Q3 2022 Granite Point Mortgage Trust Inc Earnings Call

Good morning, My name is Jason and I'll be your conference facilitator at this time I would like to welcome everyone to granite point mortgage Trust's third quarter 2022 fine financial results conference call.

All participants will be on a listen only mode. After the Speakers' remarks, there will be a question and answer period. Please note. This 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.

Thank you and good morning, everyone. Thank you for joining our call to discuss granite Point's third 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, Steve Airport, our Chief investment Officer, and co head of originations Peter morale, our Chief Development Officer, and co head of originations and Steve Potts, Our Chief operating officer.

After my introductory comments, Jack will review, our current business activities and provide a brief recap of market conditions.

Our part 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 Investor 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 slides 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 that 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.

Information is not intended to be considered in isolation or as a substitute for 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 now available on our website.

I'll now turn the call over to Jack.

Thank you, Chris and good morning, everyone. We would like to welcome you all to our third quarter 2022 earnings call.

Over the course of the third quarter volatility in the capital markets continued to increase with rapidly rising interest rates tightening financial conditions and reduced liquidity across asset classes, while the geopolitical environment remains unstable.

Well many market participants expect the fed to pause in 2020 three.

Given the magnitude and speed of recent rate increases there's less clarity about the full impact of the fed's actions on the broader economy.

With respect to commercial real estate transaction volume has declined and there was downward pressure on property values.

But as we have seen historically U S commercial real estate remains a global safe Haven in times like these.

Well the market uncertainty has kept many investors on the sidelines for now waiting for more clarity there are several hundred billion dollars of capital waiting to be invested.

As compared to the global financial crisis banks are far better capitalized and the supply and demand fundamentals of commercial real estate are generally get better balance.

Our strategy of originating first mortgage loans on high quality U S. Real estate has proven to be resilient.

With all the wells reported from the volatility of real estate values by the healthy equity investments of our borrowers.

And credit point benefits from our granular portfolio as of September 30th are $3 6 billion dollar portfolio consist of 97 loans with an average balance of $37 million.

Nevertheless, given these uncertain times it is prudent in the near term to maintain a cautious stance emphasizing on liquidity and actively managing both sides of our balance sheet.

To that effect, we have scaled back our originations by closing only one new loan during the third quarter.

Which resulted in a lower portfolio balance as we continue to realize loan repayments and buildup our liquidity position.

Despite the market volatility during the third quarter, we realized over $340 million of loan repayments.

Over 40% of these repayments included loans on office properties and over 30% were hotel assets.

Additionally, so far in the fourth quarter, we have realized about $150 million of repayments of which about 80% were office world.

Year to date repayments total over $740 million with about 50% being office loans.

These repayments have continued despite the ongoing market uncertainty and demonstrate the resilience of our portfolio, our asset management capabilities and the benefits of our strategy.

In this regard our repayments have benefitted from what seems to be somewhat more liquidity for middle market property sales and financings.

Also we proactively work with our borrowers to provide them with more flexibility and time to navigate market challenges as they continue to invest additional equity to support their properties.

We are seeing an ongoing commitment by our borrowers to their assets with over $125 million of fresh equity invested into their properties over the last year or so.

Our leverage remains moderate at two six times at quarter end and is meaningfully below our targeted three to three and a half times, while our financing sources are diverse and we continue to increase our funding flexibility.

We maintain a well balanced financing bags with a majority of our total fundings being non mark to market.

During the third quarter, we closed on a new $100 million non mark to market loan financing facility further expanding our funding capacity for a wider range of assets, while enhancing our liquidity management.

We are currently exploring additional funding sources to potentially add to our financing banks and provide us with further optionality.

Our portfolio generally has performed well despite the current difficult market in select individual credit issues.

Even so considering the evolving environment headwinds remain for the industry. Therefore for the third quarter, we have adjusted down our risk ratings on select loans.

And increased our seasonal reserves.

With this period of elevated macroeconomic uncertainty and capital markets volatility, we intend to maintain our measured stance, while drawing on the broad experience of our team to successfully navigate this environment as we have done during prior cycles.

I would now like to turn the call over to Steve Al part to discuss our portfolio activities in more detail.

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

We ended the third quarter with an aggregate committed balance of $3 9 billion at a principal balance of about $3 6 billion, including $313 million of future funding commitments, which account for less than 10% of our total commitments.

Our portfolio was well diversified across geographies and property types and includes 97 investments with an average loan size of approximately $37 million.

Our loans continued to deliver an attractive income stream with a favorable overall credit profile generating a realized yield of about five 6% with a weighted average stabilized LTV at origination of 63%.

Given our cautious stance due to the market environment during the third quarter, we closed one new multifamily loans with a total commitment of $45 million and funded about 70 million of total loan principle, which included approximately $28 million on existing commitments.

Despite the decline in commercial real estate transaction activity, our repayments and loan pay downs totaled approximately 347 million in the third quarter, which outpaced loan fundings and resulted in a $270 million decline in our portfolio a balanced over the quarter.

