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Operator
Good morning. My name is Sarah, and I will be your conference facilitator. At this time, I would like to welcome everyone to Granite Point Mortgage Trust's first quarter 2021 financial results conference call. All participants will be on a listen-only mode. After the speaker's remarks, there will be a question and answer period. I would now like to turn the call to Chris Petta with Investor Relations for Granite Point.
Sarah
Thank you, and good morning, everyone. thank you for joining our call to discuss Granite Point's first quarter 2021 financial results. With me on the call this morning are Jack Taylor, our President and Chief Executive Officer, Marcin Urbacic, our Chief Financial Officer, Steve Alpark, our Chief Investment Officer and Co-Head of Originations, Peter Morrell, our Chief Development Officer and Co-Head of Originations, and Steve Kluss, our Chief Operating Officer. After my introductory comments, Jack will review our current business activities and provide a brief recap of market conditions. Steve Appart will discuss our portfolio, and Marcin will highlight key items from our financial results. The press release and financial tables associated with today's call, as well as our Form 10-Q, were filed yesterday with the SEC. If you do not have a copy, you may find them on our website or on the SEC's website at sec.gov. In our earnings release and slides, which are now posted in the investor relations section of our website, we have provided a reconciliation of GAAP to non-GAAP financial measures. We urge you to review this information in conjunction with today's call. I would also like to mention that this call is being bypassed and may be accessed on our website in the same location. Before I turn the call over to Jack, I would like to remind you that remarks made by management during this conference call and the supporting slide 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 typically associated with the use of words such as anticipate, expect, estimate, and believe, or other similar expressions. We caution investors not to rely unduly on forward-looking statements. They imply risks and uncertainties, and actual results may differ materially from expectations. We urge you to carefully consider the risks described in our filings with the SEC, including our most recent 10-K and 10-Q reports, which may be obtained on the SEC's website at sec.gov. We do not undertake any obligation to update or correct any forward-looking statements if later events prove them to be inaccurate. I'll 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 2021 earnings call. We hope everyone continues to stay healthy and safe. The first quarter of 2021 was Granite Point's first as an internally managed REIT, and we are excited to report solid performance across our business. Yesterday afternoon, we reported strong distributable earnings of $0.38 per share, well in excess of our dividend of $0.25 per share. This was accomplished while we have continued to maintain an elevated level of liquidity on our balance sheet. Our earnings benefited from the in-the-money LIBOR floors on our loans, the continued strong credit performance of our portfolio with 100% collections of contractual interest, and lower operating expenses. In March, our board decided to increase our dividend from $0.20 to $0.25 per share, and we believe the dividend has more room to grow as we rationalize our liabilities and grow our portfolio over time. The results generated by our business over the past year illustrate the resilience of our strategy and our team across various market cycles. With the improved tone in the real estate and capital markets, towards the end of the first quarter, we restarted our new loan originations and continue to build our pipeline of attractive investment opportunities, benefiting from the strong reputation Granite Point has established in the lending market. Commercial real estate transaction volume has been steadily increasing, and the lending market is now very active. Despite the level of competition among lenders, we believe the returns currently available on new investments remain compelling and similar to pre-pandemic levels. Over the course of the year, and assuming a stable market environment, we will grow our pipeline of new originations to match and then exceed the volume of portfolio repayments as we redeploy our excess capital. Along with building our pipeline and growing our portfolio, we continue to execute on our strategy to further diversify our financing mix. As previously discussed during the first quarter, we closed a new-term financing facility with Goldman Sachs, which provided us with about $349 million of term match and credit non-market-to-market funding. As a result, we currently have no outstanding borrowings on our Goldman repurchase facility and are negotiating a new term for this facility. Additionally, and as announced earlier this week, we priced our third commercial real estate CLO, which is anticipated to close on or around May 14th. This $824 million transaction achieved very attractive terms with an 83.25% advance rate and a significantly improved cost of funds of LIBOR plus 162 basis points for transaction costs, while financing 27 of our loans on a non-mark-to-market, term-matched, and non-recourse basis. We have consistently viewed the CLO market as a highly beneficial component of our diversified funding sources and are very pleased to have accessed this market again. Upon closing of our CLO, the percentage of our credit non-mark-to-market financing will increase to about 70% of our loan-level borrowings, which achieves our previously discussed targeted goal of two-thirds. Since 2018, we have issued three CLOs totaling about $2.5 billion and have established GranitePoint as a well-respected repeat issuer in this market, which we intend to opportunistically access over time as we grow our portfolio and continue to actively manage our liabilities. GranitePoint is off to a great start to 2021 with strong earnings supported by the resilient credit characteristics of our portfolio, the benefits from the LIBOR floors embedded in our loans, and our improving capital structure. We will continue to actively manage our investments and any potential credit events, which we believe will be relatively isolated, though not unexpected considering the pandemic's impact on the real estate market as certain loans are resolved. Given the improving economic and real estate market fundamentals, we are optimistic about our performance for the rest of the year and beyond. We believe we have positioned our company well to take advantage of emerging investment opportunities in the current environment and for future growth. We will continue on our strategy of delivering attractive risk adjusted returns while providing meaningful downside protection by originating floating rate senior first mortgage loans on institutional quality properties owned by high quality sponsors with value add business plans. Over time, we will emphasize redeploying our excess liquidity, to support our earnings and dividends, rationalizing the mix of our liabilities while further diversifying our funding sources and achieving greater economies of scale as we grow our business as an internally managed REIT. I would now like to turn the call over to Steve Alpart to discuss our portfolio and recent activities in more detail.
