Q4 2022 Granite Point Mortgage Trust Inc Earnings Call
Good morning, My name is Diego and I'll be your conference facilitator at this time I would like to welcome everyone to the granite point mortgage Trust's fourth quarter and full year 2022 financial results Conference call.
All participants will be on a listen only mode. After the Speakers' remarks, there will be a question and answer session.
Note today's call is being recorded.
I'd now like to turn the call over 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 fourth quarter and full year 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 female part, our Chief investment Officer, and co head of originations you to morale, our Chief Development Officer, and co head of originations and Steve Clark, Our Chief operating officer.
After my introductory comments Jack will provide a brief recap of market conditions interview.
Of our current business activities.
Email part will discuss our portfolio.
Marcia will highlight key items from our financial results.
The press release and financial tables associated with todays call was filed yesterday with the FTC and are available on the Investor Relations section of our website, we expect to file our Form 10-K next week.
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 our risks that could affect results. We do not undertake any obligation to update any forward looking statements.
We'll also refer to non-GAAP measures on this call. This information is not intended to be considered in isolation or a substitute for the financial information presented in accordance with GAAP.
Reconciliation of those 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.
Now I'll turn the call over to Jack.
Thank you, Chris and good morning, everyone.
We would like to welcome you to our fourth quarter and full year 2022 earnings call and thank you for joining us today.
Despite the challenging market backdrop, and the fed's dramatic actions and raising interest rates, we successfully navigated this unstable environment and accomplish many of our objectives over the course of 'twenty to 'twenty two.
Earlier in the year, we Opportunistically grew our equity base through the 87 and a half million dollars add on preferred equity offering and repaid the remainder of our higher cost term loan borrowings.
We refinanced two of our legacy Deleveraged funding vehicles, releasing a substantial amount of capital further strengthening our liquidity position.
During the second half of the year, we closed on two new credit facilities with an aggregate borrowing capacity of up to $300 million.
Which are designed to fund performing sub performing and nonperforming loans on a non mark to market basis.
These facilities highlight our ability to add to our already diverse funding sources and provide us with more asset management and liquidity flexibility during the current volatile environment.
In anticipation of potential macroeconomic challenges and consistent with our conservative approach to managing our business early in the first half of 2022 we shifted our business objectives from originating new loans and growing our portfolio to preserving our liquidity to further.
Bolster our balance sheet.
For example, we further emphasized proactive asset management, working with our borrowers and driving and loan repayments through active dialogue well in advance of loan maturities.
This contributed to a healthy volume of loan repayments of about $1 billion over the course of the year.
These and other actions allowed us to strengthen our balance sheet. While also redeeming the 144 million of convertible notes that matured in December with cash on hand without needing to access the funds in the capital markets, which were quite difficult at the time.
That's what you said in the past, we expect the commercial real estate and capital markets environment to remain challenging and uncertain in the nearer term.
It's not clear when the fed will ultimately stop raising short term interest rates or for how long they will keep them elevated.
When the market environment will stabilize or when the commercial real estate markets will improve.
Well, we continue to see headwinds in the office sector, they are impacting properties and markets very unevenly.
Our portfolio the biggest impact has been on those markets or properties more affected by the pandemic and work from home trends and we're a high quality well located property with a strong sponsor has encountered a very tough leasing market.
These trends coupled with rising interest rates have resulted in a few borrowers electing to stop funding additional equity.
However, these walls have been very much the exception in general we are seeing ongoing commitment firepower hours to their properties and the loan assets in our portfolio.
We recognize and are addressing the challenges in the office sector and consistent with our intermediate term macro views, we have meaningfully increased our seasonal reserves over the last couple of quarters to about two 4% of our portfolio commitments as of the end of 2020 two.
In the nearer term, we will continue to manage our business in a conservative manner protect our balance sheet and maintain lower leverage while emphasizing liquidity and collaboratively working with our borrowers to maximize outcomes.
As we have seen during previous global dislocations. The U S. Commercial real estate market has always been viewed as a compelling place to invest over the long term.
