Q1 2024 Earnings Summary
- Active Resolution of Non-Performing Loans Expected to Improve Profitability: Management is working to resolve non-accrual loans, with visibility on resolving $150 million to $200 million of such loans in the near term, potentially over the next two quarters. This could materially improve the company's run-rate profitability as these resolutions reduce the earnings drag from non-accruals. ,
- Stable and Diversified Financing Position: GPMT maintains stable, broadly diverse financing facilities and other structures for leverage, with no significant pressure on liabilities. This strong financial position allows the company to navigate current market challenges effectively.
- Management Confidence and Potential Share Repurchases: Management believes the company's stock presents a great value opportunity for investors. They have been opportunistically repurchasing shares, acquiring approximately 2 million common shares in 2023, indicating confidence in the company's fundamentals and the potential for accretive repurchases.
- Uncertainty in resolving non-accrual loans may lead to further losses and earnings pressure: Granite Point Mortgage Trust has eight out of ten risk-rated 5 loans in the process of resolution, but management acknowledges that the timing and outcome are difficult to predict in the current market. This uncertainty may result in additional losses and prolonged pressure on earnings.
- Pressure on earnings and prioritization of liquidity may affect dividend sustainability: Due to the impact of non-accrual loans, the company expects continued pressure on earnings and is prioritizing maintaining liquidity over returning capital to shareholders. Management indicated that earnings will be below the dividend in the near term, which could impact the company's ability to maintain its current dividend.
- Significant exposure to troubled office properties leading to increased credit losses: The company has downgraded several office loans to risk ratings of 4 or 5 due to challenges such as leasing difficulties and reduced market liquidity. The majority of their specific reserves are related to office impairments, indicating higher potential losses in this sector compared to others.
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Dividend Commitment and Stock Buybacks
Q: Will you maintain dividends or buy back stock instead?
A: Management stated that they assess the dividend over a longer time horizon, considering run-rate profitability. While acknowledging earnings pressure due to asset resolutions, they expect many assets to be resolved by year-end. They have been opportunistic in stock buybacks, purchasing about 2 million shares in 2023, believing repurchases are accretive. However, their top priority is maintaining liquidity while working through non-accrual loans. -
Non-Accrual Loan Resolutions
Q: Can you sell non-accrual loans soon to buy back stock?
A: Management indicated they have near-term visibility on resolving $150 million to $200 million in assets over the next two quarters, with 8 out of 10 5-rated loans in process. Decisions on using liquidity from these resolutions for stock buybacks will depend on their position regarding liquidity and earnings potential at that time. -
Loan Sales vs REO
Q: Will you sell loans or take properties into REO?
A: Management employs multiple resolution strategies but generally believes selling the property yields a better price than selling the loan. They work with borrowers to sell properties or may simultaneously run foreclosure processes. In some cases, they may take ownership (REO) to maximize short-term value but do not intend to hold assets long term. -
CECL Reserves Allocation
Q: How are reserves allocated between office and non-office loans?
A: Management stated that the majority of the specific reserves are related to office loan impairments, which are generally higher than those for multifamily assets. There is meaningfully less reserve allocated to multifamily loans. -
Asset vs Liability Pressure
Q: Is pressure more on assets or liabilities?
A: Management believes pressure is on both sides. Banks lend at lower advance rates than non-bank lenders, so non-banks face more asset pressure in this environment. While they have stable and diverse financing, banks benefit from lower-cost deposits, affecting liabilities. -
Impact of Scale on Credit Outcomes
Q: Would access to more capital improve credit outcomes?
A: Management noted that sometimes better results come from selling the property rather than the loan, especially with cooperative borrowers via deed-in-lieu structures. They view this decision more as a case-by-case strategy than a liquidity issue related to capital access. -
Staple Financing in Sales
Q: Do buyers assume existing loans in sales?
A: Management explained that while existing loans can remain, more often they provide "staple financing" to new buyers at a reset basis, especially in office sales. This involves offering a new loan rather than the buyer assuming the existing loan. -
Loan Downgrades in Chicago and Milwaukee
Q: Why were loans downgraded during the quarter?
A: Management explained that two loans in Chicago and Milwaukee were downgraded because bids during the sales process came in below the loan amounts. The Chicago investment sales market has been soft, and the Milwaukee deal is only partially leased. However, they are generally comfortable with their multifamily loan fundamentals.
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