gpmt-20200930

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, 2020


☐			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)


Maryland						61-1843143
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)


3 Bryant Park, Suite 2400A
New York,	New York	10036
(Address of principal executive offices)		(Zip Code)

(646) 540-7940

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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.

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 November 6, 2020, there were 55,205,082 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, 2020 and December 31, 2019	1
	Condensed Consolidated Statements of Comprehensive (Loss) Income (unaudited) for the Three and Nine Months Ended September 30, 2020 and 2019	2
	Condensed Consolidated Statements of Stockholders’ Equity (unaudited) for the Three and Nine Months Ended September 30, 2020 and 2019	3
	Condensed Consolidated Statements of Cash Flows (unaudited) for the Nine Months Ended Se ptember 30, 2020 and 2019	5
	Notes to the Condensed Consolidated Financial Statements (unaudited)	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	52
Item 4.	Controls and Procedures	54
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	58
Item 3.	Defaults Upon Senior Securities	58
Item 4.	Mine Safety Disclosures	58
Item 5.	Other Information	58
Item 6.	Exhibits	58
Index of Exhibits		59
Signatures		61

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)


	September 30, 2020		December 31, 2019
ASSETS
Loans held-for-investment	$	4,052,201	$	4,226,212
Allowance for credit losses	(73,339)		—
Loans held-for-investment, net	3,978,862		4,226,212
Available-for-sale securities, at fair value	—		12,830
Held-to-maturity securities	—		18,076
Cash and cash equivalents	353,679		80,281
Restricted cash	5,326		79,483
Accrued interest receivable	11,933		11,323



Other assets	53,052		32,657
Total Assets (1)	$	4,402,852	$	4,460,862
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Repurchase agreements	$	1,850,845	$	1,924,021
Securitized debt obligations	928,623		1,041,044
Asset-specific financings	123,091		116,465
Revolving credit facilities	—		42,008
Convertible senior notes	270,847		269,634


Senior secured term loan facilities	205,647		—

Dividends payable	11,065		23,063

Other liabilities	77,272		24,491
Total Liabilities (1)	3,467,390		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	1,057,016		1,048,484
Accumulated other comprehensive income	—		32
Cumulative earnings	80,014		162,076
Cumulative distributions to stockholders	(203,120)		(192,005)
Total Stockholders’ Equity	934,462		1,019,136
Total Liabilities and Stockholders’ Equity	$	4,402,852	$	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 September 30, 2020 and December 31, 2019, assets of the VIEs totaled $1,252,969 and $1,387,148, respectively, and liabilities of the VIEs totaled $930,066 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.

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GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands, except share data)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2020		2019		2020		2019
Interest income:
Loans held-for-investment	$	56,783	$	61,796	$	180,341	$	176,594
Loans held-for-sale	774		—		895		—
Available-for-sale securities	119		308		646		927
Held-to-maturity securities	113		530		659		1,804
Cash and cash equivalents	57		810		424		2,228
Total interest income	57,846		63,444		182,965		181,553
Interest expense:
Repurchase agreements	12,791		17,951		46,742		48,469
Securitized debt obligations	5,431		12,467		21,367		35,880
Convertible senior notes	4,529		4,503		13,570		13,459
Asset-specific financings	901		1,119		2,962		1,717
Revolving credit facilities	217		322		779		1,182
Senior secured term loan facilities	145		—		145		—
Total interest expense	24,014		36,362		85,565		100,707
Net interest income	33,832		27,082		97,400		80,846




Other (loss) income:
Provision for credit losses	5,300		—		(62,241)		—
Realized losses on sales	(10,019)		—		(16,913)		—
Fee income	595		—		1,117		1,115

