Q4 2020 Granite Point Mortgage Trust Inc Earnings Call

[music].

Good morning, My name is Chad and I will be your conference facilitator at this time I would like to welcome everyone to granite point mortgage Trust's fourth quarter and year end 2020 financial results Conference call all participants will be in a listen only mode.

After the Speakers' remarks, there will be a question and answer period.

Please note today's call is being recorded.

I would now like to turn the call over to Chris Petta with Investor Relations for Granite point. Please go ahead.

And good morning, everyone. Thank you for joining our call to discuss granite 0.4th quarter and year end 2020 financial results.

After my introductory comments, Jack will review, our current business activities and provide a brief recap of market conditions female part will discuss our portfolio and Marshall will highlight key items from our financial results.

The press release and financial tables associated with today's call.

Were filed yesterday with the SEC and on form 10-K was filed this morning.

He did not have a copy from I find them on our website or on the SEC's website at SEC Docker.

In our earnings release, and slides, 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 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.

Before I turn the call over to Jack I would like to remind you that remarks made by management. During this conference call and the supporting slides may include forward looking statements.

We are uncertain and outside of the company's control.

Forward looking statements reflect our views regarding future events and are typically associated with the use of words, such as anticipate expect estimate and believe or other similar expressions.

We caution investors not to rely unduly on 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 SEC, including our most recent 10-K and 10-Q reports.

Which may be obtained on the SEC's website at SEC Darko.

We do not undertake any obligation to update or 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 to our fourth quarter and year end 2020 earnings call.

I'm joined today by Steve <unk>, our CIO and co head of originations <unk>.

<unk> <unk>, our CFO keep cluster, our colo at Piedmont morale, our co head of originations and newly appointed Chief Development Officer.

We hope everyone continues to be safe and healthy as we all navigate the ongoing impacts of the pandemic.

2020 was a challenging year for all on many fronts, particularly those arising from the global pandemic.

Despite the disruptions from the overall economy and the commercial real estate market in particular, our strategy centered around delivering attractive risk adjusted returns, while providing significant downside protection has been proving out even through the severe market dislocation.

Our defensively positioned and well diversified investment portfolio, consisting of 99% senior first mortgage floating rate loans has performed well despite the market turbulence.

Through our active management of both sides of our balance sheet since the onset of the pandemic, we have proactively be loved our financing facilities improved our liquidity position and worked with our borrowers to help them navigate business plan interruptions at their properties.

We believe our performance last year as evidenced by the $1 17 per share of distributable earnings generated by our business has demonstrated the resilience of our investment and financing strategy during even the most volatile and uncertain markets.

Despite the significant challenges we accomplished a great deal during 2020.

Driven by the strong credit quality of our loans on our proactive asset management strategy. We received 99 per cent of contractual interest payments on experienced no realized principal credit losses.

We also benefited from our strong relationships with our financing partners and their trust in our conservative credit philosophy on the quality of our assets on borrowers.

We worked proactively with our lenders to methodically delever our credit facilities.

This deliberate day per approach enables us to be patient and secure a $300 million flexible strategic financing commitment at attractive terms to better position the company to take advantage of emerging investment opportunities in the current environment and for future growth prospects as they develop.

With the enhanced liquidity and balance sheet stability, our board reinstated our quarterly dividend in the second half of 2020 as our portfolio continues to generate strong earnings and cash flows.

Additionally in December the board declared a special cash dividend of <unk> 45 per common share. In addition to the regular quarterly dividend of <unk> 20 per share.

Reflecting the performance of our business.

Lastly, we achieved a significant milestone by completing our transition to an internally managed commercial mortgage REIT at the end of the year.

Internalization carries many benefits, including lower expenses, better transparency and alignment of interest with our stockholders, while achieving greater economies of scale as we grow our business.

Our actions last year were designed to position granite point for strong performance in 'twenty 'twenty, one and beyond.

Our priorities for this year include redeploying, our excess liquidity into attractive investments to support our earnings and dividends.

Diversifying our funding sources and increasing the proportion of credit non mark to market financing.

And continuing the active management of our portfolio.

We have already made notable progress towards these goals granite.

Granite point has re entering the loan origination market along with the improvement in the broader capital markets, including that for commercial real estate CLO.

On an accelerating uptake in real estate transaction and lending activity that has so far been predominantly focused on select property types, but is expanding.

Granite point has an established reputation as a strong counterparty in the lending market and as a result over time, we have closed a meaningful number of repeat transactions with our borrowers.

Over the last few years, we have proven our ability to generate a large volume of attractive investment opportunities meeting our underwriting and return criteria.

While the origination volume in 'twenty 'twenty, one will depend on a variety of factors, we expect that the peso per our new originations will significantly dependent on the amount of loan repayments. We received over the course of the year.