Chris
Thank you, Jack, and thank you all for joining our call this morning. Our portfolio has continued to perform well in 2021. with 100% of contractual interest payments received through April. We ended the quarter with a portfolio outstanding principal balance of about $3.9 billion across 100 loans with around $450 million in future funding obligations, which account for only about 10% of our total commitments. During the first quarter, we funded $37 million of loan balances on prior commitments. We realized about $100 million of loan payoffs in the first quarter, and an additional $120 million so far in the second quarter, including a $70 million hotel loan as a result of continued improvement in market conditions and the credit quality of our portfolio. We expect this pace of loan repayments to continue with an acceleration in the latter part of the year as economic activity and transaction volume picks up, though the actual volume is likely to vary from quarter to quarter. Even during the challenge market of 2020, we had repayments in excess of $500 million which we believe will be well exceeded this year. Turning to asset management, over the last few months, we have seen a decline in the volume of loan modification requests as market conditions continue to improve. We continue to work constructively with certain of our borrowers whose properties remain impacted by the pandemic. During the first quarter, we modified nine loans with an aggregate principal balance of about $395 million. We also deferred and capitalized approximately $4.5 million of interest, which reflects these modifications, as well as others that are currently effective from prior quarters. Most of the loans amended in Q1 have been previously modified on a shorter-term basis, and the general theme is that we are seeing institutional quality borrowers with high-quality properties acting responsibly and making ongoing financial commitments to their assets. Last quarter, we highlighted $240 million of watch list loans that have been particularly impacted by the pandemic. We remain in active dialogue with these borrowers, and to date there haven't been any major developments to report. Our risk rankings were very stable in Q1 versus the prior quarter. At March 31st, we didn't have any new loans that were risk-rated five. We had one risk-rated four loan that moved to a three, and the other credit migration was mainly positive, including one $70 million hotel loan being upgraded from a rating of three to a 2 in anticipation of a repayment, which as just mentioned earlier, occurred as expected in Q2. We are in ongoing discussions with the borrower on the $67 million hotel loan in Minneapolis that was risk rated 5 and are evaluating a variety of potential options. Overall, the credit quality of our well-diversified loan portfolio remains strong, and we are confident it will deliver attractive results over time. As Jack mentioned, we resumed new loan originations during the first quarter. consistent with the improving economy, overall market conditions, and positive trends in our portfolio, and are beginning to redeploy some of our excess capital to take advantage of new investment opportunities. Our current investment pipeline consists of senior loans with total commitments of over $145 million and initial fundings of over $105 million. We expect most, if not all, of these loans to close during the second quarter. Our pipeline mainly includes loans to strong sponsors on multifamily properties, with attractive credit and return profiles. We expect our pipeline of new investments to grow significantly in the coming quarters as we review a dramatically larger set of investment opportunities and reinvest capital released from loan repayments and our most recent CLL. We will continue to focus on multifamily and other property types with favorable fundamentals and will remain opportunistic in selecting the best investments for our portfolio that meet our desired return and credit characteristics. As we noted previously, Our pace of new loan originations in 2021 will largely depend on the volume of loan repayments. However, we anticipate also redeploying some of our excess liquidity over the course of the year as market conditions continue to improve. I will now turn the call over to Marcin for a more detailed review of our financial results.
