Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

______________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: September 30, 2018

Commission File Number 001-38124

______________________________

GRANITE POINT MORTGAGE TRUST INC.

(Exact Name of Registrant as Specified in Its Charter)



Maryland		61-1843143
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)



590 Madison Avenue, 38th Floor New York, New York		10022
(Address of Principal Executive Offices)		(Zip Code)

(212) 364-3200

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
		Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 5, 2018, there were 43,456,234 shares of outstanding common stock, par value $0.01 per share, issued and outstanding.

Table of Contents

GRANITE POINT MORTGAGE TRUST INC.

INDEX



		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017	1
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2018 and 2017	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	4
	Notes to the Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	43
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
Index of Exhibits		45
Signatures		46

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share data)



	September 30, 2018			December 31, 2017
ASSETS
Loans held-for-investment	$	2,708,338		$	2,304,266
Available-for-sale securities, at fair value	12,830			12,798
Held-to-maturity securities	30,526			42,169
Cash and cash equivalents	148,228			107,765
Restricted cash	5,320			2,953
Accrued interest receivable	8,188			7,105
Deferred debt issuance costs	5,400			8,872
Prepaid expenses	1,335			390
Other assets	14,771			12,812
Total Assets⁽¹⁾	$	2,934,936		$	2,499,130
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Repurchase agreements	$	1,281,255		$	1,521,608
Securitized debt obligations	653,184			—
Convertible senior notes	140,124			121,314
Accrued interest payable	5,620			3,119
Unearned interest income	117			197
Dividends payable	18,276			16,454
Other liabilities	9,710			6,817
Total Liabilities	2,108,286			1,669,509
10% cumulative redeemable preferred stock, par value $0.01 per share; 50,000,000 shares authorized and 1,000 and 1,000 shares issued and outstanding, respectively	1,000			1,000
Stockholders’ Equity
Common stock, par value $0.01 per share; 450,000,000 shares authorized and 43,456,234 and 43,235,103 shares issued and outstanding, respectively	435			432
Additional paid-in capital	832,535			829,704
Accumulated other comprehensive income	32			—
Cumulative earnings	75,178			28,800
Cumulative distributions to stockholders	(82,530		)	(30,315		)
Total Stockholders’ Equity	825,650			828,621
Total Liabilities and Stockholders’ Equity	$	2,934,936		$	2,499,130

____________________

(1)

The condensed consolidated balance sheets include assets of consolidated variable interest entities, or VIEs, that can only be used to settle obligations of these VIEs, and liabilities of the consolidated VIEs for which creditors do not have recourse to Granite Point Mortgage Trust Inc. At September 30, 2018 and December 31, 2017, assets of the VIEs totaled $827,958 and $46,068, and liabilities of the VIEs totaled $653,755 and $0, respectively. See Note 3 - Variable Interest Entities for additional information.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(in thousands, except share data)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Interest income:
Loans held-for-investment	$	46,424		$	29,655		$	127,576		$	77,213
Available-for-sale securities	294			265			851			767
Held-to-maturity securities	757			940			2,478			2,792
Cash and cash equivalents	85			4			141			10
Total interest income	47,560			30,864			131,046			80,782
Interest expense:
Repurchase agreements	14,304			12,060			45,432			22,309
Securitized debt obligations	6,693			—			10,568			—
Convertible senior notes	2,216			—			6,601			—
Revolving credit facilities	152			—			372			—
Note payable to affiliate	—			437			—			4,067
Interest expense	23,365			12,497			62,973			26,376
Net interest income	24,195			18,367			68,073			54,406
Other income:
Fee income	—			—			1,446			—
Total other income	—			—			1,446			—
Expenses:
Management fees	3,111			3,130			9,434			6,717
Servicing expenses	616			333			1,568			962
General and administrative expenses	3,904			3,388			12,141			7,561
Total expenses	7,631			6,851			23,143			15,240
Income before income taxes	16,564			11,516			46,376			39,166
Benefit from income taxes	(1		)	(2		)	(2		)	(3		)
Net income	16,565			11,518			46,378			39,169
Dividends on preferred stock	25			25			75			25
Net income attributable to common stockholders	$	16,540		$	11,493		$	46,303		$	39,144
Basic earnings per weighted average common share (See Note 17)	$	0.38		$	0.27		$	1.07		$	0.27
Diluted earnings per weighted average common share (See Note 17)	$	0.37		$	0.27		$	1.04		$	0.27
Dividends declared per common share	$	0.42		$	0.32		$	1.20		$	0.32
Weighted average number of shares of common stock outstanding:
Basic	43,456,234			43,234,254			43,426,109			43,234,252
Diluted	50,651,612			43,234,254			50,616,264			43,234,252
Comprehensive income:
Net income attributable to common stockholders	$	16,540		$	11,493		$	46,303		$	39,144
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities	32			32			32			128
Other comprehensive income	32			32			32			128
Comprehensive income attributable to common stockholders	$	16,572		$	11,525		$	46,335		$	39,272

