Good morning. My name is Cole, and I will be your conference facilitator. At this time, I would like to welcome everyone to the Granite Point Mortgage Trust Second Quarter 2021 Financial Results Conference Call. All participants will be in a listen only mode. And as a reminder, this call is being recorded. After the speakers' remarks, there will be a question-and-answer period. I would now like to turn the conference over to Chris Petta with Investor Relations for Granite. Please go ahead.

Thank you, and good morning, everyone. Thank you for joining our call to discuss Granite Point's Second Quarter 2021 Financial Results. With me on the call this morning are Jack Taylor, our President and Chief Executive Officer; Marcin Urbaszek, our Chief Financial Officer; Steve Alpart, our Chief Investment Officer and Co-Head of Originations; Peter Morral, our Chief Development Officer and Co-Head of Originations; and Steve Plust, our Chief Operating Officer. After my introductory comments, Jack will review our current business activities and provide a brief recap of market conditions. Steve Alpart will discuss our portfolio and Marcin will highlight key items from our financial results. Press release and financial tables associated with today's call as well as our Form 10-Q were filed yesterday with the SEC. If you do not have a copy, you may find them on our Web site or on the SEC's Web site at sec.gov. In our earnings release and slides, which are now posted in the Investor Relations section of our Web site, we have provided a reconciliation of GAAP to non-GAAP financial measures. We urge you to review this information in conjunction with today's call. I would also like to mention this call is being webcast and may be accessed on our Web site in the same location. Before I turn the call over to Jack, I would like to remind you that remarks made by management during this conference call and the supporting slides may include forward-looking statements, which are uncertain and outside of the company's control. Forward-looking statements reflect our views regarding future events and are typically associated with the use of words, such as anticipate, expect, estimate and believe or other similar expressions. We caution investors not to rely unduly on forward-looking statements. They implied risks and uncertainties and actual results may differ materially from expectations. We urge you to carefully consider the risks described in our filings with the SEC, including our most recent 10-K and 10-Q reports, which may be caved on the SEC's Web site at sec.gov. We do not undertake any obligation to update or correct any forward-looking statements if later events prove them to be inaccurate. I will now turn the call over to Jack.

Thank you, Chris, and good morning, everyone. We would like to welcome you all to our second quarter 2021 earnings call. We hope everyone continues to stay healthy and safe. Our business delivered another quarter of solid operating results as we continue to successfully execute on our strategy of originating and managing a well diversified portfolio of first mortgage loans generating attractive returns. Yesterday afternoon, we reported second quarter distributable earnings of $0.29 per share, which again, comfortably covered our common stock dividend of $0.25 per share. Our earnings continue to benefit from the in the money LIBOR floors on our loans and the strength of our portfolio. In addition, our book value moderately increased to $17.27 per share, partially benefiting from the share repurchases executed during the quarter. We had an active quarter across our business with respect to both assets and liabilities. During the second quarter, we closed seven new loans totaling over $200 million of commitments and currently have an additional $280 million of loans that have either closed or are expected to close in the near term. To date, we have originated loans secured primarily by multifamily properties. We have also funded well leased office properties and are pursuing well secured by industrial warehouse, self storage, life sciences and others. In addition to our existing pipeline of committed loans, we have been actively sourcing new investment opportunities with the goal of deploying our excess liquidity and growing our portfolio, which would help improve our earnings and dividends over time. We are currently actively reviewing several million dollars of lending opportunities, the scope of which allows us to be selective and pick the most interesting investments for our portfolio. The market for lending on transitional commercial real estate assets remains very active with significantly improved transaction volumes…

Thank you, Jack, and thank you all for joining our call this morning. We had a very busy quarter with respect to our overall portfolio activity. We closed seven new loans with total commitments of over $200 million and initial fundings of over $160 million. We also funded an additional $30 million on existing commitments for total portfolio fundings of over $190 million. Six of these loans comprising over 70% of our Q2 originations are secured by multifamily properties and one loan is secured by a well leased office building in the Southeast. The new loans carry attractive returns and credit profiles with a weighted average yield of LIBOR plus 4 10 and a weighted average stabilized LTV of under 68%, reflective of the high proportion of multifamily loans. During the second quarter, we realized $23 million of repayments, including eight full loan payoffs and several partial paydowns. Repayments were diversified across various property types and included two of our larger hotel loans with a combined principal balance of about $134 million, which reduced our portfolio of hotel allocation to under 15%. We view this volume of repayments as elevated and would anticipate it to moderate over the rest of the year. Our initial estimate for full year repayments was between $500 million and $1 billion, which we still view as reasonable, though, the exact timing of them is hard to predict. We believe that a healthy repayment activity is a result of continued improvement in market conditions and is also attributable to the overall credit quality of our portfolio. We ended the second quarter with a portfolio outstanding principal balance of about $3.6 billion across 99 loans with an additional $440 million in future funding commitments, which account for only about 11% of our total commitment and is reflective…