And has attracted significant amounts of capital over time.
Currently a lot of capital is on the sidelines waiting for the more intermediate clarity and capital market stability, we believe that our significantly deleveraged balance sheet combined with our team's proven expertise will allow us to both mitigate the effects on our portfolio of market uncertainty and ultimately take advantage of attractive new market opportunities.
As we normalize our levels of leverage.
We believe that our strategy of targeting middle market and moderately leveraged U S. Commercial real estate loans with an average loan size of about $37 million with significant borrower equity cushion is more resilient in a market like this.
As our loan sizes are suited to a broader universe of potential refinancing lenders and property buyers.
Given the environment, we intend to maintain our cautious stance, while drawing other broad expertise and experience of our team to successfully navigate the challenges as we have done over our long careers and real estate lending.
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.
During 2022, we funded approximately $565 million of loan balances with an average balance of $38 million.
Our reduced origination pace for the year reflected our cautious approach to an uncertain market environment and our goal of increasing liquidity.
We ended the quarter with an aggregate committed balance of $3 6 billion and a principal balance of about $3 4 billion, including $230 million of future funding commitments, which accounts for approximately 6% of our total commitments down from a high of over $750 million in Q1 2020.
And reflective of the light transitional nature of our loans.
Our portfolio continues to benefit from broad diversification across property types and geographies 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 yield of about eight 4% with a weighted average stabilized LTV at origination of 63%.
During the fourth quarter, we funded about 109 million of total principle, consisting of approximately $31 million on an existing commitments and a $77 million acquisition financing related to the resolution of the Pasadena retail law.
We realized almost $1 billion from repayments and two loan sales during 2022 with about 44% of that being office loss.
We believe this healthy pace of repayments is due to there being more liquidity in the middle market compared to the large loan market and validates our strategy of working with our borrowers to allow them time to execute their business plans and sell the property or refinance our loan while incrementally deleveraging or allowance and we're enhancing our loan.
<unk> or structure.
Our repayments continued throughout the year with about $362 million of loan repayments.
Pay downs and one loan sale in the fourth quarter with approximately 47% of that being off as well as.
The repayments outpaced loan fundings in the fourth quarter, which resulted in a roughly $250 million decline in our portfolio balance.
As of December 31, our portfolio weighted average risk rating was $2 five which was largely unchanged from the prior quarter of 2.6.
During the quarter, we moved one of our office loans with a U P b of $32 million to our risk ranking a five and placed it on non accrual status.
We are in active discussions with the borrower and are evaluating a variety of potential resolution alternatives and we'll provide more information as we have it.
With the addition of this five rated loan in the fourth quarter and the resolution of the Pasadena retail loan at 12, 31, we have four loans totaling $247 million with the risk rate risk rating of five and associated fees. The reserves of about $39 million, which are all secured by office properties we re.
Very focused on pursuing pursuing various strategies on these loans with the exact timing and outcome being difficult to predict.
We aim to maximize economic outcomes released trapped capital.
And eliminate the meaningful drag these loans impose on our earnings as we successfully accomplished with the Pasadena retail loan during the fourth quarter.
Apart from these five rated loans our office portfolio is very granular with 28 loans across over 20 markets with an average size of about $34 million.
Some of these properties are located in markets with positive fundamentals like Miami Nashville, and the affluent suburbs in the New York City Tri State area.
We're seeing capital improvement programs, continuing and being completed.
Rent collections have remained strong and continued sponsor financial commitment as exhibited by ongoing healthy equity contributions.
It's also important to note that the vast majority of the office properties in our portfolio have been or are in the process of being substantially renovated and have or will have the amenities and other physical and locational features most desire by tenants will continue to be proactive and vigilant with our borrowers as we manage through the year.
In light of the slowdown in real estate transaction volume pressure on property values market uncertainty and our desire to increase liquidity, we expect to make measured in our approach to originations. We don't expect to match the robust repayment pace. We experienced in 2022. However, we do expect repayments to outpace new fundings. So as a result.