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except share data)



	Common Stock
	Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive (Loss) Income			Cumulative Earnings			Cumulative Distributions to Stockholders			Total Stockholders’ Equity

Balance, December 31, 2016	—	$	—	$	392,608	$	(112	)	$	35,495		$	—		$	427,991
Capital contributions from Two Harbors Investment Corp.	—	—		254,785		—			—			—			254,785
Distributions to Two Harbors Investment Corp.	—	—		—		—			(60,000		)	—			(60,000		)
Net income	—	—		—		—			39,169			—			39,169
Other comprehensive income before reclassifications	—	—		—		128			—			—			128
Amounts reclassified from accumulated other comprehensive income	—	—		—		—			—			—			—
Net other comprehensive income	—	—		—		128			—			—			128
Issuance of common stock, net of offering costs	43,071,000	431		181,444		—			—			—			181,875
Common dividends declared	—	—		—		—			—			(13,835		)	(13,835		)
Preferred dividends declared	—	—		—		—			—			(25		)	(25		)
Non-cash equity award compensation	164,103	1		685		—			—			—			686
Balance, September 30, 2017	43,235,103	$	432	$	829,522	$	16		$	14,664		$	(13,860	)	$	830,774

Balance, December 31, 2017	43,235,103	$	432	$	829,704	$	—		$	28,800		$	(30,315	)	$	828,621
Net income	—	—		—		—			46,378			—			46,378
Other comprehensive income before reclassifications	—	—		—		32			—			—			32
Amounts reclassified from accumulated other comprehensive income	—	—		—		—			—			—			—
Net other comprehensive income	—	—		—		32			—			—			32
Common dividends declared	—	—		—		—			—			(52,140		)	(52,140		)
Preferred dividends declared	—	—		—		—			—			(75		)	(75		)
Non-cash equity award compensation	221,131	3		2,831		—			—			—			2,834
Balance, September 30, 2018	43,456,234	$	435	$	832,535	$	32		$	75,178		$	(82,530	)	$	825,650

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)



