Granite Point Mortgage Trust Inc. Q4 FY2023 Earnings Call

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 in listen-only mode. After the speakers' remarks, there will be a question-and-answer session. Please note that 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.

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; 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 the 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.

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 low visibility for market participants regarding the future cost of capital and have further reduced liquidity in the sector. Heading into 2023, we communicated our cautious approach to the market while emphasizing the need to maintain higher liquidity and proactively manage 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 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 navigate market uncertainty effectively 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, we have worked hard to navigate these challenges. In mid-2022, with the expectation of continued Federal Reserve actions impacting commercial real estate fundamentals and valuations, we shifted our strategy from new loan originations to increasing liquidity, further diversifying our funding sources, and proactively managing our portfolio by collaboratively working with our borrowers. We're pleased to report that employing this approach, we have accomplished several 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. Additionally, we resolved several non-accrual loans as we addressed select credit issues. Our proactive balance sheet management strategy also enabled us to repay with cash convertible bond maturities totaling over $275 million within 10 months of each other, with the latest being in October of 2023, as we did not want to access capital markets during this challenging period. We have also opportunistically deployed capital into our own securities as part of our flexible capital allocation strategy, given the attractive relative value. Over the course of 2023, we repurchased about 2 million shares of our common stock, representing approximately 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 concerning 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. We realized a strong pace of loan repayments last year of over 20% of our portfolio, with the largest portion of about 35% related to loans collateralized by office properties. Over the last couple of years, our exposure to office loans has significantly declined by over $500 million or approximately 30%, primarily due to repayments, paydowns, and 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 closely 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 certain credit issues that we continue to proactively address, including the resolution of the San Diego office loan in the fourth quarter. As we advance on various resolution strategies for specific loans, during the fourth quarter, we downgraded two loans from a risk rating of 4 to a risk rating of 5. Both the 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. Our overall fourth-quarter CECL reserve was 4.7% of total commitments versus approximately 4.9% last quarter. Overall market sentiment has improved somewhat over the past months following the recent shift in the Fed's stance pointing to anticipated reductions in the federal funds target rate during 2024. 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 U.S. 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 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 borrowers 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.

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 includes 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, carrying 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 upsized 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 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 maintaining higher levels of liquidity. If interest rates follow the current consensus path and decline in the second half of the year, we expect continued improvement in the commercial real estate capital markets, 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 mixed-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. The borrower on the Baton Rouge loan has launched a sale process for the property, which remains ongoing. While it's difficult to predict the timing and ultimate outcome, we hope to reach a potential resolution in the next couple of quarters. The borrower on the Chicago properties is also in negotiations to potentially sell the asset; however, that process is in its early stages. Additionally, during the quarter, we moved to a risk ranking of 4 for 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 concerning 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 31 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 loan through a coordinated deed-in-lieu transaction and a sale of the property to a new buyer, while providing a $49 million senior floating rate acquisition loan to the new ownership who invested significant cash equity into the transaction. We worked collaboratively for many months with our previous borrower and the new owner to bring this transaction to a successful conclusion and in that 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 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. A 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 of 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.

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. The 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 that we disclosed in December. The distributable earnings before realized losses was $7 million or $0.14 per basic share, reflecting 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 an 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 challenging 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, which highlights 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.

Good morning. Thanks for taking the question. Steve Alpart, you mentioned in your comments a Boston loan, I believe you indicated it was downgraded to a 5. Was that an event that took place here in the first quarter of 2024? It's not listed on Page 11 on the 5-rated loans as of year-end.

Hey Steve, good morning. Thanks for joining our call this morning. That loan was downgraded in the fourth quarter from a 3 to a 4, not to a 5, right?

Okay, got it. That leads me to my next question about the remaining 4-rated loans considering the transition to a few 5s in the fourth quarter. I believe the 4s accounted for 7% of the portfolio, which might be around $200 million. How many loans are currently in that 4 category?

Sure. There are four loans, Steve, in the 4 bucket as of December.

Okay, great. That's helpful. Thank you very much. Okay. And I guess this is just kind of a general comment, but hearing you talk about your liquidity and retaining cash and Marcin's comments about near-term earnings coming in below the dividend. I model that as well simply because of some assumed losses impacting distributable EPS. Jack, I guess I'll direct this to you. You have been using your buyback; looking at where things stand now, would it not make sense for the Board to consider trimming the dividend? The yield now is mid-teens or higher today. Trim the dividend and allocate more of that cash capital into buying back the shares down here, less than 50% of book. Just curious about your thoughts on that suggestion.

