Granite Point Mortgage Trust Inc (GPMT) 2021 Q4 法說會逐字稿

Good morning. My name is Matt, and I will be your conference facilitator. At this time, I would like to welcome everyone to Granite Point Mortgage Trust's Fourth Quarter and Full Year 2021 Financial Results Conference Call. (Operator Instructions) 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 fourth quarter and full year 2021 financial results. With me on the call this morning are Jack Taylor, 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 review our current business activities and provide a brief recap of market conditions. Steve Alpart 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, along with our Form 10-K, which was just filed this morning.

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 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 also refer to certain 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 these non-GAAP financial measures to the most comparable GAAP measures can be found in our earnings release and slides, which are now 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 all to our fourth quarter and full year 2021 earnings call.

Granite Point had a very successful 2021 across our business, led by the strong performance of our well-diversified, resilient and growing investment portfolio, which continues to deliver solid earnings, supporting our attractive dividend. We have been active in strengthening our balance sheet by adding over $1.5 billion of term matched and non-mark-to-market financing, expanding our permanent capital base to over $1 billion by issuing perpetual preferred equity and meaningfully reducing secured higher-cost corporate debt. These actions, combined with our growing pipeline of attractive new loan investments, will continue to position the company for a successful 2022.

While actively managing our portfolio and growing our pipeline of new loans, we have also further expanded our nonrecourse and non-mark-to-market financings to over 75% of our total borrowings by issuing 2 commercial real estate CLOs during 2021, which financed over $1.4 billion of our loans on attractive terms. We expect to remain an opportunistic issuer in this market as it is a compelling source of financing for our portfolio and an important component of our well-diversified funding mix.

In addition to further strengthening the profile of our liabilities, over the last few months, we also repaid $145 million of our higher cost secured corporate debt and expanded our permanent equity base by issuing over $200 million of attractively priced preferred stock, inclusive of the recent $90 million add-on offering. This positive shift in our capital structure creates more flexibility by improving our interest coverage while providing us with permanent and leverageable equity capital to support accretive growth of our investment portfolio.

As an internally managed company, it also allows us to realize operating leverage benefits by lowering our expense ratio, which improves overall profitability as we grow our business.

Despite operating at a lower than historical leverage level, our run rate earnings comfortably covered our dividend in 2021. As short-term rates have remained low, our earnings have benefited from the LIBOR floors in our loans. But if as projected, short-term interest rates increase over the course of 2022, depending on the pace and magnitude of those increases, our net interest income would, in isolation, be reduced. However, our company has substantial opportunities embedded in our balance sheet to further reduce debt cost, release incremental capital and grow our portfolio.

Refinancing and repayment of the remaining $100 million of higher cost term loan borrowings would reduce interest expense. Resolution of the 2 remaining nonaccrual loans would release additional capital, which could be redeployed into earning assets. Also, some of our legacy funding vehicles have significantly delevered through loan repayments. Refinancing those facilities could also release capital, which could support further portfolio growth and lower our funding costs. We expect these initiatives to help return our liquidity and leverage to more normalized levels.

Finally, as we originate new loans and grow our portfolio, our portfolio weighted average LIBOR floor should decline and increase the correlation of our earnings with rising interest rates.

We have already begun implementing some of these activities, the full benefits of which have not yet been reflected in our financial results. We are very pleased with the progress we have made and are excited to advance and execute on our opportunities over the course of 2022. One of the main factors driving our overall results is the strong credit performance of our portfolio throughout the pandemic, which reflects the credit culture of our highly talented and experienced team as well as our ability to directly originate a significant volume of attractive senior loan investments.

We remain focused on further repositioning our balance sheet by taking advantage of market opportunities to realize economies of scale and improve our profitability. Our company is well positioned to execute on our strategic priorities, which we believe should meaningfully accrue to the benefits of our stockholders over the course of 2022 and beyond.

I would now like to turn the call over to Steve Alpart to discuss our originations, forward pipeline and portfolio.