	Nine Months Ended
	September 30,
	2018			2017
Cash Flows From Operating Activities:
Net income	$	46,378		$	39,169
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of discounts and net deferred fees on loans held-for-investment	(9,282		)	(5,551		)
Amortization of deferred debt issuance costs on convertible senior notes and securitized debt obligations	2,373			—
Equity based compensation	2,834			686
Depreciation of fixed assets	4			—
Net change in assets and liabilities:
Increase in accrued interest receivable	(1,083		)	(2,041		)
Increase in prepaid expenses	(945		)	—
Increase in other assets	(1,963		)	(4,959		)
Increase in accrued interest payable	2,501			1,676
(Decrease) increase in unearned interest income	(80		)	307
Decrease in other payables to affiliates	—			(21,374		)
Increase in other liabilities	2,893			4,970
Increase in 10% cumulative redeemable preferred stock	—			1,000
Net cash provided by operating activities	43,630			13,883
Cash Flows From Investing Activities:
Originations, acquisitions and additional fundings of loans held-for-investment, net of deferred fees	(839,668		)	(759,905		)
Proceeds from repayment of loans held-for-investment	444,878			1,793
Principal payments on held-to-maturity securities	11,643			4,862
Decrease in due from counterparties	—			229
Net cash used in investing activities	(383,147		)	(753,021		)
Cash Flows From Financing Activities:
Proceeds from repurchase agreements	871,608			1,431,366
Principal payments on repurchase agreements	(1,111,961		)	(407,269		)
Proceeds from issuance of securitized debt obligations	651,374			—
Proceeds from convertible senior notes	18,247			—
Proceeds from revolving credit facilities	49,394			—
Repayment of revolving credit facilities	(49,394		)	—
Proceeds from note payable to affiliate	—			110,653
Repayment of note payable to affiliate	—			(676,827		)
Decrease (increase) in deferred debt issuance costs	3,472			(6,977		)
Proceeds from issuance of common stock, net of offering costs	—			181,875
Proceeds from capital contribution from Two Harbors Investment Corp.	—			254,785
Payments for distributions of capital to Two Harbors Investment Corp.	—			(60,000		)
Dividends paid on preferred stock	(75		)	(25		)
Dividends paid on common stock	(50,318		)	—
Net cash provided by financing activities	382,347			827,581
Net increase in cash, cash equivalents and restricted cash	42,830			88,443
Cash, cash equivalents and restricted cash at beginning of period	110,718			56,279
Cash, cash equivalents and restricted cash at end of period	$	153,548		$	144,722

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued

(in thousands)



	Nine Months Ended
	September 30,
	2018			2017
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	60,472		$	24,699
Cash received for taxes, net	$	(5	)	$	(4	)
Noncash Activities:
Acquisition of TH Commercial Holdings LLC from Two Harbors Investment Corp. in exchange for common and preferred shares (See Note 1)	$	—		$	651,000
Dividends declared but not paid at end of period	$	18,276		$	13,835

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 1. Organization and Operations

Granite Point Mortgage Trust Inc., or the Company, is a Maryland corporation 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 is externally managed by Pine River Capital Management L.P., or PRCM. The Company’s common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “GPMT”.

The Company was incorporated on April 7, 2017 and commenced operations as a publicly traded company on June 28, 2017, upon completion of an initial public offering, or the IPO. Concurrently with the closing of the IPO, the Company completed a formation transaction, or the Formation Transaction, pursuant to which the Company acquired the equity interests in TH Commercial Holdings LLC, or the Predecessor, from Two Harbors Investment Corp., or Two Harbors, a publicly traded hybrid mortgage real estate investment trust (NYSE: TWO). In exchange, the Company issued 33,071,000 shares of its common stock, representing approximately 76.5% of its outstanding common stock after the IPO, and 1,000 shares of its 10% cumulative redeemable preferred stock to Two Harbors. Upon the completion of the Formation Transaction, the Predecessor became the Company’s wholly owned indirect subsidiary. On November 1, 2017, Two Harbors distributed to its common stockholders the 33,071,000 shares of the Company’s common stock it had acquired in connection with the Formation Transaction, allowing the Company’s market capitalization to be fully floating.

The Company has elected to be treated as a real estate investment trust, or REIT, as defined under the Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal income tax purposes. As long as the Company continues to comply with a number of requirements under federal tax law and maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income taxes to the extent that the Company distributes its taxable income to its stockholders on an annual basis and does not engage in prohibited transactions. However, certain activities that the Company may perform may cause it to earn income which will not be qualifying income for REIT purposes. The Company has designated one of its subsidiaries as a taxable REIT subsidiary, or TRS, as defined in the Code, to engage in such activities.

Note 2. Basis of Presentation and Significant Accounting Policies

Consolidation and Basis of Presentation

The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted according to such SEC rules and regulations. However, management believes that the disclosures included in these interim condensed consolidated financial statements are adequate to make the information presented not misleading. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 2018 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2018 should not be construed as indicative of the results to be expected for future periods or the full year.

The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; inter-company accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation.

