Granite Point Mortgage Trust(GPMT) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) The unaudited Q3 2020 financial statements show a net loss and reduced equity, driven by CECL, loan losses, and a restructuring charge Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheet Highlights (in millions/billions) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Loans held-for-investment, net | $3.979 billion | $4.226 billion | | Cash and cash equivalents | $353.7 million | $80.3 million | | Total Assets | $4.403 billion | $4.461 billion | | Liabilities | | | | Repurchase agreements | $1.851 billion | $1.924 billion | | Securitized debt obligations | $928.6 million | $1.041 billion | | Senior secured term loan facilities | $205.6 million | $— | | Total Liabilities | $3.467 billion | $3.441 billion | | Total Stockholders' Equity | $934.5 million | $1.019 billion | - The balance sheet reflects the adoption of the CECL accounting standard, with a new 'Allowance for credit losses' of $73.3 million reducing the net value of loans held-for-investment as of September 30, 2020[11] - The company entered into new senior secured term loan facilities during the period, with an outstanding balance of $205.6 million at quarter-end[11] Condensed Consolidated Statements of Comprehensive (Loss) Income Statement of Comprehensive (Loss) Income Highlights (in millions, except per share data) | Metric | Q3 2020 | Q3 2019 | Nine Months 2020 | Nine Months 2019 | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $33.8 million | $27.1 million | $97.4 million | $80.8 million | | Provision for credit losses | $5.3 million | $— | $(62.2) million | $— | | Realized losses on sales | $(10.0) million | $— | $(16.9) million | $— | | Restructuring charges | $43.7 million | $— | $43.7 million | $— | | Net (loss) income | $(24.7) million | $17.4 million | $(63.6) million | $52.5 million | | Net (loss) income attributable to common stockholders | $(24.7) million | $17.4 million | $(63.7) million | $52.5 million | | Diluted (loss) earnings per share | $(0.45) | $0.32 | $(1.15) | $1.00 | | Dividends declared per common share | $0.20 | $0.42 | $0.20 | $1.26 | - The company reported a net loss of $24.7 million for Q3 2020, a significant shift from a net income of $17.4 million in Q3 2019. This was primarily driven by a $43.7 million restructuring charge and a $10.0 million realized loss on sales, partially offset by a $5.3 million reversal of provision for credit losses[13] Condensed Consolidated Statements of Stockholders' Equity - Total Stockholders' Equity decreased from $1.019 billion at December 31, 2019, to $934.5 million at September 30, 2020[16] - The decrease in equity was driven by a cumulative effect of adopting a new accounting principle (CECL) of $18.5 million, a net loss of $63.6 million for the nine months, and common dividends declared of $11.0 million in Q3[16] Condensed Consolidated Statements of Cash Flows Cash Flow Summary for the Nine Months Ended September 30 (in millions) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $36.0 million | $50.4 million | | Net cash provided by (used in) investing activities | $200.5 million | $(741.0) million | | Net cash (used in) provided by financing activities | $(37.3) million | $873.4 million | | Net increase in cash, cash equivalents and restricted cash | $199.2 million | $182.7 million | - For the nine months ended Sep 30, 2020, investing activities provided $200.5 million in cash, primarily due to proceeds from loan repayments ($290.8 million) and sales of loans ($193.5 million) exceeding new originations and fundings ($314.7 million)[19] - Financing activities used $37.3 million in cash, reflecting net repayments on repurchase agreements and revolving credit facilities, partially offset by $205.6 million in proceeds from new senior secured term loan facilities[19] Notes to the Condensed Consolidated Financial Statements (unaudited) - The company will become an internally managed REIT effective December 31, 2020, terminating its external management agreement with Pine River Capital Management L.P[21][31][112] - On January 1, 2020, the company adopted the new CECL accounting standard (ASU 2016-13), resulting in a cumulative-effect adjustment to retained earnings of $18.5 million[33][41] - On September 25, 2020, the company entered into a new five-year, $300.0 million senior secured term loan facility, drawing an initial $225.0 million. In conjunction, it issued warrants to purchase up to 6.07 million shares of common stock[99][100] - A one-time restructuring charge of $44.5 million was recognized related to the cash payment to be made to the Manager for the internalization of the management function[112][136] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses COVID-19 impacts, the management internalization, Q3 2020 net loss, liquidity, and loan portfolio credit quality Key Financial Measures and Indicators Key Metrics | Metric | Q3 2020 | Q2 2020 | | :--- | :--- | :--- | | GAAP Net Loss per Share | $(0.45) | $(0.03) | | Core Earnings per Share (Non-GAAP) | $0.27 | $0.25 | | Dividend Declared per Share | $0.20 | $— | | Book Value per Share | $16.93 | $17.47 | - Core Earnings, a non-GAAP measure, is used by management