Thank you, Jack, and thank you all for joining our call this morning. During 2021, we funded over $820 million of loan balances, including over $268 million in the fourth quarter and are off to a strong start this year. We continue to see an ample volume of attractive investment opportunities with a current pipeline of approximately $285 million of commitments, which we expect to grow as we invest new capital and redeploy proceeds from loan repayments.

We had an active fourth quarter of originations, closing 7 new loans totaling about $250 million in commitments and over $220 million of initial fundings. We also funded $40 million on existing commitments and $8 million in loan upsizing, bringing total fundings to over $268 million.

We continue to source a significant volume of loans collateralized by properties with favorable fundamentals, with over 65% of our Q4 origination secured by multifamily assets and the balance split between industrial, well-leased office and mixed use. The newly originated loans carry attractive risk-adjusted return characteristics with a weighted average yield of LIBOR plus 3.60% and a weighted average stabilized LTV of approximately 67%.

The transitional property lending market remains very active, which allows us to be highly selective and pick the most attractive loans for our portfolio. We realized about $145 million of loan repayments in the fourth quarter across various property types. The repayments were more than offset by our loan fundings, which resulted in net portfolio growth of roughly $125 million quarter-over-quarter to about $3.8 billion.

Our 2021 repayments of over $950 million represent our typical expected pace of about 25% of our portfolio balance on an annual basis. We currently estimate full year 2022 repayment of about $1 billion, so the volume will vary across quarters as the timing of repayment is subject to market and typical loan closing conditions.

Our portfolio has an aggregate committed balance of $4.2 billion spread across 105 loans with an average balance of about $36 million and about $400 million of future funding commitments. Loans continue to deliver an attractive income stream and strong overall credit profile, generating a realized yield of about 5% with a weighted average stabilized LTV of 63%. Our fourth quarter weighted average portfolio risk rating of 2.6 was unchanged compared to the prior quarter, illustrative of the generally stable credit conditions in our portfolio and progress in our borrowers' business plan.

One office loan was downgraded to a risk rating of 4 during the quarter as the property's operating performance continues to be impacted by ongoing softness in the local leasing market.

As mentioned earlier, we currently have a pipeline of attractive investments with about $285 million of total commitments and $250 million of initial fundings. So far, in the first quarter, we have funded over $80 million of loan principal, including approximately $22 million on prior commitments and realized about $38 million of repayments. Over 60% of the loans in our current pipeline are secured by industrial and multifamily properties with the balance in well-leased office and other assets.

In summary, we continue to source an abundant flow of attractive investments that meet our credit and return criteria. As we execute on our strategy of optimizing our balance sheet, we plan to grow our portfolio over the course of the year.

I will now turn the call over to Marcin for a more detailed review of our financial results.

Thank you, Steve. Good morning, everyone, and thank you for joining us today. Yesterday afternoon, we reported our fourth quarter GAAP net income of $6.7 million or $0.13 per share as compared to $18.6 million or $0.34 per share in Q3. Our Q4 GAAP earnings include $5 million or $0.09 per share of CECL reserve release and a charge on early extinguishment of debt of $8.9 million or $0.17 per share, which is related to the $75 million partial repayment of our term loan, which was disclosed in our business update in December.

Distributable earnings for the fourth quarter were $12.7 million or $0.24 per share versus $5.1 million or $0.09 per share in Q3. Our Q4 earnings don't include the full benefit of the partial term loan repayment as it took place on December 9.

Our fourth quarter book value decreased to $16.70 per share from $17.33 per share in Q3. The decrease was mainly driven by the previously disclosed settlement of the remaining warrants in October, which accounted for $0.46 per share. Our book value also includes an allowance for credit losses of about $0.79 per share.