As of September 30th our portfolio weighted average risk rating was 2.6, which was largely unchanged from the prior quarter of 2.5 as rating downgrades, which were mainly driven by overall market conditions and challenges in the office sector were offset by rating upgrades.

During the quarter, we moved two of our office loans with total U P. B of 123 million to a risk rating of five placed them on non accrual status and established a $20 million seasonal reserve for these two lots.

The collateral properties securing these loans have been negatively impacted by the ongoing impacts of the pandemic on office leasing and reduced market liquidity, especially for office properties.

We're in active discussions with each of the borrowers and are evaluating a variety of potential resolution alternatives and we'll provide more information as we have it.

As of September 30th we had four loans with risk ratings of five totaling $330 million in principle and seasonal reserves of about $50 million.

During October we successfully resolved one of our five rated non accrual loans, the $114 million loan secured by a retail property in Pasadena, California.

The resolution involved the property sale through a deed in lieu.

With granite point, providing this well capitalized buyer with a new loan supported by their meaningful cash equity investor we.

We are pleased with the outcome as it allowed us to resolve alone while also creating a new earning asset on a delivered basis.

We continue to actively work to resolve our other risk weighted five loss given the overall market uncertainty the exact timing and outcome remain hard to predict.

In light of the slowdown in real estate transaction volume pressure on property values, we expect to remain measured in our approach to originations we've.

We've been very pleased with the relatively healthy pace of loan repayments, we have experienced this year, particularly in the office sector.

Considering the continued repayments in the fourth quarter, we expect a modest decline in portfolio of balance by the end of the year.

I will now turn the call over to Martin for a more detailed review of our financial results.

Thank you Steve Good morning, everyone and thank you for joining us today.

Yesterday afternoon, we reported a third quarter GAAP net loss of $29 $1 million or <unk> 56 cents per basic share, which reflects a provision for credit losses of $35 4 million or 68 cents per basic share.

Distributable earnings for the third quarter, or $8 7 million or 17 cents per basic share and exclude the provision expense.

Our Q3 book value declined by about 77 per share to $15.24 and it was mainly affected by the increase in <unk> reserves.

At quarter end totaled $85 6 million or $1 63 per common share.

Represented about 218 basis points of our total loan commitments.

Away from the credit reserve build our third quarter results were also affected by a $3 $6 million or seven cents per basic share decline in net interest income driven by two factors, one our non accrual loans and <unk>.

Two loans with high rate floors that did not benefit from a full quarter of higher interest rates.

As of September the benchmark rates or above all of our interest rate floors in our portfolio is not 100% rate sensitive excluding the non accruals.

During the third quarter, we downgraded to office loans to a risk weighting a five and placed them on non accrual status.

At September 30, we had four loans with a total principal balance of about $330 million that were on non accrual status.

We estimate that these assets impacted our interest income by about $4 million or about eight cents per share during the third quarter.

However, as Steve just discussed.

We successfully resolved a nonaccrual loan in late October that $114 million retail asset in California.

Resulting in a new earning asset and releasing additional capital.

During the third quarter, we increased our seasonal reserves to $85 6 million from $50 1 million at June 30.

About 30 million of the increase was related to our four loans with risk weightings of five.

At quarter end, the aggregate allowance allocated to these loans totaled about $50 million.

I was just mentioned one of these loans was resolved in the fourth quarter.

The main driver of our Q3 seasonal reserve increase relates to deteriorating market conditions and reduced liquidity in the capital markets day.

Delays in execution of business plans and our overall conservative view of the macro environment.

Turning to our capitalization and liquidity our total debt to equity ratio at September 30 modestly decreased to two six times from two seven times at the end of June .

Mainly due to loan repayments and deleveraging of certain assets.

We ended the third quarter with about $168 million in unrestricted cash plus another 45 million and restricted cash mostly in our CLO.

Since quarter end we.

We contributed certain loan assets into our Clo's releasing capital.

Realize additional prepayments and as of November 7th we had over $220 million in unrestricted cash on the balance sheet.

We anticipate satisfying a convertible bond maturity in December with cash on hand, and we continue to work on further improving our liquidity and developing additional financing sources to that point.

During the third quarter, we closed on a new $100 million facility, providing us loan level financing on a non mark to market basis, allowing for additional funding flexibility within our capital structure.

Our risk weighted five loans had been meaningfully delever it overtime and two of them are financed with non mark to market basis, and we anticipate the remaining non accruals will also be financed on non mark to market basis in the near term.

Thank you again for joining us today and with that we would like to open the call for questions.

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 pressing the keys 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 Doug Harter from Credit Suisse. Please go ahead.

Thanks, I just wanted to follow up on that last thing you said Martin about adding some potential leverage against some of the non accruals is there any way you could help us size that and yeah, just to give us a some added comfort and the liquidity and how that looks a post close.

The convert maturity.

Sure Good morning, Doug Thanks for joining us. Thanks for your question look the advance rates are sort of you know a loan by loan specific so.

