investors.
Our goal was to partner with the sophisticated institution that has a strong understanding of our business and she has helped boost the value upon us that's what goes into the future of the company.
This financing provides us the financial and operational flexibility to actively manage our business groups at certain times and positions us well for the future.
We have also maintained a constructive dialogue with us like Watson Counterparties, we continue to benefit from our long standing relationships with our vendors.
During the third quarter, we extended waterfall, Mark and Paul holidays.
Sitting other options as we continue our efforts to further stabilize our liabilities.
Over the past few months, we've seen real estate transaction that could be incrementally going slowly pick up.
A significant amounts of capital continued to perform about commercial real estate.
Investors pursuing deals as well as the sales people up investments backed by a hard asset classes in United States. The sentiment in the capital markets continues to improve.
We have experienced a pickup in loan prepayments, which reinforces our view with the credit quality of our assets.
We may well experience additional payments with the rest of the year, but the exact timing of time, it's very hard to predict.
As a result of our strategic term loan financing select loan sales and EBITDA.
As of last Friday, we carried a healthy cash balance of over $325 million.
Going forward, we believe it's prudent to maintain an elevated level of liquidity as we continue to assess the market as well as any potential new investment opportunities.
Given current conditions, our primary focus will be defensive with an emphasis on further stabilizing all liabilities and actively managing our investment portfolio.
I'm very pleased with him proud of the performance of our business and our entire team as we work through this difficult environment.
Our operating results in the third quarter showed the overall strength of our business with our portfolio generating strong returns.
We have further strengthened our balance sheet, while significantly improving our financial flexibility for the current market for future success and broke up.
We remain confident that our extensive experience managing through multiple cycles, and maintaining strong relationships with our borrowers and lenders, who preserve and lots of value for assets with a primary goal of delivering strong returns for our stockholders overtime.
Now before turning the call over just to help part I'd like to briefly comment on the internalization process you're.
In October we announced that we had entered into a definitive agreement with our manager to internalize the company's management function.
As part of this agreement Centerpoint will make a onetime cash payment for 44, and a half million dollars. Good management action, but the completion of the accruals section.
The internalization transaction, which was negotiated in the coupon Independent committee of our board of directors is expected to be effective on December 31st one <unk>.
At that time, the management agreement between.
The company and the manager terminated.
No longer company management incentive fees going forward.
Following the completion of the kind of the season, we will be an internally managed commercial real estate Finance Cup.
We anticipate an orderly and timely transition of wont required functions, including maintaining our excellent team such that our business will continue its mobile operations without interruption.
Our board of directors and the management team of highly competent cannibalization will enhance the companys value proposition and drive meaningful benefits for stockholders.
We believe that transition granted point to an internally managed company is an important milestone in our evolution.
A significant step in lowering cost more fully realizing benefits booked in earnings potential.
I would now like to turn the call over to Steve ballpark to discuss our portfolio in recent activities in more detail.
Thank you Jackie and thank you all for joining our call. This morning.
Our portfolio of senior first mortgage loan generally performed well in the third quarter delivering positive results benefiting in part from worldwide workforce.
Our borrowers have been highly engaged and have worked with dr. supporting their properties.
Property types in particular, hospitality and retail continue to experience significant challenges and we're monitoring those situations closely.
Yes. It was collections were again strong in Q3 with over 99% of our loan current under contractual payment after taking into consideration certain loans that have been modified mainly due to cope with Nike.
At September Thirtyth, we had no impairments no loans on non accrual status.
We remain engaged in ongoing discussions with many of our borrowers as part of our proactive asset management strategy during.
During the third quarter, we saw a decline in the number and dollar amount of loan and then modifying 12 loans with an aggregate principal balance of about 319 million.
Our loan to secure by strong properties and vibrant market with institutional sponsors in general the pandemic has extended the time needed to implement their business plan. So for the most part our approach has been to provide our borrowers with short term relief.
