Granite Point Mortgage Trust Inc. (GPMT) is an internally-managed commercial real estate finance company that focuses primarily on directly originating, investing in and managing senior floating-rate commercial mortgage loans and other debt and debt-like commercial real estate investments. The company's investment objective is to preserve its stockholders' capital while generating attractive risk-adjusted returns over the long term, primarily through dividends derived from current income produced by its investment portfolio.

Financials

For the full year 2023, Granite Point reported annual net income of -$64,858,999, annual revenue of $266,491,000, annual operating cash flow of $48,173,000, and annual free cash flow of $48,173,000. In the first quarter of 2024, the company recorded a GAAP net loss of $77.7 million, or $1.53 per basic share, which included a provision for credit losses of $75.6 million, or $1.49 per basic share, mainly related to certain risk-rated 5 loans. Distributable earnings for the quarter were $1.3 million, or $0.03 per basic share, and were impacted by non-accrual loans, which pressured interest income by approximately $12 million, or $0.24 per basic share.

Business Overview

The first few months of 2024 have resulted in diverging trends, with the ongoing strength of the overall economy and a healthy rebound in the equity and fixed income markets, while the commercial real estate sector continues to be pressured by high interest rates, deeply suppressed transaction volumes, fundamental shifts such as the work-from-home trend, and higher costs impacting properties that require capital expenditure. The company believes that the path of interest rates will continue to be the main factor affecting the activity and performance of the commercial real estate floating rate loan market in the near to medium term.

Granite Point's loan portfolio was comprised of 71 investments as of March 31, 2024, of which 70 were senior first mortgage loans totaling $2.8 billion in commitments with an unpaid principal balance of $2.7 billion, and one subordinated loan totaling $13.4 million in commitments and unpaid principal balance. The portfolio remains well diversified across regions and property types, with the largest exposures being office (43.1% of the portfolio), multifamily (31.8%), and retail (9.8%). Geographically, the portfolio is concentrated in the Northeast (25.4%), Southeast (25.2%), and Southwest (19.7%) regions of the United States.

During the first quarter of 2024, the company funded $17.5 million under existing loan commitments and upsizings and realized $35.5 million in aggregate reductions in portfolio unpaid principal balance from loan repayments, paydowns, and amortization. The weighted average risk rating of the loan portfolio increased to 3.0 as of March 31, 2024, from 2.8 as of December 31, 2023, weighted by total unpaid principal balance, primarily due to the downgrade of five loans to a risk rating of 5.

The company recorded a provision for credit losses of $75.6 million in the first quarter of 2024, compared to $21.6 million in the fourth quarter of 2023. The increase was primarily driven by recording an increase in the allowance for certain collateral-dependent loans that were individually assessed in accordance with the CECL framework, as well as a provision for credit losses in the general reserve due to the ongoing challenges in the commercial real estate market and pressure on property values.

As of March 31, 2024, Granite Point had ten loans with a total unpaid principal balance of $539.7 million and a carrying value of $383.6 million that were held on nonaccrual status, compared to five loans with a total unpaid principal balance of $274.8 million and a carrying value of $207.2 million that were held on nonaccrual status as of March 31, 2023. The company's CECL reserve at quarter-end was approximately $213 million, or $4.17 per share, representing 7.5% of total portfolio commitments, compared to $137 million, or 4.7% of total commitments, in the prior quarter.

Liquidity

Granite Point's financing consists of repurchase and secured credit facilities collateralized by loans held-for-investment and its one real estate owned (REO) asset, as well as securitized debt obligations collateralized by pools of loans held-for-investment issued in commercial real estate collateralized loan obligations (CRE CLOs). As of March 31, 2024, the company's non-mark-to-market financing sources accounted for approximately 56.5% of portfolio loan-level financing.

The company ended the first quarter of 2024 with over $155 million of unrestricted cash and a total leverage ratio of 2.3x, compared to 2.1x in the prior quarter. Granite Point's funding mix remains well-balanced, and the company continues to enjoy support from its lender counterparties.

Outlook

Looking ahead, the company expects its volume of loan repayments to be lower than the $725 million realized during 2023 due to the macro uncertainty, high interest rates, and a meaningful shift in market sentiment. Granite Point plans to maintain a conservative stance, prioritizing higher levels of liquidity and working diligently to resolve its risk-rated 5 loans. The company believes that the process of repositioning its portfolio, even though it results in additional credit reserves and associated losses, will position it to return to its core business of lending, allowing it to grow the portfolio and improve run-rate profitability over time to support its total shareholder returns.

Risks and Challenges

Despite the current challenges, Granite Point remains focused on actively managing its balance sheet and enhancing its liquidity position to best position the company for the market environment, satisfy its loan future funding and financing obligations, and make new investments. The company continues to explore various strategies, including loan sales, capital markets activities, and other sources of funding, to improve its liquidity or refinance its debt, which could result in actual losses and/or negatively impact its results of operations in the near term.

Conclusion

In conclusion, Granite Point Mortgage Trust Inc. is navigating the current challenging market conditions with a focus on maintaining liquidity and optimizing its portfolio to position the company for future growth opportunities. The company's experienced management team is actively working to resolve its non-performing loans, which are pressuring its near-term profitability, with the goal of improving the company's run-rate earnings and supporting its long-term shareholder returns.