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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-38124
GRANITE POINT MORTGAGE TRUST INC.
(Exact name of registrant as specified in its charter)
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Maryland | | 61-1843143 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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3 Bryant Park, Suite 2400A | | | |
New York, | New York | | 10036 |
(Address of principal executive offices) | | | (Zip Code) |
(212) 364-5500
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.01 per share | | GPMT | | New York Stock Exchange |
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 ☒ No ☐
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 ☒ No ☐
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.
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Large accelerated filer | ☒ | | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | | Smaller reporting company | ☐ |
| | | Emerging growth company | ☐ |
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. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of August 7, 2020, there were 55,205,082 shares of outstanding common stock, par value $0.01 per share, issued and outstanding.
GRANITE POINT MORTGAGE TRUST INC.
INDEX
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| PART I - FINANCIAL INFORMATION | |
Item 1. | Financial Statements (unaudited) | |
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| PART II - OTHER INFORMATION | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
GRANITE POINT MORTGAGE TRUST INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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| June 30, 2020 | | December 31, 2019 |
ASSETS | | | |
Loans held-for-investment | $ | 4,366,757 | | | $ | 4,226,212 | |
Allowance for credit losses | (76,710) | | | — | |
Loans held-for-investment, net | 4,290,047 | | | 4,226,212 | |
Available-for-sale securities, at fair value | 12,542 | | | 12,830 | |
Held-to-maturity securities | 10,788 | | | 18,076 | |
Cash and cash equivalents | 55,969 | | | 80,281 | |
Restricted cash | 3,497 | | | 79,483 | |
Accrued interest receivable | 11,649 | | | 11,323 | |
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Other assets | 31,156 | | | 32,657 | |
Total Assets (1) | $ | 4,415,648 | | | $ | 4,460,862 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Liabilities | | | |
Repurchase agreements | $ | 2,030,916 | | | $ | 1,924,021 | |
Securitized debt obligations | 983,521 | | | 1,041,044 | |
Asset-specific financings | 121,242 | | | 116,465 | |
Revolving credit facilities | 12,589 | | | 42,008 | |
Convertible senior notes | 270,437 | | | 269,634 | |
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Dividends payable | 25 | | | 23,063 | |
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Other liabilities | 31,582 | | | 24,491 | |
Total Liabilities (1) | 3,450,312 | | | 3,440,726 | |
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 55,205,082 and 54,853,205 shares issued and outstanding, respectively | 552 | | | 549 | |
Additional paid-in capital | 1,051,159 | | | 1,048,484 | |
Accumulated other comprehensive (loss) income | — | | | 32 | |
Cumulative earnings | 104,680 | | | 162,076 | |
Cumulative distributions to stockholders | (192,055) | | | (192,005) | |
Total Stockholders’ Equity | 964,336 | | | 1,019,136 | |
Total Liabilities and Stockholders’ Equity | $ | 4,415,648 | | | $ | 4,460,862 | |
____________________
(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 June 30, 2020 and December 31, 2019, assets of the VIEs totaled $1,307,455 and $1,387,148, and liabilities of the VIEs totaled $984,230 and $1,042,122, respectively. See Note 3 - Variable Interest Entities for additional information.
The accompanying notes are an integral part of these condensed consolidated financial statements.