We do expect to see a modest decline in our portfolio of balance over the near term.
I will now turn the call over to Martin for a more detailed review of our financial results.
Steve Good morning, everyone and thank you for joining us today.
Yesterday afternoon, we reported a fourth quarter GAAP net loss of $9 $9 million of <unk> 19 per basic share.
This includes the provision for credit losses of $16 $5 million or 72 per share.
And a loss on the loan sale of $1 $7 million or <unk> <unk> per share related to an opportunistic sale of a $22 million mixed use office and retail loan.
Distributable loss for the fourth quarter was $8 $2 million or <unk> 16 per basic share and includes a $15 $5 million realized loss related to the resolution of our retail loan in Pasadena, which we previously disclosed.
Adjusted sort of realized losses, our Q4 distributable earnings for a $9 million of 17 cents per basic share.
Our fourth quarter book value declined by about 38 cents per common share to $14 86.
And it was mainly affected by the increase in our seasonal reserves.
For the full year, we reported GAAP net loss of $65 $3 million or dollar four cents per basic share, which was mainly driven by a provision for credit losses of $69 $3 million or $1 32 per basic share.
And loss on early extinguishment of debt of $18 $8 million or 36 per basic share related to our repayment of the term loan borrowings earlier in the year.
Our full year 2022 distributor earnings were $14 $7 million or 28 cents per basic share <unk>.
Inclusive of $27 $3 million or 51 cents per basic share.
Realized losses related to the resolution of two nonaccrual loans and the sale of one loan.
Adjusted for the realized losses, our full year 2022, distributable earnings were $42 million or 79 cents per basic share.
At quarter end, our seasonal reserve totaled $86 $6 million or $1 65 per common share and represented about two 4% of our total loan commitments our allowance for credit losses included about $39 million of reserves allocated there for risk weighted five non accrual loans.
The $16 5 million provision for credit losses in the fourth quarter was mainly driven by more conservative microeconomic forecast used in our analysis.
Turning to our capitalization and liquidity, our fourth quarter total debt to equity ratio decreased to two three times from two six times at the end of Q3.
Mainly due to the repayment of our $144 million convertible notes, which matured in December and continued repayments within our loan portfolio.
We ended the quarter with about $133 million in cash after repaying the convertible notes and continued to actively manage our liquidity and emphasize stable funding.
During the quarter, we added a new $100 million secured credit facility, providing us with loan level financing on a non mark to market basis.
<unk> for additional funding flexibility, especially with respect to nonperforming loans.
US more optionality within our capital structure as we continue to actively manage our balance sheet. During this highly uncertain market environment.
Thank you again for joining us today, and now I would like to open the call for questions.
Thank you.
And at this time, we'll be conducting a question and answer session.
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Yeah.
Our first question comes from Doug Harter with Credit Suisse. Please state your question.
Alright, good morning.
Hoping you could talk about your plans to generate more liquidity to handle the convert that comes due in that in the fourth quarter.
Sure Good morning, Doug Thanks for joining us. Thanks for the question. This is Martin.
Yes look we will remain opportunistic.
The potential capital markets transactions, obviously that we did not do that deal.
Fourth quarter to address the 'twenty two maturities we do have.
Pretty de Levered portfolio. So we're looking at opportunities to potentially refinance some of our deleverage.
<unk> funding vehicles, which would provide pretty meaningful capital.
To help us address the bonds. So we may again, we will remain opportunistic we'll probably around the portfolio off a little bit.
But if theres an opportunity to refinance then we'll we'll evaluate that as well.
Just following up on that.
<unk>.
Comment about the under Levered portfolio, just looking at slide 12.
Can you help us with the non mark to market repurchase facility the secured credit facility.
What type of advance rates could you get on those facilities as we are.
Think about the.
The potential for.
Finding liquidity there.
Sure it really varies by varying by different assets. These facilities. I mean, you can see you can see on this page is somewhere between 40 and 50, 55% advance rate right now it really varies on a.
Particular alone. We said said these facilities up to really help us with.
