Granite Point Mortgage Trust Inc. Navigates Challenging Market Conditions

Granite Point Mortgage Trust Inc. (GPMT), an internally-managed real estate finance company, has navigated a volatile macroeconomic environment over the past several quarters. The period has been characterized by continued volatility in global securities markets, driven by investor concerns over inflation, high interest rates, trade tensions, slowing economic growth, and geopolitical uncertainty.

Financial Performance Overview

For the third quarter of 2024, GPMT reported a GAAP net loss attributable to common stockholders of $34.6 million, or $0.69 per basic share. The company generated Distributable Loss to common stockholders of $38.0 million, or $0.75 per basic share, which includes $44.6 million in write-offs and $8.8 million in recoveries of amounts previously written off, and excludes a $27.9 million non-cash provision for credit losses, $2.5 million of non-cash equity compensation expense, and $1.9 million of non-cash depreciation and amortization on real estate owned (REO).

Excluding the impact of write-offs and recoveries, GPMT generated Distributable Loss to common stockholders of $2.2 million, or $0.04 per basic share, for the third quarter. The company recorded a decrease to the allowance for credit losses of $7.9 million, for a total allowance of $259.0 million, or approximately 10.5% of total loan commitments of $2.5 billion as of September 30, 2024. Book value per share of common stock at the end of the quarter was $9.25, inclusive of a $5.18 per share CECL reserve.

Investment Portfolio Activity

GPMT’s loan portfolio was comprised of 62 investments as of September 30, 2024, of which 61 were senior first mortgage loans totaling $2.4 billion of commitments with an unpaid principal balance of $2.3 billion, and one subordinated loan totaling $13.3 million in commitments and unpaid principal balance. The weighted average risk rating of the loan portfolio was 3.1, compared to 2.8 at the end of 2023.

During the third quarter, the company funded $9.8 million under existing loan commitments and loan upsizes, and realized $240.1 million in aggregate reductions in portfolio unpaid principal balance from loan repayments, paydowns and amortization. The weighted average cash coupon on the loan portfolio was S+3.77%, and the weighted average all-in yield at origination was S+4.06%.

Portfolio Management and Credit Quality

GPMT actively manages each loan investment, assessing the risk of credit deterioration by quarterly evaluating the performance of the underlying collateral properties, the macroeconomic environment, real estate fundamentals, and local market dynamics. The company maintains strong relationships and an active asset management dialogue with its borrowers.

As of September 30, 2024, the company had nine loans with a risk rating of “5”, the highest risk category, with an aggregate principal balance of $508.5 million, for which it recorded an allowance for credit losses of $200.3 million. These loans were on nonaccrual status. During the quarter, the company downgraded two senior loans with an aggregate outstanding principal balance of $86.0 million to a risk rating of “5” due to borrowers’ unwillingness to make further capital commitments to support the collateral properties.

GPMT also resolved two previously risk-rated “5” loans, incurring write-offs of $22.3 million and $3.3 million, respectively. Additionally, the company modified a previously risk-rated “5” loan, restructuring the $51.0 million whole loan into a $32.0 million senior loan and a $19.0 million mezzanine note, resulting in a $19.0 million write-off.

Financing Activity

GPMT’s portfolio financing consisted of repurchase and secured credit facilities collateralized by loans held-for-investment and REO, as well as securitized debt obligations collateralized by pools of loans held-for-investment issued in commercial real estate collateralized loan obligations (CRE CLOs). The company’s non-mark-to-market financing sources accounted for approximately 56.1% of portfolio loan-level financing as of September 30, 2024.

As of the end of the third quarter, the company had repurchase facilities in place with three counterparties with aggregate outstanding borrowings of $0.7 billion, which financed a portion of its loans held-for-investment and REO. The weighted average borrowing rate on the repurchase facilities was 8.5%, the weighted average advance rate was 64.6%, and the weighted average remaining maturity was 0.8 years.

GPMT had two CRE CLOs outstanding as of September 30, 2024, totaling $0.8 billion of outstanding borrowings, financing 33 of its existing first mortgage loan investments with an aggregate principal balance, inclusive of restricted cash, of $1.1 billion. The company’s CRE CLOs financed 45.5% of its total loan portfolio principal balance on a term-matched, non-recourse and non-mark-to-market basis.

Additionally, the company had a secured credit facility with a maximum borrowing capacity of $100.0 million and aggregate outstanding borrowings of $85.2 million as of the end of the quarter, which financed a portion of its loans held-for-investment on a non-mark-to-market basis.

Liquidity and Capital Resources

GPMT’s primary sources of liquidity include cash and cash equivalents, any approved but unused borrowing capacity under its financing facilities, the net proceeds of future public and private equity and debt offerings, loan repayments and prepayments, loan sales, interest received on its portfolio, and cash generated from operating results.

As of September 30, 2024, the company had $113.5 million in cash and cash equivalents and no approved but unused borrowing capacity on its financing facilities, for total immediately available liquidity of $113.5 million. GPMT has access to liquidity through public offerings of debt and equity securities, and in August 2024 filed a shelf registration statement with the SEC for up to $500 million of securities.

The company’s debt-to-equity ratio, defined as total debt net of cash divided by total equity, was 2.2:1.0 as of September 30, 2024, down from 2.5:1.0 as of June 30, 2024, mainly driven by a reduction in total outstanding debt. GPMT intends to finance its target assets with a moderate amount of leverage, generally within a range of 3.0:1.0 to 3.5:1.0 on a total debt-to-equity ratio basis.

Outlook and Risks

The macroeconomic environment has been characterized by continued volatility in global securities markets, driven by investor concerns over inflation, high interest rates, and geopolitical uncertainty. These conditions have negatively impacted, and may continue to negatively impact, real estate and real estate capital markets, which could make it more difficult for GPMT to obtain or maintain financing.

The office property market has been experiencing higher vacancies, slower leasing activity, and tenants re-evaluating their need for space due in large part to remote and hybrid work arrangements. These factors, coupled with inflation, high interest rates, and limited market liquidity, have created a high level of uncertainty with respect to property values and stressed certain borrowers’ ability and willingness to support their properties and perform under the terms of their loans.

GPMT is subject to varying degrees of credit risk in connection with its target investments. Unanticipated credit losses, including as a result of inflation, high interest rates, capital markets volatility, and geopolitical uncertainty, could occur that could adversely impact the company’s operating results. The environmental, social, and governance (ESG) factors associated with the company’s potential collateral and borrowers could also pose credit risks.

Despite the challenging market conditions, GPMT remains focused on preserving stockholder capital while generating attractive risk-adjusted returns over the long term, primarily through dividends derived from current income produced by its investment portfolio. The company will continue to actively manage its loan investments, maintain strong relationships with borrowers, and explore additional financing options to enhance its liquidity position and navigate the current market environment.