Yahoo Finance Granite Point Mortgage Trust Inc. (NYSE:GPMT) Q1 2024 Earnings Call Transcript
Granite Point Mortgage Trust Inc. (NYSE:GPMT) Q1 2024 Earnings Call Transcript May 8, 2024
Granite Point Mortgage Trust Inc. isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: 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 speakers’ 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.
Chris Petta: 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 Urbaszek, our Chief Financial Officer; Steve Alpart, our Chief Investment Officer and Co-Head of Originations; Peter Morral, our Chief Development Officer and Co-Head of Originations; and Steve Plust, our Chief Operating Officer. After my introductory comments, Jack will provide a brief recap of market conditions and review our current business activities. Steve Alpart will discuss our portfolio, and Marcin will highlight key items from our financial results 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 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 as a substitute to the financial information presented in accordance with GAAP.
A reconciliation of these non-GAAP financial measures to most comparable GAAP measures can be found in our earnings release and slide, which are available on our website. I will now turn the call over to Jack.
Jack Taylor: Thank you, Chris, and good morning, everyone. We would like to welcome you 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, these [ph] 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 suppressed 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 GAAP results include additional credit loss provisions, mainly related to the risk graded five loans, which increased our overall first quarter CECL reserve to 7.5% of total commitments from about 4.7% last quarter. Our 5 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 as 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 5 loans, which may occur over the next several quarters. We believe we could resolve some $150 million to $200 million of these loans in the nearer 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 multi-family with an underperforming office component.
While office leasing remains slow, we have seen some improvement in office leasing activity in select markets. Multi-family 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 multi-family loan resolutions where sponsors have decided to transact in the near-term. That said, we do not anticipate these select multi-family 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 5 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.
Steve Alpart: Thank you, Jack, and thank you all for joining our call this morning. We ended the first quarter with total portfolio commitments of $2.8 billion and an outstanding principal balance of about $2.7 billion with about $134 million of future fundings, which account for only about 5% of total commitments. Our portfolio remains well diversified across regions and property types and includes 71 loan investments with an average size of about $38 million and a weighted average stabilized LTV at origination of 63.5%. Our realized portfolio yield for the first quarter was about 7.7%, net of the impact of the non-accrual loans, which we estimate to be about 175 basis points for the first three months of the year. During the first quarter, we funded about $17 million of existing loan commitments and upsizes and realized about $35 million of loan repayments and paydowns.
So far in the second quarter, we have funded about $3 million of existing loan commitments and realized about $13 million in loan paydowns. Given the macro uncertainty, high interest rates and a meaningful shift in market sentiment, particularly over the last few weeks, we anticipate our volume of loan repayments to be lower than the $725 million we realized during 2023. We expect our portfolio balance to trend lower in the coming quarters as we maintain our conservative stance and continue to prioritize maintaining higher levels of liquidity and working diligently to resolve our risk rated 5 loans. The change in market sentiment, expectations for higher cost of capital and lower property value that Jack just discussed has contributed to the risk rating downgrades of certain of our loans and higher provisions for credit losses during the quarter.
During Q1, we downgraded five loans to a risk rating of five, which we will briefly highlight. The first is a $94 million mixed use office and retail loan in New York City where the sponsor had been pursuing a recapitalization plan, potential JV with a new partner or sale of the property. The recapitalization did not materialize and over the course of the quarter, the sponsor made the decision to instead sell the building. The sale process is in its early stages and we are in active discussions with the borrower about next steps. The next one is a $26 million office loan in the Boston CBD, where the property has been impacted by challenging office leasing dynamics and low liquidity in the office sector. The sponsor has been exploring a potential residential conversion opportunity for the property.
They may also choose to list it for sale in the near-term and we are working with them on potential resolution options. The remaining three include a $51 million mixed use, multifamily event space office loan in Pittsburgh, a $34 million multifamily loan in Chicago and a $12 million multifamily loan in Milwaukee. The borrowers on these three loans have been conducting sales processes for their properties to repay our loans. The recent interest rate and capital markets environment has resulted in an expectation that the ultimate sale proceeds on all three will likely come in below our loan amounts, which in turn resulted in our impairment assessments as of March 31. In addition, during the first quarter, we also downgraded three other office loans with an aggregate UPB of about $90 million to a risk rating of four as the collateral properties have been impacted to varying degrees by office leasing challenges and reduced liquidity for office properties generally.
