Good morning. My name is Sarah and I will be your conference facilitator. At this time, I would like to welcome everyone to Granite Point Mortgage Trust’s First Quarter 2021 Financial Results Conference Call. All participants will be on a listen-only mode. After the speakers’ remarks, there will be a question-and-answer period.

I would now like to turn the call to Chris Petta with Investor Relations for Granite Point..

Thank you and good morning everyone. Thank you for joining our call to discuss Granite Point’s first quarter 2021 financial results.

With me on the call this morning are Jack Taylor, our President and Chief Executive Officer; Marcin Urbaszek, our Chief Financial Officer; Steve Alpart, our Chief Investment Officer and Co-Head of Originations; Peter Morral, our Chief Development Officer and Co-Head of Originations; and Steve Plust, our Chief Operating Officer..

Thank you, Chris and good morning everyone. We would like to welcome you all to our first quarter 2021 earnings call. We hope everyone continues to stay healthy and safe. The first quarter of 2021 was Granite Point’s first as an internally managed REIT and we are excited to report solid performance across our business.

Yesterday afternoon, we reported strong distributable earnings of $0.38 per share well in excess of our dividend of $0.25 per share. This was accomplished while we have continued to maintain an elevated level of liquidity on our balance sheet.

Our earnings benefited from the in-the-money labor floors on our loans, the continued strong credit performance of our portfolio with 100% collections of contractual interest, and lower operating expenses. In March, our Board decided to increase our dividend from $0.20 to $0.25 per share.

And we believe the dividend has more room to grow as we rationalize our liabilities and grow our portfolio over time..

Thank you, Jack and thank you all for joining our call this morning. Our portfolio has continued to perform well in 2021, with 100% of contractual interest payments received through April.

We ended the quarter with a portfolio outstanding principal balance of about $3.9 billion, across 100 loans, with around $450 million in future funding obligations, which account for only about 10% of our total commitments. During the first quarter, we funded $37 million of loan balances on prior commitments.

We realized about $100 million of loan payoffs in the first quarter and an additional $120 million so far in the second quarter, including a $70 million hotel loan as a result of continued improvement in market conditions and the credit quality of our portfolio.

We expect this pace of loan repayments to continue, with an acceleration in the latter part of the year as economic activity and transaction volume picks up. So, the actual volume is likely to vary from quarter to quarter.

Even during the challenge market of 2020, we had repayments in excess of $500 million, which we believe will be well exceeded this year..

Thank you, Steve. Good morning, everyone and thank you for joining us today. Yesterday afternoon, we reported strong first quarter results, with a GAAP net income of $28 million, or $0.51 per basic share, which included $9.1 million, or $0.17 per share in decrease of our CECL reserves.

The decrease in our reserves was mainly driven by the loan repayments and improving macroeconomic forecasts employed in our analysis. At quarter end, our allowance for credit losses was $63.1 million or $1.14 per share and represented about 146 basis points of our total loan commitments.

Distributable earnings for the first quarter were $20.7 million or $0.38 per basic share and excluded the non-cash decline in CECL reserves. Our book value increased by $0.30 per share to $17.22 at March 31 from $16.92 at year end. The increase was the result of the release of our CECL reserves and earnings meaningfully covering our dividends.

In March, our Board of Directors declared a regular common stock cash dividend of $0.25 per share, which was increased from $0.20 per share in the prior quarter.

Going forward, the main factors influencing our run-rate earnings are expected to be the volume of loan repayments, the pace of deployment of our excess liquidity, and potential interest expense savings from refinancing of our term loan, which will be largely dependent on capital market conditions.

Our earnings continue to benefit from the LIBOR floors embedded in our loans, with a weighted average of 157 basis points. Over time, as we receive more loan repayments and originate new investments with lower LIBOR floors, our net interest spread is likely to compress. We ended the quarter with about $255 million in cash.

And as of May 5, we had approximately $229 million in cash plus our option to draw an additional $75 million in term loan proceeds through the end of September of this year.

Our total debt to equity leverage at March 31 was 3x, down from 3.2x in the prior quarter and our recourse leverage, which excludes our CLOs and other non-recourse borrowings was at 1.7x.

Given current market conditions, we would anticipate our total leverage to be in the range of 3x to 3.5x debt to equity depending on developments in our portfolio, such as the pace of new loan originations and volume of repayments.

As Zack mentioned earlier this week, we announced the pricing of our third CLO, an $824 million transaction with an advanced rate of 83.25%, at a cost of funds of LIBOR plus 162 basis points before accounting for transaction expenses.

We are very pleased with this transaction as it provides us with very attractive cost of funds and increases the percentage of our non-mark-to-market low level financing to about 70%.

In addition, upon closing, the CLO is expected to also release about $50 million of additional liquidity, which we expect to redeploy into new originations in the coming months..

Thank you. We will now begin the question-and-answer session. Our first question comes from Doug Harter with Credit Suisse. Please go ahead..

Good morning, everyone. This is Josh Bolton for Doug. Appreciate the time. Hopefully, you can talk about your thoughts around liquidity. The cash on hand update was helpful. It still feels elevated especially versus where you guys are running pre-COVID.

So, just trying to get a sense of what a more steady state level of liquidity looks like, as the market normalizes. Thanks..