Hi Steve, this is Jack, and it's good to speak with you, and thank you for joining us. Sure, I'll answer that. And first, I'll start by saying it's our policy and our goal to provide an attractive income stream through the dividend to our stockholders. Dividend sustainability and the desire for it to be supported by our expectations for the run rate operating profitability is key in our mind, along with a view of long-term profitability. Given the really uncertain environment and the projections, it is challenging to make estimates. We recognize that during this and other periods of credit challenges, we and others in the industry may under-earn the dividend for a period of time, especially as we work on resolving the non-accrual loans, as you pointed out. So, as we mentioned in our prepared remarks, we anticipate that our earnings will be below the current dividend in the near term as we work to resolve these non-performing assets, which have a meaningful drag on our profitability. We do not intend for this to be a permanent situation, but we are uncertain of how long that will take and the duration of the resolutions. Management, along with our Board, will continue to evaluate the company's dividend concerning future quarters. Ultimately, the dividend is a decision made by the Board, but all these factors are being considered, including stock buybacks. Our flexible capital strategy allows us, as we have in the past, to take advantage of what we consider to be a significant discount in our stock buybacks.

I appreciate that, Jack. Can you say what the remaining buyback authorization was as of the end of 2023?

I believe we have $4 million. Yes, we have $4 million of buyback authorization remaining. It's a little bit more; it's something like $4.1 million.

Hi, good morning.

Good morning.

I have a couple of questions regarding the non-performing loans. First, Steve Alpart, I appreciate your insights as you discussed them. It seems like the mixed-use property in Los Angeles and the office in Minneapolis may take longer to resolve. Regarding the other loans you mentioned, do you have any thoughts on which ones might be resolved in the first half of 2024 and which could be in the second half? Alternatively, is there a way to rank them in terms of urgency for resolution?

Sure. Steve, good morning. Thanks for joining our call this morning. Good to talk to you. As we said earlier, the L.A. mixed-use and the Minneapolis office asset, just given what's happening in those two markets, we believe those will probably take a little bit longer than some of the others. The Baton Rouge mixed use has launched a sale process to sell the property. That process is ongoing as we speak. It's difficult in this market to predict timing, but that's one we hope to resolve in the next couple of quarters. The Chicago office deal, which has a retail component as well, we're working with that borrower, and they are in negotiations to potentially sell the property. It's early stages, and we are hopeful for a resolution. I would probably characterize that as more intermediate term. The timing is hard to predict. We currently have no other office exposure in that market. The Minneapolis hotel loan's borrower is also conducting a sale process, which is also ongoing. We'll evaluate next steps with them once they have more feedback, which we hope is soon. Again, timing is uncertain; however, that one is also ongoing. Lastly, for the Phoenix REO asset, we've discussed that in prior quarters. That configuration lays out well for potential conversion to residential, so there’s some optionality, whether it’s multifamily or office. We're actively managing that one right now and evaluating next steps that could include a potential sale process. We’re pleased with our progress to date on these assets, and remain focused on resolving all the non-performing loans. Additionally, we're pleased that the majority of our borrowers remain committed to their assets.

Great. And then I guess as a follow-up to those, will we see you offer any buyers kind of seller financing or financing on the new assets the way you did with San Diego? Or are there specific assets that we don't want to have exposure to going forward? How do you think about the willingness to provide financing to the ultimate buyer in the sales process?

Sure. It's something that we've done in the past. It's part of our toolkit. We can do it where it's necessary to facilitate a sale. In this market, particularly with some of these assets in the office lending market obviously being difficult, we would likely expect that for many of the office resolutions, we will be providing financing. That's not necessarily the case for all resolutions, however. We did not provide any financing for the Dallas office note sale. So it’s something we can evaluate on a case-by-case basis.

Great. And then lastly, maybe for Marcin. When you think about the NPLs and the financing that may be in place on them, can you discuss what the drag on run rate earnings is? Can you quantify what the potential benefit might be once you resolve some of these assets and are able to pay off the associated financing?

Sure. Good morning, Stephen. Thank you for joining us. I would say the biggest impact on those assets, as I mentioned in my prepared remarks, is over $400 million of them as of the end of the year. The interest income is financed through a variety of different means. Most of the positive impact from resolutions would come from potentially turning them into earning assets. If we decide to provide financing or repay certain expenses on the debt, those can be substantial. As you heard us say, they accounted for about 90 basis points of yield from an interest income perspective, which is significant. Its quantification depends on which resolution happens on which loan, but it’s likely in double digits in earnings per share per quarter, for sure.