As we previously announced on February four we entered into a new credit agreement with Goldman Sachs, which provided us with about $349 million of term matched and non mark to market financing, while repaying all previously outstanding borrowings on our Goldman Sachs repurchase facility.

This transaction illustrates the strength of our lender relationships and the credit quality of our loan. It also brings a percentage of our credit non mark to market financing to 51% of loan level borrowings, which we expect to grow further over the course of the year.

In addition, with respect to diversifying our funding sources, we've consistently viewed the CLO market is an attractive source of funding providing us with non mark to market term matched and non recourse financing at a competitive cost of funds.

Having been a repeat and well respected issuer in the CLO market provides us with the ability to be opportunistic.

Overall balance sheet management strategy.

Subject to market conditions, we are positioned to and would anticipate accessing the CLO market. During this year to further diversify our funding sources and improve our cost of funds, while increasing our non mark to market borrowings.

The credit characteristics of our overall portfolio remains resilient.

Ultimate credit outcome for our investments and other market participants will depend significantly on the recovery path of the overall economy and the commercial real estate sector in particular.

We will continue to actively manage our investments and any potential credit events.

We are pleased by the performance of our portfolio to date.

I believe that Theres, a lot of value embedded in it and are quite encouraged by the continuing support of collateral properties by our borrowers.

I'm very proud of our entire team's efforts and the resulting performance of our business last year.

With the recent developments around COVID-19 vaccines in their distribution.

And the expectation of continued monetary and fiscal support we.

We are optimistic about the future ahead for the economy and commercial real estate, while understanding the ongoing near term challenges.

Our board of directors and the management team are excited about the future of granite point and are confident that we can deliver attractive returns for our stockholders over time now as an internally managed REIT.

I would now like to turn the call over to Steve <unk> to discuss our portfolio and recent activities in more detail.

Thank you Jack and thank you all for joining our call. This morning.

Over the course of 2020 and into early 'twenty 'twenty, one our portfolio has performed very well considering the major economic and real estate market challenges caused by the pandemic.

Our interest collections have remained strong during 2020 running at about 99% of contractual payments through February.

We ended the year with a portfolio outstanding principal balance of $3 9 billion across 103 loans.

With about $500 million and future funding obligations.

Which account for only about 11% of our total commitments.

Electing the light to moderate transitional nature of the business plan, we typically underwrite.

Our future funding obligations have declined over the course of the year as a result of fundings.

Repayments.

Eliminate opportunistic loan sales earlier, this year and select loan modification debt extinguished either a portion or all of the future funding commitment on amended loan.

During the fourth quarter, we funded $51 million of loan balances on prior commitments, which brought our total fundings for the year to $239 million.

We feel very comfortable with the level and pace of these future fundings and continue to finance them with our lenders.

As overall market sentiment stabilized and improved over the course of last year, we began to see transaction and financing activity slowly we emerge in the real estate sector on select property types and these positive trends are further progressing in 2021.

Insistent with these improving market conditions, our volume of loan repayments increased in the second half of the year and we received about $195 million of payoffs in the fourth quarter alone, bringing our total repayments for the year to about $517 million.

Given the significant market dislocations last year, we believe these me payment demonstrate the strength and quality of our portfolio.

So far on the first quarter of this year, we have realized about $70 million of repayments and they're very hard to predict we anticipate that the pace of our loan repayment in the near term should be similar to what we have experienced over the last couple of quarters, but below our historical pace of about 25% annually.

We remain highly engaged with our borrowers and are working collaboratively with those experiencing delays in business plans, resulting from the pandemic.

During the fourth quarter, we modified 12 loans with an aggregate principal balance of about $685 million and deferred $4 2 million of interest, which was capitalized and added to principal.

Most of these modifications are related to loans that had been previously amended.

We are gratified to see these borrowers continue to support their properties.

In aggregate during 2020, we modified 46 loans with a total principal balance of about $1.8 billion and deferred and added the principal balance of approximately $8 6 million of interest income.

As of December 31, 2020, we had 41 of these 46 loans remaining on our portfolio.

Of these 41 loans 11 had active interest deferral at December 31.

As we discussed previously most of our modifications involve a combination of payment deferrals reallocation of reserve accounts, and where appropriate amendments to certain extension conditions in conjunction with an additional equity investment by the sponsor at the time of the amendment and or other forms of ongoing credit support.

Our loans are secured by high quality properties located in strong markets on by institutional sponsors have significant equity to protect and we will continue to work with them as we move forward.

While the real estate capital markets have decidedly begun to recover we expect property fundamentals to follow but the pace and extent of the recovery to vary by sector and market.

As a result, we are closely monitoring a few loans with an aggregate principal balance of about $240 million, most of which have been particularly affected by the pandemic.

