This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: Good morning. My name is Vaishnavi, and I will be your conference facilitator. At this time, I would like to welcome everyone to Granite Point Mortgage Trust's first quarter 2022 financial results conference call. All participants will be on a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After the speaker's remarks, there will be a question and answer period. To ask a question, you may press star, then one on a touchtone phone. To withdraw your question, please press star, then two. Please note, today's call is being recorded. I would now like to turn over the call to Chris Peta with Investor Relations for Granite Point. Please go ahead.
spk02: Thank you, and good morning, everyone. Thank you for joining our call to discuss Granite Point's first quarter 2022 financial results. With me on the call this morning are Jack Taylor, our President and Chief Executive Officer, Marcin Urbacic, our Chief Financial Officer, Steve Alpert, our Chief Investment Officer and Co-Head of Originations, Peter Morrell, our Chief Development Officer and Co-Head of Originations, and Steve Plus, our Chief Operating Officer. After my introductory comments, Jack will review our current business activities and provide a brief recap of market condition. Steve Alpert 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 were filed yesterday with the SEC and 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 sides may include forward-looking statements, which are uncertain and outside of the company's control. Forward-looking statements reflect our views regarding future events and are subject to uncertainties and could cause actual results to differ materially from expectations. We see our filings with the SEC for discussion of some of the risks that could affect results. We do not undertake any obligation to update any forward-looking statements. We will also refer to certain non-GAAP measures on this call. This information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. A reconciliation of these non-GAAP financial measures to the most comparable gap measures can be found in our earnings release and slides, which are available on our website. I'll now turn the call over to Jack.
spk04: Thank you, Chris, and good morning, everyone. We would like to welcome you all to our first quarter 2022 earnings call. We have made tremendous progress on our strategic priorities of repositioning our balance sheet and improving run rate earnings. As we discussed previously, we have been focused on deploying capital from loan repayments and the resolution of a few non-accrual loans into earning assets, refinancing our older, inefficient, and delevered loan-level funding vehicles to release and reinvest the capital trapped in these structures, and repaying our higher-cost term loan borrowings. We believe that our recent accomplishments in pursuing these priorities have the ability to meaningfully offset the earnings impact of rising short-term interest rates in the near term and also position us well for the second half of the year, as our portfolio loan yields are expected to increase if short-term rates continue to rise. We are very excited to report a number of steps we have recently taken to improve run rate profitability and close and surpass the gap between our current stock price and our book value. In late March, we sold our $54 million non-accrual senior loan on an office property located in Washington, D.C., which allowed us to redeploy capital into earning assets and repay expensive debt. At this point, we have resolved three of our four non-accrual loans. Our one remaining loan on non-accrual status is a first mortgage loan on a retail property in Pasadena, California, for which we are also actively pursuing various resolution strategies. In April, we refinanced about $590 million of loans from two of our legacy funding vehicles, our 2018 commercial real estate CLO, and the structured financing facility with Goldman Sachs, both of which had meaningfully delevered through repayments. The result of these transactions was a net release of about $180 million of capital at an attractive cost of funds. We are very pleased with this outcome as it lowered our cost of funds on the finance loans, helped us significantly relever a portion of our portfolio, and provided funds for repayment of higher cost borrowings and additional portfolio growth. With a portion of the capital released from the refinancing transactions, we recently fully repaid the $100 million of borrowings remaining under our senior secured term loan facilities, achieving yet another of our stated strategic goals. The full repayment of this higher cost corporate debt not only significantly reduced our cost of funds, which has not yet been fully reflected in our financial results, but also provided us with more balance sheet flexibility and the ability to further grow our portfolio. We believe that all of these actions, when fully reflected in our financial results in the coming quarters, have the ability to meaningfully improve our run rate profitability. Moreover, there are additional actions we intend to take which could provide even further benefits and drive attractive total returns for our stockholders. We are actively pursuing a few alternative resolutions with respect to the one remaining non-accrual loan, which is currently being held unlevered. Once resolved, redeploying the capital currently invested in this loan into earning assets should generate incremental earnings. We are also pursuing various opportunities to further rationalize our funding and increase our total leverage from 2.5 times at the end of Q1 closer to our target range of 3 to 3.5 times. which would afford incremental portfolio growth opportunities and could further improve our run rate profitability. Additionally, as an internally managed REIT, we are well positioned to realize operating