Granite Point Mortgage Trust (GPMT) Q2 2026 earnings call transcript

Thank you, and good morning, everyone. Thank you for joining our call to discuss Granite Point's second quarter 2026 financial results. With me on the call this morning are Jack Taylor, our President and Chief Executive Officer. Steve Alpart, our Chief Investment Officer and Co-Head of Originations. Blake Johnson, our Chief Financial Officer. Peter Morrell, our Chief Development Officer and Co-Head of Originations. And Ethan Leibowitz, our Chief Operating Officer. After my introductory comments, Jack will provide a brief recap of market conditions and review our current business activities.

Steve will discuss our portfolio, and Blake will highlight key items from our financial results. The press release, financial tables, and earnings supplemental associated with today's call were filed yesterday with the SEC, along with our Form 10-Q, and are available in the investor relations section of our website. I would like to remind you that remarks made by management during this call and the supporting slides may include forward-looking statements, which are uncertain and out of the company's control. Forward-looking statements reflect our views regarding future events and are subject to uncertainties that could cause actual results to differ materially from expectations. Please see our filings with the SEC for a discussion of some of the risks that could affect results.

We do not undertake any obligation to update any forward-looking statements. We will also refer to certain non-GAAP measures on this call. This information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with GAAP. The reconciliation of these non-GAAP financial measures to the most comparable GAAP measures can be found in our earnings release and slides, which are available on our website. I'll now turn the call over to Jack.

Thank you, Chris, and good morning, everyone. We would like to welcome you and thank you for joining Granite Point's second quarter 2026 earnings call. U. S. commercial real estate credit continued to benefit from improving fundamentals and extended its positive trajectory during the second quarter. Geopolitical developments tied to the Iran conflict are influencing the U. S. capital market, as energy prices, along with tariffs, have sharpened investors' focus on inflation and contributed to greater uncertainty about the direction of interest rates.

As a result, property values are facing potential headwinds, as expectations are shifting from pricing near-term interest rate cuts to rate hikes. Nevertheless, capital continues to flow into commercial real estate assets. Debt markets have remained competitive, and lending spreads have continued a trend of tightening, helping to mitigate a potential rise in short-term rates that could impact refinancings.

During the quarter, loan demand generally broadened due to a pickup in acquisitions. Banks have been reporting net increases in commercial real estate loan demand for the first time since 2022. The CMBS market continues to be strong, with issuance on pace to surpass last year's post-GFC record volumes. The increase in acquisition volumes was driven by portfolio and entity-level mega-deals, while the Iran War and other contributors to volatility in some instances paused and delayed individual asset sales, reducing volumes. Nevertheless, fundamentals and liquidity continue to improve in many office markets, which is a constructive sign for resolving legacy office loans.

Our reserves increased during the quarter due to an increase in our general reserve caused in part by a more negative macroeconomic forecast utilized in our general reserve model. increases in the specific reserves in some situations involving a change of circumstances at the collateral or borrower level, and in others where it was a result of more particular price discovery as processes proceeded. We will go into greater detail on these items. We do expect our nearer term resolutions to offset much of these increases. Granite Point remains focused on our primary objective for resolving our legacy loans. Following on the activities of the first quarter, which included two large loan repayments and the sale of a B-note secured by a hotel at a price somewhat above par, during the second quarter, we completed the resolution of the Chicago Retail Loan above our carrying value, realized an office loan repayment, and successfully sold two participation interest and debts secured by an office property in Dallas, Texas for a price in the low 90s.

These participation interests included a larger subordinate interest and an accompanying much smaller senior interest. These actions also furthered our goals of reducing higher cost debt. With respect to our two REO assets, we continue to make progress on maximizing value with the goal of exiting these properties opportunistically. As we continue to focus on our objectives, one of which is to lower our cost of funds, more recently, as announced in a recent press release, we refinanced the assets that were in our two legacy CLOs by extending and upsizing the JPMorgan financing facility, which reduced the cost of funds on these assets from SOFR plus 238 to SOFR plus 200. We are pleased to achieve this refinancing with one of our key lending partners at a favorable cost of funds, which also substantiates underlying value in these loan assets, which constitute a large subset of our portfolio.

