Yahoo Finance Granite Point Mortgage Trust Inc. (NYSE:GPMT) Q4 2023 Earnings Call Transcript
Granite Point Mortgage Trust Inc. (NYSE:GPMT) Q4 2023 Earnings Call Transcript February 15, 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 Donna and I will 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 2023 Financial Results Conference Call. All participants will be on listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Please note, today's call is being recorded. I would now like to call over to Chris Petta with Investor Relations for Granite Point. Please go ahead.
Chris Petta: Thank you and good morning everyone. Thank you for joining our call to discuss Granite Point's fourth quarter and full year 2023 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 Origination, 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. We expect to file our Form 10-K in the coming weeks. 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 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 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 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 fourth quarter and full year 2023 earnings call. 2023 was another challenging year for the commercial real estate industry for both property owners and lenders. Transaction volumes have remained extremely low. High interest rates have continued to increase the cost of capital, pressuring property values across sectors. They have also created a low visibility for market participants about the future cost of capital and so further reduced liquidity in the sector. Heading into 2023 [ph], we communicated our cautious approach to the market while putting more emphasis on maintaining higher liquidity and proactively managing our portfolio to protect our balance sheet and investors' capital.
Our team has decades of experience managing various real estate lending businesses through market volatility caused by various economic, credit and interest rate cycles. As such, we firmly believe that during challenging periods like today, emphasizing balance sheet stability, and protecting the downside is the prudent strategy, both to effectively navigate market uncertainty and to position the business for future success and growth opportunities. Even though such steps pressure the company's returns and profitability in the near-term. In mid-2022, with the expectation of continued Federal reserve actions and the resulting impact on commercial real estate fundamentals and valuations, we shifted our strategy from new loan originations to increasing liquidity to further diversifying our funding sources and to proactively managing our portfolio by collaboratively working with our borrowers.
We're pleased to report that in using this approach, we have accomplished a number of our goals in navigating the market challenges. We have reduced our leverage to one of the lowest levels in the industry and well below our target range. We realized a significant volume of loan repayments, paydowns and resolutions, totaling over $725 million last year, illustrating the liquidity embedded in our portfolio. And we resolved several non-accrual loans as we address select credit issues. Our proactive balance sheet management strategy also enabled us to repay with cash to convertible bond maturities, totaling over $275 million within 10 months of each other, the latest of which was in October of 2023, as we did not want to access the capital markets during this challenging period.
We have also opportunistically deployed capital into our own securities. As part of our flexible capital allocation strategy, and given the attractive relative value. Over the course of 2023, we repurchased about 2 million shares of our common stock, representing some 3.8% of our shares outstanding, generating book value accretion of about $0.35 per common share. We currently have a little over 4 million shares remaining under our existing authorization, and we intend to remain opportunistic with respect to any future buyback activity. We believe that despite the significant market challenges our industry has faced over the last couple of years, our granular senior floating rate loan portfolio has delivered relatively attractive returns benefiting from higher short-term rates and diversification across property types, many markets and many sponsors who generally remain supportive of their investments.
Although transaction volumes have remained subdued across the real estate market, our portfolio has benefited from its broad diversification and middle market focus. And as I mentioned earlier, we realized a strong pace of loan repayments last year of over 20% of our portfolio. The loan payoffs have been across property types, the largest of which or about 35% was related to loans collateralized by office properties. In fact, over the last couple of years, our exposure to office loans has significantly declined by over $500 million or about 30%, primarily due to repayments and paydowns and also select loan resolutions. Many of our repayments have come from loans that have been previously amended to allow borrowers more time to progress on their business plans and complete their exits through either property sales or refinancing.
This illustrates the benefit of working with our borrowers. The pace of repayments remains volatile and uncertain, and we will continue to manage our business accordingly. While we believe our conservative underwriting has helped our portfolio performance, given the severity of market challenges, we are not immune to experiencing select credit issues, which we continue to proactively address, including the resolution of the San Diego office loan in the fourth quarter. As we progress on various resolution strategies for certain loans, during the fourth quarter, we downgraded two loans from a risk rating of 4 to a risk rating of 5. Both of Baton Rouge mixed-use retail and office assets and the Chicago office assets are in various stages of resolutions involving potential property sales by their sponsors, which Steve will address shortly.