He's amendment involve some combination of interest deferral reallocation of reserves or waiver of an extension condition, usually coupled with additional equity commitments from the sponsors who remain focused on protecting the equity in their properties.
It's real estate market fundamentals were relatively unchanged in the quarter. It is not surprising that the risk rankings of our portfolio also remain largely unaffected in Q3.
At September Thirtyth, we maintained a risk ranking of four on the same 18 loans with an aggregate principal balance of about 820 million that were risk rated four last quarter. Most of the loan risk rated four or secured by hotel and retail properties, we have no loans at a rank five.
Given that real estate fundamentals Walton lagged the broader economy and that the duration of the current market dislocation remains unclear the level of credit threats and 2021, maybe elevated.
As of September Thirtyth, our well diversified portfolio of 110 discrete investments had a principal balance of approximately 4.1 billion and $4.7 billion inclusive of our future funding commitments.
Our portfolio was comprised of 99% senior first mortgage loans with no exposure to securities at a weighted average stabilized LTV at origination of less than 64% and is widely distributed by geographic market property type and sponsor.
The benefits of a granular highly geographically diversified portfolio have become very clear over the past few quarters.
We did not close any new investments during the quarter and funded about 55 million of our existing loan commitment to.
The decline in the balance of our portfolio was driven by the previously disclosed sales of six loans totaling $191 million in principle balance that was part of our liquidity management strategy as well as the pick up in loan repayment activity.
During Q3, we realized over 209 million of loan repayments and principal amortization across various property types, which included the full repayment of our two CMBS positions.
Since the end of the quarter, we have realized an additional $158 million of loan repayment.
The loan repayments reflect a modest increase in real estate transaction activity and we believe the high credit quality of our loan and before a borrower's completing refinancings and sales in a slowly improving market.
Well the volume of loan repayments remain significantly below our historical pace, we may realize a few additional repayments before the end of the year, but the exact timing is uncertain.
I will now turn the call over to Martin for a more detailed review of our financial results.
Thank you Steve Good morning, everyone and thank you for joining us today.
Yesterday afternoon, we reported third quarter GAAP net loss of $24.7 million.
45 cents per share, which included $43.7 million or 79 cents per share all restructuring charges related to our introspection process and $10 million or 18 cents per share of realized losses on the previously disclosed sale of six loss.
The realized loss was partially offset by a $5.3 million or nine cents per share a decrease in our seasonal reserves, which was mainly driven by the decline of the outstanding balance of our portfolio.
At quarter end, our cumulative allowance for credit losses was $80.7 million and represented about a 173 basis points of our total loan commitments.
Our core earnings for the third quarter was $15 million or 27 cents per share excluded the onetime internalization related restructuring charges as well as the decline in our allowance for credit losses.
Our GAAP book value per share at September Thirtyth was $16.93 per share.
And include $1.47 cents per share.
Impact related to the adoption and application of Cecil.
Given the significantly improved liquidity position of the company, we reinstated our common stock dividend for the third quarter and the amount of 20 cents per share, which was easily covered by our core earnings.
As we discussed on our last call the suspension of our common dividend in the first half of the year was largely driven by our liquidity management strategy rather than earnings generation of our business.
At September Thirtyth, we had approximately $29 million in undistributed taxable income.
We will continue to monitor our taxable income and work with our board of directors to take measures if necessary to ensure we maintain our wheat status and satisfying minimum distribution requirements.
Our portfolio continues to perform well in light of the challenging real estate market.
Hey did buy LIBOR floors on over 95% of our loans at a weighted average rate of 155 basis points.
Our net interest income for the third quarter showed relative stability. Despite an 8% decline in total portfolio balance to about 4.1 billion.
Reflective of the loan prepayments and divestitures.
Along with a decline in the portfolio balance and pay downs of the associated asset level borrowings, which were partially offset by the new term loan financing. We ended the quarter with total debt to equity leverage ratio of about 3.2 times.
I'd like to conclude my remarks by discussing our new financing and liquidity.
As previously disclosed we secured a $300 million strategic financing commitment.