For full year 2021, we reported GAAP net income of $67.6 million or $1.24 per basic share, which includes about $20 million or $0.37 per share benefit from the release of our CECL reserves. Our 2021 earnings reflect the ongoing benefits from the LIBOR floors in our loans as short-term rates have remained low with our Q4 portfolio weighted average floor rate of 117 basis points, which meaningfully declined from about 156 basis points a year ago. The weighted average floor is expected to further decrease as we originate new loans and the legacy loans with higher floors continue to repay, which would improve our portfolio's correlation to rising short-term rates.

Any impact on net interest income from higher rates will depend on a variety of factors such as the timing and magnitude of rate increases and the pace and timing of loan repayments and new loan originations. However, reducing higher cost borrowings, redeploying capital from nonaccrual loans into earning assets and releasing incremental growth capital through refinancing certain of our inefficient legacy funding facilities could help us manage the impact from rising short-term rates.

Turning to our CECL reserves. Our Q4 allowance declined by about $5 million to $42.4 million. The benefit was largely driven by loan repayments and the continued improvement in the overall performance of our portfolio, which was partially offset by the establishment of reserves for newly originated loans.

Our total allowance represents about 101 basis points of our total loan commitments. About $22 million of our allowance is allocated to our 2 remaining nonaccrual loans.

We ended the quarter with about $190 million in cash, and as of February 23, had $149 million in cash and about $62 million of unencumbered whole loans, which can be financed with our facility subject to lender approval. Our total debt-to-equity ratio at December 31 declined to 2.7x from 3x in the prior quarter driven by our attractively priced preferred equity offering and the partial repayment of the term loan.

Thank you again for joining us today, and I will now ask the operator to open the call to questions.

(Operator Instructions) Our first question will come from Doug Harter with Credit Suisse.

Can you talk about how the recent backup and volatility in CLO spreads might impact your ability to refinance and relever some of the older CLOs that you talked about?

Doug, this is Jack Taylor. Thank you for your question, and good to speak with you this morning. There's a definite backup in spreads in the public markets for the CLOs, and I think that's because of the extraordinary volume, overall volatility that has hit the CLO market over the past, say, 6 months and also because of general volatility in the world. But it's still a very viable market and will continue to be. And issuers such as ourselves who think of it as strategic financing as part of our portfolio mix and not as a one-off trade or an occasional trade, we'll be looking to that market.

Having said all that, some of our liabilities are inefficient now both from a cost of funds and extent of leverage perspective. And this includes one of our public CLOs, in particular. We wouldn't announce in advance the payoff or timing of -- or repayment of a CLO, but it is an obvious source of capital release and improving cost of funds.

And to really answer your question, we have multiple ways of addressing the refinancing away from the public market. So if the public markets are not as amenable, we're not dependent upon them.

Great. And then you started to -- you have made good progress in starting to pay down the high cost senior secured. Can you talk about the outlook for kind of retiring the last $100 million of that?

Thanks for the question. It's Marcin. Look, we want to repay the rest of it. I think it's something we are focused on. Obviously, it is a potential source of additional earnings power. What we're trying to accomplish is kind of balance out cash and liquidity for repayment of debt as well as originating new loans, growing the portfolio and driving our earnings that way and improving our correlation to rising rates. So it's a balancing act between the 2, but we do intend to fully repay that.

If you think about kind of overall balance sheet, the preferred cash is fungible, right? So if you look at the preferred capital over $200 million, that's sort of almost speaks for the entire term loan. We repaid $125 million of that. So from a kind of cost and earnings perspective, it's almost a wash in terms of how much interest expense we removed and how much preferred -- how many preferred dividends we added to our structure. So now we're originating new loans with the rest of the capital, which obviously is going to provide upside since that's earnings to the bottom line. But we are committed to refinancing the rest of it, hopefully, in the near term, but definitely over the course of '22.

Our next question will come from Steve Delaney with JMP Securities.

Congratulations on the progress made in reducing the high cost debt and also settling the related warrants because that really cleans up your book value. That was a point of confusion for investors, I believe, in terms of what book value really was.

Thank you.