Jack
Thank you, Steve. Good morning, everyone, and thank you for joining us today. Thank you. Yesterday afternoon, we reported strong first quarter results with gap net income of $28 million or 51 cents per basic share, which included $9.1 million or 17 cents per share in decrease of our CISO reserves. The decrease in our reserves was mainly driven by the loan repayment and improving microeconomic forecasts employed in our analysis. At quarter end, our allowance for credit losses was $63.1 million or $1.14 per share, and represented about 146 basis points of our total loan commitments. Distributable earnings for the first quarter were $20.7 million or 38 cents per basic share and excluded the non-cast decline in CISO reserves. Our book value increased by 30 cents per share to $17.22 at March 31st from $16.92 at year end. The increase was the result of the release of our CISO results and earnings meaningfully covering our dividend. In March, our Board of Directors declared a regular common stock cash dividend of 25 cents per share, which was increased from 20 cents per share in the prior quarter. Going forward, the main factors influencing our run rate earnings are expected to be the volume of loan repayments, the pace of deployment of our excess liquidity, and potential interest expense savings from refinancing of our term loan, which will be largely dependent on capital markets conditions. Our earnings continue to benefit from the LIBOR floors embedded in our loans, with a weighted average of 157 basis points. Over time, as we receive more loan repayments and originate new investments with lower LIBOR floors, our net interest spread is likely to compress. We ended the quarter with about $255 million in cash, and as of May 5th, we had approximately $229 million in cash, plus our option to draw an additional $75 million in term loan proceeds through the end of September of this year. Our total debt to equity leverage at March 31st was three times, down from 3.2 times in the prior quarter, and our recourse leverage, which excludes our CLOs and other non-recourse borrowings, was at 1.7 times. Given current market conditions, we would anticipate our total leverage to be in the range of three to three and a half times debt to equity, depending on developments in our portfolio, such as the pace of new loan originations and volume of repayments. As Jack mentioned, earlier this week we announced the pricing of our third CLO, an $824 million transaction with an advance rate of 83.25% and a cost of funds of LIBOR plus 162 basis points before accounting for transaction expenses. We are very pleased with this transaction as it provides us with very attractive cost of funds and increases the percentage of our non-mark-to-market loan-level financing to about 70%. In addition, upon closing, the CLO is expected to also release about $50 million of additional liquidity, which we expect to redeploy into new originations in the coming months. Finally, I would like to discuss the warrants we issued as part of our term loan last year and their potential impact on our book value. As a reminder, we issued a total of about 6.1 million warrants for the entire $300 million commitment, However, since we initially drew $225 million, there are about 4.6 million warrants that are effectively outstanding currently. The remaining 1.5 million warrants would vest if we decided to draw the remaining $75 million in proceeds on the term loan. Upon exercise, these warrants can be settled in either cash or net shares at the company's option. At a recent stock price over $13 per share, The dilutive effect on our book value would be approximately 3%, assuming the cash settlement option, and about 4% in the case of the net share settlement option. Thank you again for joining us today, and I will now ask the operator to open the call to questions.
Operator
Thank you. We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw from the question queue, please press star, then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Doug Harder with Credit Suisse. Please go ahead.
Doug Harder
Good morning, everyone. This is Josh Bolton, on for Doug. Appreciate the time. Hoping you can talk about your thoughts around liquidity. The cash on hand update was helpful. It still feels elevated, especially versus where you guys are running pre-COVID. So just trying to get a sense of what a more steady state level of liquidity looks like as the market normalizes. Thanks.
Jack
Hey, Josh. Good morning. It's Marcin. Thank you for joining us. Thanks for your question. Look, yes, as we said in prior calls, We have some excess liquidity, but also, as you just heard us say on our prepared remarks, we intend to deploy some of it over time. So, look, it's hard to tell exactly what the balance is going to be. It obviously will depend on pace of originations and pace of repayments, which, as you just heard, we expect to accelerate a little bit in the second half of the year. But, you know, on a net basis, we expect the excess liquidity to go down over time.
Doug Harder
Great. Makes sense. And then I guess shifting gears a little bit, the $70 million hotel loan that was upgraded and prepaid in the second quarter, any color you can give us around what type of hotel that was and kind of what was the resolution? Was it a sale or a refinance or something else? Thanks.
Chris
Hey, good morning, Josh. It's Steve Alpert. No real update from last quarter. It's a type of hotel. It's a full-service hotel. I think we mentioned last quarter it's well-located. It's in the Minneapolis CBD. It's a great asset.
Jack Taylor
Steve, he was asking about the loan that paid off.
Chris
Oh, my – Yeah, sorry. Yeah, also a full-service hotel. And the resolution on that one was that it was purchased by a large private equity firm at a very attractive price.
Doug Harder
Great. Thanks for the details.