Thank you, Steve. Good morning, everyone, and thank you for joining us today. Yesterday afternoon, we reported our results for the second quarter of 2021 with GAAP net income of $14.2 million or $0.26 per basic share as compared to $28 million or $0.51 per basic share in the first quarter. Distributable earnings for Q2 were $15.7 million or $0.29 per basic share versus $20.7 million or $0.38 per share in Q1. There were a few main drivers that affected our second quarter results as compared to the prior period. First, as we disclosed previously along with our dividend announcement in June, we realized an elevated volume of loan repayments of about $423 million in Q2, which combined with our new originations resulted in $225 million net decline in our portfolio from Q1. Second, we recorded $2.1 million reversal of interest related to three loans placed on nonaccrual status. Both of these factors drove most of the decline in our net interest income of about $5 million or $0.09 per basic share. Finally, our total allowance for credit losses was relatively stable quarter-over-quarter as we did not realize a meaningful benefit from provisions credit losses in Q2 as compared to the $9 million or $0.17 per basic share reserve release we had in Q1. Our total operating expenses in Q2 of a bit under $9 million were largely in line with the first quarter. Our distributable earnings continue to meaningfully cover our common dividend reflecting a strong run rate earnings power of our portfolio despite elevated volume of loan repayments. The attractive income generated by our portfolio continues to benefit from the LIBOR floors embedded in our loans with a weighted average rate of 155 basis points. Over time, as our portfolio mix continues to shift towards new originations with…

And our first question today will come from Doug Harter with Credit Suisse.

Hoping you could talk a little bit more about the three loans that went on to nonaccrual today. Just give us the details of how reserved they are and why you're comfortable with those reserve levels?

So we've talked about most of these loans in prior quarters. There's not a lot new this quarter. We're very comfortable with the risk rankings credit profile of our portfolio was generally stable in Q2. We're closely asset managing our portfolio. We're evaluating loans each quarter, as you know. We feel very good about the reserves. And as we have new information we'll share that.

If you look at our Q, we provide a little bit more detail on specifically kind of how much reserves are on each of these assets.

I guess what specifically changed that led you to take the interest reversal this quarter, and why you hadn't done that in the past?

So on Minneapolis Hotel, which we talked about a little bit last quarter, so we maintained the 5 ranking this quarter. There's not a lot new this quarter. We're working towards a resolution. As I said, we feel like we're adequately reserved. We just felt like given the overall status, it makes sense to put that one on nonaccrual status. We moved the Southern California retail loan that we discussed previously that had been ranked 4 in Q1. We moved it to a 5 in Q2. Doug, that was mainly due to the ongoing uncertainty around retail in general and also because it had, at the time, an upcoming July maturity date. And then we moved a loan secured by an office building in D.C. to a 5 and that one was largely due to this ongoing softness in the D.C. leasing market and some borrower fatigue about putting more equity into the property, and that was the catalyst for moving that one on to nonaccrual.

And then could you talk about deploying the liquidity, how you're weighing deploying that into loans versus repaying the term loan that you took out, I guess, a year or so ago?

Well, we're looking to deploy that liquidity. We had our, what I would say, a downturn or a trough in our portfolio balance because of the elevated level of repayments that were in advance of the originations whilst we replace them. I'll let Marcin speak to the term loan here in a second, but I'll say our expectation is, we have ample liquidity. Our expectation is to deploy that through the end of the year, expecting a year end balance, I would say, somewhere about 5%, maybe plus that, possibly lower over the current level of balance by year end.

And Doug, with respect to the term loan, as we mentioned earlier, it's a pretty attractive piece in our capital structure, though it is expensive. So our strategic priority is to refinance this term loan at some point in the future. As you can imagine, it will largely depend on capital markets conditions. We're looking at a variety of different products to accomplish that. But we can't really comment on anything with any certain high degree of certainty right now since it is capital market dependent.

