Granite Point Mortgage Trust Inc. (NYSE:GPMT) Q1 2023 Earnings Call Transcript May 10, 2023

Granite Point Mortgage Trust Inc. beats earnings expectations. Reported EPS is $0.2, expectations were $0.16.

Operator: Good morning. My name is Kevin, and I will be your conference facilitator. At this time, I would like to welcome everyone to Granite Point Mortgage Trust’s First Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. After the speakers’ remarks, there will be a question and answer period. Please note today’s call is being recorded. I will now like to turn the conference over to Chris Petta with Investor Relations for Granite Point. Chris, please go ahead.

Chris Petta: Thank you. And good morning everyone. Thank you for joining our call to discuss Granite Point’s first quarter 2023 financial results. With me on the call this morning are Jack Taylor, our President and Chief Executive Officer; Marcin Urbaszek, our Chief Financial Officer; Steve Alpart, our Chief Investment Officer and Co-Head of Originations; Peter Morral, our Chief Development Officer and Co-Head of Originations; and Steve Plust, our Chief Operating Officer. After my introductory comments, Jack will provide a brief recap of market conditions and review our current business activities; Steve Alpart will discuss our portfolio; and Marcin will highlight key items from our financial results. Press release and financial tables associated with today’s call were filed yesterday with the SEC are available in 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 our risks that could affect results. We do not undertake any obligations to update any forward-looking statement. We 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.

Jack Taylor: Thank you, Chris and good morning everyone. We would like to welcome you all to our first quarter 2023 earnings call. And thank you for joining us today. Our business delivered strong operating results in the first quarter, despite the challenging macro backdrop and negative sentiment around commercial real estate. Our well-diversified, conservatively underwritten and granular floating rate senior loan portfolio continues to benefit from higher short-term interest rates as our first quarter distributable earnings increased to $0.20 per basic share and covered our common stock dividend. Given the highly uncertain market environment, our balance sheet remains defensively positioned, benefiting from a well-diversified funding mix leverage that is meaningfully below our target range and a strong liquidity position.

We continue to emphasize protecting our balance sheet and our stockholders’ capital while actively asset managing our portfolio and rationalizing our liabilities. The diversity of our funding and the strength of our lender relationships support the execution of our objectives. During the first quarter, we successfully delivered our FL2 CLO and released a substantial amount of capital, further strengthening our liquidity position. The loans underlying the legacy CLO were refinanced on one of our large bank credit facilities, highlighting our good standing with lenders and our ability to refinance our assets even during periods of major market dislocations. Despite some signs of following and recently emerging signs of some more liquidity in the real estate capital markets, we continue to main our conservative approach to new loan originations.

However, we have been opportunistic with respect to deploying capital into our own securities when they present attractive relative value. We’ve bought back our common stock capitalizing on a deep value opportunity created by what we believe to be an unwarranted market discount versus our book value. We repurchased about one million common shares generating attractive returns and meaningful book value accretion for our shareholders, while maintaining our strong liquidity position. These repurchases have largely used up our prior stock buyback authorization as from time to time we have been an active market participant over the last couple of years, accretively repurchasing almost four million of our common shares. As a result and to provide us with more flexibility to actively manage our capital over time our Board has increased our buyback authorization by an additional five million common shares or almost 10% of our outstanding shares.

As we have done in the past, we will remain opportunistic with respect to our repurchases, taking into consideration multiple factors as we manage our business. Given our conservative stance on loan originations, we have been emphasizing proactive asset management and collaboratively working with our borrowers to ensure successful loan repayments and resolutions. In general, our borrowers continue to support their properties and protect their investments as they recognize the embedded value in those assets and wait for the markets to stabilize and transaction volumes to begin returning to more normalized levels. In the near term, we believe that the recent developments in the regional banking sector are likely to further delay market recovery and impact liquidity for commercial real estate assets, given the regional bank’s significant historical presence in this market.

It remains unclear when the market environment stabilizes the commercial real estate markets improve and for how long the Fed keeps short-term interest rates elevated. Accordingly, we further increased our CECL reserves on our portfolio in the first quarter to about 3.8% of our total loan commitments. As the ongoing market disruptions, especially for certain properties located in some of the more challenging cities are likely to continue to create uncertainty. We remain focused on the macro trends in the office market and the individual performance of our office loans. We are keenly aware of the headwinds in the office market. But the office market is not monolithic and the performance depends on the specific market fundamentals and the particular assets.

