Q1 2021 Granite Point Mortgage Trust Inc Earnings Call
Good morning, My name is Sarah and I will be your conference facilitator.
At this time I would like to welcome everyone to granite point mortgage Trust's first quarter 2021 financial results conference call.
All participants will be on a listen only mode. After the Speakers' remarks, there'll be a question and answer period.
I would now like to turn the call to Chris Petta with Investor Relations for granite point.
Thank you and good morning, everyone. Thank you for joining our call to discuss granite Point's first quarter 2021 financial results.
With me on the call. This morning are Jack Taylor, our President and Chief Executive Officer, Marty <unk>.
Our Chief Financial Officer Day ballpark, our Chief investment Officer, and co head of originations Teeter morale, our Chief development Officer and co head of origination.
Clarke, our chief operating officer.
After my introductory comments, Jack will review, our current business activities and provide a brief recap of market conditions.
See that 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.
As well as our form 10-Q were filed yesterday with the SEC.
If you do not have a copy you may find them on our website or on the SEC's website at SEC Gov.
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 mentioned on this call 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.
Which are uncertain and outside of it.
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.
Washington investors not to rely on duly on forward looking statements.
Imply risks and uncertainties and actual results may differ materially from expectations.
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 <unk> Dot Gov.
Not undertake any obligation to update or correct any forward looking statements. If later events proven can be inaccurate on.
Now I'll turn the call over to Jack.
Thank you, Chris and good morning, everyone. We would like to welcome you all to our first quarter 2021 earnings call. We hope everyone continues to stay healthy and safe.
The first quarter of 2021 was granite point's first as an internally managed REIT and we are excited to report solid performance across our business.
Yesterday afternoon, we reported strong distributable earnings of 38 cents per share well in excess of our dividend of <unk> 25 per share.
This was accomplished while we have continued to maintain an elevated level of liquidity on our balance sheet.
Our earnings benefited from being in the money LIBOR floors on our loans, but continued strong credit performance of our portfolio with 100% collections of contractual interest.
And lower operating expenses.
In March our board decided to increase our dividend from 20 to 25 per share and we believe the dividend has more room to grow as we rationalize our liabilities and grow our portfolio overtime.
The results generated by our business over the past year illustrates the resilience of our strategy and our team across various market cycles.
With the improved tone on the real estate capital markets towards the end of the first quarter, we restarted our new loan originations and continued to build our pipeline of attractive investment opportunities benefiting from the strong reputation of granite point has established in the lending markets.
Commercial real estate transaction volume has been steadily increasing and the lending market is now very active.
Right the level of competition among lenders we believe the returns currently available on new investments remain compelling and similar to pre pandemic levels.
Over the course of the year and assuming a stable market environment, we will grow our pipeline of new originations to match and then exceed the volume of portfolio repayments as we redeploy our excess capital.
Along with building our pipeline and growing our portfolio, we continue to execute on our strategy to further diversify our financing mix as.
As previously discussed during the first quarter, we closed a new term financing facility with Goldman Sachs, which provided us with about $349 million of term matched and credit non mark to market funding.
As a result, we currently have no outstanding borrowings on our Goldman repurchase facility and are negotiating a new term for this facility.
Additionally, and as announced earlier this week, we priced our third commercial real estate CLO, which is anticipated to close on or around may 14th.
This $844 million transaction achieved very attractive terms with an $83 two 5% advance rate and a significantly improved cost of funds of LIBOR, plus 162 basis points before transaction costs, while financing twenty-seven up our loans on a non mark to market term matched and non recourse.
First basis.
We have consistently viewed the CLO market as a highly beneficial component of our diversified funding sources and are very pleased to have accessed this market again.
Upon closing of our suite of well the percentage of our credit non mark to market financing will increase to about 70% of our loan level borrowings, which achieves our previously discussed targeted goal of two thirds.
Since 2018, we have issued three fellows totaling about $2.5 billion and have established granite point has a well respected repeat issuer in this market, which we intend to opportunistically access over time as we grow our portfolio and continue to actively manage our liabilities.
We had a point to swap to a great start to 2021 with strong earnings supported by the resilient credit characteristics of our portfolio benefits from the LIBOR floors embedded in our loans and our improving capital structure.
We will continue to actively manage our investments at any potential credit events, which we believe will be relatively isolated so not unexpected considering the pandemic impact on the real estate market that certain loans are resolved.