Since we won't have the 10-K for some time, could you please provide the balance of non-performing loans and non-accrual loans? The 10-Q had total loans past due as of September 30th of $231.8 million and non-accrual loans of $165.9 million. I am looking for an update on those two numbers.

Sure, good morning Jade. Thank you for joining us. As I mentioned in my prepared remarks, as of the end of the year, we had about $450 million of loans that are in non-accrual status.

And do you have the non-performing loans, the total past due?

That's pretty much the same number.

Okay. Has there been any change so far this year in terms of credit?

Hey Jade, let me ask you if you could clarify, are you asking about over the past 12 months or since the beginning of January 1?

Since January 1.

Yes, there’s no update to the risk rankings or reports that we provided. However, we have noticed some borrowers becoming more cautious and managing their financial commitments in response to the Fed’s actions, indicating a general fatigue in the market. We continue to see positive responses from our borrowers, and the performance of properties remains stable. Concerns about the multifamily sector are increasing, but given our locations and sponsors, we are not worried about that portfolio. That addresses your question.

Sure. No, I guess on the multifamily, Jade, we talked about this in our last quarter's call. Specifically regarding multifamily, it's still generally stable and healthy in the markets that we’re in, including in the Sunbelt. There’s concern about heightened new supply, which we see; we have assets in places like the Carolinas that are doing well, Savannah, and Birmingham which have very little new supply. So the supply even in the Sunbelt is not uniform. We are monitoring markets in Texas where we’ve noticed some overbuilding in Austin. We’re not in Austin, but we have noticed rent growth has slowed; however, our business plans aren’t primarily reliant on that growth. Our plans usually involve value-add renovations targeting rent bumps. We are still seeing borrowers obtain rent bumps. It may not align precisely with underwritten projections, but we believe that if you turn the rent roll one or two times, they are likely to achieve their expectations. I would not be surprised if some multifamily assets fall slightly behind plan, but we think that will only delay fulfillment by a year or two. Moreover, we didn't originate many loans at peak levels; we engaged in some, and the loans we did enact in the second half of 2021 or early 2022 have exits based on lower leverage amid plenty of equity protecting the borrowers. In general, multifamily trends remain stable and positive. Yet we are seeing the headlines and monitoring the market attentively.

Thanks very much. Since they are older originations, could you provide an update on the Illinois multifamily origination data from December 2019 and also on the New York mixed-use since it is quite a large loan, $96 million? Origination is December 2018. Are those risk-rated 3 loans? Is there any reserve against those? And what's going on with those plans? Should we expect any potential loss on those two?

Yes, they're both risk-rated 3. The first one you mentioned was the Illinois multifamily loan, which has a carrying value of about $109 million. No significant update there; I would say it’s doing fine and directionally on plan. Regarding the New York mixed-use loan, that asset's comprised of office with ground-floor retail, the retail is largely leased. The business plan revolves around leasing up the office space. The sponsors have injected more capital into supporting the asset. It's currently ranked 4 and the focus is primarily on leasing the office space.

Is there a reserve against that? Since this is an older origination, if the office is still trying to lease up, what are the risks of impairment? And what’s the reserve held against it at this point?

Yes, this loan does have a reserve on it; it's part of our general pool being risk-rated 4. It’s safe to assume that it has a higher reserve than some of the other assets in the pool. We are monitoring this loan closely given the dynamics in New York, and while it’s difficult to predict potential outcomes, this loan is firmly on our watch list.

Okay. Thanks. I also wanted to address general reserves. If I recall, I am struggling to think of others that have reduced general reserves by the magnitude that you have. I understand there's management discretion here. Clearly, the macroeconomic variables of unemployment and interest rates have improved in the fourth quarter; however, management has discretion there. Why take down reserves in the face of ongoing headwinds in the market?

Thanks for the question. It’s a function of movement in the portfolio. As downgrades from 4 to 5 take place, and as some of the 4-rated loans may hold higher reserves, that reserve sort of migrates from the general to specific. That's part of it. Repayments are another contributing factor. The general movement within the portfolio continues to showcase caution. Our general pool is still close to 2%. However, as the portfolio runs off and downgrades occur, this is something you would expect to see, varying across the peer group.

Okay, that's good color. It makes sense because the specific reserves did increase, and there were repayments; therefore, it reflects movement out of the general to the specific then declines in the general due to loans being paid off.

Correct.

Thank you, operator, and thank you everybody for joining our call. I want to ensure I thank our investors for their support and our team for their hard work. We look forward to speaking with you again next quarter. Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.