This group includes loan secured by a Minneapolis hotel.

Mixed use property in New York.

Student housing property in Kentucky, and a retail property in California.

The hotel loan is a $67 million senior loan book.

Lateral lives by a well located fully renovated property.

This hotel had been adversely affected by market conditions and the related significant decline in business travel.

As a result, we downgraded this loan to a risk rating of five at the end of the year.

We are in ongoing discussions with the borrower and are evaluating a variety of potential options.

We remain in active communication with all of these borrowers on our monitoring new situations very closely.

Overall, we feel very good about the credit quality of our well diversified portfolio and believe that it will deliver strong results over time.

Jack said earlier, we are now on a position to take advantage of new investment opportunities and have begun to evaluate new loan originations across property sectors.

We are on the process of building, our pipeline and assessing potential new loan investments and it begun quoting new transactions.

We expect to be closing new loans at some point during the second quarter of 2021.

Our pace of new loan originations in 2021 will largely depend on the volume of loan repayments and the availability of attractive investments meeting our desired return and credit characteristics.

With that 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.

Before I discuss our fourth quarter financial results I'd like to highlight that beginning with this quarter.

And similar to a number of our publicly traded commercial mortgage REIT peers.

We have adopted distributable earnings as a key non-GAAP financial measure.

As a replacement for core earnings.

This is only a change in terminology and the calculation itself and a reconciliation to GAAP earnings is the same as it was for core earnings.

Turning to our financial results.

Yesterday afternoon, we reported fourth quarter GAAP net income of $23 $1 million.

42 cents per basic share.

Which included $8 $5 million or <unk> 16 per share decrease in our <unk> reserve.

And $2 $6 million or <unk> <unk> per share of additional restructuring charges related to our internalization process, which closed on December 31.

The decrease in on.

Our seasonal reserves was mainly driven by the decline in the outstanding balance of our portfolio.

And somewhat improving microeconomic forecast employed in our analysis.

On a year and our allowance for credit losses was $72 $2 million or $1 31 per share.

And it represented about 163 basis points of our total loan commitments.

For full year 2020, we reported a GAAP loss of $40 $5 million or <unk> 73 per basic share.

Which mainly reflects the charges related to our internalization of $46 $3 million or <unk> 84 per share.

And provision for credit losses of $53 $7 million on 97 per share recorded during the year.

These items more than offset the strong earnings generated by our portfolio in 2020.

Distributable earnings for the fourth quarter were $18 $4 million or <unk> 33 per share.

And excluded the noncash provision for credit loss benefit.

And the internalization related restructuring charges.

Our book value at year end was $16 92 per common share, which was largely unchanged versus the prior quarter and included $1 31 per share book accumulative impact of Cecil.

In December our board of directors declared a regular common stock cash dividend of <unk> 20 per share.

On a nonrecurring special cash dividend of <unk> 25 per share both of which were paid in January of 2021.

The special dividend was it related to the distribution of a portion of our undistributed taxable income accumulated over the course of 2020.

Our net interest income for the fourth quarter decreased by about six and a half million dollars or <unk> 12 per share to $27 $4 million, mainly for two reasons.

First our average portfolio balance declined quarter over quarter and second on.

Our interest expense increased due to the first full quarter recognition of costs associated with our term loan financing, which closed late in September.

For the full year on net interest income improved by about $15 $5 million from 2019, mainly.

Mainly driven by a decrease in interest expense on LIBOR declined significantly over the course of the year.

In 2020, our interest income benefitted from the LIBOR floors embedded in our loans. How is our portfolio is 98 per cent floating rate with an average.

Floor of 156 basis point as of December 31.

About 87 per cent of our loans have LIBOR floors of at least 1%.

In the near term, we expect to continue to profit from the wider net interest margins supported by the LIBOR floors.

As we receive more loan repayments and originating new investments.

Our net interest spread is likely to compress over time LIBOR.

LIBOR floors on newly originated loans.

I'll be generally said closer to current rates consistent with market standard.

Our total operating expenses declined significantly in Q4, mainly related to the recognition of the majority of internalization related costs in the prior quarter.

Going forward as an internally managed REIT, we will no longer incur any management or incentive fees.

Instead, we will be reporting compensation and related expenses beginning in the first quarter of 2021.

We ended the year with about $260 million on cash on hand, and as of March 3rd had approximately $235 million on cash.

Our option to draw an additional $75 million in term loan proceeds through September of this year, which is subject to payment of an extension fee.

Our total debt to equity leverage on December 31 was.

<unk> 3.2 times, largely unchanged from the prior quarter, and our recourse leverage which excludes our clo's was up 2.2 times.

Given current market conditions, we would anticipate our total leverage to be in the range of three to three five times debt to equity depend.

And depending on developments in our portfolio.