Operator
Again, if you'd like to ask a question, please press star, then one. Our next question comes from Jade Rahimi with KBW. Please go ahead.
Rahimi
Thank you very much. Could you elaborate on the warrants and how you're thinking about potential settlement? Hey, Jade.
Jack
It's Martin.
Rahimi
You gave color. Thanks. Hey, Martin, I know you gave color on the potential dilutive effect, but I guess is the company's perspective that given its cash position that cash settlement is more likely?
Jack
So thank you for the question. The warrants can't be exercised for the first year. So that's one thing. So they can't be exercised through the September of this year. I think, look, we like the optionality of cash versus stock because depending on where the stock price is at the moment, if they get exercised, we can help limit dilution. Obviously, today, because stock is below book value, cash is cheaper on a relative basis in terms of dilution effect. But I think it will largely depend on where we are in terms of valuation and our balance sheet overall if they get exercised.
Rahimi
Okay. And do you think they're likely to be exercise or too hard to predict at this point?
Jack
It's really hard to tell.
Rahimi
Okay. Turning to the outlook for M&A, there's been a lot of discussion this quarter from mortgage REITs about it. So Jack, I was wondering if you could give your thoughts and whether you think combining with another firm that perhaps doesn't have a middle market emphasis that Granite Point has would make sense and could be accretive?
Jack Taylor
Well, we are focused on growing our book, and we're not in any discussions. We wouldn't be able to tell you if we were, but I'll tell you we're not pursuing anything like that, and the whole industry is in recovery and reacceleration mode, including us. So there's been some discussion amongst mortgage rates, I think, often prompted by questions from a particular analyst. But my point is that we are not looking to that in the near intermediate term.
Sarah
Okay.
Rahimi
Thanks very much. Thank you. The watch list loans, I think the dollar amount you said was 240 million. Just want to make sure I got that correct. AJ, that is correct. Okay. And that was unchanged from last quarter? That is correct. Okay. Over what timeframe do you anticipate those loans to come to some type of resolution?
Chris
That's a great question. We're really just monitoring all of these loans, and obviously these four watch list loans in particular, each situation is obviously a little bit different. So really, I guess all I would say is that there's no real update from last quarter. We'll continue to share information as we have it, but there's no specific timeline on that right now.
Rahimi
Okay, and lastly, is there just one loan on non-accrual at this point?
Chris
Yes, that is correct. It's the same. It's a relatively small loan that was put on non-accrual, I believe, in the fourth quarter, and it's the same one that's on non-accrual in the first quarter.
Rahimi
Thanks for taking the questions.
Chris
Thank you, Jay.
Operator
Our next question comes from Chris Moeller with JMP Securities. Please go ahead.
Chris Moeller
Hi, guys. Thanks for taking the question. I'm on for Steve today. On the CISO reserve release, I appreciate your comments on that, Mark. But just digging a little bit deeper, was the majority of that driven by macro assumption improvements or specific loans either paying off or improving on the risk scale?
Jack
I would say it's a mix. I think the majority of it is related to the macro. Obviously, you know, we had one hotel loan repay in the second quarter that was a little bit allocated to that, but it was mostly on the macro level.
Chris Moeller
All right. Thank you. And then other than multifamily, which you guys mentioned in your comments, are there any other asset classes that you like going into 2021? I know we've heard competition of multifamilies elevated right now. Thanks.
Jack Taylor
I'll address that. We are doing two things. We're always balancing our competing interests and needs. So there's levels available in the market. There's also portfolio composition and also credit dynamics. So giving all that together, we're shifting our mix a bit with more, at least initially, of a focus on multifamily and warehouse logistics. as well as some self-storage, life sciences, some well-used office. This is largely driven by portfolio composition and trends that we think will occur over time. For example, multi-families are, across our portfolio and others, the ones that are prepaying fastest. So to maintain your balance on that, you need to originate more, for example. And we'll also de-emphasize more of the impacted classes such as hotel and retail, at least in the near term. But all those classes I've talked about, we've originated over many years, know them well, like them, and know how to pursue them.
Chris Moeller
Great. Thanks for the comments, everyone, and congrats on a strong start to the year.
Jack Taylor
Thank you.
Operator
This concludes our question and answer session. I would like to turn the conference back over to Jack Taylor for any closing remarks.
Jack Taylor
Thank you for all your questions, and thank you, everybody, for listening to our call today. We look forward to a continuation of a very strong first quarter into the rest of the year, both as the market recovers and as the economy opens up. and as we take advantage of the opportunities ahead of us. Thank you again, and we wish you all a good, safe, healthy next quarter. Thank you.
Operator
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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