All entities in which the Company holds investments that are considered VIEs for financial reporting purposes were reviewed for consolidation under the applicable consolidation guidance. Whenever the Company has both the power to direct the activities of an entity that most significantly impact the entity’s performance, and the obligation to absorb losses or the right to receive benefits of the entity that could be significant, the Company consolidates the entity.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amount and timing of allowances for loan losses and impairments and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., valuation changes to the underlying collateral of loans due to changes in capitalization rates, leasing, credit worthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders, overall economic conditions, the broader commercial real estate market, local geographic sub-markets or other factors) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from its estimates and the differences may be material.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Significant Accounting Policies

Included in Note 2 to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 is a summary of the Company’s significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the Company’s consolidated financial condition and results of operations for the three and nine months ended September 30, 2018.

Formation Transaction

On June 28, 2017, the Company completed the Formation Transaction, through which the Company acquired the equity interests in the Predecessor from Two Harbors. In accordance with Accounting Standards Codification (ASC) 805, Business Combinations, the Predecessor is considered the acquiring or surviving entity, meaning the historical assets and liabilities of TH Commercial Holdings LLC included in the condensed consolidated balance sheets are recorded at the Predecessor’s historical carryover cost basis. As a result of the Formation Transaction, the Company is considered a continuation of the Predecessor’s business operations and its historical results of operations and cash flows are included in the Company’s condensed consolidated financial statements. In consideration for the contribution, Two Harbors received 33,071,000 shares of the Company’s common stock and 1,000 shares of cumulative redeemable preferred stock with an aggregate liquidation preference of $1,000 per share.

Securitized Debt Obligations

In the second quarter of 2018, the Company financed a pool of its commercial real estate loans through a collateralized loan obligation, or CLO, retaining the subordinate securities in its investment portfolio. The securitization was accounted for as a financing arrangement and consolidated on the Company’s condensed consolidated financial statements. The securitized debt obligations not retained by the Company, which are nonrecourse to the Company beyond the assets held in the CLO, are recorded at outstanding principal balance, net of any unamortized deferred debt issuance costs, on the Company’s condensed consolidated balance sheets.

Offsetting Assets and Liabilities

Certain of the Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default of either party to the agreement. Under certain of these agreements, the Company and the counterparty may be required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparty.

Under U.S. GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. The Company presents repurchase agreements subject to master netting arrangements or similar agreements on a gross basis. Regardless of whether or not the Company pledges or receives any cash collateral in accordance with its repurchase agreements, the Company does not offset financial assets and liabilities with the associated cash collateral on its condensed consolidated balance sheets.

The following table presents information about the Company’s repurchase agreements that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018			December 31, 2017
Gross amounts of repurchase agreements	$	1,281,255		$	1,521,608
Gross amounts offset in the consolidated balance sheets	—			—
Net amounts of repurchase agreements presented in the consolidated balance sheets	1,281,255			1,521,608
Gross amounts not offset against repurchase agreements in the consolidated balance sheets ⁽¹⁾:
Financial instruments	(1,281,255		)	(1,521,608		)
Cash collateral received (pledged)	—			—
Net amount	$	—		$	—

____________________

(1)

Amounts presented are limited in total to the net amount of liabilities presented in the condensed consolidated balance sheets by instrument. Excess cash collateral or financial assets that are pledged to counterparties may exceed the financial liabilities subject to a master netting arrangement or similar agreement. These excess amounts are excluded from the table above, although separately reported within restricted cash or due from counterparties in the Company’s condensed consolidated balance sheets.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Recently Issued and/or Adopted Accounting Standards

Under the Jumpstart Our Business Startups Act, or the JOBS Act, the Company meets the definition of an “emerging growth company.” The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised U.S. accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Based on the market value of the Company’s common stock that is held by non-affiliates as of June 30, 2018, the Company will no longer qualify as an “emerging growth company” as of December, 31 2018.

