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spk03: 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 speaker's remarks, there will be a question-and-answer session. Please note, today's call is being recorded. I would now like to turn the call over to Chris Petta with Investor Relations for Granite Point.
spk01: 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, Marcin Urbacek, our Chief Financial Officer, Steve Alport, our Chief Investment Officer and Co-Head of Originations, Peter Morrell, our Chief Development Officer and Co-Head of Originations, and Steve Plouft, our Chief Operating Officer. After my introductory comments, Jack will provide a brief recap of market conditions and review of our current business activities. The eval part 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. We expect to file our foreign 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 will 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. A 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. I'll now turn the call over to Jack.
spk02: 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 in raising interest rates, we successfully navigated this unstable environment and accomplished many of our objectives over the course of 2022. Earlier in the year, we opportunistically grew our equity base through the $87.5 million add-on preferred equity offering and repaid the remainder of our higher-cost term loan borrowings. We refinanced two of our legacy delevered 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 non-performing 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 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. As we have said in the past, we expect the commercial real estate and capital markets environment to remain challenging and uncertain in the nearer term. It remains unclear 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. While we continue to see headwinds in the office sector, they are impacting properties and markets very unevenly. In our portfolio, the biggest impact has been on those markets and properties more affected by the pandemic and work-from-home trends, and where 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 loans have been very much the exception. In general, we are seeing ongoing commitment by our borrowers 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 CECL reserves over the last couple of quarters to about 2.4% of our portfolio commitment as of the end of 2022. 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 and is waiting for more intermediate clarity and capital market stability. We believe that our significantly delevered balance sheet, combined with our team's proven expertise, will allow us to both mitigate the effects on our portfolio of the 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 on the broad expertise and experience of our team to successfully navigate the challenges as we have done over our long careers in real estate lending. I would now like to turn the call over to Steve Halpert to discuss our portfolio activities in more detail.
spk10: 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 to 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 continue to deliver an attractive income stream with a favorable overall credit profile, generating a yield of about 8.4%, with a weighted average stabilized LTV at origination of 63%. During the fourth quarter, we funded about $109 million of total principal, consisting of approximately $31 million on existing commitments and a $77 million acquisition financing related to the resolution of the Pasadena retail loan. We realized almost $1 billion from repayments and two loan sales during 2022, with about 44% of that being office loans. 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 our loans and or enhancing our loan economics or structure. Our repayments continue 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 office loans. The repayments outpaced loan fundings in the fourth quarter, which resulted in a roughly $250 million decline in our portfolio balance. As of December 31st, our portfolio weighted average risk rating was 2.5, which was largely unchanged from the prior quarter of 2.6. During the quarter, we moved one of our office loans with a UPB of 32 million to a risk ranking of five and place it on non-accrual status. We are in active discussions with the borrower and are evaluating a variety of potential resolution alternatives and will 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 1231, we have four loans totaling $247 million with a risk rating of five and associated CECL reserves of about $39 million which are all secured by office properties. We remain very focused on pursuing various strategies on these loans, with the exact timing and outcome being difficult to predict. We aim to maximize economic outcomes, release trapped capital, and eliminate the meaningful drag these loans impose on our earnings as we successfully accomplish 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 that remain 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 desired by tenants. We'll 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 remain 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 balance over the near term. I will now turn the call over to Marcin for a more detailed review of our financial results.
spk05: Thank you, Steve. Good morning, everyone, and thank you for joining us today. Yesterday afternoon, we reported a fourth quarter gap net loss of $9.9 million, or 19 cents per basic share, which includes a provision for credit losses of $16.5 million, or 32 cents per share, and a loss on a loan sale of $1.7 million, or 3 cents 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 16 cents 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 for the realized losses are Q4 distributable earnings for $9 million, or 17 cents per basic share. Our fourth quarter book value declined by about 38 cents per common share to $14.86, and was mainly affected by the increase in our CECL reserves. For the full year, we reported gap net loss of $55.3 million, or $1.04 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 extradition of debt of $18.8 million, or $0.36 per basic share. related to our repayment of the term loan borrowings earlier in the year. Our full year 2022 distributable earnings were $14.7 million, or 28 cents per basic share, inclusive of $27.3 million, or 51 cents per basic share, realized losses related to the resolutions of two non-accrual 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 CECL reserve totaled $86.6 million or $1.65 per common share and represented about 2.4% of our total loan commitments. Our allowance for credit losses includes about $39 million of reserves allocated to the four risk-rated five non-accrual loans. The $16.5 million provision for credit losses in the fourth quarter was mainly driven by more conservative microeconomic forecasts used in our analysis. Turning to our capitalization and liquidity, our fourth quarter total debt-to-equity ratio decreased to 2.3 times from 2.6 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 continue 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-market-to-market basis and allowing for additional funding flexibility, especially with respect to non-performing loans, giving 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.