Thank you again for joining us today, and I will now ask the operator to open the call to questions.

Thank you.

We'll now begin the question and answer session.

I ask a question you May press Star then one on your telephone keypad.

The speakerphone, please pick up your handset before pressing the keys.

It was drawn on your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

And the first question will come from Doug Harter with Credit Suisse. Please go ahead.

Thanks.

You mentioned that you'd be reentering the loan origination.

Market share.

Can you just talk.

Your expectations from your four kind of deploying your capital position and kind of your outlook or guidance.

Do you expect to kind of replace run off to be able to net grow the portfolio and just any thoughts on you know kind of how do you view the outlook.

Hi, Doug.

Thank you for joining us this is Jack and I'll be happy to answer that question.

So far we as we've mentioned we've been focused on managing our portfolio and are working with our borrowers on other counterparties.

But with the.

The increase in activity in the market fairly dramatically over the last.

A month or so.

We are quite comfortable going back in and with respect to the ramping up of our pipeline and the volume I think we will be looking first to answer. Your question, we will be replacing the run off and we will be looking for portfolio growth later on in the year.

Now to be a little more specific because it is a moving target on.

On the volume because.

This is going to depend on a variety of factors one that we mentioned earlier is the prepayment rate debt.

It will be a significant driver of the origination volume.

Because as those wells repay debt, we will provide additional liquidity to make new loans to replace those.

We have provided estimates.

Prior years about a range of prepayments.

Saying that from a portfolio our experience over the decades has been portfolio like this tends to repay at a rate of about 25 per cent per year.

Given the current situation, we would expect debt to be a lower number we've been experiencing at lower just to kind of bracket. It even during last year, albeit the first couple of months we're on.

On more normal period.

We were about half that volume.

M a cast our normal pace.

And so.

So it would be reasonable to assume we'd be between below a half the volume and the 25% rate.

But I think what we'll see is the transaction activity at <unk>.

Financing and acquisitions.

Picks up during the course of the year there'll be a gradual slope up in origination volumes and then it'll be somewhere between call. It the.

500 million to a 1 billion pace, probably more likely on the higher end.

Great.

And then you mentioned.

You know kind of hoping to kind of be able to issue a CLO this year.

I guess, just how should we think about what you know.

To the extent that you're able to.

The issue.

With financing with that replace wood that replace kind of warehouse lines with that replace kind of the senior secured.

Debt that you entered into.

September just from.

Hum on them.

So it is primarily would be new originations plus.

Our warehouse lines.

It can work.

We're not signaling anything from the market, but it could also.

B, partly refinance of existing too little debt.

So I would say primarily it will be a warehouse lines.

And right now.

That market is quite strong.

Ouch, Oh significant part to the.

Pretty strong performance of the bridge loans in.

In the existing CLO.

Securitization is outstanding.

Including ours.

And so.

So that debt that forward pipeline is strong.

It's been well met by strong demand from the Investor base and.

It's actually even been opening up now to include a more flexibility for ramp.

Periods and also for reinvestment so and so.

Quite positive set of developments from for the overall market.

And as I.

So on.

Earlier, we've always positioned ourselves to be repeat issuers in that market.

We'd hope to access that during the course of the year.

Great. Thanks, Jack.

Thank you.

And the next question will be from Jade Rahmani with <unk>. Please go ahead.

Yes, thank you very much.

Just starting with the cash flow statement when I look at the fourth quarter.

Based on your 10-K, I calculate and negative $16 million.

Cash flow from operations with a negative $29 million or so working capital adjustment. So I just want to make sure.

Does that include a payable to the external manager that would explain that difference or is there anything else. We should note that would've caused the cash flow in the fourth quarter to be negative.

Okay.

Hey, Jade, it's Martin Yeah. There wasn't there was obviously a payable to the manager of $44 $5 million in the fourth quarter.

So and then and then obviously we have there's a couple of other.

Items in there but.

Yeah.

Yeah.

Okay. So I think that that's not on nonrecurring expense and therefore cash flow from operations should be positive going forward.

That would be extra day expectation, yes.

And when we look historically at the management fees plus on.

Operating expenses and stock compensation.

It was 10 million $9 6 million in the fourth quarter, so annualized that would be $38 4 million.

I think that there could be some modest.

Improvement to that but for now.

Nothing around our brown $40 million of DNA.

$35 million in operating expenses and $5 million and stock compensation is that reasonable to assume as a run rate for the company.

At its current size.

Oh look it's it's really it's hard to predict exactly what the numbers are going to be you know when we announced the internalization we said.

That.

We were anticipating kind of $30 million to $35 million on run rate.

<unk> expenses, excluding the noncash equity comp.

I would say that they are noncash equity comp because they are running somewhere on five to five on a half million a year.

