Granite Point Mortgage Trust(GPMT) - 2020 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, income statements, equity, and cash flows, highlighting a $39.0 million net loss for the six months ended June 30, 2020, driven by credit loss provisions Condensed Consolidated Balance Sheets The balance sheet shows total assets of $4.42 billion as of June 30, 2020, a slight decrease from $4.46 billion, with total stockholders' equity decreasing to $964.3 million Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2020 | December 31, 2019 | | :--- | :--- | :--- | | Total Assets | $4,415,648 | $4,460,862 | | Loans held-for-investment, net | $4,290,047 | $4,226,212 | | Allowance for credit losses | ($76,710) | — | | Cash and cash equivalents | $55,969 | $80,281 | | Total Liabilities | $3,450,312 | $3,440,726 | | Repurchase agreements | $2,030,916 | $1,924,021 | | Securitized debt obligations | $983,521 | $1,041,044 | | Total Stockholders' Equity | $964,336 | $1,019,136 | Condensed Consolidated Statements of Comprehensive Income (Loss) The company reported a net loss of $1.8 million for Q2 2020 and $39.0 million for the six months ended June 30, 2020, primarily due to significant provisions for credit losses and realized losses on sales Income Statement Summary (in thousands, except per share data) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $34,382 | $27,627 | $63,568 | $53,764 | | Provision for credit losses | ($14,205) | — | ($67,541) | — | | Realized losses on sales | ($6,894) | — | ($6,894) | — | | Net (loss) income attributable to common stockholders | ($1,758) | $18,152 | ($38,974) | $35,096 | | Diluted (loss) earnings per share | ($0.03) | $0.33 | ($0.71) | $0.68 | Condensed Consolidated Statements of Stockholders' Equity Stockholders' equity decreased to $964.3 million at June 30, 2020, primarily due to a $18.5 million cumulative effect adjustment from adopting ASU 2016-13 and a $38.9 million net loss - Upon adopting ASU 2016-13 on January 1, 2020, the company recorded a cumulative-effect adjustment that reduced cumulative earnings by $18.5 million[14][36] - The net loss for the first six months of 2020 further reduced cumulative earnings by $38.9 million (net of preferred dividends)[13][14] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities was $32.3 million for the six months ended June 30, 2020, while investing and financing activities resulted in a $100.3 million net decrease in cash Cash Flow Summary for Six Months Ended June 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $32,305 | $28,662 | | Net cash used in investing activities | ($131,768) | ($379,631) | | Net cash (used in) provided by financing activities | ($835) | $396,533 | | Net (decrease) increase in cash | ($100,298) | $45,564 | | Cash, cash equivalents and restricted cash at end of period | $59,466 | $168,987 | Notes to the Condensed Consolidated Financial Statements The notes detail accounting policies, including the CECL standard adoption, a $1.5 billion loan portfolio downgrade due to COVID-19, financing arrangements, and the temporary suspension of common stock dividends - The company adopted the new credit loss standard (CECL) on January 1, 2020, recording an initial allowance for credit losses of $18.5 million as a cumulative-effect adjustment to equity[28][36] - Due to the ongoing COVID-19 pandemic, the company downgraded 35 loans with a total principal balance of $1.5 billion during Q2 2020, with the number of loans rated 'Higher Risk' increasing from 2 to 18[55] - The company has agreed to a process with its Manager to internalize the management function, with a binding arbitration to determine any termination payment, and the hearing is expected in Q3 or Q4 2020[97][98] - The company has temporarily suspended the payment of dividends on its common stock to conserve liquidity due to uncertainty from the COVID-19 pandemic[107] - Subsequent to quarter-end, on July 30, 2020, the company sold senior floating rate loans with a total unpaid principal balance of approximately $190.9 million for a sale price of $181.4 million[136] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the significant impact of the COVID-19 pandemic, reporting a $39.0 million GAAP net loss for the first six months of 2020, primarily due to credit loss provisions, and outlines actions to strengthen liquidity - The COVID-19 pandemic has caused significant macroeconomic disruptions, adversely impacting the commercial real estate sector, reducing borrower demand, and lowering transaction volume[143][149] - The GAAP net loss for the six months ended June 30, 2020 was largely a result of an increase in the provision for credit losses recognized under the new CECL standard, magnified by the economic dislocation from the pandemic[172] - The company is focused on strengthening its balance sheet and enhancing liquidity by raising capital, selling assets, and changing its dividend policy, which includes the temporary suspension of the common stock dividend[215] Results of Operations Net interest income increased to $63.6 million for the six months ended June 30, 2020, but a $67.5 million provision for credit losses and increased operating expenses resulted in a $38.9 million pre-tax loss Key Operating Results (Six Months Ended June 30) | Metric (in millions) | 2020 | 2019 | | :--- | :--- | :--- | | Total Interest Income | $125.1 | $118.1 | | Total Interest Expense | $61.6 | $64.3 | | Net Interest Income | $63.6 | $53.8 | | Provision for credit losses | ($67.5) | — | | Realized losses on sales | ($6.9) | — | | Total expenses | $28.6 | $19.7 | | (Loss) income before income taxes | ($38.9) | $35.1 | - The decrease in yields on the investment portfolio was driven by a significant decline in short-term interest rates and repayments of higher-spread loans[185] - The increase in operating expenses was primarily from increased expenses related to personnel and infrastructure to support business growth[196] Financial Condition As of June 30, 2020, the company's investment portfolio had a carrying value of $4.31 billion, primarily financed by $3.4 billion in debt, resulting in a 3.5:1.0 debt-to-equity ratio Portfolio Summary as of June 30, 2020 | Type | Principal Balance | Carrying Value | All-in Yield at Origination | | :--- | :--- | :--- | :--- | | Senior loans | $4,364.1M | $4,264.9M | L+4.19% | | Subordinated loans | $27.2M | $25.2M | L+9.84% | | CMBS | $24.5M | $23.3M | L+7.61% | | Total/Wtd. Avg. | $4,415.8M | $4,313.4M | L+4.22% | - As of June 30, 2020, the company had outstanding debt of $2.0 billion in repurchase agreements, $983.5 million in securitized debt obligations, and $270.4 million in convertible senior notes[206][208] - The debt-to-equity ratio (total debt, net of cash, divided by equity) was 3.5 to 1.0 as of June 30, 2020[209] Liquidity and Capital Resources The company focuses on strengthening liquidity, holding $56.0 million in cash as of June 30, 2020, by suspending common stock dividends and actively managing financing facilities, while remaining compliant with all financial covenants - The company held $56.0 million in cash and cash equivalents as of June 30, 2020[219][220] - The pace of loan repayments and prepayments, a key source of liquidity, is expected to slow meaningfully due to the economic impact of COVID-19[213] Financial Covenant Compliance as of June 30, 2020 | Covenant | Requirement | Actual | | :--- | :--- | :--- | | Unrestricted Cash | > $43.9M | $56.0M | | Tangible Net Worth | > $782.3M | $1.0B | | Total Leverage Ratio | < 80.0% | 78.2% | | Minimum Interest Coverage | > 1.5:1.0 | 2.3:1.0 | Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks, including credit, interest rate, capital markets, and liquidity, are heightened by COVID-19, with interest rate sensitivity showing a $24.6 million decrease in net interest income for a 100 bps rate increase - The company's primary risks include credit, interest rate, liquidity, and capital markets risk, all heightened by the COVID-19 pandemic[235] - Approximately 98.5% of the loan portfolio earns a floating rate of interest, which helps mitigate interest rate risk as most borrowings are also floating-rate[239] Interest Rate Sensitivity Analysis (in thousands) | Change in Interest Rates | Change in Value of Net Assets | Change in Annualized Net Interest Income | | :--- | :--- | :--- | | +100 bps | $5,785 | ($24,615) | | +50 bps | $2,951 | ($12,699) | | -50 bps | ($2,568) | $4,223 | | -100 bps | ($5,000) | $4,223 | - The company is monitoring the expected discontinuation of LIBOR after 2021 and is working with lenders and borrowers to manage the transition, as nearly all floating-rate instruments are indexed to LIBOR[245] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[253] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, internal controls[254] PART II - OTHER INFORMATION Legal Proceedings The company is engaged in confidential arbitration with its Manager regarding termination payment for management internalization, with the hearing expected in Q3 or Q4 2020 - The company and its Manager are in a confidential, binding arbitration to determine amounts payable for the termination of the management agreement in connection with the planned internalization of the management function[258] Risk Factors This section details heightened risks due to the COVID-19 pandemic, including negative impacts on collateral value, increased loan modification requests, margin call risks, reduced liquidity, and operational challenges - The ongoing COVID-19 pandemic is presented as a primary risk factor, causing severe disruptions to the global economy and the company's business, performance, and results of operations[261] - Specific pandemic-related risks include: - Negative impact on the value of collateral, particularly for hotel and retail assets - Increased borrower requests for loan modifications and potential for defaults - Risk of margin calls and defaults on repurchase agreements due to market volatility - Reduced liquidity and potential inability to meet funding obligations - Heightened cybersecurity risk due to extended remote working[262][263][264] Unregistered Sales of Equity Securities and Use of Proceeds The company reports no unregistered sales of equity securities or use of proceeds during the period - None reported[266] Defaults Upon Senior Securities The company reports no defaults upon senior securities during the period - None reported[267] Mine Safety Disclosures The company reports no mine safety disclosures as this item is not applicable - None reported[268] Other Information The company reports no other information for the period - None reported[269] Exhibits This section lists exhibits filed with the Form 10-Q, including amendments to financing agreements and CEO/CFO certifications - Lists filed exhibits, including amendments to master repurchase agreements and required CEO/CFO certifications[271]