Picking up on where Doug was, I think that is the question of the day, sort of. And I appreciate he asking it. I was just scratching some numbers out. And we actually have -- I think there's a stated rate on that [TEMCO] facility of like 8%. But I guess with fees and OID, it seems there's -- I saw somewhere where the effective cost is more like 11%. So Marcin, am I correct that it's somewhere in the neighborhood of 11% the way you look at it on an all-in basis?

Yes. It's 10% to 11%. So my point to Doug's question, $125 million of principal balance, that's sort of $12 million to $13 million of interest expense, right? If we added roughly $14 million of preferred dividends but we didn't deploy all the money, right, we have another $70 million, $75 million of the preferred capital to put to work. So net-net, it's accretive transaction, and it gives us a way more balance sheet flexibility. The preferred equity is essentially growth capital for us, if you think about it from a [portfolio] of the balance sheet.

And that's the way I was thinking about it. It seems to me you could probably have close to a 4%, if you just looked at the whole thing, whether it's the 100 or the 225. It looks like you can roll your funding costs down by about 4%. And that would -- it depends whether we look at the whole thing or just the remaining, but it seems like it could be several cents a quarter anyway in terms of the savings.

And your answer to him, I think what you're saying is it's a process, and it probably will be incremental. You've already given us another $50 million here already. So it's not like we should be expecting this just to go away in the next quarter or so is kind of the way I took your response.

Yes. It is a process. And if you -- look, we're looking at this from an overall balance sheet and earnings perspective, right? Do we have the cash to just write a check and write -- and pay the whole thing off? Yes. However, if you think about the earnings and a run rate earnings perspective of the company, kind of where we are in a -- in the rate environment, right, removing a chunk of this helps us with earnings, remove the drag from the preferred. And at the same time, it allows us to increase the correlation of the portfolio to rising rates by originating new loans rather than just paying off the debt, right? So we are looking at it from both perspectives, and we think we will repay the rest of it, or like I said, over the course of the year, but adding additional loans to the balance sheet today is also beneficial today and going forward.

(Operator Instructions) Our next question will come from Jade Rahmani with KBW.

Just wanted to find out the surge in originations we've seen from nonbank lenders. What in your view has driven that? Do you feel it's a sustainable trend? And do you expect that to continue this year?

Jade, it's Steve. Yes. So look, we all have seen that the nonbank lenders are playing an important role in our market, filling a big need in our market. Whether you're talking about mortgage REITs or debt funds or other specialty players, I mean, from what we see, we and our peers can move quickly. We can execute with a high degree of certainty, deliver a very professional institutional experience for borrowers. So we view this sector as important for the CRE lending universe, and it's growing rapidly, and we expect it to continue to grow.

And then in terms of credit outlook and credit quality, can you talk to both what you're seeing in terms of portfolio trends? Anything on the horizon, positive or negative that we should be cognizant of? And just overall in the market in terms of credit quality in loans that's being originated, what are your views on that?

Sure. I'll start with, I guess, our portfolio. So I guess the best thing to look at is our risk rankings, which were stable in Q4 compared to Q3, not much credit migration. We're comfortable with our risk rankings and feel very good about the overall credit of our portfolio. As you guys know, we look at all of our loans every quarter, evaluate each loan. So we feel good about the overall credit profile in the portfolio.

As far as the second part of your question about, I guess, credit quality in the market, we like what we see. We have a robust pipeline. We like the fundamentals in the sectors that we're targeting. The credit quality of the individual loans look strong. Leverage levels are in check. The structure and covenants that we like on these loans we're able to achieve. We're not originating billions per quarter, so we can be very selective. So overall, I think we -- notwithstanding some of the current market volatility, we like the profile of the credits that we're seeing coming down the pipe.

This concludes our question-and-answer session. I would like to turn the conference back over to Jack Taylor for any closing remarks.

Thank you. And I would like to thank all of you for joining us today for our 2021 and Q4 call, and we look forward to speaking with you again in the future. And we wish you health during this continuing time and a respect for the volatility that's ongoing in the market. Thank you again. Bye-bye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.