Granite Point Mortgage Trust(GPMT) - 2023 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements for June 30, 2023, including balance sheets, income, equity, and cash flow statements, which show total assets decreased to $3.31 billion, net income for common stockholders was $1.4 million in Q2 2023, and cash increased by $136.7 million in the first six months due to loan repayments Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | Loans held-for-investment, net | $2,966,088 | $3,267,815 | | Cash and cash equivalents | $235,840 | $133,132 | | Total Assets | $3,310,856 | $3,454,101 | | Total Liabilities | $2,386,409 | $2,469,431 | | Total Equity | $924,447 | $983,670 | Condensed Consolidated Statements of Comprehensive Income (Loss) Highlights (in thousands) | Account | Three Months Ended June 30, 2023 (in thousands) | Three Months Ended June 30, 2022 (in thousands) | Six Months Ended June 30, 2023 (in thousands) | Six Months Ended June 30, 2022 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net interest income | $21,840 | $21,935 | $44,753 | $45,447 | | Provision for credit losses | $(5,818) | $(13,627) | $(52,228) | $(17,315) | | Net income (loss) | $5,041 | $(13,731) | $(28,788) | $(9,095) | | Net income (loss) attributable to common stockholders | $1,416 | $(17,356) | $(36,038) | $(16,345) | | Basic earnings (loss) per share | $0.03 | $(0.32) | $(0.69) | $(0.30) | Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended, in thousands) | Cash Flow Activity | June 30, 2023 (in thousands) | June 30, 2022 (in thousands) | | :--- | :--- | :--- | | Net cash provided by operating activities | $26,391 | $22,780 | | Net cash provided by (used in) investing activities | $231,305 | $(99,874) | | Net cash (used in) provided by financing activities | $(121,011) | $92,485 | | Net increase (decrease) in cash | $136,685 | $15,391 | Note 3. Loans Held-for-Investment, Net of Allowance for Credit Losses This note details the company's loan portfolio, with a carrying value of $2.97 billion as of June 30, 2023, a significantly increased allowance for credit losses of $130.4 million due to a $52.3 million provision, and a slightly increased weighted average risk rating from 2.5 to 2.7 Loan Portfolio by Property Type (Carrying Value) | Property Type | June 30, 2023 (in thousands) | % of Portfolio | | :--- | :--- | :--- | | Office | $1,240,544 | 41.8% | | Multifamily | $917,566 | 30.9% | | Hotel | $258,638 | 8.7% | | Retail | $275,440 | 9.3% | | Industrial | $187,072 | 6.4% | | Other | $86,828 | 2.9% | | Total | $2,966,088 | 100.0% | - The allowance for credit losses on loans held-for-investment increased to $130.4 million as of June 30, 2023, from $82.3 million at year-end 2022. The provision for credit losses for the first six months of 2023 was $52.3 million[50][55] - As of June 30, 2023, there were four senior loans with a total unpaid principal balance of $245.6 million on nonaccrual status[55] Loan Portfolio by Risk Rating (Unpaid Principal Balance) | Risk Rating | June 30, 2023 (in thousands) | December 31, 2022 (in thousands) | | :--- | :--- | :--- | | 1 - Lower Risk | $158,427 | $291,236 | | 2 - Average Risk | $1,541,383 | $1,857,744 | | 3 - Acceptable Risk | $797,189 | $697,532 | | 4 - Higher Risk | $362,744 | $268,236 | | 5 - Loss Likely | $245,619 | $247,258 | | Total | $3,105,362 | $3,362,006 | Note 4. Real Estate Owned, Net On May 16, 2023, the company acquired an office property in Phoenix, AZ, via deed-in-lieu of foreclosure, recognizing it as REO with a $24.0 million carrying value, generating $0.46 million in revenue and incurring $1.66 million in expenses for the quarter - On May 16, 2023, the company acquired legal title to an office property in Phoenix, AZ, via a negotiated deed-in-lieu of foreclosure. The property was recognized as REO with a carrying value of $24.0 million[67] REO Operations (in thousands) | Account | Three Months Ended June 30, 2023 (in thousands) | | :--- | :--- | | Revenue from real estate owned operations | $462 | | Expenses from real estate owned operations | $(1,664) | | Total | $(1,202) | Note 6. Secured Financing Agreements This note details the company's secured financing, totaling $1.22 billion in outstanding borrowings as of June 30, 2023, confirming compliance with all financial covenants, including a tangible net worth of $1.1 billion against a $931.7 million requirement and a 1.5:1.0 interest coverage ratio Outstanding Secured Financing as of June 30, 2023 (in thousands) | Facility Type | Amount Outstanding (in thousands) | | :--- | :--- | | Repurchase facilities | $1,072,132 | | Asset-specific financings | $45,823 | | Secured credit facility | $100,000 | | Total | $1,217,955 | - The company was in compliance with all financial covenants as of June 30, 2023. Key covenants include a minimum tangible net worth of $931.7 million (actual $1.1 billion) and a minimum interest coverage ratio of 1.5:1.0 (actual 1.5:1.0)[94][95] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the challenging macroeconomic environment impacting commercial real estate, reporting Q2 2023 GAAP net income of $0.03 per share and Distributable Earnings of $0.12 per share, with a slight decline in loan portfolio credit quality to a 2.7 weighted average risk rating, while maintaining $235.8 million in unrestricted cash and a 2.3:1.0 total debt-to-equity ratio Second Quarter 2023 Activity In Q2 2023, the company generated $1.4 million GAAP net income ($0.03/share) and $6.0 million Distributable Earnings ($0.12/share), declared a $0.20 per share dividend, and saw $206.2 million in loan repayments and a $24.0 million office property acquisition, with book value per share