Total other (loss) income	(4,124)		—		(78,037)		1,115
Expenses:
Management fees	3,974		3,801		11,840		11,013
Incentive fees	—		—		—		244
Servicing expenses	914		1,013		3,025		2,671
General and administrative expenses	5,808		4,877		24,421		15,499
Restructuring charges	43,682		—		43,682		—
Total expenses	54,378		9,691		82,968		29,427
(Loss) income before income taxes	(24,670)		17,391		(63,605)		52,534
Benefit from income taxes	(4)		(1)		(15)		(4)
Net (loss) income	(24,666)		17,392		(63,590)		52,538
Dividends on preferred stock	25		25		75		75
Net (loss) income attributable to common stockholders	$	(24,691)	$	17,367	$	(63,665)	$	52,463
Basic (loss) earnings per weighted average common share	$	(0.45)	$	0.32	$	(1.15)	$	1.00
Diluted (loss) earnings per weighted average common share	$	(0.45)	$	0.32	$	(1.15)	$	1.00
Dividends declared per common share	$	0.20	$	0.42	$	0.20	$	1.26
Weighted average number of shares of common stock outstanding:
Basic	55,205,082		54,853,205		55,140,163		52,492,324
Diluted	55,205,082		54,853,205		55,140,163		52,492,324
Comprehensive (loss) income:
Net (loss) income attributable to common stockholders	$	(24,691)	$	17,367	$	(63,665)	$	52,463
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities	—		—		—		224
Other comprehensive income	—		—		—		224
Comprehensive (loss) income	$	(24,691)	$	17,367	$	(63,665)	$	52,687

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

(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


Net income	—	—		—		—		17,392		—		17,392
Other comprehensive income before reclassifications	—	—		—		—		—		—		—
Amounts reclassified from accumulated other comprehensive income	—	—		—		—		—		—		—
Net other comprehensive income	—	—		—		—		—		—		—
Issuance of common stock, net of offering costs	—	—		—		—		—		—		—

Common dividends declared	—	—		—		—		—		(23,038)		(23,038)
Preferred dividends declared	—	—		—		—		—		(25)		(25)

Non-cash equity award compensation	—	—		1,175		—		—		—		1,175
Balance, September 30, 2019	54,853,205	$	549	$	1,047,200	$	32	$	144,400	$	(168,941)	$	1,023,240

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

(in thousands, except share data) (Continued)


	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, 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 income before reclassifications	—	—		—		(4,511)		—		—		(4,511)
Amounts reclassified from accumulated other comprehensive income	—	—		—		767		—		—		767
Net other comprehensive income	—	—		—		(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


Net loss	—	—		—		—		(24,666)		—		(24,666)
Other comprehensive income before reclassifications	—	—		—		—		—		—		—
Amounts reclassified from accumulated other comprehensive income	—	—		—		—		—		—		—
Net other comprehensive income	—	—		—		—		—		—		—
Issuance of common stock, net of offering costs	—	—		—		—		—		—		—
Issuance of warrants to purchase common stock	—	—		4,541		—		—		—		4,541
Common dividends declared	—	—		—		—		—		(11,040)		(11,040)
Preferred dividends declared	—	—		—		—		—		(25)		(25)

Non-cash equity award compensation	—	—		1,316		—		—		—		1,316
Balance, September 30, 2020	55,205,082	$	552	$	1,057,016	$	—	$	80,014	$	(203,120)	$	934,462

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

(in thousands)


	Nine Months Ended
	September 30,
	2020		2019
Cash Flows From Operating Activities:
Net (loss) income	$	(63,590)	$	52,538
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	(12,557)		(11,038)
Amortization of deferred debt issuance costs on convertible senior notes, securitized debt obligations and term loan facilities	4,646		5,792
Provision for credit losses	62,241		—

Realized losses on sales	16,913		—



Equity based compensation	3,994		3,607

Net change in assets and liabilities:
Increase in accrued interest receivable	(610)		(530)



Increase in other assets	(19,899)		(10,157)




Increase in other liabilities	44,911		10,197

Net cash provided by operating activities	36,049		50,409
Cash Flows From Investing Activities:
Originations, acquisitions and additional fundings of loans held-for-investment, net of deferred fees	(314,722)		(1,216,679)

Proceeds from repayment of loans held-for-investment	290,838		468,534


Principal payments on available-for-sale securities	12,798		—


Principal payments on held-to-maturity securities	18,076		7,102

Proceeds from sales of loans held-for-sale	193,538		—


Net cash provided by (used in) investing activities	200,528		(741,043)