GRANITE POINT MORTGAGE TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Six Months Ended | | | | |
| | June 30, | | | | June 30, | | | | |
| | 2020 | | 2019 | | 2020 | | 2019 | | |
Interest income: | | | | | | | | | | |
Loans held-for-investment | | $ | 60,299 | | | $ | 58,133 | | | $ | 123,558 | | | $ | 114,798 | | | |
Loans held-for-sale | | 121 | | | — | | | 121 | | | — | | | |
Available-for-sale securities | | 247 | | | 311 | | | 527 | | | 619 | | | |
Held-to-maturity securities | | 236 | | | 613 | | | 546 | | | 1,274 | | | |
Cash and cash equivalents | | 41 | | | 907 | | | 367 | | | 1,418 | | | |
Total interest income | | 60,944 | | | 59,964 | | | 125,119 | | | 118,109 | | | |
Interest expense: | | | | | | | | | | |
Repurchase agreements | | 14,276 | | | 13,529 | | | 33,951 | | | 30,518 | | | |
Securitized debt obligations | | 6,502 | | | 13,554 | | | 15,936 | | | 23,413 | | | |
Convertible senior notes | | 4,525 | | | 4,491 | | | 9,041 | | | 8,956 | | | |
Asset-specific financings | | 939 | | | 598 | | | 2,061 | | | 598 | | | |
Revolving credit facilities | | 320 | | | 165 | | | 562 | | | 860 | | | |
| | | | | | | | | | |
Total interest expense | | 26,562 | | | 32,337 | | | 61,551 | | | 64,345 | | | |
Net interest income | | 34,382 | | | 27,627 | | | 63,568 | | | 53,764 | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other (loss) income: | | | | | | | | | | |
Provision for credit losses | | (14,205) | | | — | | | (67,541) | | | — | | | |
Realized losses on sales | | (6,894) | | | — | | | (6,894) | | | — | | | |
Fee income | | — | | | 202 | | | 522 | | | 1,115 | | | |
| | | | | | | | | | |
Total other (loss) income | | (21,099) | | | 202 | | | (73,913) | | | 1,115 | | | |
Expenses: | | | | | | | | | | |
Management fees | | 3,959 | | | 3,763 | | | 7,866 | | | 7,212 | | | |
Incentive fees | | — | | | — | | | — | | | 244 | | | |
Servicing expenses | | 1,002 | | | 885 | | | 2,111 | | | 1,658 | | | |
General and administrative expenses | | 10,060 | | | 5,006 | | | 18,613 | | | 10,622 | | | |
Total expenses | | 15,021 | | | 9,654 | | | 28,590 | | | 19,736 | | | |
(Loss) income before income taxes | | (1,738) | | | 18,175 | | | (38,935) | | | 35,143 | | | |
Benefit from income taxes | | (5) | | | (2) | | | (11) | | | (3) | | | |
Net (loss) income | | (1,733) | | | 18,177 | | | (38,924) | | | 35,146 | | | |
Dividends on preferred stock | | 25 | | | 25 | | | 50 | | | 50 | | | |
Net (loss) income attributable to common stockholders | | $ | (1,758) | | | $ | 18,152 | | | $ | (38,974) | | | $ | 35,096 | | | |
Basic (loss) earnings per weighted average common share | | $ | (0.03) | | | $ | 0.34 | | | $ | (0.71) | | | $ | 0.68 | | | |
Diluted (loss) earnings per weighted average common share | | $ | (0.03) | | | $ | 0.33 | | | $ | (0.71) | | | $ | 0.68 | | | |
Dividends declared per common share | | $ | — | | | $ | 0.42 | | | $ | — | | | $ | 0.84 | | | |
Weighted average number of shares of common stock outstanding: | | | | | | | | | | |
Basic | | 55,158,283 | | | 53,953,634 | | | 55,107,347 | | | 51,292,318 | | | |
Diluted | | 55,158,283 | | | 67,624,395 | | | 55,107,347 | | | 51,292,318 | | | |
Comprehensive income (loss): | | | | | | | | | | |
Net (loss) income attributable to common stockholders | | $ | (1,758) | | | $ | 18,152 | | | $ | (38,974) | | | $ | 35,096 | | | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | |
Unrealized gain (loss) on available-for-sale securities | | 3,712 | | | 32 | | | (32) | | | 224 | | | |
Other comprehensive income (loss) | | 3,712 | | | 32 | | | (32) | | | 224 | | | |
Comprehensive income (loss) | | $ | 1,954 | | | $ | 18,184 | | | $ | (39,006) | | | $ | 35,320 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
GRANITE POINT MORTGAGE TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | | | | | | | | | | | |
| Shares | | Amount | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Cumulative Earnings | | Cumulative Distributions to Stockholders | | Total Stockholders’ Equity |
Balance, December 31, 2018 | 43,621,174 | | | $ | 436 | | | $ | 836,288 | | | $ | (192) | | | $ | 91,875 | | | $ | (100,876) | | | $ | 827,531 | |
Cumulative effect of adoption of new accounting principle | — | | | — | | | 13 | | | — | | | (13) | | | — | | | — | |
Adjusted balance, January 1, 2019 | 43,621,174 | | | 436 | | | 836,301 | | | (192) | | | 91,862 | | | (100,876) | | | 827,531 | |