at $13.93 Q2 2023 Key Operating Results | Metric | Value | | :--- | :--- | | GAAP net income (to common) | $1.4 million | | GAAP EPS (basic) | $0.03 | | Distributable Earnings (to common) | $6.0 million | | Distributable EPS (basic) | $0.12 | | Common Dividend Declared | $0.20 per share | | Book Value per Share | $13.93 | - Portfolio activity included $206.2 million in loan repayments and the acquisition of an office property valued at $24.0 million through a deed-in-lieu of foreclosure[160] Loan Portfolio Overview and Management As of June 30, 2023, the loan portfolio comprised 82 investments with a $3.1 billion unpaid principal balance, primarily senior first mortgage loans, and saw its weighted average risk rating increase from 2.5 to 2.7 due to office sector downgrades, with four loans on nonaccrual status Loan Portfolio Summary as of June 30, 2023 | Metric | Value | | :--- | :--- | | Number of loans | 82 | | Unpaid principal balance | $3.1 billion | | Carrying value | $2.97 billion | | Weighted-average all-in yield | S+4.03% | | Stabilized LTV at origination | 62.9% | - The weighted average risk rating of the loan portfolio increased to 2.7 as of June 30, 2023, compared to 2.5 as of December 31, 2022, mainly due to downgrades of office-related loans[190] - During Q2 2023, two loans were downgraded from a risk rating of '3' to '4', including a $79.8 million office loan in Chicago and a $37.1 million mixed-use property in Los Angeles[65][191] Portfolio Financing and Liquidity The company's financing structure includes repurchase agreements and CRE CLOs, with non-mark-to-market sources accounting for 52% of its $2.2 billion loan-level financing, while maintaining $235.8 million in unrestricted cash and a 2.3:1.0 total debt-to-equity ratio, in compliance with all financial covenants - As of June 30, 2023, non-mark-to-market financing sources (CRE CLOs, asset-specific financing, etc.) accounted for approximately 52.0% of the total $2.2 billion in portfolio loan-level financing[194][195] - The company maintained unrestricted cash of $235.8 million as of June 30, 2023[162][254] Leverage Ratios | Ratio | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Recourse leverage ratio | 1.2:1.0 | 1.2:1.0 | | Total leverage ratio | 2.3:1.0 | 2.3:1.0 | Results of Operations Comparing Q2 2023 to Q1 2023, net interest income slightly decreased to $21.8 million due to rising interest expenses, while the provision for credit losses was significantly lower at $5.8 million in Q2, though the first half of 2023 saw a larger net loss due to a substantially higher $52.2 million provision compared to H1 2022 Quarterly Net Interest Income Comparison (in thousands) | Period | Total Interest Income (in thousands) | Total Interest Expense (in thousands) | Net Interest Income (in thousands) | | :--- | :--- | :--- | :--- | | Q2 2023 | $68,826 | $46,986 | $21,840 | | Q1 2023 | $66,719 | $43,806 | $22,913 | Six-Month Provision for Credit Losses Comparison (in thousands) | Period | Provision for Credit Losses (in thousands) | | :--- | :--- | | H1 2023 | $(52,228) | | H1 2022 | $(17,315) | Item 3. Quantitative and Qualitative Disclosures About Market Risk This section outlines the company's primary market risks—credit, interest rate, liquidity, and real estate—all magnified by current macroeconomic conditions, with a strategy to mitigate interest rate risk by matching floating-rate assets and liabilities, and an analysis showing a 100 basis point rate increase would boost annualized net interest income by $5.7 million, while also facing extension risk - The company's primary risks are credit risk, interest rate risk, liquidity risk, and real estate risk[263][265][281][283] Interest Rate Sensitivity Analysis (in thousands) | Change in Interest Rates | Change in Annualized Net Interest Income (in thousands) | | :--- | :--- | | +100 bps | $5,682 | | +50 bps | $2,841 | | -50 bps | $(2,841) | | -100 bps | $(5,682) | - The company faces extension risk, as rising interest rates and market disruptions may cause borrowers to exercise extension options, potentially creating a maturity mismatch with the company's financing facilities[284] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during the second quarter - Management concluded that the company's disclosure controls and procedures were effective as of the end of the period covered by the report[286] - There were no changes in internal control over financial reporting during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, internal controls[287] PART II - OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its financial condition or results of operations - As of the filing date, the company is not party to any litigation or legal proceedings that would have a material adverse effect on its results of operations or financial condition[289] Item 1A. Risk Factors This section refers readers to the Annual Report on Form 10-K for the year ended December 31, 2022, for a comprehensive discussion of risk factors - The report refers to Part I, Item 1A. 'Risk Factors' in the Annual Report on Form 10-K for the year ended December 31, 2022, for information on risk factors[290] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds from such sales during the period - None reported[291] Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities - None reported[292] Item 5. Other Information The company disclosed that no director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the second quarter of 2023 - During the three months ended June 30, 2023, no director or officer adopted or terminated a 'Rule 10b5-1 trading arrangement' or 'non-Rule 10b5-1 trading arrangement'[294]