Q1 2022 Granite Point Mortgage Trust Inc Earnings Call
Good morning, My name is like Navi and I will be your conference facilitator at this time I would like to welcome everyone to granite point mortgage Trust's first quarter 2022 financial results conference call. All participants will be on a listen only mode should you need assistance. Please signal.
Conference specialist by pressing the star key followed by zero.
After the Speakers' remarks, there will be a question and answer period to ask a question you May Press Star then one on a touchtone phone to withdraw your question. Please press Star then two please note today's call is being recorded I would now like to ton always a car to crisp set out with Investor Relations for granite point. Please go ahead.
Thank you and good morning, everyone. Thank you for joining our call to discuss granite Point's first quarter 2022 financial results with me on the call. This morning are Jack Taylor, our President and Chief Executive Officer, Marcia Neuropathic, our Chief Financial Officer email part, our Chief investment Officer, and co head of origination Peter Marie.
Our Chief Development Officer, and co head of originations and Steve Clark, Our Chief operating officer.
After my introductory comments, Jack will review, our current business activities and provide a brief recap of market conditions.
Now Paul will discuss our portfolio in Boston 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 are available on the rest of the relations section of our website along with our Form 10-Q.
I would like to remind you that remarks made by management. During this call and the supporting size may include forward looking statements, which are uncertain and outside of the company's control.
Forward looking statements reflect our views regarding future events and are subject to uncertainties and could cause actual results to differ materially from expectations.
Please see our filings with the SEC for a discussion of some of the risks that could affect results. We do not undertake any obligation to update any forward looking statements.
We will also refer to certain non-GAAP measures on this call.
This information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP.
A reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in our earnings release and slides, which are available on our website 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 first quarter 2022 earnings call.
We have made tremendous progress on our strategic priorities of repositioning our balance sheet and improving run rate earnings.
As we discussed previously we have been focused on deploying capital from loan repayments and the resolution of a few non accrual loans into earning assets.
Refinancing our older inefficient and de leveraged loan level funding vehicles to release and reinvested capital trapped in these structures.
And repay our higher cost term loan borrowings.
We believe that our recent accomplishments in pursuing these priorities have the ability to meaningfully offset the earnings impact of rising short term interest rates in the near term and also position us well for the second half of the year as our portfolio loan yields are expected to increase if short term rates continue to rise.
We are very excited to report a number of steps we have recently taken to improve run rate profitability and close them surpass the gap between our current stock price and our book value.
In late March we sold our $54 million nonaccrual senior loan on an office property located in Washington, D C, which allowed us to redeploy capital into earning assets and repay expensive debt.
At this point, we have resolved three of our four non accrual loans, our one remaining loan on non accrual status as a first mortgage loan on a retail property in Pasadena, California for which we are also actively pursuing various resolution strategies.
In April we refinanced about 590 million of loans from two of our legacy funding vehicles, our 2018 commercial real estate CLO and the structured financing facility with Goldman Sachs.
Both of which had meaningfully delever through repayments.
The result of these transactions was a net release of about $180 million of capital at an attractive cost of funds.
We were very pleased with this outcome is it lowered our cost of funds on the finance loans helped us significantly re lever a portion of our portfolio and provided funds for repayment of higher cost borrowings and additional portfolio growth.
With a portion of the capital released from the refinancing transactions. We recently fully repaid the $100 million of borrowings remaining under our senior secured term loan facilities, achieving yet another of our stated strategic goals.
The full repayment of this higher cost corporate debt not only significantly reduced our cost of funds, which has not yet been fully reflected in our financial results, but also provided us with more balance sheet flexibility and the ability to further grow our portfolio.
We believe that all of these actions when fully reflected in our financial results in the coming quarters has the ability to meaningfully improve our run rate profitability. Moreover, there are additional actions, we intend to take which could provide even further benefits and drive attractive total returns for our stockholders.
We are actively pursuing a few alternative resolutions with respect to the one remaining non accrual loan which is currently being held unlevered once resolved redeploying the capital currently invested in this loan into earning assets should generate incremental earnings.
We are also pursuing various opportunities to further rationalize our funding and increase our total leverage from two and a half times at the end of Q1.
Closer to our target range of three to three and a half times.
Which would afford incremental portfolio growth opportunities that could further improve our run rate profitability.
Additionally, as an internally managed REIT, we are well positioned to realize operating leverage benefits as we grow our business.
We continue to see a healthy flow of attractive lending opportunities and are focused on properties with favorable fundamentals.
Given the ongoing uncertainties with respect to global events, the pandemic supply chain disruptions inflation rising interest rates and credit spreads we remain disciplined in our approach to investing underwriting and loan structure.