Hi Josh. Good morning. It’s Marcin. Thank you for joining us. Thanks for your question. Look, yes, so as we said, and in prior calls, we have some excess liquidity, but also as we just – as you just heard us say on our prepared remarks, we intend to deploy some of it over time. So look, it’s hard to tell exactly what the balance is going to be.

It obviously will depend on pace of originations and pace of repayments, which as you just heard, we expect to accelerate a little bit in the second half of the year. But, on a net basis, we expect the excess liquidity to go down over time..

Great, it makes sense. And then I guess, shifting gears a little bit to $70 million hotel loan that was upgraded and prepaid in the second quarter. Any color you can give us around what type of hotel that was or any kind of what was the resolution? Was it a sale or a refinance or something else? Thanks..

Hey, good morning, Josh. It’s Steve Alpart. No, no real update from last quarter as the type of hotel it’s a full service hotel that we mentioned last quarter. It’s located in the Minneapolis CBD is great asset..

Steve, he was asking – I am sorry he was asking about the loan that paid off..

Yes, also a full service hotel. And the resolution on that one was that it was purchased by a large private equity firm at a very attractive price..

Great. Thanks for details..

Our next question comes from Jade Rahmani with KBW. Please go ahead..

Thank you very much. Could you elaborate on the warrants and how you are thinking about potential settlements, I know that you gave color..

Marcin?.

Thanks. Hey, Marcin. I know you gave color on the potential dilutive effect. But I guess is the company’s perspective that, given its cash position, that cash settlement is more likely? Thanks..

So, thank you for the question. The warrants can’t be exercised for the first year. So, that’s one thing. So, they can’t be exercised through the September of this year. I think look, the option we like the optionality of cash versus stock, because depending on where the stock price is at the moment, if they get exercised, we can help limit dilution.

Obviously, today, because stock is below book value, cash is cheaper on a relative basis in terms of dilution effect. But I think it will largely depend on where we are in terms of valuation and our balance sheet overall, if they get exercised..

Okay.

And do you think they are likely to be exercised or it’s too hard to predict at this point?.

It’s really hard to tell..

Okay. Turning to the outlook for M&A, there has been a lot of discussion this quarter, from mortgage REITs about it.

So Jack, I was wondering if you could give your thoughts and whether do you think combining with another firm that perhaps doesn’t have middle market emphasis that Granite Point has would make sense and could be accretive?.

Well, we are focused on growing our books. And we are not in any discussions. We wouldn’t be able to tell you if we weren’t, but I will tell you, we are not pursuing anything like that. And the whole industry is in recovery and reacceleration mode, including us.

So, there has been some discussion in mortgage REITs, I think often prompted by questions from a particular analyst. But my point is that we are not looking to that in the near intermediate term..

Okay. Thanks very much..

Thank you..

The watch list loans, I think the dollar amount you said was $240 million..

Just want to make sure I got that correct..

Peter, that’s correct..

Okay. And that was unchanged from last quarter..

That is correct..

Okay, over what timeframe do you anticipate those loans to come to some type of resolution?.

That’s a great question. We are really good monitoring all of these loans. And obviously, these for watch list loans in particular each situation is volatile, a little bit different. Really, I guess all I would say that there is no real update from last quarter.

We will get this information as we have it, but there is no specific timeline on that right now..

Okay.

And lastly, there is – is there just one loan on non-accrual at this point?.

Yes, that’s correct. It’s the same. It’s a relatively small loan that was put on non-accrual, I believe in the fourth quarter. That’s the same one that’s on non-accrual in the first quarter..

Thanks for taking the questions..

Thanks Jade..

Our next question comes from Chris Muller with JMP Securities. Please go ahead..

Hi, guys, thanks for taking the questions. I am on for Steve today. On the CECL reserve release. I appreciate your comments on that Marcin.

But just thinking a little bit deeper was the majority of that driven by macro assumption improvements or specific loans either paying off or improving on the risk scale?.

I would say it’s a mix. I think the majority of it is related to the macro. Obviously, we had one hotel loan repay. So in the second quarter, there was a little bit allocated to that, but it was mostly on a macro level..

Alright. Thank you. And then other than multifamily, which you guys mentioned in your comments, are there any other asset classes that you like going into 2021? I know we have heard competition of multi-families elevated right now? Thanks..

I will address that. We are doing two things. We are always balancing our competing interests and needs. So, there is levels available in the market. There is also portfolio composition, so and also credit dynamics.

So, giving all that together, we are shifting our mix a bit that’s more at least initially of a focus on multifamily and warehouse logistics, as well as some self storage, Life Sciences, some well used office. This is largely driven by portfolio composition and trends that we think will occur over time.

For example, multi-families are across our portfolio and others, the ones that are prepaying faster. So, to maintain your balance on that, you need to originate more, for example. That will also be emphasized more of the impacted classes such as hotel and retail, at least in the near-term.

But we have always classes out I have talked about, we have originated over many years, know them well, like them and know how to pursue them..

Great. Thanks for the comments, everyone and congrats on strong start today..

Thank you..

This concludes our question-and-answer session. I would like to turn the conference back over to Jack Taylor for any closing remarks..

Thank you for all your questions. And thank you everybody for listening to our call today. We look forward to a continuation of a very strong first quarter into the rest of the year, both as the market recovers and as the economy opens up, and as we take advantage of the opportunities ahead of us.

Thank you again and we wish you all a good safe healthy next quarter. Thank you..

The conference is now concluded. Thank you for attending today’s presentation. You may now disconnect..