Net income | — | | | — | | | — | | | — | | | 16,969 | | | — | | | 16,969 | |
Other comprehensive income before reclassifications | — | | | — | | | — | | | 192 | | | — | | | — | | | 192 | |
Amounts reclassified from accumulated other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Net other comprehensive income | — | | | — | | | — | | | 192 | | | — | | | — | | | 192 | |
Issuance of common stock, net of offering costs | 8,291,829 | | | 83 | | | 157,145 | | | — | | | — | | | — | | | 157,228 | |
| | | | | | | | | | | | | |
Common dividends declared | — | | | — | | | — | | | — | | | — | | | (21,913) | | | (21,913) | |
Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (25) | | | (25) | |
| | | | | | | | | | | | | |
Non-cash equity award compensation | 258,918 | | | 3 | | | 1,146 | | | — | | | — | | | — | | | 1,149 | |
Balance, March 31, 2019 | 52,171,921 | | | 522 | | | 994,592 | | | — | | | 108,831 | | | (122,814) | | | 981,131 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | 18,177 | | | — | | | 18,177 | |
Other comprehensive income before reclassifications | — | | | — | | | — | | | 32 | | | — | | | — | | | 32 | |
Amounts reclassified from accumulated other comprehensive income | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Net other comprehensive income | — | | | — | | | — | | | 32 | | | — | | | — | | | 32 | |
Issuance of common stock, net of offering costs | 2,663,095 | | | 27 | | | 50,150 | | | — | | | — | | | — | | | 50,177 | |
| | | | | | | | | | | | | |
Common dividends declared | — | | | — | | | — | | | — | | | — | | | (23,039) | | | (23,039) | |
Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (25) | | | (25) | |
| | | | | | | | | | | | | |
Non-cash equity award compensation | 18,189 | | | — | | | 1,283 | | | — | | | — | | | — | | | 1,283 | |
Balance, June 30, 2019 | 54,853,205 | | | $ | 549 | | | $ | 1,046,025 | | | $ | 32 | | | $ | 127,008 | | | $ | (145,878) | | | $ | 1,027,736 | |
| | | | | | | | | | | | | |
Balance, December 31, 2019 | 54,853,205 | | | $ | 549 | | | $ | 1,048,484 | | | $ | 32 | | | $ | 162,076 | | | $ | (192,005) | | | $ | 1,019,136 | |
Cumulative effect of adoption of new accounting principle | — | | | — | | | — | | | — | | | (18,472) | | | — | | | (18,472) | |
Adjusted balance, January 1, 2020 | 54,853,205 | | | 549 | | | 1,048,484 | | | 32 | | | 143,604 | | | (192,005) | | | 1,000,664 | |
Net loss | — | | | — | | | — | | | — | | | (37,191) | | | — | | | (37,191) | |
Other comprehensive loss before reclassifications | — | | | — | | | — | | | (4,511) | | | — | | | — | | | (4,511) | |
Amounts reclassified from accumulated other comprehensive income | — | | | — | | | — | | | 767 | | | — | | | — | | | 767 | |
Net other comprehensive loss | — | | | — | | | — | | | (3,744) | | | — | | | — | | | (3,744) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (25) | | | (25) | |
| | | | | | | | | | | | | |
Non-cash equity award compensation | 283,680 | | | 3 | | | 1,352 | | | — | | | — | | | — | | | 1,355 | |
Balance, March 31, 2020 | 55,136,885 | | | 552 | | | 1,049,836 | | | (3,712) | | | 106,413 | | | (192,030) | | | 961,059 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Net loss | — | | | — | | | — | | | — | | | (1,733) | | | — | | | (1,733) | |
Other comprehensive income before reclassifications | — | | | — | | | — | | | 4,223 | | | — | | | — | | | 4,223 | |
Amounts reclassified from accumulated other comprehensive income | — | | | — | | | — | | | (511) | | | — | | | — | | | (511) | |
Net other comprehensive income | — | | | — | | | — | | | 3,712 | | | — | | | — | | | 3,712 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Preferred dividends declared | — | | | — | | | — | | | — | | | — | | | (25) | | | (25) | |
| | | | | | | | | | | | | |
Non-cash equity award compensation | 68,197 | | | — | | | 1,323 | | | — | | | — | | | — | | | 1,323 | |
Balance, June 30, 2020 | 55,205,082 | | | $ | 552 | | | $ | 1,051,159 | | | $ | — | | | $ | 104,680 | | | $ | (192,055) | | | $ | 964,336 | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
GRANITE POINT MORTGAGE TRUST INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | |
| | Six Months Ended | | | | |
| | June 30, | | | | |
| | 2020 | | 2019 | | |
Cash Flows From Operating Activities: | | | | | | |
Net (loss) income | | $ | (38,924) | | | $ | 35,146 | | | |
Adjustments to reconcile net (loss) income to net cash provided by operating activities: | | | | | | |