Given our liquidity and leverage we are well positioned to take advantage of wider loan spreads and remain opportunistic in further improving our capitalization.
With the amount of volatility global markets are experiencing we believe that U S. Commercial real estate will continue to be viewed as a safe Haven asset class by long term fundamental investors and our strategy of lending on a senior floating rate basis against institutional quality real estate should generate attractive risk adjusted returns over time.
In summary, our strategic plan has been working well and we have already accomplished a lot over the last few quarters to reposition the balance sheet and improve our run rate earnings. One key net result of our actions on our overall capitalization structure is the replacement of higher cost secured term loan corporate debt with lower cost less.
Virtual permanent preferred equity.
Additionally, resolutions of all but one of our non accrual loans and refinancing of our inefficient funded vehicles helped reduce the earnings drag from trapped capital and allowed for more reinvestment into earning assets.
Our business continues to deliver strong operating performance led by our well diversified and resilient senior loan focused investment portfolio generating solid run rate earnings supporting an attractive dividend. We believe that our recent accomplishments and are fully reflected in our financial results in the coming quarters as Marshall will discuss in more detail later.
We will significantly benefit our run rate profitability and position gratified well for the second half of the year.
We are currently pursuing the additional embedded opportunities to potentially provide incremental benefits with the ultimate goal of delivering attractive total returns to our stockholders.
I would now like to turn the call over to Steve Al part to discuss our originations forward pipeline and portfolio.
Thank you Jack and thank you all for joining our call. This morning.
Our broadly diversified and defensively positioned portfolio continues to generate attractive returns, while exhibiting a favorable credit profile.
Over the last few quarters, we have generally seen positive credit migration within our portfolio as we resolve three or four non accrual loans and have upgraded the risk ratings of select loans driven by progress in the business plan of the collateral properties.
During the quarter, our weighted average risk rating improved from 2.6 at December 31 to 2.5 at March 31st driven by new loan originations. The resolution of a five rated non accrual loan and the upgrading of nine loans, which includes about $100 million of loans changed from a risk rating category of <unk>.
Four to three to reflect the improved credit profile of those investments.
We closed four new loans totaling about 142 million in commitments and over $130 million of initial fundings and about half of those loans closed in the last two weeks of March.
Our pace of first quarter originations was impacted by the timing of our capital raises and the timing of certain loan closings that occurred later in the quarter.
We also funded over 34 million on existing commitments and $6 million and one loan upsizing, bringing total fundings to over $170 million for the quarter.
Over 65% of our Q1 originations were secured by industrial assets and the balanced by well leased office properties.
Newly originated loans carry attractive risk adjusted return characteristics with a weighted average yield of sulfur plus 388, and a weighted average stabilized LTV of approximately 59%.
During Q1, we realized about 172 million of repayments across various property types inclusive of the office loan sale.
Adjusting for the disposition of the non accrual loan, our earning assets moderately increase quarter over quarter.
Our portfolio ended the first quarter with an aggregate committed balance of $4 2 billion spread across 103 loans with an average balance of approximately $37 million and about 370 million of future funding commitments.
Our loans continued to deliver an attractive income stream with a favorable overall credit profile generating a realized yield of about 5% with a weighted average stabilized LTV of 63%.
Transitional property lending market remains active and healthy notwithstanding increased market volatility.
We have remained disciplined and highly selective while picking the most attractive new loans for our portfolio.
Continue to see an ample volume of attractive investment opportunities.
Current pipeline of approximately $200 million of commitments and $165 million of initial fundings, which we expect to grow as we invest our excess liquidity and redeploy proceeds from loan repayments.
So far in the second quarter, we have funded over $140 million of loan principal, including approximately $12 million on prior commitments and realized about 40 million of repayments.
Over 75% of the loans in our current pipeline are secured by multifamily properties with the balance in other categories.
Summary, we continue to source and ample flow of attractive investments that meet our credit and return criteria, which we can often originate at lower leverage and wider spreads than what was available in prior quarters.
The current market environment, and our outlook on loan repayments, we anticipate moderately growing our portfolio over the remainder of the year.
I'll 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 our first quarter GAAP net income of $1 million or two cents per basic share as.
As compared to $6 7 million or 13 cents per basic share in Q4.
GAAP earnings include a previously disclosed $5 8 million or 11 cents per basic share charge on early extinguishment of debt related to the 50 million partial repayment of the term loan from February and provision for credit losses of $3 7 million or seven cents per basic share of which about four cents were related.
So the sale of our non accrual loan.
Distributable earnings for the first quarter were $2 6 million or <unk> per basic share, which included a previously disclosed realized loss on the loan sale.