It may go up a little bit this year.

So I think I think we're probably on the ballpark, but there will be some obviously variability on that.

And on the cash side is there any increased asset management expenses or other back office functions administrative expenses, we should be expecting.

Or is that inclusive in that 30% to $35 million that's already.

Debt you've already put out there now that's inclusive of that so I would say on a net net basis kind of apples to apples the kind of core run rate cash expenses should be lower this year than in prior than in prior years.

Okay.

I think I've asked Jack this you know.

On many of these past calls just given the management team's history in the business and now Youre internally managed maybe it would be more open to other.

Business strategies would you explore.

<unk> conduit.

Perhaps an asset management vehicle on the stock is currently trading at about 65 per cent of book value. One of the lowest appears so clearly the market is looking at number one you know what the credits credit risk outlook is but also to the current dividend yield is at 7% yield and peers. The average is about eight nine.

Per cent or so.

So either the stock goes up because you raised the dividend or perhaps there's some other accretive way to grow earnings.

I'm wondering what your thoughts are on those on those two potential business lines.

Hi, Jay. Thank you, yes, I do recall you having asked in the past M.

I'm happy to answer now.

We will.

First and foremost be looking at accessing first off though.

M nation for our growth if you will in our share price is.

Is protecting our existing credits.

Using our strong origination capabilities and redeploying the capital.

Improving our cost of funds and increasing our earnings and dividends and that should drive the share price and by the way proving out our credits because we think that the portfolio is.

Forming quite well and is recognized by the market yet.

That's the foundation, though for any other expansion.

We believe that the floating rate market.

As for non bank lenders as even more in demand more important to commercial real estate finance now than it has been in the past.

So our primary focus will be there.

Settle debt, we will over time be looking at other opportunities.

Peter Ralph on the call with us.

The rest of the team.

We'll be taking.

It considered looked at.

Jason businesses, we're not signaling anything now there's nothing specific to discuss but we are.

Now that we are an internally managed REIT, we have greater flexibility to pursue any number of avenues of additional growth.

Primary emphasis in the near term will be on proving out our credits and increasing our earnings and dividends.

Focusing on our main book and that'll be the strength from which we can use.

Utilize our really robust origination capabilities to expand on businesses.

And have you gotten any inbound interest from.

Our asset managers looking to do potential joint ventures, because perhaps in this current dislocated environment. There are outsized opportunities some of which candidly could include the contribution of loans that in the near term in the existing T. P. M. T portfolio you mentioned, the 800 million on watch list could go.

On some turbulence, but the underlying assets can have a clear path to value creation and given the LTV of the company could be an interesting investment opportunity I've been kind of amazed that the mortgage Reits. This cycle have not bought back shares have been more creative.

And value creation strategies, and given you're one of the only internally managed companies does taking any oreo.

On the loans into Oreo create the potential for outsized returns and maybe create joint ventures or some other strategies that can help you now reap the benefits for G. P. M P.

So you had a lot in there let me.

Trust a couple of them, so I think from central ones.

Sure we'd have some inbound inquiries.

We do have.

The ability to provide outside capital sources.

With co origination doesn't necessarily have to be joint venture.

It could be.

We we can provide access to a hard to access market. You know these are not things unless you've built out.

And intentional.

Structure and team for accessing these markets. These loans these investments.

It's very hard to access.

On a whole loan basis, so we can pursue that.

Yes, there's value creation opportunities, which is always on a case by case basis.

There may be times, where.

One goes into Oreo, we think it's better to sell at all there will be times, where.

Speculating on Oh by Hypotheticals, but where we think it's better to hold and not to sell into the deepest trough of the market, where maybe the second deepest maybe four or five months ago with the deepest.

So we have that flexibility to do all those things we've done them in the past.

Worked through portfolios and what we've learned.

Right on point to what you just asked Jade, which is there there's no one answer to any particular part of your portfolio or even a particular asset.

In times like this you have to take a highly crafted individualistic approach.

Teach asset.

Under new larger question, we are Oh.

Well in mind that we have a lot of value we can present to cowen.

Co investors for example, but wanted to join in on loans.

With us we have had inbound inquiries.

Thank you.

The collections numbers, you've cited which seems really strong.

I say that that's I've asked every company that same thing it's on contractual.

Our loan agreements, which have been modified and I think you said that 46 loans have been modified so that roughly half the portfolio do you know what collections are.

Relative to pre Covid.

Loans granted that some have repaid and you guys have any have had strong repayments, but maybe if you could give a sense of what that statistic would look like pre COVID-19.

Hey, Martin sorry J.

Steve.

Morning.

I can give you a statistic for 'twenty 'twenty.

Where we deferred about $8 6 million of interest payments.

That's about three 5% of our total collections, if we had not entered into.