Given the improving economic and real estate market fundamentals, we are optimistic about our performance through the rest of the year and beyond.
We believe we have positioned our company well to take advantage of emerging investment opportunities in the current environment and for future growth.
We will continue on our strategy of delivering attractive risk adjusted returns, while providing meaningful downside protection by originally floating rates senior first mortgage loans on institutional quality properties owned by high quality sponsors with value add business plans.
Over time, we will emphasize redeploying our excess liquidity to support our earnings and dividends rationalizing the mix of our liabilities, while further diversifying our funding sources and achieving greater economies of scale as we grow our business as an internally managed REIT.
I would now like to turn the call over to Steve L part to discuss our portfolio and recent activities in more detail.
Thank you Jack and thank you all for joining our call. This morning.
Our portfolio has continued to perform well in 2021 with 100% of contractual interest payments received through April.
We ended the quarter with a portfolio outstanding principal balance of about 3.9 billion across 100 loans with around $450 million in future funding obligations, which accounts for only about 10% of our total commitment.
During the first quarter.
We funded $37 million of loan balances on prior commitments.
We realized about $100 million of loan payoffs in the first quarter and an additional $120 million so far on the second quarter <unk>.
Including a $70 million of hotel loan as a result of continued improvement in market conditions in the credit quality of our portfolio.
We expect this pace of loan repayments to continue with an acceleration in the latter part of the year as economic activity and transaction volume picks up so the actual volume is likely to vary from quarter to quarter.
Even during the challenged market of 2020, we had repayments in excess of $500 million, which we believe will be well exceeded this year.
Turning to asset management over the last few months, we have seen a decline in the volume of loan modification requests as market conditions continue to improve.
We continue to work constructively with certain of our borrowers whose properties remain impacted by the pandemic.
During the first quarter, we modified nine loans with an aggregate principal balance of about $395 million. We also deferred and capitalized approximately $4.5 million of interest which reflects these modifications as well as others that are currently effective from prior quarters.
Most of the loans amended in Q1 had been previously modified on a shorter term basis and the general theme is that we are seeing institutional quality borrowers with high quality properties, acting responsibly, and making ongoing financial commitments to their assets.
Last quarter, we highlighted $240 million of watch list loans that have been particularly impacted by the pandemic. We remain in active dialogue with these borrowers and to date there haven't been any major developments to report.
On a risk rankings were very stable in Q1 versus the prior quarter.
At March 31, we didn't have any new loans that were risk rated five.
We had one risk weighted for loan that moved to a three and.
And the other credit migration was mainly positive including $170 million per hotel loan being.
Being upgraded from a rating of three two or two in anticipation of a repayment, which is just mentioned earlier occurred as expected in Q2.
We are in ongoing discussions with the borrower on the $67 million hotel on in Minneapolis that was risk weighted five and are evaluating a variety of potential options.
Overall, the credit quality of our well diversified loan portfolio remained strong and we are confident it will deliver attractive results over time.
As Jack mentioned, we resumed news on originations during the first quarter consistent with the improving economy overall market conditions, and a pot and positive trends on our portfolio and.
And are beginning to redeploy some of our excess capital to take advantage of new investment opportunities.
Our current investment pipeline consists of senior loans with total commitments of over 145 million and initial fundings of over $105 million.
We expect most if not all of these loans to close during the second quarter.
Our pipeline mainly includes loans to strong sponsors on multifamily properties with attractive credit and return profiles.
We expect our pipeline of new investments to grow significantly in the coming quarters as we review a dramatically larger set of investment opportunities and reinvest capital released from loan repayments and our most recent CLO.
We will continue to focus on multifamily and other property types with favorable fundamentals and will remain opportunistic in selecting the best investments for our portfolio that meet our desired return on credit characteristics.
As we noted previously our pace of new loan originations in 2021 will largely depend on the volume of loan repayments. However, we anticipate also redeploying some of our excess liquidity over the course of the year as market conditions continue to improve.
I will now turn the call over to margin 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 strong first quarter results with GAAP net income of $28 million or <unk> 51 per basic share.
Which included $9 $1 million or <unk> 17 per share and decrease of our seasonal reserves.
The decrease in our reserves was mainly driven by the loan repayments and improving macroeconomic forecasts employed in our analysis.
At quarter end, our allowance for credit losses was $63 $1 million or $1 14 per share.
Represented about 146 basis points of our total loan commitments.
Distributable earnings for the first quarter or $27 million or <unk> 38 per basic share.
And excluded the non cash decline in seasonal reserves.
Our book value.
Increased by 30 per share to $17 22 at March 31 from.
From $16 92 at year end.
The increase was the result of the release of our seasonal reserves on earnings meaningfully covering our dividends.
In March our board of directors declared a regular common stock cash dividend of 25 per share, which was increased from 20 per share on the prior quarter.
Going forward. The main factors influencing our run rate earnings are expected to be the volume of loan repayments that pace of deployment of our excess liquidity and potential interest expense savings from refinancing of our term loan which will be largely dependent on capital markets conditions.
Our earnings continue to benefit from the LIBOR floors embedded in our loans with a weighted average of 157 basis points.
Overtime as we receive more loan repayments and originating new investments with lower LIBOR floors, our net interest spread is likely to compress.
We ended the quarter with about $255 million on cash.
And as of May five.
We had approximately $229 million on cash.
Our option to draw an additional $75 million in term loan proceeds from <unk>.
End of September of this year.
Our total debt to equity leverage at March 31 was three times down from 3.2 times in the prior quarter.
And our recourse leverage which excludes our clo's and other non recourse borrowings was at one seven 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 depending on developments on our portfolio such as the pace of new loan originations and volume of repayments.
As Jack mentioned earlier this week, we announced the pricing of our third CLO and $824 million transaction with an advance rate of 83 on a quarter percent on it.
Cost of funds of LIBOR, plus 162 basis points before accounting for transaction expenses.
We are very pleased with this transaction as it provides us with very attractive cost of funds and increase of the percentage of our non mark to market loan level financing to about 70%.
In addition, upon closing the CLO is expected to also release of about $50 million of additional liquidity.
Which we expect to redeploy into new originations in the coming months.
Finally, I would like to discuss the warrants we issued as part of our term loan last year and their potential impact on our book value.
As a reminder, we issued a total of about $6 1 million warrants for the entire at $300 million commitment.
However, since we initially drew $225 million.
There are about $4 6 million warrants that are effectively outstanding currently.
The remaining one on a half million warrants would vest, if we decided to draw the remaining $75 million on proceeds on the term loan.
Upon exercise these warrants can be settled in either cash or net shares at the company's option.
At our recent stock price over a $13 per share.
The dilutive effect on our book value would be approximately 3%.
Assuming that cash settlement option at about 4% in the case of the net share settlement option.
Thank you again for joining us today, and I will now ask the operator to open the call to questions.
Thank you we will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before I pass on that Keith.
To withdraw from the question queue. Please press Star then two.
At this time, we'll pause momentarily to assemble all off day.
Our first question comes from Doug Harter with Credit Suisse. Please go ahead.
Good morning, everyone. This is Josh Bolton on for Doug I. Appreciate the time I'm, hoping you can talk about your thoughts around liquidity on the cash on hand update was helpful still feels elevated especially versus where you guys are running pre COVID-19. So just trying to get a sense of what a more steady state level of liquidity looks like.
As the market normalizes.
Hey, Josh Good morning, It's Martin and thank you for joining us and thanks for the question look yes. So as we as we said and you know on.
<unk> calls.
We have some excess liquidity, but also as we as we just as you just heard us say on our prepared remarks, we intend to deploy some of it overtime.
So look it's hard to tell exactly what the what the balance is going to be it obviously will depend on.
Pace of originations on pace of repayments, which is as you just heard we expect to accelerate a little bit in the second half of the air but.
On a net basis, we expect the excess liquidity to go down over time.
Great makes sense, and then I guess shifting gears, a little bit the 70 million hotel loan that was upgraded than prepaid in the second quarter on any color you can give us around what type of hotel that was or.
Kind of what was the resolution was it a sale or a refinance or something else. Thanks.
Hey, good morning, Josh It's Steve Elkhart.
No no real update from from last quarter.
Type of hotel it so it's a full service hotel.
I think we mentioned last quarter is well located and from the.
Minneapolis CBD is a great asset.
How do you think he was asking Steve I'm, sorry, he was asking about the loan that paid off.
Oh My Blackberry.
Yeah I'll take the also a full service hotel.
And the resolution on that one was that.
It was purchased by a large private equity firm at a very attractive price.
Great. Thanks for the details.