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, which is a comprehensive revenue recognition standard that supersedes virtually all existing revenue guidance under U.S. GAAP. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. As a result of the issuance of ASU No. 2015-14 in August 2015 deferring the effective date of ASU No. 2014-09 by one year, the ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption prohibited. The Company has evaluated the new guidance and determined that interest income and gains and losses on financial instruments are outside the scope of ASC 606, Revenues from Contracts with Customers. As a result, the adoption of this ASU did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

Lease Classification and Accounting

In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize on their balance sheets both a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. The Company has determined this ASU will not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, which changes the impairment model for most financial assets and certain other instruments. Allowances for credit losses on available-for-sale, or AFS, and held-to-maturity, or HTM, debt securities will be recognized, rather than direct reductions in the amortized cost of the investments. The new model also requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, HTM debt securities, loans, and other instruments held at amortized cost. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018. The Company is evaluating the adoption of this ASU to determine the impact it may have on its condensed consolidated financial statements, which at the date of adoption, is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings.

Accounting for Share-Based Payments to Nonemployees

In June 2018, the FASB issued ASU No. 2018-07 to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Under the guidance, equity-classified nonemployee awards will be measured on and fixed at the grant date, rather than measured at fair value at each reporting date until the date at which the nonemployee’s performance is complete. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. The Company is evaluating the adoption of this ASU to determine the impact it may have on its condensed consolidated financial statements.

Fair Value Measurement Disclosure Requirements

In August 2018, the FASB issued ASU No. 2018-13, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Under the guidance, entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies are required to disclose (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period and (2) the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted. Early adoption of this ASU did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

SEC Disclosure Update and Simplification

In August 2018, the SEC adopted a final rule that eliminates or amends disclosure requirements that have become duplicative, overlapping, or outdated in light of other SEC disclosure requirements, U.S. GAAP, or changes in the information environment. However, the guidance also added requirements for entities to include in their interim financial statements a reconciliation of changes in stockholders’ equity for each period for which an income statement is required (both year-to-date and quarterly periods). The final rule is effective for all filings made on or after November 5, 2018. However, the SEC staff said it would not object to a registrant waiting to comply with the new interim disclosure requirement until its Form 10-Q for the quarter that begins after the effective date. As a result, the Company plans to adopt the new interim disclosure requirement in its Form 10-Q for the three months ended March 31, 2019. The Company has determined this final rule will not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

Note 3. Variable Interest Entities

In the second quarter of 2018, the Company financed a pool of its commercial real estate loans through a CLO, which is considered a VIE for financial reporting purposes and, thus, was reviewed for consolidation under the applicable consolidation guidance. Because the Company has both the power to direct the activities of the CLO that most significantly impact the entity’s performance, and the obligation to absorb losses or the right to receive benefits of the entity that could be significant, the Company consolidates the CLO.

As of December 31, 2017, the Company was the sole certificate holder of a trust entity that holds a commercial mezzanine loan. The trust is considered a VIE for financial reporting purposes and, thus, was reviewed for consolidation under the applicable consolidation guidance. Because the Company had both the power to direct the activities of the trust that most significantly impact the entity’s performance, and the obligation to absorb losses or the right to receive benefits of the entity that could be significant, the Company consolidated the trust. The loan held by the trust was repaid during the three months ended March 31, 2018. As a result, the Company no longer consolidates the trust on its condensed consolidated financial statements.

The following table presents a summary of the assets and liabilities of all variable interest entities consolidated on the Company’s condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018		December 31, 2017
Loans held-for-investment	$	820,257	$	45,890
Accrued interest receivable	2,441		178
Other assets	5,260		—
Total Assets	$	827,958	$	46,068
Securitized debt obligations	$	653,184	$	—
Accrued interest payable	571		—
Total Liabilities	$	653,755	$	—

The Company is not required to consolidate VIEs for which it has concluded it does not have both the power to direct the activities of the VIEs that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant. The Company’s investments in these unconsolidated VIEs include CMBS, which are classified within available-for-sale securities, at fair value, and held-to-maturity securities on the condensed consolidated balance sheets. As of September 30, 2018 and December 31, 2017, the carrying value, which also represents the maximum exposure to loss, of all CMBS in unconsolidated VIEs was $43.4 million and $55.0 million, respectively.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 4. Loans Held-for-Investment

The Company originates and acquires commercial real estate debt and related instruments generally to be held as long-term investments. These assets are classified as loans held-for-investment on the condensed consolidated balance sheets. Additionally, at December 31, 2017 the Company was the sole certificate holder of a trust entity that held a commercial mezzanine loan. The underlying loan held by the trust was consolidated on the Company’s condensed consolidated balance sheet and classified as loans held-for-investment. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the trust. Loans held-for-investment are reported at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless the assets are deemed impaired.