Our GAAP results include additional credit loss provisions mainly related to the 5 rated loans. While our overall fourth quarter CECL reserve was 4.7% of total commitments versus about 4.9% last quarter. Overall market sentiment has improved somewhat over the past months following the recent shift in the Fed stance pointing to anticipated reductions in the federal funds target rate during 2024, and we believe that sentiment and activity will likely continue to improve, particularly during the second half of the year. However, the continued strength in the labor market and consumer spending supporting the overall performance of the US economy may impact the timing of such interest rate cuts, which may further delay the recovery in the commercial real estate market.
Although we have seen a modest pickup in transaction volumes in the industry, we believe the future path of macro trends remains uncertain. Fundamental performance across property types continues to be uneven and high interest rates all contribute to continued constrained liquidity in the real estate market. As such, in the near to medium term, we will continue to emphasize maintaining higher liquidity, working with our powers to facilitate repayments and resolving our non-accrual loans, given their meaningful impact on our returns. We believe that these actions over time will help improve our run rate profitability, while positioning us to redeploy our capital into attractive investments and grow our portfolio as the real estate market stabilizes.
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 fourth quarter with total portfolio commitments of $2.9 billion and an outstanding principal balance of about $2.7 billion, with $160 million of future fundings accounting for only about 6% of total commitments. Our portfolio remains well-diversified across regions and property types and include 73 loan investments with an average size of about $37 million. Both of our loans continued to benefit from higher short-term interest rates and deliver an attractive income stream and carry a generally favorable credit profile with a weighted average stabilized LTV at origination of 64%. Our realized portfolio yield for the fourth quarter was about 8.3%, net of the impact of the non-accrual loans, which we estimate to have been about 90 basis points.
During the fourth quarter, we funded $15 million of existing loan commitments and upsizes and one new loan for about $49 million related to the previously disclosed resolution of the risk rated 5 San Diego office loan. So far in the first quarter, we have funded about $7 million of existing commitments. During 2023, we realized over $725 million of loan payoffs, including over $255 million in the fourth quarter, consisting of full loan repayments, principal paydowns, and select loan resolutions. About 35% of the repayment volume was related to office properties and about 28% were multifamily assets with the balance allocated primarily between hotel and industrial loans. Despite the broader market challenges, our volume of loan repayments has been relatively healthy, including from office assets as we have benefited from some more liquidity in the middle market and our broad portfolio diversification across primary and secondary markets.
Given the market uncertainty, repayments are hard to predict. In the near-term, we anticipate our loan portfolio balance to trend lower as we maintain our cautious stance and continue to prioritize meaning higher levels of liquidity. Interest rates follow the current consensus path and decline in the second half of the year. We would anticipate some continued improvement in the commercial real estate capital markets, with the real estate markets improving, transaction volumes increasing and repayment levels normalizing. While higher interest rates have generally benefited our returns and those of our industry, increased capital costs and reduced liquidity have negatively affected certain borrowers, and in turn, the performance of several of our loans.
During the fourth quarter, we downgraded two loans from risk rankings of 4 to 5, including an $86 million senior loan collateralized by a mix use retail and office property in Baton Rouge, Louisiana and an $80 million senior loan secured by an office property with a retail component in Chicago. We have been monitoring these assets for some time and both are in various stages of potential resolutions. Borrower on the Baton Rouge loan has launched a sale process for the property. The process remains ongoing. And while it is difficult to predict the timing and ultimate outcome, we hope to reach a potential resolution in the next couple of quarters. Borrower on the Chicago properties also in negotiations to potentially sell the asset. However, the process is in its early stages.