Taken together, we believe our initiatives are strengthening Granite Point's financial position and enhancing our ability to create long-term shareholder value. The board and management believe that the company's current market valuation does not fully reflect the underlying value of Granite Point and its assets, and we remain actively focused on narrowing that gap.

We intend to do so in a variety of ways to Steve to discuss our portfolio activities in more detail Steve McLaughlin Thank you, Jack, and thank you all for joining our second quarter earnings call. We ended the quarter with $1.5 billion in total loan portfolio commitments, inclusive of $1.4 billion in outstanding principal balance and about $57 million of future fundings, which accounts for only about 4% of total commitments. Our loan portfolio remains diversified across regions and property types and includes 38 investments with an average UPB of about $37 million and a weighted average stabilized LTV of 66% at origination. As of June 30th, our portfolio weighted average risk rating remains stable at 3.2, quarter over quarter.

The realized loan portfolio yield for the second quarter was 6%, which excluding nonaccrual loans would be 7.4% or 1.4% higher. We had an active quarter of loan repayments, resolutions, paydowns, amortization, and loan participation sales totaling about $160 million. During the second quarter, we had a repayment of a $37 million loan secured by an office property in Richmond, Virginia.

This property has been a strong-performing property in a solid office market. However, until recently, we had not seen much liquidity in this market, either debt or equity. As Jack mentioned earlier, we are now seeing expanded capital available for office assets. In addition, we sold two interests in debt secured by a strong-performing, well-occupied office property in Dallas, Texas, totaling $31 million.

We achieved the final resolution on the $76 million Chicago retail loan via a property sale. We had about $8 million of future fundings and other investments, resulting in a net loan portfolio reduction of about $122 million for the second quarter. We'll now provide some color on the remaining risk-rated five loans. At June 30th, we had five such loans with a total UPB of about $253 million.

Three of the five are in active sales processes that we anticipate may be completed over the coming quarters. At quarter end, we downgraded a $65 million loan collateralized by a 384,000-square-foot office property The Gronite Point Mortgage Trust Inc. earnings conference call. I'm going to turn the call over to management for a new company. And as a result, we downgraded this loan from a four rating to a five rating. We are in discussions with the borrower and pursuing several potential resolution alternatives.

Regarding the $27 million Tempe Hotel and Retail Loan, which we've discussed in prior quarters, we've been in active dialogue with the borrower and are reviewing resolution alternatives, which we expect will involve a sale of the property. The property securing the Atlanta multifamily loan, which we've also discussed in prior quarters, is now under contract with a hard deposit with a targeted close in the near term.

We are in discussions with the borrower on the $15 million New Haven Hotel loan, and as we mentioned last quarter, we expect to resolve this loan via a property sale by the borrower over the next couple of quarters. The last five-rated loan is the $93 million Minneapolis office loan, where we are working collaboratively with current ownership to take the property back as REO in the nearer term. Resolving these remaining five-rated loans remains a top priority. At quarter end, we had two loans with a combined UPB of $68 million, which have risk ratings of four that are on non-accrual status. We are reviewing resolution alternatives for each of these loans, and we'll provide additional information as the situations progress.

Turning to the REO assets, we continue to have positive leasing momentum at the suburban Boston property and remain actively engaged with our partner and other third parties on several value-enhancing, repositioning opportunities. The Miami Beach office property is a Class A asset located in a strong market. We are having positive leasing discussions with a variety of existing and new tenants, will prudently invest in the property, and continue to review alternatives targeting a sale of the property during the second half of 2026. As we've shared in prior quarters, our plan is to remain focused on repayments and resolutions. Along with resolving the five-rated and other non-accrual loans, the REO assets provide additional capital that can be unlocked and redeployed into higher-earning investments.

