Good morning, everyone. My name is Jamie, and I will be your conference facilitator. At this time, I would like to welcome everyone to Granite Point Mortgage Trust's Third Quarter 2020 Financial Results Conference Call. After the speakers' remarks, there will be a question-and-answer period. At this time, I'd like to turn the conference call over to Chris Petta with Investor Relations for Granite Point. Sir, please begin.

Thank you, and good morning, everyone. Thank you for joining our call to discuss Granite Point's third quarter 2020 financial results. With me on the call this morning are Jack Taylor, our President and CEO; Marcin Urbaszek, our CFO; Steve Alpart, our CIO; and Steve Plust, our COO. After my introductory comments, Jack will review our current business activity and provide a brief recap of market conditions. Steve Alpart will discuss our portfolio, and Marcin will highlight key items from our financial results. The 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 website or on the SEC's website at sec.gov. In our earnings release and slides, which are now posted in the Investor Relations section of our website, 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 that this call is being webcast and may be accessed on our website 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. 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 such words. We caution investors not to rely unduly on forward-looking statements. They imply 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 obtained on the SEC's website 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, and thank you for joining our third quarter 2020 earnings call. We hope everyone continues to stay safe and healthy. I'm happy to report that we made substantial progress since we last spoke as we continue to navigate the historic challenges in our market and the broader economy. With the goal of further bolstering our balance sheet, we secured a $300 million strategic long-term financing commitment to enhance our liquidity and financial flexibility and to take advantage of future growth opportunities as they develop. With the improved liquidity, our Board reinstated our quarterly dividend as our portfolio continues to generate strong earnings and cash flows. As previously disclosed, we also entered into a definitive agreement with our manager to internalize the company's management function. This process is expected to be completed at the end of the year, which I will discuss a bit later in my remarks. We remain focused on actively managing our portfolio and working with our borrowers through the ongoing dislocation within the real estate market to preserve value for our stockholders. We firmly believe that we have a lot of embedded value not only in our assets, but also in our business, given our deep and experienced team and our investment strategy. We are confident that our time-tested experience managing through multiple cycles will ultimately deliver strong returns to our stockholders over the long term. Our portfolio continues to generate solid returns and overall credit performance remains strong as our sponsors protect their properties through the business interruptions. During the third quarter and through the October payment date, we have collected over 99% of our contractual debt service payments. And as of quarter end, we did not have any loans risk rated…

Thank you, Jack, and thank you all for joining our call this morning. Our portfolio of senior first mortgage loans generally performed well in the third quarter, delivering positive results, benefiting in part from our LIBOR floors. Our borrowers have been highly engaged and have worked with us in supporting their properties. Some property types, in particular, hospitality and retail, continue to experience significant challenges, and we are monitoring those situations closely. Debt service collections were again strong in Q3, with over 99% of our loans current under contractual payments after taking into consideration certain loans that have been modified, mainly due to COVID-19. At September 30, we had no impairments and no loans on nonaccrual status. We remain engaged in ongoing discussions with many of our borrowers as part of our proactive asset management strategy. During the third quarter, we saw a decline in the number and dollar amount of loan amendments, modifying 12 loans with an aggregate principal balance of about $319 million. Our loans are secured by strong properties in vibrant markets with institutional sponsors. In general, the pandemic has extended the time needed to implement their business plans. So for the most part, our approach has been to provide our borrowers with short-term relief. These amendments involve some combination of interest deferral, reallocation of reserves or waiver of an extension condition, usually coupled with additional equity commitments from the sponsors who remain focused on protecting the equity in their properties. As real estate market fundamentals were relatively unchanged in the quarter, it is not surprising that the risk rankings of our portfolio also remained largely unaffected in Q3. At September 30, we maintained the risk ranking of 4 on the same 18 loans with an aggregate principal balance of about $820 million that were risk rated…

Thank you, Steve. Good morning, everyone, and thank you for joining us today. Yesterday afternoon, we reported third quarter GAAP net loss of $24.7 million or $0.45 per share, which included $43.7 million or $0.79 per share of restructuring charges related to our internalization process and $10 million or $0.18 per share of realized losses on the previously disclosed sale of 6 loans. The realized loss was partially offset by a $5.3 million or $0.09 per share decrease in our CECL reserves, which was mainly driven by the decline in the outstanding balance of our portfolio. At quarter end, our cumulative allowance for credit losses was $80.7 million and represented about 173 basis points of our total loan commitment. Our core earnings for the third quarter was $15 million or $0.27 per share and excluded the onetime internalization related restructuring charges as well as the decline in our allowance for credit losses. Our GAAP book value per share at September 30 was $16.93 per share and included $1.47 per share impact related to the adoption and application of CECL. Given the significantly improved liquidity position of the company, we reinstated our common stock dividend for the third quarter in the amount of $0.20 per share, which was easily covered by our core earnings. As we discussed on our last call, the suspension of our common dividend in the first half of the year was largely driven by our liquidity management strategy rather than earnings generation of our business. At September 30, we had approximately $29 million in undistributed taxable income. We will continue to monitor taxable income and work with our Board of Directors to take measures if necessary, to ensure we maintain our REIT status and satisfy minimum distribution requirements. Our portfolio continues to perform well in light of…

[Operator Instructions] Our first question today comes from Doug Harter from Credit Suisse.