In the form of five year senior secured term loan facilities.
Which carry an annual coupon of 8%.
The gross proceeds from the initial draw under the facilities were.
For $225 million and we retain an option to borrow up to an additional 75 million for six months.
And kind of extended for another six months subject to payment of an extension fee.
I'm currently with the closing of this financing we issued six year net share settled warrants parts.
Purchase up to a little over 6 million shares of our common stock.
Approximately one and a half million out these warrants are subject to vesting will depend on future draws under the term loan facilities.
The warrants cannot be exercised sort of first year and the company has an option to settle any exercise warrants and shares or in cash.
We view this capital is very attractive given the current environment and believe it provides us with much flexibility to actively manage our business.
As of November six.
Got over $325 million of cash on hand.
We anticipate that our cash balance will decline through year end as we potentially further de lever our financing facilities continue to fund our existing loan commitments and paid a cost associated with our internalization process, which is expected to close at December 31st.
Thank you again for joining us today, and I will now ask the operator to open the call to questions.
Ladies and gentlemen at this time, we'll begin the question and answer session.
To ask a question you May press Star and then one using a touchtone telephone to withdraw your questions you May press star and two.
If you are using a speaker phone we do ask you. Please pick up the handset before pressing the numbers to ensure the best sound quality.
Once again that is star and then one to ask a question.
Our first question today comes from Doug Harter from Credit Suisse. Please go ahead with your question.
Hi, Thanks.
Given the potential uses of liquidity you just talked about Morrison you know you you didn't mention funding new loans can you just talk about you know kind of when you might think about that and kind of how you're thinking about where the portfolio size might stabilize.
Hi. Thank you. This is Chuck Taylor ill actually answer that it's good to hear from you today, and we will be making new loans and we intend to grow our portfolio, but not just yet we're in a more defensive position, while we focus on our current assets and liabilities and also well.
We monitor the progress of the overall investment market. So I would say not before year end and sometime in the first quarter will be reassessing.
It's hard to say when will started originating because that will be timed.
Depend on a variety of factors, including the pace of prepayments on our portfolio. Our assessment of the alternative uses of capital and I'd say the attractiveness of new loan investments at the time, so it's difficult to specify right now, but not before year end and we'll be constantly monitoring that going into the.
Beginning of the year.
Got it and just you know I guess, how do you think about what is the right level of liquidity kind of now one year kind of in a more defensive positioning and you know and then ultimately you know kind of as.
As you move to kind of a more neutral stance some point into the future.
Hi, Doug. This is mark good morning look I think we will probably be north of $200 million for the foreseeable future.
As Jack mentioned, considering kind of the the environment being a little bit defensive I think.
Over time, that's likely to decline but for.
For the foreseeable future I would expect us to be able to on a night.
Okay. Thanks Marcy.
Our next question comes from Steve Delaney from JMP Securities. Please go ahead with your question.
Good morning, everyone. Congrats on the progress you've made.
Maher sitting your comments regarding the the reinstatement of the dividend in your ongoing dialogue with the board you mentioned true up at year end can you comment as to whether you in fact have any undistributed retaxable income at this time.
And if so maybe give us some range or estimate.
Sure Good morning, Steve Thanks for joining US sure Mark Yes, we have a as I said in my prepared remarks, we have about $29 million of undistributed taxable income through September 30.
So you know we'll be discussing.
Different options.
In terms of how to.
How to manage that with our board as we go into year end, well see what a fourth quarter looks like and obviously, we want to maintain our fleet status. So a TBD on that about yes, we do have Oh, we do have some undistributed taxable income of excellent sorry, sorry, I missed that in your remarks apologies, but you do have some flexibility I believe in rolling some of that into.
2021, if I'm not mistaken so.
Should we should we assume that.
But that would not be your plan to take advantage of that roll over.
Oh, Yes, we do just to me how do how quickly we.
We do have some flexibility and we obviously will do.