Accretion of discounts and net deferred fees on loans held-for-investment | | (9,321) | | | (7,897) | | | |
Amortization of deferred debt issuance costs on convertible senior notes and securitized debt obligations | | 3,280 | | | 3,882 | | | |
Provision for credit losses | | 67,541 | | | — | | | |
| | | | | | |
Realized losses on sales | | 6,894 | | | — | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Equity based compensation | | 2,678 | | | 2,432 | | | |
| | | | | | |
Net change in assets and liabilities: | | | | | | |
(Increase) decrease in accrued interest receivable | | (326) | | | 344 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Decrease (increase) in other assets | | 1,501 | | | (9,483) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
(Decrease) increase in other liabilities | | (1,018) | | | 4,238 | | | |
| | | | | | |
Net cash provided by operating activities | | 32,305 | | | 28,662 | | | |
Cash Flows From Investing Activities: | | | | | | |
Originations, acquisitions and additional fundings of loans held-for-investment, net of deferred fees | | (257,004) | | | (688,044) | | | |
| | | | | | |
Proceeds from repayment of loans held-for-investment | | 106,115 | | | 303,737 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Principal payments on held-to-maturity securities | | 6,350 | | | 4,676 | | | |
| | | | | | |
Proceeds from sales of loans held-for-sale | | 12,771 | | | — | | | |
| | | | | | |
| | | | | | |
Net cash used in investing activities | | (131,768) | | | (379,631) | | | |
| | | | | | |
Cash Flows From Financing Activities: | | | | | | |
Proceeds from repurchase agreements | | 310,471 | | | 500,127 | | | |
Principal payments on repurchase agreements | | (203,576) | | | (746,643) | | | |
Proceeds from issuance of securitized debt obligations | | — | | | 646,868 | | | |
Principal payments on securitized debt obligations | | (60,000) | | | (171,000) | | | |
| | | | | | |
Proceeds from asset-specific financings | | 4,777 | | | 75,060 | | | |
| | | | | | |
Proceeds from revolving credit facilities | | 38,361 | | | 48,697 | | | |
Repayment of revolving credit facilities | | (67,780) | | | (123,697) | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Proceeds from issuance of common stock, net of offering costs | | — | | | 207,405 | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Dividends paid on preferred stock | | (50) | | | (50) | | | |
Dividends paid on common stock | | (23,038) | | | (40,234) | | | |
Net cash (used in) provided by financing activities | | (835) | | | 396,533 | | | |
Net (decrease) increase in cash, cash equivalents and restricted cash | | (100,298) | | | 45,564 | | | |
Cash, cash equivalents and restricted cash at beginning of period | | 159,764 | | | 123,423 | | | |
Cash, cash equivalents and restricted cash at end of period | | $ | 59,466 | | | $ | 168,987 | | | |
Supplemental Disclosure of Cash Flow Information: | | | | | | |
Cash paid for interest | | $ | 63,350 | | | $ | 64,534 | | | |
| | | | | | |
Noncash Activities: | | | | | | |
Transfers of loans held-for-investment to loans held-for-sale | | $ | 19,665 | | | $ | — | | | |
Dividends declared but not paid at end of period | | $ | 25 | | | $ | 23,064 | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
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 currently externally managed by Pine River Capital Management L.P., or the Manager. The Company’s common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “GPMT.”
On March 2, 2020, the Company announced that it has agreed to a process with the Manager to internalize the Company’s management function. If the internalization is completed, the Company will become a self-managed real estate investment trust, or REIT. There can be no assurance that the internalization will be consummated.
The Company has elected to be treated as a 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 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 unaudited 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, 2019. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at June 30, 2020 and results of operations for all periods presented have been made. The results of operations for the three and six months ended June 30, 2020 should not be construed as indicative of the results to be expected for future periods or the full year.