In addition, during the quarter, we also moved to a risk ranking of 4, a smaller $26 million senior loan secured by an office property located in Boston, that has been negatively impacted by the ongoing soft leasing environment in that market. We are in active discussions with the borrower on this asset as we evaluate potential next steps with respect to this loan. These actions, along with the repayments realized in the fourth quarter resulted in a portfolio weighted average risk ranking of 2.8 as of December 31st compared to 2.7 in the prior period. As we previously disclosed, during the quarter, we resolved a non-accrual $93 million San Diego office loans through a coordinated deed-in-lieu transaction and a sale of the property to a new buyer, while providing $49 million senior floating rate acquisition loan to the new ownership who invested meaningful cash equity into the transaction.
We worked collaboratively over many months with our previous borrower and the new owner to bring this transaction to a successful conclusion and in the process, created an attractive earning asset at a reset basis. As we discussed on our last call, during the quarter, we also opportunistically sold a $31.8 million senior loan collateralized by an office property located in Dallas. These two resolutions resulted in losses, most of which had been previously accounted for in our book value through our CECL reserves. Considering the impact of the non-performing loans have on our run rate profitability, we are actively pursuing various resolution paths for these assets to allow us to redeploy our capital and improve our operating results. Borrower on a $28 million Minneapolis hotel loan has been conducting a sale process for the property, and that process remains ongoing.
We are in active discussions with the sponsors on the $37 million L.A. mixed-use office and retail loan and the $93 million Minneapolis office loan regarding next steps and potential resolutions, both of which are likely to take longer than some of the other assets we are looking to resolve given local market conditions. With respect to the REO office property in Phoenix, we are actively asset managing the property, which continues to generate modestly positive operating income. We continue to evaluate potential next steps, including a sale process. We're pleased with our progress to date on these assets and remain focused on resolving all the non-performing loans. We're also pleased that the majority of our borrowers remain committed to their assets.
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 fourth quarter GAAP net loss of $17.1 million or $0.33 per basic share, which includes a provision for credit losses of $21.6 million or $0.42 per basic share, mainly related to certain risk rated 5 loans. Distributable loss for the quarter was $26.4 million or $0.52 per basic share, including a write-off of $33.3 million or $0.65 per basic share related to the resolution of our San Diego office loan we disclosed in December. Distributable earnings before realized losses was $7 million or $0.14 per basic share and reflects the impact of loan repayments and additional loans placed on non-accrual status during the quarter.
Our book value at December 31st was $12.91 per common share, a decline of about $0.37 per share or about 2.7% from Q3. The decrease was primarily due to the loan loss provision, the impact of which was partially offset by our accretive repurchases of 1 million common shares during the quarter, which we estimate benefited book value by about $0.16 per share. Our CECL reserve at year end was about $137 million or $2.71 per share. representing about 4.7% of our portfolio commitments as compared to about $149 million or 4.9% of total commitments last quarter. The modest change in our CECL reserve was mainly related to the write-off of the allowance related to the San Diego asset, loan repayments, and slightly better macro assumptions used in estimating the general reserve, partially offset by additional specific allowance recorded on the two new risk rated 5 loans.
Two-thirds of our total CECL reserve or about $90 million is allocated to certain individually assessed loans, which implies an estimated loss severity of about 27%. As of year-end, we had about $450 million of loans on non-accrual status, most of which are in various stages of resolutions. The additional loans that were placed on non-accrual accounted for over $5 million of interest income during the fourth quarter. Given the impact our non-performing assets have on 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 and ultimate outcomes remain difficult to predict.
Turning to liquidity and capitalization. We ended the quarter with over $188 million of unrestricted cash and our total leverage continued to modestly decline to 2.1 times in Q4 from 2.2 times in Q3, mainly due to loan payoffs and repayment of the convertible notes in October, which was partially offset by an additional $100 million in borrowings related to an upsizing of the JPMorgan facility during the quarter. Our funding mix remains well-diversified and stable and we enjoy continued support from our lenders, highlighting the strength of these long-standing relationships. Following the repayment of our convertible notes, we have no corporate debt maturities remaining. As of a few days ago, we carried about $170 million in unrestricted 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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