Given the potential uses of liquidity, you just talked about, Marcin, you didn't mention funding new loans. Can you just talk about kind of when you might think about that? And kind of how you're thinking about where the portfolio size might stabilize?

This is Jack Taylor. I'll actually answer that. It's good to hear from you today. We will be making new loans, and we intend to grow our portfolio, but not just yet. We're in a more defensive position while we focus on our current assets and liabilities. And also while we monitor the progress of the overall investment market. So I would say not before year-end and sometime in the first quarter, we'll be reassessing. It's hard to say when we'll start originating because that will tend -- depend on a variety of factors, including the pace of prepayments on our portfolio, our assessment of the alternative uses of capital, and I'd say the attractiveness of loan investments at the time. So it's difficult to specify right now, but not before year-end, and we'll be constantly monitoring that going into the beginning of the year.

And just, I guess, how do you think about what is the right level of liquidity kind of now when you're kind of in a more defensive positioning? And then ultimately, kind of as you move to kind of a more neutral [indiscernible] point into the future?

Doug, this is Marcin. Look, I think we will probably be north of $200 million for the foreseeable future, as Jack mentioned, considering kind of the environment and being a little bit defensive. I think over time, that's likely to decline. But for the foreseeable future, I would expect this to be over $200 million.

Our next question comes from Steve Delaney from JMP Securities.

Congrats on the progress you've made. Marcin, in your comments regarding the reinstatement of the dividend and your ongoing dialogue with the Board, you mentioned true up at year-end. Can you comment as to whether you, in fact, have any undistributed REIT taxable income at this time? And if so, maybe give us some range or estimate?

Yes, we have -- as I said in my prepared remarks, we have about $29 million of undistributed taxable income through September 30. So we'll be discussing different options in terms of how to manage it with our Board as we go into year-end. We'll see what the fourth quarter looks like. And obviously, we want to maintain our REIT status. So activity on that, yes, we do have some undistributed taxable income.

Sorry, I missed that in your remarks, apologies, but you do have some flexibility, I believe, in rolling some of that into 2021, if I'm not mistaken. So should we assume that that would not be your plan to take advantage of that roll over as we do just to help liquidity.

We do have some flexibility, and we obviously will do whatever is necessary to maintain REIT status, but at the same time, protect book value as much as we can, but it's hard to get into any specifics at this point, but we will look at any and all options to kind of come up with the most optimal solution.

And our next question comes from Jade Rahmani from KBW.

I think that your comments around credit in 2021 seems a bit cautious. Can you elaborate on what your expectations are? I think you said credit threats in '20-'21 may be elevated?

Jade, I'll speak to that and then pass it on to Steve Alpart. We are very experienced in going through cycles, and we see that real estate fundamentals will often lag the overall economy. But it's really driven by the duration of the pandemic. Yesterday's news was very positive with respect to the Pfizer and its partners development on the vaccine, but it related more to the idea of how long over the last couple of weeks, there's been a kind of a whipsaw. There was a growing sense that this would be a much longer duration in the pandemic. And then yesterday, that kind of reversed. But we're just saying that we're looking forward to 2021 cautiously because of the ongoing nature of the pandemic. Did you want to elaborate, Steve?

No, I think that covers, Jack [indiscernible] thanks for joining this morning. I would just add for our portfolio, it's mainly focused around hotel and retail. For the hotels, we saw a reopening. But if you look at Hotels nationally, a lot of hotels are still running at 10% to 40%, 50% occupancy and there's an expected slow ramp back up. Our feeling has been that once we have a vaccine and people feel comfortable traveling again, we'll see the sector come back. But as Jack just mentioned, even with yesterday's positive news, it just feels too early to predict the timing of the recovery. So we're generally having a more cautious outlook right now. And those similar comments apply to the retail sector.

And how are you thinking about the office exposure? I just saw a survey in terms of housing, there's expected to be something like 10 million households that plan to have a significant amount of work from home going forward? How are you thinking about the office exposure in the portfolio?

Sure. Well, the short-term and the long term. And in the short term, what we're seeing industry-wide and in our portfolio is that collections have been strong since the pandemic started. We saw some early requests for relief from rent from some of our landlords, our borrowers. But the collections have been strong overall and not been a huge factor. We don't have much exposure to co-working. You're really getting at some of the broader trends that work from home. I think it feels very early to make these predictions. Look, I would say that the office market is a very broad, diverse market. Our portfolio is very diverse by geographic location, primary market, secondary markets, type of office. And we also don't have a lot of exposure to some of the harder hit COVID markets. But as far as the broader trends, I mean, that has to play out over time.