leverage benefits as we grow our business. We continue to see a healthy flow of attractive lending opportunities and are focused on properties with favorable fundamentals. Given the ongoing uncertainties with respect to global events, the pandemic, supply chain disruptions, inflation, rising interest rates, and credit spreads, we remain disciplined in our approach to investing, underwriting, and loan structure. Given our liquidity and leverage, we are well positioned to take advantage of wider loan spreads and remain opportunistic in further improving our capitalization. With the amount of volatility global markets are experiencing, we believe that U.S. commercial real estate will continue to be viewed as a safe haven asset class by long-term fundamental investors, and our strategy of lending on a senior floating rate basis against institutional quality real estate should generate attractive risk-adjusted returns over time. In summary, our strategic plan has been working well, and we have already accomplished a lot over the last few quarters to reposition the balance sheet and improve our run rate earnings. One key net result of our actions on our overall capitalization structure is the replacement of higher cost secure term loan corporate debt with lower costs, leverageable permanent preferred equity. Additionally, resolutions of all but one of our non-accrual loans and refinancing of our inefficient funding vehicles helped reduce the earnings drag from trapped capital and allowed for more reinvestment into earning assets. Our business continues to deliver strong operating performance led by our well-diversified and resilient senior loan-focused investment portfolio, generating solid run rate earnings supporting an attractive dividend. We believe that our recent accomplishments and fully reflected in our financial results in the coming quarters, as Marcin will discuss in more detail later, will significantly benefit our run rate profitability and position Granite Point well for the second half of the year. We are currently pursuing the additional embedded opportunities to potentially provide incremental benefits with the ultimate goal of delivering attractive total returns to our stockholders. I would now like to turn the call over to Steve Alpart to discuss our originations, forward pipeline and portfolio.
spk05: Thank you, Jack, and thank you all for joining our call this morning. Our broadly diversified and defensively positioned portfolio continues to generate attractive returns while exhibiting a favorable credit profile. Over the last few quarters, we have generally seen positive credit migration within our portfolio as we have resolved three of four non-accrual loans and have upgraded the risk ratings of select loans driven by progress in the business plans of the collateral properties. During the quarter, our weighted average risk rating improved from 2.6 at December 31st to 2.5 at March 31st, driven by new loan originations, the resolution of a five-rated non-accrual loan, and the upgrading of nine loans, which includes about 100 million of loans changed from a risk rating category of four to three to reflect the improved credit profile of those investments. We closed four new loans totaling about $142 million in commitments and over $130 million of initial fundings, and about half of those loans closed in the last two weeks of March. Our pace of first quarter originations was impacted by the timing of our capital raises and the timing of certain loan closings that occurred later in the quarter. We also funded over $34 million on existing commitments and $6 million in one loan upsizing, bringing total fundings to over $170 million for the quarter. Over 65% of our Q1 originations were secured by industrial assets and the balance by well-leased office properties. Newly originated loans carry attractive risk-adjusted return characteristics with a weighted average yield of SOFR plus 388 and a weighted average stabilized LTV of approximately 59%. During Q1, we realized about 172 million of repayments across various property types, inclusive of the office loan sale. Adjusting for the disposition of the non-accrual loan, our earning assets moderately increased quarter over quarter. Our portfolio ended the first quarter with an aggregate committed balance of $4.2 billion spread across 103 loans with an average balance of approximately $37 million and about $370 million of future funding commitments. Our loans continue to deliver an attractive income stream with a favorable overall credit profile generating a realized yield of about 5 percent, with a weighted average stabilized LTV of 63 percent. The transitional property lending market remains active and healthy, notwithstanding increased market volatility. We have remained disciplined and highly selective while picking the most attractive new loans for our portfolio. We continue to see an ample volume of attractive investment opportunities, with a current pipeline of approximately 200 million of commitments and $165 million of initial fundings, which we expect to grow as we invest our excess liquidity and redeploy proceeds from loan repayments. So far in the second quarter, we have funded over $140 million of loan principal, including approximately $12 million on prior commitments, and realized about $40 million of repayments. Over 75% of the loans in our current pipeline are secured by multifamily properties, with the balance in other categories. In summary, we continue to source an ample flow of attractive investments that meet our credit and return criteria, which we can often originate at lower leverage and wider spreads than what was available in prior quarters. Given the current market environment and our outlook on loan repayments, we anticipate moderately growing our portfolio over the remainder of the year. I will now turn the call over to Marcin for a more detailed review of our financial results.