In the interim, we expect our portfolio balance will trend lower until we restart our origination efforts to take advantage of attractive investment opportunities and begin to regrow our portfolio.

I will now turn the call over to Blake to discuss our financial results. Thank you, Steve. Good morning, everyone, and thank you for joining us today. Turning to our financial results, for the second quarter, we reported a gap net loss attributed to common stockholders of $62 million, or negative $1.29 per basic common share, which includes a provision for credit losses of $47 million and an impairment loss on REO of $6.1 million, and a distributable loss of $37.7 million, or negative $0.79 per basic common share. Our book value as of June 30th was $5.70, a decline of $1.35 from Q1.

Our aggregate CISO reserve at June 30th was about $166 million, which is approximately $17 million higher than last quarter. The $10 million increase in our specific reserve is largely due to one new risk-rated five loan, partially offset by the write-off associated with one loan resolution during the quarter. The $7 million increase in our general reserve was driven by downgraded macroeconomic forecasts in our CECL model and changes in loan attributes in our investment portfolio.

Approximately 78 of our total allowance was allocated to individually assessed loans As a quarter end we had about million of principal balance on risk at 5 loans with specific CISL reserves of about million representing 47 of the unpaid principal balance We believe we are appropriately reserved and further resolutions should meaningfully reduce our total CISL reserve balance Turning to liquidity and capitalization, we ended the quarter with about $58 million of unrestricted cash and total leverage of 1.9 times.

During the quarter, we extended the Citibank and Morgan Stanley repurchase facilities by approximately one year, and extended the secured credit facility to December 2027, including reducing its cost of funds by 25 basis points. After quarter end, we refinanced our legacy CLOs by upsizing and extending the JPMorgan Repurchase Facility. As of a few days ago, we carried about $35.7 million in cash. Our funding mix remains well diversified and stable, and we continue to have very constructive relationships with our financing counterparties, who know our assets very well, as evidenced by their recent extensions. We expect to expand our financing capacity once we return to originating new loans.

Lastly, as Jack mentioned earlier, the refinance of our legacy CLO assets and upsize of the JPMorgan Repurchase Facility will reduce our cost of funds and interest expense. We expect the weighted average cost of funds for those refinanced assets to decrease to SOFR plus $200 from SOFR plus $238 as of $630. The 38 basis point improvement in the cost of funds will decrease our interest expense by approximately $2 million on an annualized basis using the 630 CLL withstanding balance of $521 million.

As we look forward, we continue to believe the best use of our capital is to continue paying down our higher cost debt, resolving our remaining non-accrual loans and REO, and regrowing our investment portfolio. I will now ask the operator to open the line for questions.

Hey, Chris. Good morning. It's Steve Alpart. Thanks for joining the call. So you mentioned that you may have joined a little bit late. So what we just mentioned on the earlier call is that, look, we downgraded this loan. It's a $65 million loan. It's a 384,000-square-foot office property in the San Diego CBD. The property was purchased by a West Coast institutional owner. Original business plan was a major hotel redevelopment strategy. They partnered with a prominent hotel brand, and the development also was potentially including residential and retail components.

We mentioned earlier also that the borrower and the brand each made pretty significant equity investments in the property. But more recently, they said that because of the impact of rising construction costs, also elevated financing costs, they feel that the original business plan is more difficult. So it was really kind of the cumulative effect of those factors that led them to say that at least even though they were putting in equity until very recently, that they're not going to put more equity into the property behind our loan. So that was really the catalyst for the movement of the loan from a four to a five rating during the quarter. You asked about the occupancy. This was originally designed as an office building.

The occupancy is, I'll just say, very low intentionally because the current strategy is to reposition a hotel or a hotel with mixed use. So it was originally a low-occupied office building for redevelopment. And so that's, I guess that's the answer to your question on occupancy. As far as timing and next steps, look, we're in discussions with the borrower. They are engaged. They are cooperative. And we're looking at a number of resolution alternatives, but I would say it's early days to get into timelines.