spk03: Thank you. And at this time, we'll be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. Confirmation tone will indicate that your line is in the question queue. You may press star followed by the number two if you'd like to remove your question from the queue. Once again, to ask a question, press star one on your telephone keypad. Our first question comes from Doug Harder with Credit Suisse. Please state your question.
spk06: Hi. Good morning. I'm hoping you could talk about your plans to generate more liquidity to to handle the convert that comes due in the fourth quarter?
spk05: Sure. Good morning, Doug. Thanks for joining us. Thanks for the question. This is Marcin. Look, we will remain opportunistic vis-à-vis any potential capital markets transactions. Obviously, we did not do that due in the Fourth quarter to address the 22 maturities. We do have a pretty delivered portfolio, so we're looking at opportunities to potentially refinance some of our delivered funding vehicles, which would provide pretty meaningful capital to help us address the bond. Again, we'll remain opportunistic. We'll probably run the portfolio off a little bit, but if there's an opportunity to refinance them, we'll evaluate that as well.
spk06: Just following up on that, comment about the underlevered portfolio. Just looking at slide 12, do 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 think about the potential for finding liquidity there?
spk05: Sure. It really varies by, varies by different assets. You know, these facilities, I mean, you can see, you can see on this page, it's somewhere between 40 and 50, 55% advance rate right now. It really varies on a particular loan. We said, set these facilities up to really help us with financing or some of the self-performing and non-performing loans, which we were very happy with that. It's a great tool to help us manage overall liquidity. we see a lot of opportunity to potentially refinance FL2, the second CLO, which is below 40% advance rate right now. So we're looking into that. But again, the portfolio is pretty delevered, so we really will have some opportunities to maybe swap some of the corporate debt for some asset-related debt over time.
spk02: Hi, Doug. This is Jack Taylor. I would just add one thing. I wouldn't use as the operative assumption that any refinancing of underlevered assets is put onto the $200 million non-market-to-market repurchase facility or the secured credit facility.
spk06: Okay. I guess is that implying that refinancing – I guess what is the appetite or the availability to get new financing facilities, secured financing facilities in the market today?
spk02: We're in good position with our existing banks and wouldn't need to reach out to new lenders, so we also have inquiry from new lenders as well.
spk06: Okay. Thank you.
spk03: Our next question comes from Steve Delaney with JMP Securities. Please state your question.
spk04: Good morning, everyone. The new five-rated, I'm sure everyone on the call wants to learn a little more about the new five-rated office loan in Dallas. I'm not really familiar with that market, but could you just generally describe what sub-market, what part of Dallas it's located in, and maybe some comments about the age of the building, the business plan for the sponsor, and what the current occupancy and tenant mix looks like? Thanks. Hey, Steve. It's Steve Alpert. Good morning.
spk10: I'll keep this high level. Hey, Steve. Good morning. So this is a small loan secured by an office property in Dallas, as you know. We moved this one to a 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 is also performing very well. This one has underperformed. The leasing has been sluggish. You know, general area of Dallas is kind of north Dallas. Okay. But the ethic is, you know, you've heard us talk a little bit about how uneven performance has been across markets, within markets, by buildings. This one's just underperformed. So those are the reasons why we moved to 205. As far as, you know, potential outcomes here, it's the usual mix, but we're looking at a potential sale of the property. could be a deed in lieu. The timing of the resolution is hard to predict, but we're very focused on resolving all the five-rated assets and increasing run rate earnings.