spk06: Thank you, Steve. Good morning, everyone, and thank you for joining us today. Yesterday afternoon, we reported our first quarter gap net income of $1 million or $0.02 for basic share as compared to $6.7 million or $0.13 per basic share in Q4. Our gap earnings include a previously disclosed $5.8 million or $0.11 per basic share charge on early extinguishing of debt related to the $50 million partial repayment of the term loan from February and provision for credit losses of $3.7 million or $0.07 per basic share of which about $0.04 were related to the sale of our non-accrual loan. Distributable earnings for the first quarter were $2.6 million or $0.05 per basic share, which include a previously disclosed realized loss on the loan sale of $10.1 million or $0.19 per basic share. Our Q1 distributable earnings before the write-off were about $12.7 million or $0.24 per basic share, which is largely unchanged from the prior period. Additionally, we believe that the impact of short-term interest rates increasing towards the end of Q1 should be largely offset by the loan originations closed during the second half of March and the remaining benefit from the partial term loan repayment in mid-February. Our March 31st book value decreased to $16.39 per share from $16.70 per share last quarter as a result of transaction costs on the additional preferred shares issued in Q1 and the dividends exceeding GAAP earnings, which were affected by the factors I mentioned earlier. The first quarter book value includes an allowance for credit losses of about 67 cents per share. Our total allowance declined by about 6.4 million, or 12 cents per share, quarter over quarter, mainly due to a write-off on the loan sale, which was partially offset by an increase in our general reserve of about 1.6 million, or 3 cents per share, as we employed a more conservative microeconomic forecast and some changes in our portfolio mix. Our total allowance represents about 86 basis points of our portfolio commitments as of March 31st. About 14 million of the 36 million total reserve is allocated to the one remaining non-accrual loan. We ended the first quarter with about $148 million of unrestricted cash, and as of May 9th, had about $174 million in cash reflecting our recently announced activities. Our total debt to equity ratio at March 31st declined to 2.5 times from 2.7 times in the prior quarter, driven by the issuance of additional preferred equity and the partial repayment of the term loan during the first quarter. As Jack described earlier, we have made some changes to our balance sheet over the last couple of quarters by executing on our strategic priorities. Given those shifts, we would like to provide some additional information to better illustrate the potential impacts of these actions on our run rate profitability when they are fully reflected in our results. Page 5 of our earnings supplement illustrates those potential estimated impacts. Our current pipeline, most of which has already closed in Q2, is anticipated to benefit our earnings going forward. Our recent refinancing of legacy funding vehicles generated about $180 million of capital at an attractive cost of funds. The cost of this incremental capital is estimated to be more than offset by the savings generated by the full repayment of the remaining $100 million term loan borrowings, which occurred over the last couple of weeks. As Steve mentioned, we're actively evaluating and quoting new loan investments and will be redeploying the remaining excess liquidity over the coming months, which should potentially generate additional benefits. Taken together, we believe that these actions have the ability to meaningfully increase our run rate profitability and help reduce the impact of higher short-term interest rates on our earnings, while positioning us to benefit from higher rates should they continue to rise later in the year. Thank you again for joining us today, and I will now ask the operator to open the call to questions.