Those forbearance agreements.

Pretty much all of those forbearance agreements were deferrals not not waivers are important to note debt.

Most of them were discussed on prior calls where parcel forbearance and tended to be short term, but for the year was value 0.6 months.

Okay, that's good to know and what what's the percentage of loans on nonaccrual.

Currently.

We currently have one relatively small loan on non accrual and it's.

The one that we highlighted earlier, which is the new York mixed use asset.

Okay.

Great I will I'll get back in the queue in case there are other questions on the line.

Yeah. This is Martin I, just wanted to clarify something you and your first question you referred to a watch list of about $800 million I I don't I'm not sure if I would.

That's how I would class classify all those loans.

I think you know not not all four rated loans are on kind of watch list loans. They obviously have some elevated risk on them in.

But just because we put them on the other four rating doesn't mean that we expect them to have a loss I think.

If you on a kind of think of a quarter on quarter Watch list I'd, probably more focus on the 200 and some million dollars of loans Thats. The ballpark referred to in his prepared remarks, which were obviously happy to discuss it if anyone has any questions on that.

Okay. Thanks very much.

And the next question will be from Charlie <unk> with Jpmorgan. Please go ahead.

Hey, good morning, guys. Thanks for taking the questions.

Wanted to ask about your repo facilities.

Looking at the maturities coming up in the next few months that are disclosed in your 10-K M.

As you mentioned you know the Goldman facility was refinanced in February but wondering if you can provide an update on those other facilities and kind of just more broadly how conversations are going with your lenders. It seems anecdotally like the banks are pretty eager to increase utilization, but just curious to get your take on that.

Hey, Charlie it's Marty good morning, Thanks for thanks for joining us I would definitely agree with your last statement I think the sentiment on the.

And the banking community as is more bullish than it was back so you get some new business.

So we feel we feel very good about that and that's obviously part of the reason why we feel comfortable reentering the originations market because obviously when you're when you make a loan you have to find a way to finance. It. So so it's all good good news.

On that front.

Regarding to your question on maturities obviously Goldman.

Has a maturity in may we refinanced all of those all of those assets with this new agreement, which we think is a great great.

Great no mark to market financing for us it provides much more flexibility on the balance sheet that facility is still outstanding we will decide whether to extended or terminated its likely we will extend it to have more flexibility.

M.

The other two wells Fargo, we have an option to extend episode, which we intend to exercise and we are in active discussions with Morgan Stanley about extending that facility as well again, we really haven't had any issues with our with our lenders in the past week, we've always extended these facilities and we are in.

In good standing and constructive dialogue with all of them So I wouldn't.

I wouldn't worry about any of those.

Okay. Thanks, Marshall and I appreciate that and then real quickly on the hotel property that was downgraded to five.

M was this purely an issue of the <unk>.

Cash flow is being disrupted by Covid, maybe I'm focusing too much on the.

New information available that you guys disclosed I'm just wondering if there's anything else there that we should be thinking about and then have you guys disclosed what the new maturity of that loan is.

Hey, good morning, its Steve on them all.

I'll provide some just some color.

On the hotel asset.

So I think some on this has already been disclosed but it is a well located recently renovated full service hotel in the Minneapolis market.

Very strong institutional sponsorship with a significant equity investment.

When we close this loan our sponsor had just completed.

On a major Reno, so the hotel looks really great business plan was to ramp operations on.

On the rebranded hotel on ultimately sell the asset.

On the fantastic on pandemic began.

We saw across the whole country of hotel operations were impacted.

This impacted this hotel is impacted the entire Minneapolis market.

Since then the borrower here has continued to make a significant and ongoing commitment financial commitment to the asset.

Well go on to your question just given the situation it seemed prudent to move the risk ranking from four to five in Q4.

That notwithstanding.

We continue to have very productive conversations with the borrower.

And just wanted to just highlight that it's a very high quality institutional asset and it looks as if it's a beautifully renovated hotel.

Thanks, David appreciate the color.

Sure.

And the next question comes from Stephen Laws with Raymond James. Please go ahead.

Hi, good morning.

Marching to follow up on Charlie's question, the new Goldman facility can you talk about the the cost of that to get the more attractive characteristics. Just trying to think about how our financing costs are going to trend.

Here in the near term given the shift in mix or a shift.

Shifting our financing facilities.

Hey, Stephen this is Steve plus good morning.

Hey, Steve it's about a $450 million transaction.

On the coupon on this LIBOR 361.

It will increase our cost of funds slightly but he has accomplished some very important things for us.

It provides match term nonrecourse non mark to market financing for the assets about a third of the assets or hotel and the other two thirds are assets that I would think would traditionally conform to our CLO. So we're happy to put those assets on long term non recourse financing.