to evaluate performance. For Q3 2020, it was $15.0 million, adjusting the GAAP net loss of ($24.7 million) primarily for the $43.7 million restructuring charge and a $5.3 million reversal of credit loss provisions[173][177] Results of Operations - Net interest income for Q3 2020 was $33.8 million, up from $27.1 million in Q3 2019. This was due to a significant decline in interest expense on borrowings (driven by lower short-term rates) that outpaced the decline in interest income[208][214] - The company recorded a $5.3 million reversal of its provision for credit losses in Q3 2020, primarily due to changes in portfolio composition from loan sales and repayments. This contrasts with a cumulative provision of $62.2 million for the first nine months of 2020, reflecting the negative macroeconomic outlook from COVID-19[223] - Realized losses on loan sales were $10.0 million in Q3 2020 as the company strategically sold certain assets[224] Portfolio Overview and Management Loan Portfolio Summary as of Sep 30, 2020 | Metric | Value | | :--- | :--- | | Number of Investments | 110 | | Principal Balance | $4.07 billion | | Carrying Value | $3.98 billion | | Weighted Avg. Stabilized LTV | 63.6% | | % Senior Loans | 100% (by loan count) | | % Floating Rate | 98.4% (by carrying value) | - The company collected 99% of contractual interest payments due in Q3 2020. Management has been actively working with borrowers impacted by COVID-19, modifying 12 loans with a principal balance of $319.6 million during the quarter[238][239] - Loan modifications typically involve temporary interest deferrals, use of reserves for debt service, and covenant waivers, often coupled with additional equity support from sponsors[239] Liquidity and Capital Resources - As of September 30, 2020, the company had $353.7 million in available cash and cash equivalents[257][258] - The debt-to-equity ratio (net of cash) decreased to 3.2:1.0 at September 30, 2020, from 3.5:1.0 at June 30, 2020[246][257] - The company amended its financing facilities to exclude the impact of general CECL reserves from the calculation of tangible net worth and leverage ratio covenants, and was in compliance with all covenants as of quarter-end[263] Quantitative and Qualitative Disclosures About Market Risk The company faces magnified credit, interest rate, and liquidity risks due to COVID-19, managed through portfolio structure and active borrower support - Credit risk has increased due to COVID-19, leading to loan modification requests from borrowers in hard-hit sectors like hotels and retail. The company is actively managing these situations to protect its portfolio[279][280] Interest Rate Sensitivity Analysis (in millions) | Change in Interest Rates | Change in Annualized Net Interest Income | | :--- | :--- | | +100 bps | $(23.3) million | | +50 bps | $(11.8) million | | -50 bps | $3.5 million | | -100 bps | $3.5 million | - The company is exposed to liquidity risk from its repurchase agreement financing, where lenders can make margin calls if collateral value declines. This risk is heightened by market volatility from the pandemic[294] - The company is monitoring the planned discontinuation of LIBOR after 2021, as the vast majority of its assets and liabilities are indexed to it. All agreements have fallback language for an alternative base rate[288] Controls and Procedures Management concluded disclosure controls were effective as of September 30, 2020, with no material changes to internal controls over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[297] - No changes occurred in the internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[298] PART II - OTHER INFORMATION Legal Proceedings An arbitration with the external Manager concluded, setting a $44.5 million payment for management internalization, with no other material litigation pending - An arbitration with the company's Manager concluded on October 7, 2020, with an award setting the payable amount at $44.5 million, which relates to the internalization of management[301] Risk Factors The company faces significant new and heightened risks from the COVID-19 pandemic and the upcoming management internalization - The COVID-19 pandemic has caused severe disruptions and may continue to adversely impact the company's performance, borrower stability, collateral values, and liquidity[302] - Specific pandemic-related risks include potential defaults from borrowers, margin calls from lenders on repurchase agreements, and reduced availability of liquidity sources[303] - The company may not realize all the targeted benefits of the management internalization and faces risks in attracting and retaining key personnel post-transition[307][308] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - No unregistered sales of equity securities were reported Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - No defaults upon senior securities were reported Exhibits This section lists the exhibits filed with the Form 10-Q, including key financing agreements and documents related to the management internalization - A list of exhibits filed with the report is provided, including key agreements related to financing and the management internalization[313][315]