The following tables summarize the Company’s loans held-for-investment by asset type, property type and geographic location as of September 30, 2018 and December 31, 2017:



	September 30, 2018
(dollars in thousands)	Senior Loans ⁽¹⁾			Mezzanine Loans			B-Notes			Total
Unpaid principal balance	$	2,684,269		$	31,964		$	14,702		$	2,730,935
Unamortized (discount) premium	(156		)	—			—			(156		)
Unamortized net deferred origination fees	(22,441		)	—			—			(22,441		)
Carrying value	$	2,661,672		$	31,964		$	14,702		$	2,708,338
Unfunded commitments	$	441,538		$	—		$	—		$	441,538
Number of loans	71			3			1			75
Weighted average coupon	6.3		%	11.1		%	8.0		%	6.3		%
Weighted average years to maturity ⁽²⁾	2.1			2.2			8.3			2.1



	December 31, 2017
(dollars in thousands)	Senior Loans ⁽¹⁾			Mezzanine Loans			B-Notes			Total
Unpaid principal balance	$	2,220,361		$	88,945		$	14,845		$	2,324,151
Unamortized (discount) premium	(169		)	(9		)	—			(178		)
Unamortized net deferred origination fees	(19,752		)	45			—			(19,707		)
Carrying value	$	2,200,440		$	88,981		$	14,845		$	2,304,266
Unfunded commitments	$	337,623		$	1,580		$	—		$	339,203
Number of loans	53			5			1			59
Weighted average coupon	5.9		%	9.7		%	8.0		%	6.0		%
Weighted average years to maturity ⁽²⁾	2.3			2.0			9.1			2.4

____________________


(1)	Loans primarily secured by a first priority lien on commercial real property and related personal property and also includes, when applicable, any companion subordinate loans.

(2)

Based on contractual maturity date. Certain loans are subject to contractual extension options which may be subject to conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities in connection with loan modifications.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)



(dollars in thousands)	September 30, 2018				December 31, 2017
Property Type	Carrying Value		% of Loan Portfolio		Carrying Value		% of Loan Portfolio
Office	$	1,356,705	50.1	%	$	1,223,642	53.1	%
Multifamily	430,156		15.9	%	356,016		15.4	%
Hotel	398,218		14.7	%	274,416		11.9	%
Retail	302,151		11.2	%	254,786		11.1	%
Industrial	221,108		8.1	%	195,406		8.5	%
Total	$	2,708,338	100.0	%	$	2,304,266	100.0	%



(dollars in thousands)	September 30, 2018				December 31, 2017
Geographic Location	Carrying Value		% of Loan Portfolio		Carrying Value		% of Loan Portfolio
Northeast	$	1,012,429	37.4	%	$	896,361	38.9	%
West	654,097		24.2	%	509,088		22.1	%
Southwest	599,696		22.1	%	454,088		19.7	%
Southeast	323,433		11.9	%	346,623		15.0	%
Midwest	118,683		4.4	%	98,106		4.3	%
Total	$	2,708,338	100.0	%	$	2,304,266	100.0	%

At September 30, 2018 and December 31, 2017, the Company pledged loans held-for-investment with a carrying value of $2.6 billion and $2.2 billion, respectively, as collateral for repurchase agreements and securitized debt obligations. See Note 10 - Repurchase Agreements and Note 11 - Securitized Debt Obligations.