And the structure also gives us the ability to pull out $100 million loans in the pool that we think do in fact.

Conform to CLO profiles without any penalty so it's a very flexible structure for us and.

Relatively modest cost of funds.

Great I appreciate the color there Steve.

Kind of thinking about the portfolio returns our dividend policy.

You know.

Martin can you touch on what undistributed taxable income was it spills forward to this year and then Jack kind of how does the do you expect the board review the dividend policy.

Something.

No unintentional last year, but maybe a more conservative dividend policy near term or a true up at the end of the year or you know more of a run rate dividend based on on an outlook that can be sustained for 2021.

I'm just curious Stephen so we we rolled around $25 million on distributor taxable income into this year.

We paid out.

A 25 special dividend. So we have a we have some additional flexibility.

Vis vis the dividend for this year, obviously our earnings.

Our distributable earnings.

In Q4.

M West we're strong on covered the dividend quite nicely. So look the policy is to make sure that the dividend is sustainable stable and supported by core profitability of the business.

We are continuously discussed this with our board.

As we try to assess the performance of the portfolio and capital markets.

Obviously, an overall environment. So I would say we feel we feel pretty good about our earnings run rate. Obviously, you know we may have some.

As everybody else in this whole industry, some credit events here and there they're hard to predict.

But from a core profitability perspective, we feel pretty good.

In terms of where we are and I think over time the dividend should should closely track that once we once we go through this period of uncertainty.

Okay.

Great. Thanks for the comments this morning.

Thank you.

And the next question comes from Aaron <unk> with Citi. Please go ahead.

Thanks, just looking through your portfolio you have a handful of loans that have now been marked to carrying values that are in there.

Excess of a couple of percent of of a b.

Original principal value.

Knees ones.

Just I guess the hotel example that you.

Can you just mark down or created reserve for this quarter.

How are you coming up with the valuations for the carrying values and.

Does this suggest that the value of that property now is through.

The principal amount and is that just a kind of I imagine there's not a ton of transactions to really follow to get a true value of that property.

Just trying to think about the potential risk there and and in here a little bit more about the process that you go through.

Sure.

<unk> value is a function of.

The volume discounts and fees related to the property as well as us.

The reserves.

That you know the seasonal reserves.

Across the portfolio, we were required to have reserves kind of across the board on all assets.

So that's part of our overall allowance analysis that we go through every quarter.

With the modeling exercise. There then you know that we go through on a review all the results of all day long. So primarily that was on those those are the differences between principal on carrying value.

Yeah, but the the ones that are more you know.

Drastically reduce some of them are 10 to 12 per cent.

Uh huh of a reduction in just I guess it suggests given the.

The initial ltvs that are in our sixties.

That you would be pretty well protected for the for the most part.

I guess, the the big discount that you have associated with those is that.

Truly a function of what you view the collateral value to be or is there. Other things that are that are driving that debt figure discount associated with it.

It's a function of the overall analysis on on the reserves, which obviously value in LTV is one of the inputs into the overall analysis on the model I think if you just step back and think about.

Kind of overall, how these reserve reserve's work and what the ultimate performance of the portfolio.

M may be a you know I think it's pretty safe to assume that the reserves tend to be.

Concentrated you know and in a subset of loans rather than evenly across the whole portfolio at.

All along and then the loans have kind of varian credit characteristics and a different property types and things like that so again, it's a function of the analysis that we do we're obviously value is one of the inputs, but it's not the all land put it. So obviously cash flow on sponsorship market on property type and I'll end on a bunch of other inputs that we use.

Okay. Thank you.

And the next question is a follow up from Jade Rahmani with K BW. Please go ahead.

Thank you very much.

I think the big item on everyone's mind, right now as interest rates and I forgot to ask that.

So how do you think that changes the commercial real estate outlook. It sounds like Youre seeing an uptick in transaction volumes and he said you know so.

Select property types, which I assume means.

Australia and single family rental the invoke property types, and maybe multifamily as well due to rates.

But overall.

Rates are up quite meaningfully.

And it seems like there's the potential for rates.

Rising further, especially if the stock market is signaling a strong economy.

You know on how does that change the way you're looking at the outlook on commercial real estate.

Hi, Jade this is Jack.

So there's a general perception.

Over market cycles that the arrives on the long end of interest rates will.

<unk> capitalization rates up and in fact.

Many of the statistics don't don't bear that out.

I like to look at this.

And therefore values.

I do think that for longer term say 10 year fixed rate.

Assets a rise in.

Interest rates.

We'd put pressure on some refinancing but it depends on windows those loans were made.

And how they're performing.

The rise in rates.

As a function of the eye.

I would say tremendous support both monetary and fiscal <unk>.

It has been provided and it is being provided to the market.

And into B.

On the economy.