It is necessary to maintain reached out as about the same time protect book value as much as we as much as we can but it's hard to get into any specific at this point, but we will look at any at all.
Since two kind of come up with the most optimal solution.
Well that was my primary question appreciate the detail response. Thanks.
Yes.
And our next question comes from Jade Rahmani from KBW. Please go ahead with your question.
Thank you very much I think that your comments around credit in 2021 seems a bit cautious can you elaborate on what your expectations. I think you said credit threats 2020 one may be elevated.
Hi, Jay I'll speak to that and then passing on to skew ballpark of where we are.
Very experienced in going through cycles, and we see that.
Real estate fundamentals will often lag on the overall economy, but it's really driven by the duration of the pandemic Yesterdays news was a very positive with respect to the Pfizer and its partners development on the vaccine, but related more to the idea of how long over the last call.
In the weeks, there's been a cannabis whipsawed, a there was a growing sense that this would be a much longer duration in the pandemic, then yesterday that kind of reverse but we're we're we're just saying that we're looking forward to a 2021 cautiously because of the ongoing nature of the pandemic.
People I'm sorry.
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If you want to do elaborate scheme.
No I think that covered the Jackie how are you and thanks for joining this morning.
I would just add for our portfolio <unk>, it's mainly focused around hotel and retail the hotels, we saw a reopening but.
But if you look at hotels nationally lot of hotels are still running at 10% to 40, 50% occupancy and isn't expected slow ramp back up.
Our feeling is going up once we have the vaccine and give people feel comfortable traveling again.
We'll see the sector come back, but as Jack just mentioned, even with Yesterdays a positive news it just feels too early to predict a time.
Yeah, the recovery silver generally.
Having a more cautious outlook right now in that couple of similar comments apply to the retail sector.
And how are you thinking about the office exposure I'm I just saw survey I intend to housing there is expected to be something like 10 million households that plan to have a significant amount of work from home going forward. How are you thinking about the office exposure in the portfolio.
Sure well, it's a short term or long term in the short term what were seeing industry wide in our portfolio was a collections have been strong.
Strong.
The pandemic started we saw from early request.
For relief from rent from some of our Oh, we were going to see some of our landlords are borrowers but.
But the collections have been strong.
Overall and enough in an open a huge factor.
We don't have much exposure to co working.
You're really getting at some of the broader trends that work from home.
Hi, It feels very early to make make these predictions look I would say that the office market is a very broad diverse mount market.
Our portfolio is very diversified by geographic location primary market secondary markets type of office.
And we also don't have a lot of exposure to some of the harder hit cobot market.
But as far as the broader trend I mean, they have to play out over time.
Okay.
You mentioned the management team has expanded and multiple cycles and looking at some of the legacy mortgage rates and the ones that survived and actually thrived coming out of the.
Global financial crisis, Yeah. Many of them that did take advantage of the market. We are able to buy for example, their own see lows at or below 50 cents on the dollar.
Which northstar and our S famously did and that allowed to book value to start creeping upwards and be on a growth trajectory, which gave investors confidence you know looking at GE PMP you know the stock is about 48% or 50% of book value. There's a few others that are in that similar position are you seeing any.
[noise] outsized investment opportunities away from loan originations, where you could make such accretive discounted purchases, including perhaps buying back some of grow.
Granted points CLS.
Hi, Jade. This is Jack I will say that we continue to be focused on our liquidity management and creating additional stability of our balance sheet.
That will likely require some additional de leveraging and some other actions and it's our general policy not to comment on any potential buybacks or their timing.
But it's a good question and it's something that along with many other possible uses of our capital.
We're always focused on generating the attractive risk adjusted shareholder returns.
And where were trading now we think that would be a potential for us keeping our eye on it but with respect to the best use of capital that's not what we're thinking it's a tomorrow event, but it's something that we're.
Looking to position ourselves for whether or not its stock buybacks or siloed. So overall like.
We have the broad ability with the capital that we raised.
To use it for such activities as well.