The following table summarizes activity related to loans held-for-investment for the three and nine months ended September 30, 2018 and 2017.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2018			2017			2018			2017
Balance at beginning of period	$	2,483,606		$	1,739,253		$	2,304,266		$	1,364,291
Originations, acquisitions and additional fundings	249,532			393,425			851,662			771,473
Repayments	(24,199		)	(303		)	(444,878		)	(1,793		)
Net discount accretion (premium amortization)	4			6			22			(11		)
Increase in net deferred origination fees	(3,990		)	(5,858		)	(11,994		)	(11,568		)
Amortization of net deferred origination fees	3,385			1,431			9,260			5,562
Allowance for loan losses	—			—			—			—
Balance at end of period	$	2,708,338		$	2,127,954		$	2,708,338		$	2,127,954

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

The Company evaluates each loan for impairment at least quarterly by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, loan structure and exit plan, loan-to-value ratio, project sponsorship, and other factors deemed necessary. Risk ratings are defined as follows:


1 –	Lower Risk


2 –	Average Risk


3 –	Acceptable Risk


4 –	Higher Risk: A loan that has exhibited material deterioration in cash flows and/or other credit factors, which, if negative trends continue, could be indicative of future loss.


5 –	Impaired/Loss Likely: A loan that has a significantly increased probability of default or principal loss.

The following table presents the number of loans, unpaid principal balance and carrying value (amortized cost) by risk rating for loans held-for-investment as of September 30, 2018 and December 31, 2017:



(dollars in thousands)	September 30, 2018					December 31, 2017
Risk Rating	Number of Loans	Unpaid Principal Balance		Carrying Value		Number of Loans	Unpaid Principal Balance		Carrying Value
1	7	$	235,532	$	234,727	6	$	414,695	$	413,314
2	63	2,326,386		2,305,166		50	1,840,638		1,822,134
3	5	169,017		168,445		3	68,818		68,818
4	—	—		—		—	—		—
5	—	—		—		—	—		—
Total	75	$	2,730,935	$	2,708,338	59	$	2,324,151	$	2,304,266

The Company has not recorded any allowances for losses as it is not deemed probable that the Company will not be able to collect all amounts due pursuant to the contractual terms of the loans.

Note 5. Available-for-Sale Securities, at Fair Value

The following table presents the face value and carrying value (which approximates fair value) of AFS securities as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018		December 31, 2017
Face value	$	12,798	$	12,798
Gross unrealized gains	32		—
Gross unrealized losses	—		—
Carrying value	$	12,830	$	12,798

On September 30, 2018, the Company’s AFS securities had contractual maturities of less than one year.

At September 30, 2018 and December 31, 2017, the Company pledged AFS securities with a carrying value of $12.8 million and $12.8 million, respectively, as collateral for repurchase agreements. See Note 10 - Repurchase Agreements.

At September 30, 2018, the Company’s AFS securities were in an unrealized gain position. At December 31, 2017, the Company’s AFS securities had a carrying value equal to their face value.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Evaluating AFS Securities for Other-Than-Temporary Impairments

In evaluating AFS securities for other-than-temporary impairments, or OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and will not be more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in other comprehensive income. If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings. The Company did not record any other-than-temporary credit impairments during the three and nine months ended September 30, 2018 and 2017 as expected cash flows were greater than amortized cost for all AFS securities held.

Gross Realized Gains and Losses

Gains and losses from the sale of AFS securities are recorded as realized gains (losses) in the Company’s condensed consolidated statements of comprehensive income. The Company did not sell any AFS securities during the three and nine months ended September 30, 2018 and 2017.

Note 6. Held-to-Maturity Securities

The following table presents the face value and carrying value of HTM securities by collateral type as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018		December 31, 2017
Face value	$	30,526	$	42,169
Unamortized premium (discount)	—		—
Carrying value	$	30,526	$	42,169

On September 30, 2018, the Company’s HTM securities had contractual maturities of less than one year.

At September 30, 2018 and December 31, 2017, the Company pledged HTM securities with a carrying value of $30.5 million and $42.2 million, respectively, as collateral for repurchase agreements. See Note 10 - Repurchase Agreements.