spk00: 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. If at any time your question has been addressed and you would like to withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Steve Delaney with JMP Securities. Please go ahead.
spk03: Everyone, and thanks for taking my question. I think first I'd just like to say, you know, congratulations on the strong progress with the non-accruals, and we really appreciate the slide five that kind of shows the walk forward from the benefits from all of that activity. As far as this second quarter, because we've last – I guess fourth quarter and first quarter, we had these special charges related to debt extinguishment. And just to be clear, in the second quarter, we've got the final $0.21 charge on the PIMCO extinguishment. And I believe in your deck or your press release, you also mentioned $0.03 per share on Goldman, so negative $0.24. As far as you see things, are these the only – non-recurring charges that you currently expect in the second quarter?
spk06: Morning, Steve. Thank you for joining.
spk03: Hi, Marcin.
spk06: Thanks for your question. Sure. Appreciate the kind words. Yeah, so far, those are kind of the two items that we see related to essentially the refinancings and removing the high-cost and inefficient debt on our liability side. Okay.
spk03: And your two-and-a-half... debt-to-equity, moving forward, I realize it'll take a couple of quarters, two or three probably, but do you see that approaching? We sort of tend to think about 3.0 times debt-to-equity as being kind of a benchmark or a standard for the commercial mortgage REITs. Do you see that as achievable over the next several quarters?
spk06: Yes. Look, heading into the pandemic, we were three and a half times levered debt to equity. Our target is three to three and a half. Our goal is to definitely increase, get closer to that target leverage. We began obviously doing that already by refinancing some of these legacy vehicles and reinvesting the capital. There will be a slight pickup in leverage on that. And then as we continue to work through the rest of our plan, we would anticipate leverage to go up a little bit more. We have $100 million in a non-accrual loan that's sitting unlevered, so that's sort of $100 million of capital that's not earning anything today as we resolve that, which we expect to do at some point in the second half of the year. We can relever that capital, so that will also help with leverage, portfolio growth, and hopefully earnings as well. Great. All right.
spk03: Well, congratulations again on the non-accruals. And to be clear, Pasadena, $114 million loan, is it accurate to say that is the only non-accrual loan in your portfolio remaining? Is that correct? Yes, that's correct. Okay. Thank you very much for the comments. Thanks.
spk00: The next question comes from Doug Harter with Credit Suisse. Please go ahead.
spk08: Thanks. Now that you've repaid the expensive debt and issued the preferred, you know, I guess, how do you think about the composition of your capital today? You know, do you expect any other changes or any issuance to look to grow the capital base?
spk06: Morning, Doug. Thanks for joining us. Thank you for your question. Look, I think, you know, before the pandemic, this is sort of where we were. in terms of capitalization, equity, some unsecured on the convert side. We like to have a balanced capitalization structure. We like to have some unsecured debt on the balance sheet. So I would say this is sort of close to where we were before as we kind of go through the next several quarters. We don't anticipate major changes to the overall structure. There may be some, you know, changes between, you know, how the loans are financed, whether they're in CLOs and, or other different types of facilities. But I think overall, we'd like to keep it balanced on kind of where we are. We didn't see kind of very significant changes from that, but obviously it will be dictated by, you know, our capital needs liquidity and sort of market conditions. So we always want to remain flexible. But, you know, we're very pleased with sort of where we've gone over the last couple quarters replacing this debt and then adding some more leverageable equity, which is very beneficial to us.
spk08: Got it. And to follow up on the leverage and getting to the 3.0, I guess does it take the resolution of the non-accrual to get to the 3.0? You know, how close can you get, you know, before that resolution happens? happens, just, you know, kind of what are the limiting factors to, you know, that kind of cause or delay the timing to get there?