The unaudited 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 GAAP requires management to make a number of significant estimates. These include estimates of amount and timing of allowances for credit losses, fair value of certain assets and liabilities, 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 market capitalization rates, leasing, credit worthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders, overall economic and capital markets conditions, the broader commercial real estate market, local geographic sub-markets or other factors) will occur in the near term. Over the course of the first half of 2020, a global outbreak of a novel strain of coronavirus, or COVID-19, has taken place. The outbreak has spread around the world, including to every state in the United States. As a result of the pandemic, numerous countries, including the United States, have declared national emergencies. Such actions have created significant macroeconomic disruptions and adversely impacted many industries. The outbreak could have a continued adverse impact on macroeconomic and market conditions, and trigger a period of global economic slowdown. The rapid development and fluidity of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on macroeconomic and market conditions. The Company believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as of June 30, 2020. However, the significant degree of uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of June 30, 2020
GRANITE POINT MORTGAGE TRUST INC.
Notes to the Condensed Consolidated Financial Statements
inherently less certain than they would be absent the current and potential impacts of COVID-19. The Company’s actual results could ultimately differ from its estimates and the differences may be material.
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, 2019 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 six months ended June 30, 2020.
Loans Held-for-Sale
The Company classifies certain loans as held-for-sale based on management’s intent to sell or otherwise dispose of them. Loans held-for-sale are reported at the lower of amortized cost or fair value. Fair value is determined under the guidance of ASC 820. Interest income on loans held-for-sale is recognized at the loan coupon rate and recorded on the consolidated statements of comprehensive income.
Recently Issued and/or Adopted Accounting Standards
Measurement of Credit Losses on Financial Instruments
On January 1, 2020, the Company adopted Accounting Standard Update, or ASU, 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. ASU 2016-13 significantly changes how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaces the incurred loss model under existing guidance with a Current Expected Credit Loss, or CECL, model for instruments measured at amortized cost, and also require entities to record allowances for available-for-sale, or AFS, debt securities rather than reduce the amortized cost, as they did under the other-than-temporary impairment model. It also simplifies the accounting model for purchased credit-impaired debt securities and loans. In addition, the new model applies to off-balance sheet credit exposures, such as unfunded loan commitments. ASU 2016-13 was adopted by the Company through a cumulative-effect adjustment to cumulative earnings of $18.5 million as of January 1, 2020.
The allowance for credit losses required under ASU 2016-13 is a valuation account that is deducted from the amortized cost basis of related loans and debt securities on the Company’s condensed consolidated balance sheets, and which reduces the Company’s total stockholders’ equity. The initial allowance for credit losses recorded on January 1, 2020 is reflected as a direct charge to cumulative earnings; however, going forward, changes to the allowance for credit losses are recognized through net income on the Company’s condensed consolidated statements of comprehensive (loss) income. While ASU 2016-13 does not require any particular method for determining the allowance for credit losses, it does specify the allowance should be based on relevant information about past events, including historical loss experience, current portfolio, market conditions, and reasonable and supportable forecasts for the duration of each respective loan. In addition, other than a few narrow exceptions, ASU 2016-13 requires that all financial instruments subject to the CECL model have some amount of expected loss to reflect the GAAP principal underlying the CECL model that all loans, debt securities, and similar assets have some inherent risk of loss, regardless of credit quality, subordinate capital or other mitigating factors.
The Company’s loans typically include commitments to fund incremental proceeds to its borrowers over the life of the loan. Those future funding commitments are also subject to an allowance for credit losses. The allowance for credit losses related to future loan fundings is recorded as a component of other liabilities on the Company’s condensed consolidated balance sheets, and not as an offset to the related loan balance. This allowance for credit losses is estimated using the same process outlined below for the Company’s outstanding loan balances, and changes in this component of the allowance for credit losses similarly flow through the Company’s condensed consolidated statement of comprehensive (loss) income.
The Company elected not to measure an allowance for credit losses on accrued interest receivable when the accrued interest is due within 90 days. The Company generally writes off accrued interest receivable balance when interest is 90 days or more past due unless the loan is both well secured and in the process of collection. Write-offs of accrued interest receivable are recognized within provision for credit losses in the condensed consolidated statements of comprehensive income. Accrued interest receivable includes deferred interest that may be collected at the loan maturity or past 90 days, and an allowance for credit losses has been included as part of the loan’s amortized cost. The Company did not write-off any accrued interest receivable during the three and six months ended June 30, 2020.