$10 1 million or 19 cents per basic share.
Our Q1 distributor earnings before and a write off for about $12 7 million or 24 cents per basic share, which is largely unchanged from the prior period.
Additionally, we believe that the impact of short term interest rates decreasing towards the end of Q1 should be largely offset by the loan originations closed during the second half of March and the remaining benefit from the partial term loan repayment in mid February .
Our March 31 book value decreased to $16 39 per share from $16 70 per share last quarter.
Results of transaction costs on the additional preferred shares issued in Q1, and the dividends exceeding GAAP earnings which were affected by the factors I mentioned earlier.
The first quarter book value includes an allowance for credit losses of about 67 per share.
Our total allowance declined by about $6 4 million or <unk> 12 per share quarter over quarter, mainly due to a write off on the loan sale, which was partially offset by an increase in our general reserve of about $1 6 million or <unk> <unk> per share.
We employed a more conservative microeconomic forecast and some changes in our portfolio mix.
Our total allowance represents about 86 basis points of our portfolio of commitments as of March 31.
About 14 million of the 36 million tolerance is allocated to the one remaining non accrual loan.
We ended the first quarter with about $148 million of unrestricted cash and as of May nine at about $174 million in cash, reflecting our recently announced activities.
Our total debt to equity ratio at March 31st declines are two and a half times from two seven times in the prior quarter.
Driven by the issuance of additional preferred equity and the partial repayment of the term loan during the first quarter.
As Jack described earlier, we have made some changes to our balance sheet over the last couple of quarters by executing on our strategic priorities.
Given those shifts we would like to provide some additional information to better illustrate the potential impacts of these actions on our run rate profitability. When they are fully reflected in our results.
Page five of our earnings supplement illustrates those potential estimated impacts.
Our current pipeline most of which has already closed in Q2 is anticipated to benefit our earnings going forward.
Our recent refinancing of legacy funding vehicles generated about $180 million of capital at an attractive cost of funds.
The cost of this incremental capital is estimated to be more than offset by the savings generated by the full repayment of the remaining $100 million term loan borrowings which occurred over the last couple of weeks.
As Steve mentioned, we are actively evaluating and quoting new loan investments and it will be redeploying the remaining excess liquidity over the coming months.
Which would potentially generate additional benefits.
Taken together, we believe that these actions have the ability to meaningfully increase our run rate profitability and help reduce the impact of higher short term interest rates on our earnings while positioning us to benefit from higher rates should they continue to rise later in the year.
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.
Ask a question you May press Star then one on your Touchstone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys is that anytime. Your question has been addressed and you would like to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
Our first question comes from Steve Delaney with JMP Securities. Please go ahead.
Everyone and thanks for taking my question I think first I'd just like to say congratulations on the strong progress with the non accruals and we really appreciate the slide five that kind of shows the walk forward from the benefits from from all of that activity.
As far as this this second quarter, because we have less I guess fourth quarter and first quarter. We had these special charges related to debt extinguishment and just to be clear in the second quarter. We've got the the final Ah 21 cent charge on the Pimco extinguishment and I believe in your.
In your deck or your press release, you also mentioned three cents per share on Goldman So negative 24 cent as far as you see things are these the only non recurring charges that you currently expect in the second quarter.
Good morning, Steve. Thank you for Jpmorgan. Thanks for your question I appreciate the kind words.
Yes, so far.
So those are kind of the two items that we see related to sensitive refinancings and removing the high cost inefficient debt on our liability.
Our liability side.
Okay.
And you're you're two and a half debt to equity I'm moving forward.
I realize it'll take a couple of quarters, two or three probably but.
Do you see that approaching we sort of tend to think about three times, what pre pointed out times debt to equity as being kind of a benchmark or a standard for the commercial mortgage Reits do you see that is achievable over the next several quarters.
Yes, that's.
Heading into the pandemic, we were at three five times levered debt to equity.
Our target is three to three and a half.
Our goal is to definitely increase and get closer to that to that target leverage. We began obviously doing that already by refinancing some of these legacy vehicles and reinvesting the capital.
There'll be a slight pickup in leverage on that and then as we continue to work through.
The rest of our plan.
We would anticipate leverage to leverage to go up a little bit more right. We have we have $100 million nonaccrual loan that sitting on levered. So that's sort of $100 million of capital, that's an earning not earning anything today as we resolve that which we expect to do.
At some point in the second half of the year, we can rely for that capital is set out that also help with leverage portfolio growth and hopefully earnings as well.
Right.
Alright, well congratulations again on the non accruals and to be clear Pasadena 114 million dollar loan is.