Financing of some of the sub performing and nonperforming loans, which we.
We're very happy with that it is a great tool to help us manage overall liquidity we.
We see a lot of opportunity to potentially refinance that fell to the second CLO, which is below 40% advance rate right. Now so we're looking into that but again the portfolio is pretty deleverage. So we believe we'll have some opportunities to maybe swap some of the corporate debt for some assets asset related debt overtime.
Hi, Doug This is Jack Taylor.
I would.
Just add one thing.
I wouldn't use is the operative assumption that any refinancing of under Levered assets is put on to the.
200 million a.
Non mark to market repurchase facility or the secured credit facility.
Okay.
Implying that refinancing.
I guess, what is the appetite or the availability to get new financing facilities.
Secured financing facilities in the market today.
We're in good position with our existing banks and wouldn't need to reach out to new lenders. So we also have inquiries from new lenders as well.
Okay. Thank you.
Our next.
Comes from Steve Delaney with JMP Securities. Please state your question.
Good morning, everyone.
The new five rated I'm sure everyone on the call wants to learn a little more about the new fab rated office flown in Dallas.
I'm not really familiar with that market, but could you just generally describe what sub market with part of Dallas, It's located in and maybe some comments about the age of the building the business plan for the sponsor and with the current occupancy and tenant mix looks like thanks.
Hey, Steve It's Steve I'll, Mark Good morning, I'll keep this high level.
Good morning.
So this is a small loan secured by an office property in Dallas as you know we moved this one to five in the fourth quarter.
We have had other Dallas office loans that have performed very well we have another.
Dallas loan right now, which is nearby and it's also performing very well.
This one is has underperformed.
The leasing has been sluggish.
General area of Dallas is kind of north Dallas.
But the asset.
You've heard us talk a little bit about how uneven performance has been.
Across markets within markets by building. This one just underperformed.
So we know that those are the reasons why we moved it to a five.
As far as.
Potential outcomes here.
It's the usual mix, but we're looking at a potential sale of the property.
It could be a deed in lieu.
The timing of the resolution is hard to predict.
But we're very focused on resolving all the all the five rated assets and any increase in run rate earnings.
Yeah.
Understood. Thank you for that it was a 2017 loans. So I assume was it originally like three years and two one year extension. So is it pretty much part of the decision is that they kind of reach the end of their their second extension.
Yeah, that's a fair.
Our assumption most of these loans are.
There was a couple of extensions.
Full of extension options. This one is.
Past the maturity. So those are all the factors that went into.
Moving this one to a $5 at the underperformance in the maturity.
We're talking to the borrower the conversations like almost all these deals are very cooperative.
We have to just kind of just look at all of them on a range of options.
Got it thank you for that Jack.
Jack could comment.
And in your opening remarks, we'd seen all seen a lot of cycles over the years, a lot of real estate equity capital on the sidelines.
I assume some of that could be considered.
Distressed or rescue capital I'm sure there their credit funds that that play in that as you see the market and where we are right now what what do we need as a flash point to see some of that money come in is it sort of wait and see the fed's in game and when.
We know kind of people and expect terminal rates and just if you could share some thoughts about over the next year or or more when might there be some.
Capital coming into the commercial real estate market from that type of source. Thanks.
Well. Thank you for the question and good to speak with you.
I think it's an excellent question and it goes to I think very fundamental point, which is that.
The commercial real estate market is not monolithic.
It's composed of many different types of investors with different objectives and needs. So the.
Credit oriented funds or capital that's been raised or is being raised.
We'll probably come in when there is more distressed selling.
And opportunities for them to realize there.
Higher yields or <unk>.
Access to the properties through buying of notes that will.
Yet two properties very quickly and then they couldn't.
Uh huh.
The properties themselves.
On for longer periods of time.
The bigger issue I think is the inflection point and my view is that the <unk>.
Primary driver for so much of the healing in the capital markets and all will be more clarity about when rates are going to stop being raised and.