Evaluating HTM Securities for Other-Than-Temporary Impairments

In evaluating HTM securities for OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred and the credit loss is recognized in earnings. The Company did not record any other-than-temporary credit impairments during the three and nine months ended September 30, 2018 and 2017, as expected cash flows were greater than amortized cost for all HTM securities held.

Note 7. Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash held in bank accounts and cash held in money market funds on an overnight basis.

The Company is required to maintain certain cash balances in restricted accounts as collateral for the Company’s repurchase agreements and with counterparties to support activities related to securities. As of September 30, 2018 and December 31, 2017, the Company had $5.3 million and $3.0 million, respectively, as collateral for repurchase agreements and by counterparties to support activities related to securities.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Company’s condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017 that sum to the total of the same such amounts shown in the statements of cash flows:



(in thousands)	September 30, 2018		December 31, 2017
Cash and cash equivalents	$	148,228	$	107,765
Restricted cash	5,320		2,953
Total cash, cash equivalents and restricted cash	$	153,548	$	110,718

Note 8. Accrued Interest Receivable

The following table presents the Company’s accrued interest receivable by collateral type as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018		December 31, 2017
Loans held-for-investment	$	8,009	$	6,880
Available-for-sale securities	51		51
Held-to-maturity securities	128		174
Total	$	8,188	$	7,105

Note 9. Fair Value

Fair Value Measurements

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring fair value of a liability.

ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a description of the three levels:


Level 1	Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.


Level 2	Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities.


Level 3	Unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized.

Available-for-sale securities. The Company holds AFS securities that are carried at fair value on the condensed consolidated balance sheet and are comprised of CMBS. In determining the fair value of the Company’s CMBS AFS, management judgment may be used to arrive at fair value that considers prices obtained from third-party pricing providers or broker quotes received using the bid price, which are both deemed indicative of market activity, and other applicable market data. The third-party pricing providers and brokers use pricing models that generally incorporate such factors as coupons, primary and secondary mortgage rates, rate reset period, issuer, prepayment speeds, credit enhancements and expected life of the security. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon internally developed models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels, and credit losses). The Company classified its CMBS AFS as Level 2 fair value assets at September 30, 2018 and December 31, 2017.

Recurring Fair Value

The following tables display the Company’s assets measured at fair value on a recurring basis. The Company does not hold any liabilities measured at fair value on its condensed consolidated balance sheets.



	Recurring Fair Value Measurements
	September 30, 2018
(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale securities	$	—	$	12,830	$	—	$	12,830
Total assets	$	—	$	12,830	$	—	$	12,830



	Recurring Fair Value Measurements
	December 31, 2017
(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale securities	$	—	$	12,798	$	—	$	12,798
Total assets	$	—	$	12,798	$	—	$	12,798

The Company may be required to measure certain assets or liabilities at fair value from time to time. These periodic fair value measures typically result from application of certain impairment measures under U.S. GAAP. These items would constitute nonrecurring fair value measures under ASC 820. As of September 30, 2018 and December 31, 2017, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis in the periods presented.

Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. The Company did not incur transfers between Levels for the three and nine months ended September 30, 2018 and 2017.

Fair Value of Financial Instruments

In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the condensed consolidated balance sheets, for which fair value can be estimated.

The following describes the Company’s methods for estimating the fair value for financial instruments.

•

Loans held-for-investment are carried at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless deemed impaired. The Company estimates the fair value of its loans held-for-investment by assessing any changes in market interest rates, shifts in credit profiles and actual operating results for mezzanine loans and senior loans, taking into consideration such factors as underlying property type, property competitive position within its market, market and submarket fundamentals, tenant mix, nature of business plan, sponsorship, extent of leverage and other loan terms. The Company categorizes the fair value measurement of these assets as Level 3.


•	AFS securities are recurring fair value measurements; carrying value equals fair value. See discussion of valuation methods and assumptions within the Fair Value Measurements section of this footnote.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)


•	HTM securities, which are comprised of CMBS, are carried at cost, net of any unamortized acquisition premiums or d