Is it accurate to say that is the only non accrual loan in your portfolio with remaining is that correct.
Yes, that's correct. Okay. Thank you very much for the comments.
Sure.
The next question comes from Doug Harter with Credit Suisse. Please go ahead.
Yeah.
Thanks.
You've repaid the D bench.
With that and issued the preferred you know I guess, how do you think about the composition.
Of your capital today, you know do you expect any other changes or any issuance to to to look to grow the capital base.
Good morning, Doug Thanks for joining us and thank you for your question look I think you know before the pandemic. This is sort of where we were.
In terms of capitalization equity.
Some unsecured on the convert side, we like to have a balanced capitalization structure are we like to have some unsecured debt on our balance sheet.
So I would say this is sort of close to you know where we were before.
You kind of go through and go through the next several quarters, we don't anticipate major changes to the overall structure and maybe some changes between you know how the loans are financed whether they're in CLO, then or are there different types of facilities, but I think overall, we'd like to keep it balanced on kind of where we are we didn't see.
It's one of our significant changes from that but obviously it will be dictated by.
You know our capital needs liquidity and sort of market conditions. So we always want to remain flexible.
But you know we are very pleased with sort of where are we where we've gone through over the last couple of quarters, replacing this debt and then adding some more leverage of all equity.
Which we which is very beneficial to us.
Got it and to follow up on the on the leverage and getting to the three porno I guess does it take the resolution of the non accrual to to get to the three point O. How close can you get you know before that that resolution happens just kind of what are the what are the limiting factors to.
But that kind of cause or delay the timing to get there.
Look I think it's just executing on the plan I think you know resolving the nonaccrual along with again, it's unlevered today that that's.
That's part of it.
If you look at our sort of weighted average advance rate on our portfolio.
In the sixties right. So we still we still have a little bit more work to do.
On improving that going forward, so it's sort of sort of all of the above making the loan level financing a little bit more efficient and reliable ring. The capital that's sitting idle right now on our balance sheet.
Great. Thank you.
The next question comes from Jade Rahmani with Keybanc. Please go ahead.
Very much I'm curious as to your thoughts regarding scale I think that's really what explains the discount to book value.
Because at the current dividend.
You know, there's not enough of a return relative to book value to warrant the shares trading in line with book value.
So either they will have to be dilutive capital raise to increase the scale of the company or the dividend has to meaningfully increase.
So one question would be how you think about overall scale you know how much stockholders equity is sufficient to really get the scale the.
The second question related would be just the G&A of the company.
It totaled about 10 million in the quarter, So 40 million annualized that's running at around 75 cents per share.
Annualized which is 18 cents per quarter.
So are there any components to G&A that could be reduced.
Perhaps temporarily suspended or perhaps paid in stock compensation in order to increase the earnings power of the company. Thank you.
Yeah.
Hi, Jay. Thank you for the question good to hear from you questions I should say Oh, I'll start off and then pass it on to Martin.
The first question about scale.
I'd like to address it by talking about the deep discount that we're trading at.
We think that the at our scale that we were before we were trading at a much higher level and we think that the deep discounters related not so much to the scale, but to the misconceptions about the earnings power of the company's balance sheet in this business.
What we've shown in the presentation today is that we've been unlocking that earnings power over the last few quarters and are going to continue to do so.
And so supported by a well performing portfolio. We believe that this earnings power should further improve as we continue to execute on our strategic priorities. So I'll pass it over to Martin to answer your follow on question.
Sure. Thanks, Zach Hi, Jay Thanks for joining us look I think and to follow up on scale, we have $1 1 billion of equity.
So from my perspective.
It's not really.
There were subscale right, it's more about earnings power of the company, which we've we've just.
Provided more information as to how we have improved it and we will be improving it and to your point on G&A.
Don't forget about $8 million run rate of G&A is in a non noncash equity compensation. So.
The true sort of cash comp cast company.
<unk> expenses are much lower than that we had we had a couple of one timers in Q1, I would I would probably add.
I mean, it'll be somewhere under a penny per share.
Our sort of run rate cash costs are probably somewhat below $30 million. If you look at what they were in 2021.
So I think you've got a you've got to sort of look at it on a sort of apples to apples on a cash basis versus versus the total.
Total expense base, because a big chunk of that is a noncash equity comp.
Yeah.
Thank you very much in the current competitive environment.
Do you think are there any changes the company should be making in terms of its target investments everyone has pivoted towards multifamily that's very consensus move everyone has pivoted towards sunbelt markets.
But would you contemplate any fixed rate product.