How long they'll be there and that's a very iterative process, there's been a lot of head fakes in both directions over the last six months you can look at not only official statements, but prognosticators.
The general view is that once the fed pivot or the market believes they've pivoted.
There will be.
Ratchet back up and not only transaction volume, but capital moving into the space.
And a leveling off of the problems most people can't.
Entertain.
A longer term hold on our property and acquisition if they don't know what their liabilities cost and.
All liabilities are being driven.
Driven by the uncertainty right now.
And the equity markets I mean the.
The 10 year is 50 basis points higher this morning than it was on February 2nd So Thank you February .
Sure.
Everybody's comments. This morning. Thank you all the best for your participation. Thank you.
Thank you and just a reminder to ask a question press star one on your telephone keypad to remove yourself from Q Press star followed by the number too.
Our next question comes from Stephen Laws with Raymond James Please state your question.
Hey, good morning, a couple of things sit on but wanted to follow up on the new financing facility.
Jack can you talk about.
The parameters for financing the nonperforming loans kind of what type of advanced rates do you get on that line and what is the cost of that financing to put that in place non mark three year basis.
Oh, I'll actually turn that over to Marshall.
Hey, Steven It's Martin Good question. So when you when you look at our page 12.
650 over sofa.
And again as I as I mentioned to Doug earlier, the advance rates well sort of.
The different based on different different loans somewhere between 40, and 60%, but it really is asset specific as it is with any type of financing on any type of facility. It's all it's all really highly dependent on a particular asset in your financing at the time.
Great. Thanks, Martin I'll follow up with additional questions on that later I appreciate it.
Thank you.
Thank you. Our next question comes from Jade Rahmani with K B W. Please state your question.
Thank you very much wouldn't.
When we look at the leverage of the company.
I'm puzzled as to why there isn't more.
Leverage available I'm, just looking at many of your peers.
Hey.
Quite a lot of them have on the asset level north of four times leverage.
And when I look at G PMT.
The network the leverage really never got to those levels and now is among the lower appears yet it doesn't seem that there's an immediate source of liquidity aside from cash. So now what do you think the main reasons for that is the credit performance is likely to be resilient Brazil.
<unk>.
Given the lower average loan size.
Those that play in say the $100 million plus range.
Yeah.
Hey, Jed it's Martin Thanks for the question I think.
When you look at the overall leverage of the company, obviously theres a lot of factors that go into it.
And it's very funding source specific so if you look at some of our.
CLO financing at sort of at 80% or north of 80% financing right. So you can get.
Lot of financing on the CLO market, which all of US have right and then as the CLO sort of Delever.
Yes.
As we have with our with our second CLO is below 40%. So when you you have to look at it sort of on a on a specific source of funds.
Because the total leverage on the company itself.
Obviously.
Summation of all of those so.
So we have as you just sort of say, we have availability to lever up.
Certain assets and we intend to do so over time, we are maintaining lower leverage right now.
As you know due to the uncertainty in the markets. We obviously have the bonds coming due at the end of the year. So we're planning on that so it's a holistic approach, but we definitely have sources of financing.
So we elaborate a company and we'll just we'll just have to wait for some markets the ability to do that.
And with respect to the existing repurchase facilities that were in place excluding the new facility that was added the $100 million.
Is there unused capacity. That's currently available based on the existing collateral that's on hand to get to like a 75% advance rate.
There is we chose we chose not to go there yet, but theres opportunities to re lever some of those assets, but again its asset asset specific.
And.
It obviously depends on the facility in a particular alone so but we're as Jack said earlier, we're in good standing with our with our lenders on that.
Do you want to do more business with us. So we're obviously, taking all that into consideration.
How much capacity do you think there is.
The 10-K, I don't think it yet but.
As of September 30th.
Something around 700 million.
Yes that hasn't really changed that much.
Okay, but you said, it's asset specific so not all of the 700 would be available.
Right.
Okay and then the.
Second question would just be about more of a strategic.
Approach to the business I have seen mortgage REIT trade at these kind of levels relative to book value and there's lots of reasons for that one of the reasons is investments in looking forward.
They're applying a discount the forward book value, you know modeling and seasonal reserves. They would expect book value to go down and also perhaps the dividend being above GAAP earnings.
But in addition to that.
Where the next source of capital comes from to sort of bridge any GAAP. The company has is there a chance to change the conversation, Jeff perhaps buyback stock or partner with.
An outside Investor.
Haps do some sort of creative financing that might be in combination.
Like our preferred and common stock or perhaps a convert of some sort.
Lawrence, perhaps that could really be accretive to shareholders on a book value basis, and provide leverage capital to put the company in a totally different position.
Hi, Jade this is Jack thank you.
Nice to speak with you and.
So will you.
Things like stock buybacks and other things we don't.
Comment on that.
So I won't go to anything specific or fundamental but.
It is part of our thinking about.
Accretive capital raises whether in the public or private market that could provide more of a momentum because we do believe we're confident that our trading value.
The stock is not reflective of the inherent value of the company. So we will be.
Analyzing these things are analyzing them and we'll be proceeding, but we cant comment specifically about it but of course, we think about our strategic.
The future in terms of accessing more capital.
And do you think.
Yeah go ahead.
Just to add to that just in terms of profitability, we have a lot of capital and sort of earnings capital trapped in earnings drag from these non accrual loans.
So we estimate that our non accruals cost us over $4 million in interest income in the fourth quarter. So that's a pretty significant amount. So we are really obviously focused on <unk>.
Resolving these and once we do that.
<unk> got a double benefit from releasing some trapped capital, but also turning them into earning assets sort of run rate profitability can improve dramatically. Once those those loans are resolved and that can be then financed in a more.
In a more efficient way so it's sort of a combination of the two.
And going into the pandemic, we were three five times leverage.
On a total company basis, so there's definitely an opportunity to re lever backups.
We're looking at all the different potential outcomes here.
But I think once those loans are resolved I mean, thats, probably going to be a pipeline of other loans that go through.
Issues.
I mean, considering what's playing out in the office that theyre, considering what's playing out in real estate more broadly in the price corrected itself.
I think hopefully.
Some kind of capital.
Plan is priority number one.
Rather than <unk>.
Resolving those risk five rated loans and thinking that.
That will produce earnings and that'll get the stock up.
I have a couple of comments about that one our seasonal reserve process takes into account what.
Our current thoughts are we can speak to that a little more but the in.
In terms of the pipeline the market is very very uncertain.
But the extent of the problem.
Problem loans.
Youre thinking about it I think is different than how we view it and and so R. R.
As I responded to we're looking at ways to bolster the balance sheet.
All sorts of the resolution of the non accruals. It doesn't mean that we're blind to the fact that there might be some more depending on what goes on in the market.
We are quite aware of the dynamics in the office market.
We think our portfolio is largely misunderstood because of the Ah.
Idea that only bigger is better and we think that our portfolio is quite resilient as we've said, so we'll probably encounter problems.
Borrowers.
Grapple with the rising cost of carry on all of these things.
Somebody probably somewhere who will approach us I'd say, we need to extend with this and other relief something like that we're not.
Blind to those type of that eventuality, but we've categorized them and our risk rankings and in our reserves.
And even if we're off by some measure it's not going to be the type of thing I think that youre thinking of.
Okay, well, thanks, very much and I wasn't planning to G. Pmt's portfolio in particular, but just the environment overall, but I really appreciate you taking the questions. Thank.
Thank you very much.
Nice to speak with you.
Thank you and there are no further questions at this time, so I'll hand, the floor back to Jack Taylor for closing remarks.
I would like to thank everybody for participating in the call. Today are specifically want to include our team not only in the C suite, but throughout the company for all the hard work they are doing to support this company and.
To move through these challenging markets has been superb efforts on everybody's part and a fantastic execution exhibited most importantly, I want to thank our shareholders for continuing to support our company. Thank you very much.
Thank you and that concludes today's conference for today all parties may disconnect have a good day.