The Company’s implementation process included a selection of a credit loss analytical model, completion and documentation of policies and procedures, changes to internal reporting processes and related internal controls and additional disclosures. A control framework for governance, data, forecast, and model controls was developed to support the CECL process. The allowance for credit losses is estimated on a quarterly basis and represents management’s estimates of current expected credit losses in the Company’s investment portfolio. Pools of loans with similar risk characteristics are collectively evaluated while loans that no longer share risk characteristics with loan pools are evaluated individually. Estimating an
GRANITE POINT MORTGAGE TRUST INC.
Notes to the Condensed Consolidated Financial Statements
allowance for credit losses is inherently subjective, as it requires management to exercise significant judgment in establishing appropriate factors used to determine the allowance and a variety of subjective assumptions, including (i) determination of relevant historical loan loss data sets, (ii) the expected timing and amount of future loan fundings and repayments, (iii) the current credit quality of loans and operating performance of loan collateral and the Company’s expectations of performance, (iv) selecting the forecast for macroeconomic conditions, and (v) determining the reasonable and supportable forecast period.
Considering the lack of historical company data related to any realized loan losses since its inception, the Company elected to estimate its allowance for credit losses by using a probability-weighted analytical model that considers the likelihood of default and loss-given-default for each individual loan. The analytical model incorporates a third-party licensed database with historical loan losses from 1998 to 2019 for over 100,000 commercial real estate loans. At the time of adoption of ASU No. 2016-13, in determining its initial allowance for credit losses estimate, the Company employed a third-party licensed macroeconomic forecast that largely reflected management’s views at the time and projected a stable overall economic scenario over the reasonable projection period. Significant inputs to the Company’s estimate of the allowance for credit losses include the reasonable and supportable forecast period and loan specific factors such as DSCR, LTV, remaining contractual loan term, property type and others. In addition, the Company also considers relevant loan-specific qualitative factors to estimate its allowance for credit losses. In certain instances, for loans with unique risk characteristics, the Company may instead elect to employ different methods to estimate loan losses that also conform to ASU 2016-13 and related guidance.
Upon adoption of ASU No. 2016-13 on January 1, 2020, based on the Company’s loan portfolio, pre-COVID-19 economic environment and management’s expectations for future economic and market conditions at the time, the Company recorded an initial allowance for credit losses, as a cumulative-effective adjustment to the cumulative earnings in its consolidated statement of equity, of approximately $18.5 million, or approximately $0.34 per share.
The following table illustrates the day-one financial statement impact of the adoption of ASU 2016-13 on January 1, 2020:
| | | | | | | | | | | | | | | | | |
(in thousands) | | | | | |
ASSETS | Pre-ASU 2016-13 Adoption | | Cumulative Effect of Adoption | | As Reported Under ASU 2016-13 |
Loans and securities | $ | 4,257,086 | | | $ | — | | | $ | 4,257,086 | |
Allowance for credit losses | — | | | (16,692) | | | (16,692) | |
Loans and securities, net | $ | 4,257,086 | | | $ | (16,692) | | | $ | 4,240,394 | |
| | | | | |
LIABILITIES | | | | | |
Liability for off-balance sheet credit losses (1) | $ | — | | | $ | 1,780 | | | $ | 1,780 | |
| | | | | |
STOCKHOLDERS’ EQUITY | | | | | |
Cumulative earnings | $ | 162,076 | | | $ | (18,472) | | | $ | 143,604 | |
____________________
(1)Represents expected loss on unfunded commitments.
Note 3. Variable Interest Entities
The Company finances pools of its commercial real estate loans through collateralized loan obligations, or CLOs, which are considered VIEs for financial reporting purposes and, thus, are reviewed for consolidation under the applicable consolidation guidance. The Company has both the power to direct the activities of the CLOs 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, therefore, the Company consolidates the CLOs.
GRANITE POINT MORTGAGE TRUST INC.
Notes to the Condensed Consolidated Financial Statements
The following table presents a summary of the assets and liabilities of all VIEs consolidated on the Company’s condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019:
| | | | | | | | | | | |
(in thousands) | June 30, 2020 | | December 31, 2019 |
Loans held-for-investment | $ | 1,319,151 | | | $ | 1,301,369 | |
Allowance for credit losses | (20,674) | | | — | |
Loans held-for-investment, net | 1,298,477 | | | 1,301,369 | |
| | | |
Restricted cash | 192 | | | |