spk06: Look, I think it's just executing on the plan. I think, you know, resolving that on a cruel loan, which, again, is unlevered today. That's part of it. If you look at our sort of weighted average advance rate on our portfolio, it's in the 60s, right? So we still have a little bit more work to do. on improving that going forward. So it's sort of all of the above, making the loan level financing a little bit more efficient and re-levering the capital that's sitting idle right now on the balance sheet. Great.
spk08: Thank you.
spk00: The next question comes from Jade Armani with KBW. Please go ahead.
spk01: Thank you very much. I'm curious as to your thoughts regarding scale. I think that's really what explains the discount to book value, because at the current dividend, there is not enough of a return relative to book value to warrant the shares trading in line with book value. So either there will have to be dilutive capital raise to increase the scale of the company, or the dividend has to meaningfully increase. So one question would be how you think about overall scale, how much stockholders' equity is sufficient to really get the scale. The second question related would be just the G&A of the company. It totaled about $10 million in the quarter, so $40 million annualized. That's running at around $0.75 per share annualized, which is $0.18 per quarter. So are there any components to G&A that could be reduced or perhaps temporarily suspended or perhaps paid in stock compensation in order to increase the earnings power of the company. Thank you.
spk04: Hi, Jay. Thank you for the question. Good to hear from you, or questions, I should say. I'll start off and then pass it on to Marcin. The first question about scale, I'd like to address it by talking about the deep discount that we're trading at. We think that at our scale that we were before, we were trading at a much higher level, and we think that the deep discount is related not so much to the scale but to the misconceptions about the earnings power of the company's balance sheet and its business. What we've shown in the presentation today is that we've been unlocking that earnings power over the last few quarters and are going to continue to do so. And so supported by our well-performing portfolio, we believe that this earnings power should further improve as we continue to execute on our strategic priorities. So I'll pass it over to Marcin to answer your following question.
spk06: Thanks, Jack. Hi, Jay. Thanks for joining us. Look, I think, and to follow up on scale, we have $1.1 billion of equity, right? So from my perspective, it's not really that we're self-scale, right? It's more about earnings power of the company, which we've just provided more information as to how we have improved it and we will be improving it. And to your point on GNA, don't forget, you know, about $8 million run rate of GNA is a non-cash equity compensation. So the true sort of cash expenses are much lower than that. We had a couple one-timers in Q1. I would probably... estimated to be somewhere around a penny per share. I would say our sort of run rate, you know, cash costs are probably somewhere below $30 million if you look at what they were in 2021. So I think you've got to sort of look at it on sort of apples to apples on a cash basis versus the total expense basis because a big chunk of that is in non-cash equity comp.
spk01: Thank you very much. In the current competitive environment, do you think there are any changes the company should be making in terms of its target investments? Everyone has pivoted toward multifamily. That's a very consensus move. Everyone has pivoted towards Sunbelt Markets. But would you contemplate any fixed-rate product? And more on a strategic standpoint, side, there are quite a handful of mortgage REITs trading at discounts to book value. Would you contemplate any potential combinations with other companies?
spk04: I'll let Steve Alpert address the first part of your question.
spk05: Hey, Jay. Good morning. Thanks for joining. So we expect to continue to focus on what we've been doing, floating rate, senior loans, we're going to continue to focus on multifamily, as well as some other sectors, still storage, student housing, warehouse logistics, currently de-emphasizing office and retail. If you look at our first quarter originations, you can see it skewed towards warehouse industrial. The second quarter, which we alluded to, was about 75% multifamily. So we're going to continue to focus on those sectors in growth markets. with good cash flow, lighter transition business plans, a lot of repeat borrowers, continue to stay diversified by geography. So for what we see right now, I would say, you know, Q2 and heading into Q3, I think we'll stay on that theme. We're also seeing that, you know, spreads have widened, leverage has come down a bit on our loans, underwriting standards are favorable, we're getting good structure. So with what we just described, we feel pretty good about what's in the pipeline.