Properties located in our portfolio markets such as Miami continue having favorable demand characteristics and fundamentals. In other markets that were more impacted by the pandemic and where the trend of returning to the office is more delayed, such as Minneapolis, there have been greater challenges. Fortunately, we have a very diversified and granular office portfolio across 19 MSAs. We have little to no office exposure in some of the most impacted markets such as San Francisco, Washington, D.C., Portland, and Seattle. As for specific asset characteristics, approximately 90% of our office assets by UPB are either Class A or recently renovated. So, while we are witnessing greater stress and challenges in some of our loans, for which we have established reserves and where we are working with the borrowers on resolutions, these situations are not indicative of the balance of our portfolio.

In addition, we take comfort in the strong sponsorship profile of the owners of the office properties securing our loans, the substantial cash equity invested in these properties to date, and that these sponsors are generally committed to supporting their properties during this period of dislocation. Over the last year, our portfolio of borrowers have contributed over $140 million of additional equity in support of their properties. In the near term, we will maintain our conservative stance actively managing our business, protecting our balance sheet, and maintaining lower leverage, while emphasizing liquidity and collaboratively working with our borrowers. As we have said in the past, we believe that the U.S. commercial real estate market provides attractive, long-term opportunities and a significant amount of capital, which is currently on the sidelines waiting for more market stability will ultimately be deployed providing support for the sector.

As the environment stabilizes and likely increased regulations for banks occur, once we are on the other side of the current disruptions, this will allow us to take advantage as a non-bank lender of attractive investment opportunities. I would not like to turn the call over to Steve Alpart to discuss our portfolio activities in more detail.

Steve Alpart: Thank you, Jack. And thank you all for joining our call this morning. We ended the first quarter with an aggregate committed balance of $3.5 billion and an outstanding principle balance of about $3.3 billion, with only $205 million of future funding commitments, accounting for less than 6% of our total commitments. Our portfolio is well diversified across regions and property types and includes 88 investments with an average loan size of approximately $38 million. Our loans continue to deliver an attractive income stream with a favorable overall credit profile generating a realized portfolio yield of about 8% with a weighted average stabilized LTV at origination of 63%. Given our cautious stance on originations due to the market environment during the first quarter we funded about $17 million on existing commitments.

Our repayments and loan pay downs totaled approximately $60 million in the first quarter, which out-pays loan funding’s and resulted in a slight decline in our portfolio balance over the quarter. As of March 31st our portfolio weighted average risk rating was 2.6, which was largely unchanged from the prior quarter of 2.5. During the first quarter we downgraded a $27.5 million senior loan collateralized by an institutional quality full service hotel property located in Downtown Minneapolis to a risk ranking of 5. The property was recently substantially renovated and reflected. It’s owned by a well-regarded institutional sponsor who invested significant cash equity to purchase and then renovate the property. Although the property’s performance and the market in general have shown recent signs of improvement, operating performance has continued to be negatively affected by the ongoing impact of delayed business travel trends in the Minneapolis CBD and from the lingering impact of social unrest.

We are actively working with the owner of the property who has elected to market the property for sale. We anticipate the property will be lifted soon and are hopeful for a resolution this year although the exact timing is hard to predict. As of March 31st, we have five loans that are risk rated 5 and on non-accrual status totaling $275 million in UPB. For which we established specific CECL reserves of about $67.5 million, which implies an average estimated loss rate on those loans of about 25%. As we have mentioned in the past we are in active discussions with all five of these borrowers and are evaluating a variety of potential resolution alternatives and will provide more information as these situations develop over the course of the year.

Four of our non-accrual loans are backed by office properties, each with its own characteristics and attributes. As we evaluate a variety of resolution options for these office assets, some may include a conversion to an alternative use. While not all office properties are amenable to such outcomes we would like to point out that the Phoenix and San Diego office loans are two where the highest and best use could be other than an office building. So recently extensively renovated property securing the Phoenix office loan benefits from a convenient pedestrian oriented downtown location with nearby access to light rail and mass transit. The property’s configuration lays out quite well for a conversion to residential use for which there is demand in the market.

Similarly, the San Diego office property has an excellent location, is recently and extensively renovated and can be converted to hotel, residential or mixed use. The building’s physical and locational attributes lend itself well to conversion. And in fact the borrower was under contract to a buyer who planned to convert the property to a hotel, but it fell out of contract shortly after the failure of Silicon Valley Bank. For both the Phoenix and San Diego assets we are working with the borrowers to take possession of the properties and have had multiple indications of interest for purchase for conversion. We are evaluating a range of resolution alternatives, which could include a foreclosure or deed in lieu followed by a sale of the property.

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

Marcin Urbaszek: Thank you, Steve. Good morning everyone, and thank you for joining us today. Yesterday afternoon, we reported our first quarter GAAP net loss of $37.5 million or $0.72 per basic share, which includes a provision for credit losses of $46.4 million or $0.89 per basic share. Compared to the prior period, our GAAP net loss widened due to an increase in our CECL reserves driven by the unsettled market conditions. Distributable earnings for the first quarter were $10.7 million or $0.20 per basic share as compared to a distributable loss last quarter, which was mainly impacted by the resolution of one of our non-accrual loans in Q4. On a pre-loss basis, quarter-over-quarter our distributor earnings improved by about $0.03 per basic share, driven by higher net interest income as our floating rate portfolio continues to benefit from increases in short-term interest rates.

Our distributor earnings covered our common dividend in the first quarter, despite us carrying over $200 million in cash, which represents over 20% of our equity. Our balance sheet leverage meaningfully below our target levels and the five non-accrual loans, which we estimate impacted our interest income by over $5 million in Q1 or about $0.10 per share. Our first quarter book value declined by about $0.78 per common share, or about 5% to $14.08, and was mainly affected by the increase in our CECL reserves, which was partially offset by an estimated $0.19 per share benefit from our share buybacks. As Jack mentioned earlier, during the first quarter, we were purchased about 1 million shares of our common stock, given what we believe is a deep value opportunity our stock price currently represents.

Our Board’s increase in our buyback authorization of an additional 5 million shares furthers our ability to over time the opportunistic in the market given our flexible and shareholder focused capital allocation strategy. Our CECL reserve at quarter ends stood at about $33 million or $2.54 per share, representing about 3.8% of our portfolio commitments. The $46 million increase in our CECL reserve quarter-over-quarter was mainly related to a higher allowance on our collateral dependent loans and more recessionary assumptions used in our analysis reflecting the uncertain market environment. As disclosed in our earning supplemental, slightly more than half of our CECL allowance or about $67 million is allocated to the five non-accrual loans.

Turning to our capitalization and liquidity, as we announced in March we successfully refinanced our legacy 2019 FL2 CLO and funded the $269 million of loans with one of our bank facilities, which improved the efficiency of our loan level borrowings and released about $85 million of capital further strengthening our liquidity position. This is our second refinancing of this type, following a similar transaction in the second quarter of last year related to our legacy 2018 FL1 CLO and our term financing facility. We believe this highlights the strong general quality of our loan portfolio, our ability to finance our assets during challenging market conditions, and the strength of our longstanding relationships with our lending partners as they look to do more business with us.

In connection with this refinancing, we upsized our J.P. Morgan financing facility to $425 million. Additionally, post quarter end we also extended the maturity of our Morgan Stanley facility to June 2024. As a result of the CLO refinancing, our total leverage ticked up at quarter end to 2.5 times from 2.3 times in Q4. We ended the quarter with over $220 million in cash and continue to actively manage our liquidity, focusing on protecting the balance sheet and our investors’ capital given the market environment. Thank you again for joining us today, and now we would like to open the call for questions.

Q&A Session

Operator: Thank you. [Operator Instructions] Our first question today is coming from Steve DeLaney from JMP Securities. Your live is now live.

Operator: Thank you. Next question is coming from Stephen Laws from Raymond James. Your line is now live.

Operator: Thank you. [Operator Instructions] Our next question is coming from Douglas Harter from Credit Suisse. Your line is now live.

Operator: Thank you. Next question today is coming from Jade Rahmani from KBW. Your line is now live.

Operator: Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over to Jack for any further or closing comments.

Jack Taylor: I would like to thank everybody for joining us for today. We really appreciate your time and attention. And I would like to thank our team for all the hard work that you’ve been putting in to maintain our portfolio and the quality of it. And I especially want to thank our investors for the support you have showing to us.

Operator: Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.