Okay, and just a final one I wanted to ask a follow up because it sounds like you really are prioritizing liquidity management, yet you agreed to make any onetime cash payment to pine river of close to $45 million.
By December 31st you know what in your mind and in the board's buying justifies that use of liquidity I don't believe at least at the outset, it's going to be accretive to earnings on a fully a full run rate expense ratio why use that $45 million liquidity at you know do you expect that 2021.
Could have potentially elevated credit this is why not issue shares or postpone that internalization transaction.
Well I would answer that there is a lot of questions embedded in what you. Just asked first it was it was a board one process and the company entered into a binding arbitration process with the manager.
And I'll remind you the amount payable by the company's manager was decided by an arbitration panel.
We believe as we stated in our prepared remarks that the benefits. The internalization are quite substantial well worth the investment and we have the liquidity to be adequate to meet the demands of the current situation as we see it now including making this payment in fact.
And the capital that we raised.
In terms of sizing that this was taken into account.
And I don't think you can look at just the immediate next couple of quarters or to try to assess the benefit of the truck station. We have every intention of growing this company a growing it dramatically its during those growth periods that the benefits are most expressed.
For the internalization.
Okay. Thank you very much.
[noise] once again, if you would like to ask a question. Please press star and then one to withdraw your question you May press Star and two.
And our next question comes from Charlie RSV F from JP Morgan. Please go ahead with your question.
Hey, good morning, guys. Thanks for taking the questions today more appreciate the LIBOR floor disclosures that you guys provide I think it does.
A better job of illustrating the nuance there than you know a simple weighted average floor, if I'm looking at slide down correctly as those 2017 loans begin to roll off.
Might be slower than anticipated given where repayments are in this space. This should drive the overall floor higher right because there's a big pretty big jump in the 2018 2019 vintages from a floor perspective, and I'm just trying to get a sense of.
The net interest income trends given you know the new financing facility and the continued benefit of your floors.
Hey, Charlie Smarts and Yeah, I think in general you can think of it that way again, it really depends on the timing and which loans repay when.
And then you know as Jack mentioned earlier, if we have you know a lot of repayments, we do intend to start originating new loans all right. So it will depend on kind of what.
Well those loans looked like from a return perspective, LIBOR floors and things like that so again.
Again, it's hard to say I think you.
Your head on a on a on an important point on.
Our net interest margin will shrink.
Going forward right now as we you know we haven't really.
Ah recognized a lot of interest expense related with the new term loan right that all the first full quarter of that will be Q4. So please keep in mind as well.
As you all model earnings that'll be over $5 million per quarter impact to our interest expense.
Again on the LIBOR floors, obviously, we benefit from it now and we'll see what happens going forward, but we do expect them to compress over time.
Okay. Thanks, Martin for that color.
And then if I could just get an update on the.
Hi, good morning retail property, it's the largest one portfolio and the original maturity was.
Believe over the summer so just.
Serious if you could give us an update on how that asset is performing.
Hey, Charlie it's Steve how are you.
Look it's a it's a well located a lifestyle center.
Forming well prior to the pandemic.
As a result of the pandemic operations were certainly impacted.
It was limitations on the ability to stay open I'll refer to full capacity.
The bar borrower here has a institutional capital partners and a very large equity positions to protect here.
And like a lot of our assets to be the hotels and retail. We're you know we're in constant dialogue with these guys is this whole pandemic plays out.
Thanks, very much for taking the questions.
And ladies and gentlemen, with that we will end today's question and answer session I'd like to turn the conference call back over to Jack Taylor for any closing remarks.
Thank you Jamie I want to say, we really appreciate all of you joining us today and taking the time to be with us and.
And we will look forward to speaking with you again very soon to be further updates on how we're doing.
Most particularly we wish everybody and our analysts can believe me our investment community and anybody else listening in good health and safety throughout this period and thank you again, we appreciate it.
And ladies and gentlemen, with that we will conclude today's conference call. We do thank you for attending you may now disconnect your lines.
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