Cash Flows From Financing Activities:
Proceeds from repurchase agreements	397,004		1,014,802
Principal payments on repurchase agreements	(470,180)		(790,433)
Proceeds from issuance of securitized debt obligations	—		646,868
Principal payments on securitized debt obligations	(115,853)		(181,000)

Proceeds from asset-specific financings	6,626		114,080

Proceeds from revolving credit facilities	38,361		164,598
Repayment of revolving credit facilities	(80,369)		(239,598)
Proceeds from senior secured term loan facilities	205,647		—
Proceeds from issuance of warrants to purchase common stock	4,541		—

Proceeds from issuance of common stock, net of offering costs	—		207,405



Dividends paid on preferred stock	(75)		(75)
Dividends paid on common stock	(23,038)		(63,273)
Net cash (used in) provided by financing activities	(37,336)		873,374
Net increase in cash, cash equivalents and restricted cash	199,241		182,740
Cash, cash equivalents and restricted cash at beginning of period	159,764		123,423
Cash, cash equivalents and restricted cash at end of period	$	359,005	$	306,163
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	83,366	$	95,847

Noncash Activities:
Transfers of loans held-for-investment to loans held-for-sale	$	210,452	$	—
Dividends declared but not paid at end of period	$	11,065	$	23,063

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’s common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “GPMT.”

Although the Company is currently externally managed by Pine River Capital Management L.P., or the Manager, subsequent to September 30, 2020, the Company entered into an internalization agreement with the Manager pursuant to which the Company will become an internally managed real estate investment trust, or REIT, as of 11:59 p.m. on December 31, 2020. See Note 21 – Subsequent Events for additional discussion of the Company’s internalization.

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 unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. The accompanying interim 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 September 30, 2020 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2020 should not be construed as indicative of the results to be expected for future periods or the full year.

The interim 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. As of September 30, 2020, the COVID-19 pandemic remains ongoing, and as a result, numerous countries, including the United States, have declared national emergencies. Such actions have resulted in significant macroeconomic disruptions and have adversely impacted many industries. The ongoing pandemic may continue to adversely impact macroeconomic and market conditions, resulting in a period of global economic slowdown. The rapidly evolving and fluid nature of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. The Company believes the estimates and assumptions underlying its interim unaudited condensed consolidated financial statements are reasonable and supportable based on the information available as of September 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 September 30, 2020 inherently less certain than they would be absent the current and potential impacts of

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

COVID-19. The Company’s actual results could ultimately differ from its estimates and such 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 nine months ended September 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.

Restructuring Charges

Subsequent to September 30, 2020, the Company entered into an internalization agreement with the Manager pursuant to which the Company’s management agreement with the Manager, or the Management Agreement, will terminate effective as of, 11:59 p.m. on December 31, 2020, and the Company will no longer pay base management fees or incentive fees with respect to any period thereafter. The termination of the Management Agreement will be a material change in the management structure of the business, and is accounted for under ASC 420, Exit or disposal cost obligations. The one-time payment to be made to the Manager under the internalization agreement, and other associated costs incurred as part of the internalization of the Company’s management function, are recorded within restructuring charges with a corresponding liability recorded within other liabilities. See Note 17 – Restructuring Charges for additional discussion of the restructuring charges related to the Company’s internalization and Note 21 – Subsequent Events for additional discussion of the Company’s internalization.

Senior Secured Term Loan Facilities

The Company records senior secured term loan facilities as liabilities on the Company’s consolidated balance sheets. Where applicable, any issue discount or transaction expenses are deferred and amortized over the term of the loan using the effective interest method, and is included within interest expense in the Company’s consolidated statements of comprehensive (loss) income, while the unamortized balance is included as a reduction to the carrying amount on the Company’s consolidated balance sheets.