And our next question will come from Steve Delaney with JMP Securities.

Marcin, you were discussing some items that you indicated had $0.09 per share impact on second quarter earnings. And I believe you were comparing that relative to first quarter. I think $2.1 million was the reversal of interest that you described on, I think, the three nonaccrual loans. What would the other roughly $3 million of impact have come from to get to $0.09 or about $5 million per total dollar amount?

I would say the rest of it is largely related to the repayments. We had really elevated level of repayments in the quarter. Some of those repayments are hotel loans, which obviously is a good sign from a credit perspective, but they tend to carry higher yields. So I would say most of rest of the decline is related to repayments. And it's just tying to repayments and the closing of new loans.

So smaller average portfolio size, obviously?

Correct.

And just to be clear, the Page 11 in the deck. These five loans, these are all 5 rated at this time, right? And I think there were, what, two new vibrated loans in the quarter. Just trying to make sure I've got -- I'm looking at the entirety of the 5 rated loans and also the number that were new in the quarter?

So we have three 5 rated loans, that's the Pasadena, California retail, the Minneapolis Hotel and then the Washington, D.C. office, the other two are not 5 rated but they are loans that we've discussed in prior quarters on our watch list that we're monitoring closely.

So this is not -- this is your watch list, but it's not intended to suggest that all 5. So three of these are 5 rated two were not. And then Page 3 of the deck, I'm just trying to get the nuance right here. You are making the statement at the top that through July of 2021, 100% of borrowers are making their contractual payments in accordance with agreements. And there's a footnote there, three, and it says including loan mods and four nonaccrual loans. So with respect to the nonaccrual loans, when you say 100% of borrowers are making their contractual payments, are they making interest payments even though they're nonaccrual and you're just recognizing the income as it comes in as opposed to accruing it?

No, they're not. So we're excluding that from our calculation.

So when you say 100% of borrowers making payments, that's excluding the four nonaccrual loans because we're assuming that they are not paying? So other than those four loans, you've got everybody making their payments. Is that correct?

Correct. Adjusted for mods, which some of the modifications may involve some partial deferral of interest, not waivers, but deferrals, which to Steve's point earlier, we've seen a pretty significant decline in those requests.

When you mentioned CECL reserve, I thought I heard you mention a figure of $63 million. I'm looking at my model and I'm seeing $39 million, it was down -- you had released $9 million in the first quarter. Is it $39 million, or I don't know where the $63 million came from?

Now $63.1 million in Q1 and it's $62.9 million in Q2 on a total reserve. So it was largely unchanged but we obviously had some movement between kind of the general population and some of the loans that we individually assessed over the quarter.

And within that CECL reserve on the five loans on Page 11. Can you tell me how much of the CECL reserve do you have specific reserves on any of the loans shown on Page 11? Or I guess the other way to look at…

If you look at our 10-Q when we talk about our portfolio, we provide a little bit more detail on the 3, 5 rated loans. So there's about $32 million to $35 million for those specifically assessed 5 rated loans in the pool. So more than half of our reserve 30% is related to those 3, 5 rated loans.

And our next question will come from Stephen Laws with Raymond James.

Jack, to follow up on Doug's question earlier about your excess liquidity. As you think about deploying in new loans, paying down some more expensive capital or refinancing that. Where does stock repurchase fit in? I know you bought back a little bit of stock, I believe, during the quarter. So can you talk about your options there?

First, I'll do the usual caveat, it's our general policy not to comment on any potential buybacks or their timing. But having said that, we always have been focused on generating the best risk adjusted returns and what's best for the business, which has a lot of different factors that play into it. And one of the assessments of the best use of capital, of course, there's any discount to book valuation that we would take that into consideration in assessing the best use of capital. I think as origination opportunities, the rationalization of our other liabilities, et cetera. And we do have authorization for more share buybacks that are available to us as we make this assessment.

Marcin, looking at Page 12 on the financing, can you talk to the '18 -- opportunities to call that either it looks like cheaper financing either through the repo facilities or putting into newer CLO? Can you talk about opportunities you see other than the term loan to kind of reduce financing costs going forward?

When we assess our liabilities and fundings, we kind of look at everything all together. So you make an interesting point on FL1. It is a function of what type of assets are financed with different pools, what's available in the market. But I can assure you that we are looking at our liabilities and funding and reassessing the best way to rationalize that and bring down our cost of funds, which we've been definitely focused on. So we can probably become a little bit more efficient on the asset finance side of our business that we intend to do so.

And our next question will come from Jade Rahmani with KBW.

Looking at the expense base of $9 million on an annualized basis, it's 3.8% of common -- the typical fee structure for even externally managed REIT is 1.5% base fee and probably about 20% above or 20% of excess returns above an 8% hurdle, 7% hurdle. So the peer expense ratio is 2.5%. For GPMT to operate at that level of efficiency, your equity base needs to be 40% higher. So my question is, number one, with the existing capital base, what kind of returns on equity do you believe are achievable? And what other options do you believe there are to increase the operating leverage at the company so that that expense base could be rationalized?

I think you're missing a couple of other pieces. And in the expenses just across the board, there's additional G&A that we all incur as public company as public company costs and also amortization of noncash equity compensation. The ratio for us that you are referring includes all of that. So it's not just compensation costs, it's the public company costs but also close to $2 million of LTIP amortization, which all of our peers also have. But look as an internally managed company, we obviously have pretty significant economies of scale available to us as we grow the company, which we intend to do. And I think as we deploy our excess liquidity, rationalize the liabilities, we fully intend to grow the equity base of this company in the future and realize those economies of scale.

And based on the current equity base, do you have a view as to what the levered ROE is over, say, a multiyear period rolling off LIBOR floors but also rationalizing some of the high cost liabilities. Do you have a view as to what range we should be thinking about as to achievable ROEs within the existing equity base? Because right now, book value of 12.77, the common stock price is 12.47. So I've seen a lot of mortgage REITs get into this situation. I know my peers have as well where these companies trade below book value and it becomes somewhat difficult to get out of that, and grow the common equity base. There could be other tools at your disposal as well. I'm just curious what the outlook for levered returns within existing capital are?

I think the outlook is still high single digits. We are a little bit inefficient on the balance sheet in terms of liquidity and our liabilities. Our portfolio on a run rate basis continues to generate low double digit gross returns. We continue to make loans and then low double digit gross returns levered. So I think we have enough of a capital base to grow our earnings once we deploy our liquidity and do some more work on the liability structure to get to those high single digit net ROEs, which are kind of par for the peer group generally. I just think we just have a little bit more work to do on the balance sheet.

I guess a couple of other items. One is a clarification. The $0.04 of other to get to the $0.29 of distributable EPS? What does that relate to?

You mean the difference between GAAP and distributable?

Yes, I think you gave a walk to get to the $0.29…

It's essentially as a noncash equity comp, which is about 3 and there was a slight benefit from provision of $0.05. So that's the difference on Page 6 in the presentation.

And I actually misspoke. The $0.04 of others to get to the 17.27 of book value. Do you happen to know what that related to?

Most of that is related to the benefit of the share repurchases.

And then a question for Jack and Steven would be, one company I spoke with said that the majority of the increase in production, they're a brokerage firm, was related to debt funds. And I was wondering if you believe that the surge in repayments that we're seeing across really primarily reflects loan takeouts by other debt funds, or what do you believe the refinancing source of capital is that's driving this elevated level of activity?

I'll address that and then Steve, if you'd like to follow on. We think it's across the board. There was a huge surge of, I'll call it, increased and renewed interest in the transition and debt specifically but also the debt fund space generally and a lot of money came into the space. Also, in the public REIT sector, there's been an acceleration of financings. So we're seeing, I would say, primarily takeouts from the private side but it's been across the board.

Well, I was just going to say, so not primarily debt funds. When you guys are losing a loan and you add a huge amount of repayments, which speaks well to the credit quality, but those loans are being taken out by traditional lenders or debt funds?

I would say, for our portfolio, notwithstanding the 3, 5 ranked loans, the portfolio of credit has been strong. And what we're seeing is that my progression the business plans the agency -- the GSEs are wide open. So you're seeing multifamily loans go into kind of permanent loan takeouts. You're seeing hotels that were transitional that have progressed, notwithstanding the pandemic. So for our portfolio, a lot of it is just the natural progression of business plans and being taken out by various types of permanent lenders or securitizations or GSEs, that's a lot of it.

And this will conclude our question-and-answer session. I'd like to turn the conference back over to Jack Taylor for any closing remarks.

Well, thank you everybody for joining us today. We really appreciate your questions and your time and attention. We really are excited about continuing our strong operating results and growing our business. And I'd like to personally and for the group wish you all a safe and healthy quarter ahead. Thank you.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.