spk04: Understood. Thank you for that. It was a 2017 loan, so I assume was it originally like three years and two one-year extensions? So is it pretty much part of the decision is that they kind of reached the end of their second extension?
spk10: Yeah, that's a fair assumption. Most of these loans are – there was a couple of extension options. This one is past maturity. So those are all the factors that went into, you know, moving this one to a five, just the underperformance and the maturity. But if we're talking to the borrower, you know, the conversations, like almost all these deals are very cooperative. We have to just, you know, kind of just look at all the range of options.
spk04: Got it. Thank you for that. Jack, a comment. In your opening remarks, we've 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 are credit funds that play in that. As you see the what do we need as a flashpoint to see some of that money come in? Is it sort of wait and see the feds in game? And when we know kind of people can expect terminal rates and just, if you could share some thoughts about over the next year or more, when might there be some, um, capital coming into the commercial real estate market from that type of source? Thanks.
spk02: Well, thank you for the question and good to speak with you. Um, I think it's an excellent question, and it goes to, I think, a very fundamental point, which is 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 will probably come in when there's more distressed selling, and opportunities for them to realize their higher yields or access to the properties through buying notes that will get to the properties very quickly and then they can operate on the properties themselves and hold on for a longer period of time. The bigger issue, I think, is the inflection point And my view is that the 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. I think that the general view is that once the Fed pivots or the market believes they've pivoted, there will be a ratchet back up in not only transaction volume but capital moving into the space and leveling off of the problems. Most people can't entertain a longer-term hold on a property or an acquisition if they don't know what their liabilities cost. And all liabilities are being driven by that uncertainty right now.
spk04: And the equity markets. I mean, the 10-year is 50 basis points higher this morning than it was on February 2nd. So thank you, February. I appreciate everybody's comments this morning.
spk02: Thank you. All the best. Thank you for your participation. Thank you.
spk03: Thank you. Just a reminder to ask a question, press star 1 on your telephone keypad. to remove yourself from queue, press star, followed by the number two. Our next question comes from Steven Laws with Raymond James. Please state your question.
spk08: Hey, good morning. A couple things hit on, but wanted to ask a follow-up on the new financing facility. Jack, can you talk about, you know, the parameters for financing the non-performing loans, kind of what type of advance rate do you get on that line, and what is the cost of that financing to put that in place on a, you know, non-marked three-year basis?
spk02: I'll actually turn it over to Marcin.
spk05: Hey, Steven, it's Marcin. I have a good question. So when you look at our page 12, it's 650 over SOFR. And again, as I mentioned to Doug earlier, the advance rates will sort of differ based on 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 at all. It's all really highly dependent on a particular asset that you're financing at the time.
spk07: Great. Thanks, Marcel. I'll follow up with additional questions on that later. Appreciate it. Thank you.
spk03: Thank you. Our next question comes from Jade Romani with KBW. Please state your question.
spk09: Thank you very much. When we look at the leverage of the company, I'm puzzled as to why there isn't more leverage available. just looking at many of your peers, you know, quite a lot of them have on the asset level north of four times leverage. You know, and when I look at GPMT, you know, the leverage really never got to those levels and now is among the lower of peers, yet it doesn't seem that there's an immediate source of liquidity aside from cash. So, you know, what do you think the main reasons are for that if the credit performance is likely to be resilient, you know, given the lower average loan size versus, you know, those that play in, say, the $100 million plus range.
spk05: Hey, Jay, it's Marcin. Thanks for the question. I think when you look at the overall leverage of the company, obviously there's 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, it's sort of at 80 or north of 80% financing, right? So you can get a lot of financing in the CLO market, which all of us have, right? And then as the CLO sort of de-lever, as we have with the second CLO, it's below 40%. So you have to look at it sort of on a specific source of funds. because the total leverage on the company is obviously a summation of all of those. So we have, as you just heard us say, we have availability to lever up certain assets, and we intend to do so over time. We are maintaining lower leverage right now. 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 to reliver the company. We'll just have to wait for some market stability to do that.
spk09: And with respect to the existing repurchase facilities that were in place, excluding the new facility that was added, the $100 million facility, 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?