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,

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

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 statements 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 (loss) 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 nine months ended September 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 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. The Company’s allowance for credit losses reflects its estimates of the current and future economic conditions that impact the performance of the commercial real estate properties serving as collateral for the Company’s loan investments. These estimates include unemployment rates, interest rates, price indices for commercial property and other macroeconomic factors impacting the likelihood and magnitude of potential credit losses for the Company’s loans during their anticipated term. The Company licenses certain macroeconomic financial forecasts from a third-party to inform its view of the potential future impact that broader macroeconomic conditions may have on the performance of its loan portfolio. The forecasts are embedded in the licensed analytical model that the Company uses to estimate its allowance for credit losses. The Company may use one or more of these forecasts in the process of estimating its allowance for credit losses. Selection of these economic forecasts requires significant judgment about future events that, while based on the information available to the Company as of the balance sheet date, are ultimately unknowable with certainty, and the actual economic conditions impacting the Company’s portfolio could vary significantly from the estimates the Company made for the periods presented. At the time of adoption of ASU No. 2016-13, in determining its initial allowance for credit losses estimate, the Company employed a 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 debt service coverage ratio, or DSCR, loan-to-value, or 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 statements of stockholders’ 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:

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)


(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.

Facilitation of the Effects of Reference Rate Reform on Financial Reporting

In March 2020, the Financial Accounting Standards Board, or FASB, issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate, or LIBOR, or another reference rate expected to be discontinued because of reference rate reform. ASU No. 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is currently evaluating the impact of adopting this ASU on its consolidated financial statements.

Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in an Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The intention of ASU 2020-06 is to address the complexities in accounting for certain financial instruments with a debt and equity component. Under ASU 2020-06, the number of accounting models for convertible notes will be reduced and entities that issue convertible debt will be required to use the if-converted method for the computation of diluted "Earnings per share" under ASC 260. ASC 2020-06 is effective for fiscal years beginning after December 15, 2021 and may be adopted through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is currently assessing the impact this guidance will have on its condensed consolidated financial statements.

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.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

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 September 30, 2020 and December 31, 2019:


(in thousands)	September 30, 2020		December 31, 2019
Loans held-for-investment	$	1,262,619	$	1,301,369
Allowance for credit losses	(19,677)		—
Loans held-for-investment, net	1,242,942		1,301,369

Restricted cash	1,921		76,093

Other assets	8,106		9,686
Total Assets	$	1,252,969	$	1,387,148
Securitized debt obligations	$	928,623	$	1,041,044

Other liabilities	1,443		1,078
Total Liabilities	$	930,066	$	1,042,122

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 commercial mortgage-backed securities, or CMBS, which are classified within AFS securities, at fair value, and held-to-maturity, or HTM, securities on the condensed consolidated balance sheets. As of December 31, 2019, the carrying value, net of allowance for credit losses, which also represents the maximum exposure to loss, of all CMBS in unconsolidated VIEs was $30.9 million. The Company did not hold any CMBS as of September 30, 2020.

Note 4. Loans Held-for-Investment, Net of Allowance for Credit Losses

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. Loans held-for-investment are reported at cost, net of any unamortized acquisition premiums or discounts, loan fees, origination costs and allowance for credit losses as applicable.

The following tables summarize the Company’s loans held-for-investment by asset type, property type and geographic location as of September 30, 2020 and December 31, 2019:


	September 30, 2020
(dollars in thousands)	Senior Loans (1)			Mezzanine Loans			B-Notes			Total
Unpaid principal balance	$	4,045,912		$	12,586		$	14,290		$	4,072,788
Unamortized (discount) premium	(72)			—			—			(72)
Unamortized net deferred origination fees	(20,543)			28			—			(20,515)
Allowance for credit losses	(71,632)			(1,421)			(286)			(73,339)
Carrying value	$	3,953,665		$	11,193		$	14,004		$	3,978,862
Unfunded commitments	$	596,440		$	—		$	—		$	596,440
Number of loans	107			2			1			110
Weighted average coupon	5.1		%	10.4		%	8.0		%	5.1		%
Weighted average years to maturity (2)	1.3			1.2			6.3			1.3

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)


	December 31, 2019
(dollars in thousands)	Senior Loans (1)		Mezzanine Loans		B-Notes		Total
Unpaid principal balance	$	4,229,194	$	13,503	$	14,448	$	4,257,145
Unamortized (discount) premium	(124)		—		—		(124)
Unamortized net deferred origination fees	(30,788)		(21)		—		(30,809)
Carrying value	$	4,198,282	$	13,482	$	14,448	$	4,226,212
Unfunded commitments	$	748,878	$	—	$	—	$