And then if you'd like to ask a question. Please press Star then one.
Our next question comes from Jade.
Okay.
On <unk>. Please go ahead.
Thank you very much could you elaborate on the warrants and how youre thinking about.
On a potential settlement.
Hey, guys you gave color.
Thanks, Hey, Hey, Martin I know you gave color on the potential dilutive effect, but I guess is the company's perspective that are given its cash position that cash settlement is more likely.
But the thing so thank you for the question the warrants cannot be exercised for the first year. So that's that's one thing so they cannot be exercised through to September of this year.
I think look the option, we like the optionality of cash versus stock because depending on where the stock price at the moment, if they get exercised.
We can help limit dilution, obviously, you know today because stock is below book value cash is cheaper on a relative basis in terms of dilution effect.
I think it'll largely you know.
It would depend on where we are in terms of evaluation on our balance sheet overall, if they get exercised.
Okay.
And do you think they're likely to be exercising or.
On to predict at this point, it's really hard to tell.
Okay.
Turning to the.
Outlook for M&A, there's been a lot of discussion this quarter.
From mortgage REIT about it.
So Jack I was wondering if you could give your thoughts and whether you think combining with.
With another firm that perhaps doesn't have.
Our middle market emphasis.
Our net debt.
Granite point has would make sense and could be accretive.
Well we are.
Focused on growing our book and we're not in any discussions we wouldn't be able to tell you if we were but I.
I'll tell you, we're not pursuing anything like that and the whole industry is in.
On a recovery and reacceleration mode, including us so.
There is.
Oh, Ben some discussion amongst mortgage rates I think often prompted by Oh.
<unk> from a particular analyst, but my.
The point is is that we are not.
Not looking to that in.
In the near or intermediate term.
Okay. Thanks very much.
Thank you.
The watch list loans I think the the dollar amount and you said was $240 million.
Just wanted to make sure I got that correct.
Hey, Jade it's correct.
Okay and that was unchanged from last quarter.
That is correct.
Okay.
Over what timeframe do you anticipate.
Those loans to come to some type of resolution.
That's a great question.
We're really just monitoring.
All of these loans and obviously these these four watch list loans in particular each situation.
It's obviously a little bit different.
So really I guess, all I would say is that there's no real update from last quarter.
What can you get this information as we have it but there's no specific timeline.
Timeline on that right now.
Okay and lastly does is there just one loan on non accrual at this point.
Yes that is correct. It's the same.
Relatively small loan that was put on non accrual I believe in the fourth quarter at the same one that's on non accrual in the first point.
Thanks for taking the questions. Thank you Jay.
Our next question comes from Chris smaller right.
JMP Securities. Please go ahead.
Hi, guys. Thanks for taking the question I'm on for Steve today on.
The <unk> reserve release.
I appreciate your comments on that Mark.
It's taken a little bit deeper was the majority of that driven by macro assumption improvements are specific long did are paying off our N protein on the rest scale.
I would say, it's a mix I think majority of it is related to the macro.
You know we had wallet one hotel loan repay so in the second quarter, there was a little bit allocated to that but it was mostly on the macro level.
Alright. Thank you and then other than multifamily, which you guys mentioned on your comments are there any other asset classes that you like on into 2020 one.
We've hired competition of multi families.
Elevated right now thanks.
I'll address that we are doing.
Doing two things, we're always balancing our.
Competing interest of needs. So theres levels available in the market. There's also portfolio composition, So and also credit dynamics, so giving all that together.
Shifting our mix a bit.
More at least initially our focus on multifamily and warehouse logistics as well as loss from self storage life Sciences from well leased office.
This is largely driven by our portfolio composition.
Trends that we think will occur over time for example, multi families are across our.
Portfolio and others on the ones that are prepaying fastest maintained your balance on that you need to originate more for example.
And we'll also deemphasize.
More of the impacted classes, such as hotel and retail at least in the near term.
But we all those classes I talked about.
Originated over many years Goldman well liked them and know how to parse through them.
Okay. Thanks for the comments, everyone and congrats on a strong start to the year.
Thank you.
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.
For all your questions and thank you everybody for listening to our call today, we look forward to a continuation of a very strong first quarter until the rest of the year.
What does the.
Market recovers and as the economy opens up and as we take advantage of the opportunities ahead of us. Thank you again and we wish you all.
Good safe healthy next quarter. Thank you.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.