Yes. We have been looking at alternatives. The focus has been on leasing. We have gotten good leasing traction. This happens to be in a very, very strong and robust market. We are now under contract on that property sale, and we are targeting a sale during the second half of this year.

I'll address that. This is Jack. Nice to speak with you, Chris. We do evaluate quarter to quarter all our uses of capital, including the dividend. It is a board decision with recommendation from management, and as we move forward, we will, as we always do, look at the competing uses of capital, including the dividend.

Morning, Marissa. This is Blake. Thank you for the question. I'll take a first pass at answering this, and then I can pass it to Jack to provide some more color. But yes, so as of quarter end, we held around $58.5 million of cash, and then as of the other day, we held around $35.7, so roughly around a $23 million change.

As far as the CLO refi goes, we did actually reduce our borrowings there. So part of this change from that $23 million is largely from $12 million of reduced borrowings. We also had some fees associated with the refinance as well, in addition to the upsides. And then we also had fees associated with other facilities, which resulted in total of around $4 million. So the combination of those two is around $16 million for the month.

The rest of the change is largely attributed to things that we see on a recurring basis. So spending money in our REO, for example, future fundings, that sum to around $2.8. And depending on the quarter, we see around $3 to $4 million a month. The other one that was unique in the month of July was we had the dividend payment go out the door to common and preferred. That was around $6 million.

Got it. Thank you. Are you done, Blake?

I am, Jack. Yes. I'll just add, we added disclosure in our 10-Q and a footnote relating to the secured financing agreements, which basically does two things. It's right below our statement of how we are in compliance with four financial covenants. The disclosure sets out two things.

First, the favorable change to our most restrictive minimum tangible net worth covenant from $600 million to $500 million, and a favorable change to the minimum unrestricted cash covenant from $30 million to $20 million. It also outlines a plan to mitigate the possibility of temporarily falling below $20 million of unrestricted cash That could occur later this year between the third and fourth quarters. It's a footnote per prescriptive gap rules, and so it does not include all the other items that could release capital, which we're working on, because it doesn't fit in with the prescriptive rules, such as repayments of certain assets that we believe are likely to occur in the coming months or other mitigants or levers available to us, such as, say, like a loan sale.

We do not believe that we will have a temporary fall below our minimum cash of $20 million, and we will remain in compliance with the covenant.

Steve, do you want to address that and then I can follow up?

Sure. I think I heard a couple of questions in there. I'm going to turn the call over to management for prepared remarks. And to the extent there's an active resolution process, which particularly for the fives, some of the four-rated loans, as we get more information, it's a very prescriptive process. So I would say earlier it's appraisal-based. If you're in the market on the sale or other process and you're taking in more information, for example, if you're taking in bids, at some point that will become more relevant.

And I think you heard a lot of commentary this quarter. There's a lot of capital in the market, particularly debt capital. Equity capital is very selective in many cases, I would say particularly for office and some of these more complicated situations. So we've seen processes where you get 20 or more real bidders showing up, and there'll be some outliers, but there's a really well-defined market.

And then there's other cases where you start a process, and at the end, there's only a handful of bidders. So depending on what happens with those bidders, it can really move around a lot.

And, you know, with the movement in rates and some of the interest rate volatility, that is impacting pricing in some cases. You've seen return requirements drift off. That has an impact on values. So basically, as we go through, you know, a process, then that will become more impactful to our reserves and the appraisal.

Sure.

Thank you, Operator, for assisting us today. I want to thank everybody on the team for all the hard work that you've been doing to get the refinancing done and other activities that we've been engaged in. We are all working very hard to pursue the repayments. We have good visibility on repayments coming through, and we are actively working on the resolutions that we've discussed and are optimistic that many of those are going to come through as we set out in our prepared remarks and commentary. Thank you, everybody, for joining us, and we wish you a good day.