And we are looking at Oh, Hey, so port poor commercial real estate through those actions.

On the it's not like Oh, let's say, it's the support.

For the tenant base.

And for the operators and ultimately for the lenders and investors from securities backed by these laws so that day.

And I would say that the rise in rates may be proportionally because of the very very small base, what's gotten caught up from but we're still we're not talking about tremendously high interest rates and the if the short end goes up our portfolio for example, you'll benefit from that.

But I would say that it's really all a function of the.

So liquidity supply, which is a positive for commercial real estate all around including.

As an inflation hedge.

Thanks for that.

Do you think that pricing in the CLO market has adjusted over the last couple of weeks.

Yes, well it firmed up quite a lot.

It is.

I would describe it and while it may be understated way is a vibrant market and.

And.

A lot of supply.

The CLO market, especially compared to say, let's see MBS market currently.

For a number of reasons one being debt.

So I think I mentioned the bridge loan.

Oh the loans from the original marks that were put into CLO.

Outperformed.

And are doing quite well the structures.

Hopefully pre existing CLO issuances are holding up well with very minimal losses on what I referred to structures.

The overcollateralization tests and things like that but the fundamental structure is that the issuer retains there's embedded equity.

From the borrower.

Borrowers.

On let's call it the average loans and at 65 per cent LTV on.

They're sat equity plus the retention of the bonds, but beneath the investment grade by the issuer.

Providing very strong alignment of interest and this has been recognized by the outperformance of the positive structure. It's been recognized by the Investor community and so while there's been a lot of issuance.

That has occurred already this year and we expect to continue its being met by very well.

Robust demand as well as people search for yield. This is considered a very attractive secure place to get on.

More yield it requires from technical expertise.

And that's reward on the part of the investors and that is rewarded with it.

With respect to issuers like granite point.

Having a well inside of.

On all the cost well inside of LIBOR 200 with bond spreads.

On the bonds themselves being in the $1 15 to $1 20 range.

It's very positive.

Environment.

And sorry, if I missed it but in response to Stephen launch question. What did you say the cost of the Goldman facility was.

Its available for 360.

Over a half a point and fee.

But as Steve.

Pointed out and by the way he was referring to the aggregate loan balance.

The bond issuance, if you will because it's it's like a couple of warehouse.

Facility private CLO from people referred to it as well as.

It was 349 and as he pointed out.

We're able to.

Reduced that cost if we so.

Choose by taking.

Picking up we have the right to take out over 100 million of those loans and put them into a CR.

CLO securitization issuance.

Without prepay penalty.

Okay. So the cost would be.

LIBOR is 10 basis points, plus $363 70, and just amortize the 50 basis points of feeds over over three years or so about 50.

55, Yes, 55 day 65, three yeah is 18 plus three seven day those are all on cost is something like 390 basis points.

Right.

Okay. So im looking at a sheet of loan spreads net cushman Wakefield nicely sends out and when I look at floating rate three to five year mortgages on plain Vanilla office.

At a over 65 basis point, you know the spreads are somewhere in.

250 to 325 basis point range before fees.

So let it seems pretty close to the cost of this goldman's facility.

And your existing loan book has higher spreads than where we're currently at.

Hey, Hey, Jade, it's Steve obviously, it depends tremendously on what type of assets Youre talking about what we're seeing in the bridge space right now.

It seems like a lot of.

Folks are talking about coupons versus spreads, but we're seeing.

We're probably seeing multifamily.

Depending on the deal on the low to mid threes.

We're probably seeing office.

It was a lot on office product two months ago into force.

Some of it now is in the threes as well, but from the stuff that I think we're looking at.

You know something in the twos.

Or even high teens wood is a little below what we're seeing right now.

Yeah.

And thats coupon before fees.

Yeah absolutely.

For feeds with LIBOR floors that vary by deal, but let's just say you know 25 basis point LIBOR floor somewhere in that area.

Okay. So do you think that ROE is in the 10% to 12% gross rois are achievable on a levered basis.

Yeah, there's obviously a lot of variables in terms of spreads and floors and fees and liability pricing, but I would say when you kind of put it all together we're seeing.

Leather returns that are probably at or near where they were pre pandemic.

Okay.

Great. Thanks, so much for taking all the questions really appreciate it.

Sure. Thanks.

Thanks for joining.

Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over to Jack Taylor for any closing remarks.

Thank you Chad and thank you everybody for joining US today, we really appreciate you taking the time.

Spending your hour with us to hear about our company.

I want to particularly wish everybody out there and the granite point community and beyond a very safe and healthy period of time going forward hopefully towards the final months or so of the pandemic.

Good health.

On prosperity to you all and thank you again.

And thank you Sir the conference has now concluded. Thank you for attending today's presentation you may now disconnect.

[music].

Okay.

[music].