spk04: Thank you very much. Oh, go ahead, Jack. Yeah, with respect to your second part of the question, Jay, as I said earlier, we were training at much higher levels, at an even smaller scale than we are now, given where our stock prices right now. We're not contemplating making any acquisitions, though we would in the future look to that if we found it accretive at the time. Thank you.
spk00: The next question comes from Stephen Laws with Raymond James. Please go ahead.
spk07: Hi, good morning. You guys have covered a lot already and my congratulations on accomplishing so much here today, as far as collapsing the legacy vehicles, the repaying the debt and other actions you've taken resolving DC, et cetera. Um, you know, kind of wanted to get some general comments and property type around office that continues to be the property type. I get the most, most questions on as far as, as outlook. So if you could talk a little about the performance of the office assets in your portfolio, uh, And then, Jack, on the other side of the coin from some of the questions, just curious, get your thoughts on a stock buyback. At this discount, I know it works against your outlook for getting more scale, but would certainly contribute to pushing leverage towards your target. So I just wanted to get your comments on that, please.
spk04: Well, so, Steve, I'll let you go second for once, and I'll go first. It's our general policy not to comment on potential buybacks. Having said that, we're always focused on generating the best risk-adjusted return and what's best for the business. There's a lot of different factors that play into it. One of the assessments of the best use of capital is, of course, the discount to book value that we're trading at now or might be in the future. I'll remind you and others that we've done share buybacks in the past. We do have authorization for more buybacks. There's some 2.7 million shares that are authorized. As we make this assessment, we have the ability to use those shares when appropriate.
spk05: Hey, Steve. It's Steve. I'll take the first part of your question on, I guess, how we're thinking about our office portfolio. Look, we feel generally good about our office assets. Those loans are all current at quarter end. Rent collections have been strong. We've seen the capital improvement programs are continuing, even in the face of the supply chain and labor issues that are out there. We're not really seeing any delays or blown budgets there. Leasing is clearly increasing. slowed during the pandemic and coming out of the pandemic. It has been coming back. It is uneven across markets and geographies. But, you know, we have strong sponsors with really good assets. We saw during the pandemic that they have real equity to protect. We've seen borrowers where it's been needed, you know, stepping up and putting more equity into their assets. We're carefully monitoring a few deals where business plans are behind schedule and could stay behind schedule due to some of the headwinds in the office space. So we're monitoring some of these assets carefully, but overall, as I said at the beginning, we feel generally good about our office assets.
spk07: Great. Thanks, Steven. As a follow-up to that, You mentioned, I believe in your prepared remarks, upgraded nine loans during the quarter. Can you give us a breakdown of kind of property type or region of where those upgrades took place? It would be great.
spk05: Sure. It's been a little bit across the board, and it was upgrades, a mix of, you know, fours to threes, threes to twos, twos to ones. It's kind of across the board by asset type and geography. It included a couple of office loans. It included a mixed-use loan. It included a couple of hotel, some multifamily. So it's really been kind of across the board, including office. And that was, as I think we said earlier, due to specific improvement in those business plans.
spk07: Great, well good to see that breadth across different property types in the portfolio. Jack and Steve, thanks for the comments this morning, appreciate it.
spk01: Thank you.
spk00: This concludes our question and answer session. I would like to turn the conference back over to Jack Taylor for any closing remarks.
spk04: Thank you very much, operator, and I would first like to say that we're really pleased to be able to report today that of our recent accomplishments and that when they're fully reflected in our financial results in the coming quarters, we'll meaningfully see benefit from our run rate profitability. And it positions us well for the second half of the year as rates rise and as these results continue. And as a further reminder, we're pursuing more embedded opportunities to potentially provide incremental benefits with the ultimate goal of delivering the attractive total returns to the shareholders. I would like to thank you all for joining our call today. We wish you good health during these continuing times, and we look forward to speaking with you soon.
spk00: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer