Q4 2023 Earnings Summary
- GPMT has a $4 million share buyback authorization remaining, and they consider their stock to be trading at a very deep discount to value, which can lead to accretive repurchases and enhance shareholder value.
- The company's multifamily portfolio remains stable and healthy, particularly in markets like the Carolinas, Savannah, and Birmingham. Borrowers have a good amount of equity to protect, reducing risk. GPMT exercised conservative underwriting, increasing exit debt yields and lowering leverage in recent loans.
- Resolving non-performing loans could significantly improve earnings per share, potentially adding double digits in earnings per share per quarter. The company has over $400 million in non-accrual loans, and resolutions could turn these into earning assets, boosting profitability.
- The company has approximately $450 million of loans on non-accrual status , which significantly impacts profitability and may lead to further credit losses if market conditions deteriorate.
- Management anticipates that earnings will be below the current dividend in the near term , which may necessitate a dividend cut, potentially reducing the attractiveness of the stock to income-focused investors.
- The company holds significant exposure to office properties facing leasing challenges, such as a $96 million New York mixed-use loan risk-ranked 4, relying on leasing up office space in a difficult market , which may lead to further credit issues.
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Dividend Sustainability
Q: Should the Board consider trimming the dividend to increase share buybacks?
A: Management recognizes that earnings will be below the current dividend in the near term due to nonaccrual loans and is evaluating the dividend with the Board. They aim to provide an attractive income stream and are considering factors like the stock trading at less than 50% of book value when making decisions.
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Impact of NPLs on Earnings
Q: What's the earnings drag from nonperforming loans and potential benefit upon resolution?
A: Nonperforming loans total over $400 million as of year-end and account for about 90 basis points of yield loss from interest income, significantly impacting earnings. Resolutions could lead to a positive impact in double digits in earnings per share per quarter.
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Non-Performing Loan Resolutions
Q: Which NPLs could be resolved sooner, and what's the plan?
A: The Baton Rouge mixed-use loan is in an active sale process and may resolve in the next couple of quarters. The Chicago office asset is in early negotiations for sale. The Minneapolis hotel is also undergoing a sale process. The LA mixed-use and Minneapolis office loans may take longer due to market conditions. The Phoenix REO asset has options including conversion to residential and may enter a sale process.
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Liquidity and Share Buybacks
Q: How are you managing liquidity between buybacks and defensive needs?
A: The company maintains elevated liquidity, aiming for about 10–15% of the capital base in cash, currently above that. They remain opportunistic with share buybacks, having $4 million of remaining authorization, while ensuring sufficient liquidity for potential credit events.
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Upcoming Loan Maturities
Q: Do you have control over potential problems with 2024 maturities?
A: Management believes they have a good handle on maturities in 2024 and 2025. Many loans will pay off or extend normally. For cooperative borrowers, they may offer extensions or restructuring. A smaller group may need approaches like note sales or property sales. They are focused on this and have increased CECL reserves, which have about doubled since Q4 2022, to prepare for potential challenges.
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Credit Quality and Reserves
Q: Why was the general reserve reduced despite market headwinds?
A: The reduction in general reserves is due to downgrades from risk rating 4 to 5, causing reserves to migrate from general to specific categories, and due to loan repayments. The general reserve pool remains close to 2%, and they remain cautious, expecting such migrations as the cycle continues.
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Specific Loan Updates
Q: What's the status of the Illinois multifamily and New York mixed-use loans?
A: The Illinois multifamily loan, with a carrying value of about $109 million, is performing well and on plan. The New York mixed-use loan, with a carrying value of about $96 million, focuses on leasing up office space. The sponsor has injected more capital, and the loan is risk-rated 4, with higher reserves and is on the watch list.
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Multifamily Sector Outlook
Q: How are multifamily assets performing given market concerns?
A: Multifamily assets are generally stable and healthy in their markets, including the Sunbelt. Rent growth has slowed, but borrowers are achieving rent increases through value-add renovations. Some assets may be slightly behind plan but are expected to meet targets over time. The company is monitoring the sector carefully but remains positive given their portfolio's characteristics.
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