Okay. You mentioned the management team has experience in multiple cycles and looking at some of the legacy mortgage REITs and the ones that survived and actually thrive coming out of the global financial crisis. Many of them that did take advantage of the market were able to buy, for example, their own CLOs below $0.50 on the dollar, which Northstar, NRF famously did, and that allowed book value to start accreting upwards and be on a growth trajectory, which gave investors confidence. Looking at GP&T, the stock is about 48% or 50% of book value. There's a few others that are in that similar position. Are you seeing any outsized investment opportunities away from loan originations where you could make such accretive discounted purchases, including perhaps buying back some of Granite Point's CLOs?

Jade, this is Jack. I will say that we continue to be focused on our liquidity management and creating additional stability of our balance sheet, and that will likely require some additional deleveraging and some other actions. And it's our general policy not to comment on any potential buybacks or their timing. But it's a good question, and it's something that, along with many other possible uses of our capital, we're always focused on generating the attractive risk-adjusted shareholder returns. And where we're trading now, we think that would be a potential for us. We're keeping our eye on it. But with respect to the best use of capital, it's not what we're thinking is a tomorrow event, but it's something that we're looking to position ourselves for whether or not it's stock buybacks, or CLOs, or the like. And we have the broad ability with the capital that we raised to use it for such activities as well.

Okay. And just a final one. I wanted to ask a follow-up because it sounds like you really are prioritizing liquidity management. Yet you agreed to make a onetime cash payment to Pine River of close to $45 million by December 31. What in your mind and in the Board's mind justifies that use of liquidity? I don't believe, at least at the outset, it's going to be accretive to earnings on a full run rate expense ratio. Why use that $45 million of liquidity? Do you expect that 2021 could have potentially elevated credit issues? Why not either issue shares or postpone that internalization transaction?

Well, I would answer that. There's a lot of questions embedded in what you just asked. First, it was a Board run process, and the company had entered into a binding arbitration process with the manager. And I'll remind you the amount payable to the company manager was decided by an arbitration panel. We believe, as we stated in our prepared remarks that the benefits of the internalization are quite substantial, well worth the investment, and we have the liquidity adequate to meet the demands of the current situation as we see it now, including making this payment. And in fact, in the capital that we raised in terms of sizing that, this was taken into account. And I don't think you can look at just the immediate next couple of quarters to try to assess the benefit of the internalization. We have every intention of growing this company and growing it dramatically. And it's during those growth periods, that the benefits are most expressed for the internalization.

[Operator Instructions] And our next question comes from Charlie Arestia from JPMorgan.

I appreciate the LIBOR floor disclosures that you guys provide. I think it does a better job of illustrating the nuance there than a simple weighted average floor. If I'm looking at Slide 10 correctly, as those 2017 loans begin to roll off, which might be slower-than-anticipated given where repayments are in the space, this should drive the overall floor higher, right? Because there's a big -- pretty big jump in the 2018, 2019 vintages from a floor perspective. And I'm just trying to get a sense of the net interest income trends, given the new financing facility and the continued benefit of your floors?

Charlie, it's Marcin. Yes, I think in general, you can think of it that way. Again, it really depends on the timing and which loans we pay when. And then as Jack mentioned earlier, if we have a lot of repayments, we do intend to start originating new loans, right? So it will depend on kind of what those loans look like from a return perspective, LIBOR floors, and things like that. So again, it's hard to say. I think you hit on an important point. Our net interest margin will shrink going forward, right now, as we haven't really recognized a lot of interest expense related with a new term loan, right? That will -- the first full quarter of that will be Q4. So please keep that in mind as you all model earnings. That will be over $5 million per quarter impact to our interest expense. But again, on the LIBOR floors, obviously, we benefit from it now, and we'll see what happens going forward. But we do expect the NIM to compress over time.

Okay. And then if I could just get an update on the California retail property. It's the largest one in the portfolio. And the original maturity was, I believe, over the summer. So just curious if you could give us an update on how that asset is performing.

Charlie, it's Steve. Look, it's a well-located lifestyle center. Was performing well prior to the pandemic. As a result of the pandemic, operations were certainly impacted. There was limitations on the ability to stay open or operate at full capacity. The borrower here has institutional capital partners and a very large equity position to protect here. And like a lot of our assets, particularly the hotels and retail, we're in constant dialogue with these guys as this whole pandemic plays out.

And ladies and gentlemen, with that, we will end today's question-and-answer session. I'd like to turn the conference call back over to Jack Taylor for any closing remarks.

Thank you, Jamie. I want to say we really appreciate all of you joining us today and taking the time to be with us and we will look forward to speaking with you again very soon to give you further updates on how we're doing. Most particularly, we wish everybody in our analyst community, investment community, and anybody else listening in, good health and safety throughout this period. And thank you again. We appreciate it.

And ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.