spk05: There is. We chose not to go there yet, but there's opportunities to reliver some of those assets. But again, it's asset-specific, and it obviously depends on the facility and a particular loan. But as Jack said earlier, we're in good standing with our lenders, and they actually want to do more business with us, so we're obviously taking all that into consideration.
spk09: How much capacity do you think there is? I don't have the 10K. I don't think it's yet, but as of September 30th, it was something around $700 million.
spk05: Yeah, that hasn't really changed that much.
spk09: Okay. Okay. But you said at that, that's specific. So not all of the 700 would be available. Right. Okay. And then, you know, the second question would just be about more of a strategic approach to the business. You know, I've seen mortgage REITs trade at these kinds of levels relative to book value. And there's lots of reasons for that. One of the reasons is investors are looking forward, you know, so they're, they're applying a discount to forward book value. modeling in CISO reserves, they would expect the value to go down and also perhaps the dividend being above gap earnings. But in addition to that, it's where the next source of capital comes from to sort of bridge any gap the company has. Is there a chance to change the conversation to perhaps buy back stock or partner with an outside investor to perhaps do some sort of creative Financing that might be in combination like a preferred and common stock or perhaps a convert of some sort, warrants perhaps, that could really be accretive to shareholders on a book value basis and provide leverageable capital to put the company in a totally different position.
spk02: Hi, Jay. This is Jack. Thank you. Nice to speak with you. And, you know, so we, you know, 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 momentum. Because we do believe, we're confident, that our trading value at the stock is not reflective of the inherent value of the company. So we will be analyzing these things, are analyzing them, and will be proceeding. But we can't comment specifically about it. But, of course, we think about our strategic future in terms of accessing more capital.
spk09: And do you think that you – yeah, go ahead.
spk05: Just to add to that, just in terms of profitability, we have a lot of capital and sort of earnings, capital trapped and earnings dragged from these non-accrual loans, right? So, I mean, we estimate that the 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 resolving these. And once we do that, you sort of get a double benefit from releasing some trapped capital, but also turning them into earning assets. So the run rate profitability can improve dramatically once those loans are resolved and they can be then financed in a more efficient way. So it's sort of a combination of the two. And going into the pandemic, we were three and a half times levered on a total company basis. So there's definitely an opportunity to re-lever back up. But we're looking at all the different potential outcomes here.
spk09: But I think once those loans are resolved, I mean, there's probably going to be a pipeline of other loans that go through, you know, issues. I mean, considering what's playing out in the office sector, considering what's playing out in real estate more broadly and the price correction. So, you know, I think hopefully some kind of capital plan is priority number one rather than, you know, resolving those risk five rated loans and thinking that, That will produce earnings and that will get the stock up.
spk02: I have a couple of comments about that. One, our CECL reserve process takes into account what our current thoughts are. We can speak to that a little more. But in terms of the pipeline, the market is very, very uncertain today. But the extent of the problem loans that you're thinking about, I think, is different than how we view it. And so as I responded to you, we're looking at ways to bolster the balance sheet of all sorts. The resolution of the non-accruals 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 idea that only bigger is better, and we think that our portfolio is quite resilient, as we've said, though we'll probably encounter problems as borrowers grapple with the rising costs of carry and all these things. There will be somebody probably somewhere who will approach us and say, we need to extend with this, that, and other relief, something like that. We're not blind to those type of eventualities, but we've categorized them in 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 you're thinking of.
spk09: Okay. Well, thanks very much. And I wasn't pointing to GPMT's portfolio in particular, but just the environment overall. But I really appreciate your taking the questions.
spk02: Thank you very much. Always nice to speak with you.
spk03: Thank you. And there are no further questions at this time, so I'll hand the floor back to Jack Taylor for closing remarks.
spk02: I would like to thank everybody for participating in the call today. I specifically want to include Our team, not only in the C-suite but throughout the company, for all the hard work they're doing to support this company and to move through these challenging markets. It's been superb efforts on everybody's part and a fantastic execution being exhibited. Most importantly, I want to thank our shareholders for continuing to support our company. Thank you very much. Thank you.
spk03: And that concludes today's conference for today. All parties may disconnect. Have a good day.
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