And more on a strategic side there are quite a handful of mortgage Reits trading at discounts to book value would you contemplate any potential combinations with other companies.
I'll, let Steve L part address the.
First part of your question.
Hey, good morning, Thanks for joining.
We expect to continue to focus on what we've been doing a floating.
Floating rate senior loans, a we're going.
To continue to focus on multifamily.
As well as some other sectors self storage student housing warehouse logistics currently deemphasizing office and retail.
Look at our first quarter originations you can see it skewed towards warehouse industrial are the second quarter.
Which we alluded to it was about 75% multifamily. So we're going to continue to focus on those sectors in growth markets.
With good cash flow wider transition business plans a lot of repeat borrowers continue to stay diversified by geography.
So for what we see right now I would say Q2 and heading into Q3, I think well, we'll stay on that on that theme.
We're also seeing that spreads have widened leverages come down a bit on our loans our underwriting standards are favorable we're getting good structure. So what what we just described we feel pretty good about what's what's in the pipeline.
Yeah.
Thank you very much Oh go ahead, Jack Yeah with respect to your second part of the question a J.
Hi.
As I said earlier, we were trading.
Trading at much higher levels are even smaller scale than we are now given where our.
Stock prices right now, we're not contemplating making any acquisitions that we would in the future look to that.
If we found it accretive at the time.
Thank you.
Yeah.
The next question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
You guys have covered a lot already in my congratulations on accomplishing so much year to date as far as collapsing the legacy vehicles.
Paying debt.
Other actions you've taken resolved in D C et cetera.
You know kind of wanted to get some general comments and property type around office that continues to be the property type I get the most questions on as far as his outlook. So if you could talk a little about the performance of the office assets in your portfolio.
And then Jack on the other side of the coin from some of the questions. Just curious to get your thoughts on a stock buyback at this discount I know it works against you or your outlook for getting more scale, but would certainly contribute to pushing leverage towards your targets.
So just wanted to get your comments on that please.
So Steve I'll, let you go second for once and I'll I'll go first.
It is our general policy not to comment on potential buybacks I'm, having said that we're always focused on generating the best risk adjusted return and what's best for the business.
There's a lot of different factors that play into it one of the assessments of the best use of capital is of course the <unk>.
<unk> book value.
We're trading at now or might be in the future I'll remind you.
You and others that we've done share buybacks in the past.
We do have authorization for more buybacks are theres, some $2 7 million shares that are authorized.
As we make this assessment we have the ability.
To use those shares when.
When appropriate.
Yeah.
Hey, Steve It's Steve I'll take the first part of your question on on I guess, what's how are we thinking about our office portfolio.
We feel generally good about our office assets.
Those loans are all current at quarter end.
Rent collections have been strong.
We've seen the capital improvement programs are continuing.
Even in the face of the supply chain and labor issues that are out there, we're not really seeing any delays or blown budgets there.
Our leasing is clearly slowed during the pandemic and coming out of the pandemic has been coming back.
It is uneven across markets and geographies.
But we have strong sponsors with really good assets.
During the pandemic that they have real equity to protect we've seen borrowers where it's been needed.
Stepping up and putting more equity into their assets.
We're carefully monitoring a few deals where business plans.
Are behind schedule.
And could stay behind schedule due to some of the headwinds in the office space.
So we're monitoring these assets somebody's assets carefully, but overall as I said at the beginning we feel generally good about our office assets.
Great. Thanks, Steven its a follow up to that.
You mentioned I believe in your prepared remarks upgraded nine loans during the quarter can you give us a breakdown of kind of property type or region, where those upgrades took place.
Great.
Yeah.
Sure.
It's been a little bit across the board.
And it's it was upgrades are a mix of you know for us to threes.
Three is the twos twos to ones Ah It it's kind of across the board by asset type and geography and it included.
A couple of office loans that included a mix you Sloan cleared a couple of hotel.
Some multifamily so it's really been kind of across the board including office.
And that was because I think we said earlier.
Due to specific improvement in those business plans.
Great well good to see that breadth across different property types in the portfolio I'm, Jack and Steve. Thanks for the comments. This morning appreciate it.
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 very much operator, and I would first like to say.
That we're really pleased to be able to report today that of our recent accomplishments and then when they are fully reflected in our financial results in the coming quarters. We.
We will meaningfully see benefit from our run rate profitability.
And it positions us well for the second half of the year as rates rise and as these results continue.
And as a further reminder, we're pursuing more embedded opportunities to potentially provide incremental benefits.
With the ultimate goal of delivering attractive total returns to the shareholders.
I would like to thank you all for joining our call today.
We wish you good health.
During these continuing times and we look forward to speaking with you soon.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.