It's hard it's hard to be universe specific as to what what that is we do anticipate.

We pay our bonds just.

Instead of a build up our liquidity to sort of where we've been somewhere plus or minus $100 million high which we believe is an inappropriate level. You know we may go a little bit higher after that as soon as we get more repayments.

You as you heard us say in the prepared remarks.

Focused on on managing liquidity and liabilities and you know that the types of financing that we closed in the third quarter provide additional funding.

Ability, we might have we might add another one of such facilities as against we increased funding flexibility we have to move certain assets between different financing vehicles and also keep in mind.

During the pandemic, we had almost twice the repo exposure that we have today and we're really significantly de Levered, which also sort of provides additional optionality.

When we might re lever some assets going forward once out of the market stabilize.

And just on the new facility it looks like as of 930, it was like a 35% advance rate.

Can you talk about was that kind of an interim level of leverage on that what is kind of a stabilize our advance rate on that facility.

Again, it really depends on what assets, it's really asset specific it sort of varies.

Depending on which loans are financed there.

So it's and again, it's like like whatever.

Wherever it type of facility like in it sort of it varies depending on an asset.

Okay. Thanks.

Okay and if you have a question. Please press Star then one.

Our next question comes from Steve Delaney from JMP Securities. Please go ahead.

Thanks, and good morning, everyone wanted to ask about the new Phoenix loan. It has been around for some time, a 2017 originations can you just give us some background on that loan and what recent event or develop triggered the you know the downgrade I assume it was a four.

Previous sleep, but what triggered the downgrade to a five at this at this point.

Hey, Steve It's Steve Good morning, Thank you for joining us this morning sharply yet.

Our Phoenix office phone.

One of the loans that we moved this quarter more four to five.

The property itself is a well located its been nicely renovated it has an institutional quality sponsorship the borrower had come very close.

On some leasing however, the leasing market in Phoenix has been sluggish. So it was just really.

Continued slowness in the business plan thoughts leasing market, where somebody triggers go onto your question why we decided to downgrade this quarter we're.

We're looking at a bunch of options are as we mentioned and we'll we'll provide more information as we have.

It sounds vaguely similar to the conversation we had about San Diego I think the the prior.

Prior quarter, I guess, the difference and Fortunately this one is a 30 30.

<unk> $37 billion alone and not a $90 million loan.

Easier to work with I guess.

Okay. Thanks, that's that's helpful to hear.

Just the.

You mentioned that you I believe if I heard you right at 30 million of your seats are reserved is spread across your three five rated clients correct.

Yeah.

It was 50 million at the end of the quarter.

Okay.

Loans in won and one was one was resolved in October the retail on that was the Pasadena, Okay got it so 15 million, including Paas. It.

Pasadena, right and how much was on Pasadena.

What are you seeing how it goes about $16 million 669, okay.

Okay very good 16, correct I do regret that what's your what's your estimated your loss to be okay. Fine. Thank you and on the portfolio I understand clearly your comment about the convert maturity I wasn't it wasn't focused on that so that makes a lot of sense why you would.

Kind of restrict lending here to recover some cash along with your new facility is there.

Once you get through the fourth quarter and the convert do you have a target level.

For the portfolio I mean, I think the total commitments were like $3 9 million at September how how small would you see the portfolio potentially growing I think we when we kind of need that for modeling purposes. Thanks.

Okay.

There are no more questions in the queue.

Oh wait wait one second.

I'm sorry, we were I was on mute and I didn't realize I am sorry, I am extra Jack Steve.

Good to speak with you as usual, yes, Sir.

We believe that the there will be.

<unk>.

Modest portfolio declined imbalanced by yearend and we expect that the rate of prepayments will slow down.

Okay over the course of the year, you know, we had a pretty healthy rate.

During this year and as we've pointed out sure even in the first month of this quarter.

And historically, we've said that we would have.

A normal market run rate for our portfolio prepayment would it be about 25%.

We kind of came close to that this year or anticipate that we will fall short of it but we definitely expect to see a lower pace of repayments in.

In the year, but that's about that's balanced off by the fact that we're building liquidity and be very cautious in this uncertain market. So we're not looking to add a lot of loans in the near term. So while the repayments will slow down our originations will stay quite modest in the meantime.

And.

I think we would see a modest decline in the portfolio and our balance at the beginning of the year for the until we see some greater stability.

Understood. So not just not just a one time event, but we should expect.

Limited originations for another quarter or two as well.

So that's a very very good actually right. Thanks for clarifying that Jack.

You say well bye bye.

Chip.

There are no more questions in the queue. This concludes our question and answer session I'd like to turn the conference back over to Jack Taylor for any closing remarks.

Well, thank you very much operator and for those of you that have been attending with us we'd like to thank you for joining our call and also I'd like to thank you for your continuing support of our business. Thank you to the team here are helping us navigate through this tough environment and are getting ready for the future and we look forward.

Just speaking with you all soon.

Conference is now concluded.

You for attending today's presentation you may now disconnect.

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