The risk rating downgrades, which were partially offset by several upgrades to loans where the business plan has been achieved, resulted in our portfolio, weighted average risk rating, modestly increasing to 3.0 as of March 31 compared to 2.8 in the prior period. With respect to our other risk rated 5 loans, most of them are in various stages of their respective resolution processes, which remain ongoing. The mixed use retail and office property collateralizing our $84 million loan in Baton Rouge, Louisiana is in a sales process and though the ultimate timing and outcome remain hard to predict in this market, we hope to reach a potential resolution in the coming months or quarters. Similarly, the office property with a retail component that secures our $81 million loan in Chicago is also in the process of being sold, which could happen in the intermediate term.
The sale process for the Minneapolis hotel securing our $28 million loan remains ongoing and may take some time given the local market dynamics. We are in discussions with the sponsor on the $37 million LA mixed use office and retail loan as they are evaluating various leasing opportunities for the property. We are actively managing our one REO office asset in Phoenix, while also marketing it for a potential sale later this year. The office property securing our $36 million 4risk rated loan in Massachusetts is likely to be transferred to REO in the coming months through a negotiated deed in lieu. The asset has positive cash flow and we intend to maximize the value of the asset over time. Despite the low real estate transaction volumes overall, there is some increased liquidity in the market as buyers believe we’re getting close to the bottom in valuations, have capital to deploy and are beginning to invest in the long-term recovery.
Our strategies for these loans are likely to include property sales, sometimes with staple financing from Granite Point, loan sales, discounted payoffs, loan restructurings and select transfers to REO, where we see potential for medium term value upside, all with the goal of maximizing economic outcomes for the company. Timing is hard to predict in this type of market, but given the current macro backdrop and ongoing discussions with our borrowers, we believe we could resolve many of these assets by the end of 2024, with some potentially taking longer to resolve given more challenging local market dynamics. Our goal is to balance the timing of resolutions, realized losses and improving the company’s run rate profitability by repaying higher cost financing and/or returning some of these assets to accrual status on a delevered basis with new equity sponsors supporting the properties.
Despite the headwinds impacting the loans we’ve just discussed, we remain pleased that most of our high quality institutional sponsors continue to support their properties and are progressing on their business plans. While we have a lot of work to do, we look forward to resolving our five rated loans and REO asset and returning to our core business as soon as possible. I will now turn the call over to Marcin for a more detailed review of our financial results and capitalization.
Marcin Urbaszek: Thank you, Steve. Good morning everyone and thank you for joining us today. Yesterday afternoon, we reported a first quarter GAAP net loss of $77.7 million, or $1.53 per basic share, which includes a provision for credit losses of $75.6 million, or $1.49 per basic share, mainly related to certain risk rated 5 loans. Distributable earnings for the quarter were $1.3 million, or $0.03 per basic share, and were mainly impacted by non-accrual loans, which pressured interest income by approximately $12 million, or $0.24 per basic share. Our book value at March 31 was $11.14 per common share, a decline of about $1.77 per share from Q4, which was primarily due to the loan loss provision mentioned earlier. Our CECL reserve at quarter end was about $213 million, or $4.17 per share, representing 7.5% of our portfolio commitments as compared to $137 million, or 4.7% of total commitments last quarter.
The change in our CECL reserve was mainly related to the additional provisions on loans that were newly risk rated 5 this quarter. Our general reserve increased by about $12 million in Q1 due to macro assumptions, expectations for ongoing challenges in the commercial real estate market and pressure on property values. Over 70% of our total CECL reserve, or $155 million, is allocated to select individually assessed loans, which implies an average estimated loss severity of about 29% of those assets. As of quarter end, we had about $690 million of loans on non-accrual status, most of which are in various stages of resolutions. The additional five loans that were placed on non-accrual as of March 31 accounted for about $4 million of interest income realized during the first quarter.
Given the impact, our non-performing loans have on the company’s run rate profitability, we anticipate our earnings to be below our dividend in the near-term. As we make progress on resolving these assets, we believe the company’s profitability should improve over time, though the exact timing remains difficult to predict in this uncertain market. Turning to liquidity and capitalization, we ended the quarter with over $155 million of unrestricted cash and our total leverage modestly increased to 2.3 times in Q1, compared to 2.1 times in Q4, mainly due to a lower equity balance impacted by the higher CECL reserves. Our funding mix remains well balanced and we enjoy continued support from our lenders, highlighting our longstanding relationships in the market.
As of a few days ago, about $130 million in cash. I would like to thank you again for joining us today and we will now open the call for questions.
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