Granite Point Mortgage Trust Inc.

Good morning. My name is Paul, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Granite Point Mortgage Trust First Quarter 2024 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. 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.

Thank you, and good morning, everyone. Thank you for joining our call to discuss Granite Point's first quarter 2024 financial results. With me on the call this morning are Jack Taylor, our President and Chief Executive Officer, Marcin Urbasic, our Chief Financial Officer, Steve Alpart, our Chief Investment Officer and Co-Head of Originations, Peter Murau, our Chief Development Officer and Co-Head of Originations, and Steve Plus, our Chief Operating Officer. After my introductory comments, Jack will provide a brief recap of market conditions and review our current business activities. Steve Alpert will discuss our portfolio, and Marcin will highlight key items from our financial results and capitalization. The press release, financial tables, and earnings supplemental 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 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 risks that could affect our 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 as a substitute to 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. Thank you, Chris, and good morning, everyone.

We would like to welcome you and thank you for joining us for Granite Point's first quarter 2024 earnings call. The first few months of 2024 have resulted in diverging trends, with the ongoing strength of the overall economy and a healthy rebound in the equity and fixed income markets, while the commercial real estate sector continues to be pressured by high interest rates, deeply suppressed transaction volumes, some fundamental shifts such as the work-from-home trends, and higher costs such as materials and labor impacting properties that require some level of capital expenditure. The year began with a more upbeat sentiment in the commercial real estate market, fueled by expectations of six to seven interest rate cuts by the Fed over the course of 2024, and an anticipated rebound in real estate transaction activity, which along with pent-up capital demand contributed to a tightening of credit spreads and a strong pickup in CMBS issuance. However, since then, higher-than-expected inflation readings and stronger employment reports have lowered the consensus estimates for interest rate cuts to a hope for one to two cuts by year end, resulting in higher interest rates across the curve and with uncertainty and sentiment in the commercial real estate markets notably worsening in the past several weeks. We believe that the path of interest rates will continue to be the main factor affecting the activity in and the performance of the commercial real estate floating rate low market in the near to medium term. We expect the prolonged elevated rates will further impact the real estate market in the near term by continuing to suppress transaction activity and property values, and by putting more pressure on certain borrowers who may be reluctant to support their properties, especially those with additional capital needs in more challenged markets, and may instead choose to sell the properties rather than continue to wait for a lower cost of capital. While we are seeing this in the market and in our portfolio, we want to note that most of our borrowers are continuing to support their properties. However, driven by some of these dynamics and the change in sentiment within the commercial real estate market, we lowered the risk ratings on several of our loans and increased our CECL reserves to reflect the market uncertainty and ongoing pressure on property values. Our gap results include additional credit loss provisions, mainly related to the risk-rated five loans, which increased our overall first quarter CECL reserve to 7.5% of total commitments from about 4.7% last quarter. Our five-rated loans are in various stages of their respective resolutions, with some expected to occur in the nearer term, while the timelines of others may extend longer. Although we see lending activity is currently subdued, we anticipate that improving market liquidity and opportunistic capital, actively looking for investments, should help drive our non-performing loan resolutions over the course of this year, though timing remains difficult to predict. We have visibility on resolutions for most of our risk-rated five loans, which may occur over the next several quarters. We believe we could resolve some 150 to 200 million of these loans in the near term. Most of the credit impact on our portfolio is driven to varying degrees by the office exposure, including on some where the overall value of the property may currently be mainly concentrated in retail or multifamily with an underperforming office component. While office leasing remains slow, we have seen some improvement in office leasing activity in select markets. Multifamily fundamentals remain generally favorable. However, we have seen some pressure on property values in this sector resulting from higher interest rates and higher cap rates. While there is meaningful liquidity in the apartment market, Even properties with strong cash flow are not immune from the effects of higher rates, and we are likely to realize modest losses on select multifamily loan resolutions where sponsors have decided to transact in the near term. That said, we do not anticipate these select multifamily credit events to be very material in the context of our portfolio. We remain highly focused on our asset management activities and moving through this credit cycle while maximizing economic outcomes for the business and our shareholders. We believe that the process of repositioning our portfolio, even though it results in additional credit reserves and associated losses, will position us to return to our core business of lending so we can grow the portfolio and improve our run rate profitability over time and support our total shareholder returns. Our strategy for this year reflects our ongoing conservative approach to the market with an emphasis on maintaining higher liquidity and proactively managing our portfolio to protect our balance sheet. We benefit from our team's decades of experience successfully managing through various real estate cycles and market volatility. Over the course of the last couple of years, we have materially reduced our leverage through paying off corporate debt and deleveraging our loan portfolio, modified and resolved many loans, and realized healthy prepayment levels. We firmly believe that during challenging periods, emphasizing balance sheet stability is the prudent and effective strategy to navigate market uncertainty and to reposition the business for future growth opportunities, even though such steps pressure the company's returns and profitability in the near term. Recent market consensus points to the bottoming of the property value declines. While the future path of macro trends remains uncertain and fundamentals across property types continue to be uneven, and the timing of interest rate cuts will drive the path of recovery for commercial real estate, we agree that once there is more visibility on the cost of capital in the market, the sentiment and activity should improve significantly, particularly later in the year, all of which will be aided by the large amounts of capital currently available on the sidelines. We will continue working with our borrowers to facilitate repayments and resolutions of our risk-rated five loans, given their material effect on our current returns. We believe that these actions over time will help improve our run rate profitability while positioning us to take advantage of attractive investment opportunities in the future. I would now like to turn the call over to Steve Alpart to discuss our portfolio activities in more detail.