Granite Point Mortgage: 7.5% Yielding Preferred Shares Are Getting Attractive (NYSE:GPMT)

Introduction

In November final yr, I had a more in-depth have a look at the Granite Level Mortgage (NYSE:GPMT) most well-liked share which was issued in 2021 by the mortgage REIT. Buying and selling as (NYSE:GPMT.PA), this is the one most well-liked share issued by Granite Level and with a 7% most well-liked dividend yield I used to be already fairly charmed by the difficulty from each the attitude of dividend security in addition to asset protection. As rates of interest are rising, the popular share is now buying and selling at a reduction of roughly 6% to the par worth of $25/share which additional boosts the popular dividend yield.

We have to have a look at the monetary outcomes earlier than figuring out how engaging the popular shares are

Throughout 2021, Granite Level’s steadiness sheet was lowered which weighed on the corporate’s curiosity revenue and internet curiosity revenue. Wanting on the FY 2021 outcomes, GPMT reported a internet curiosity revenue of slightly below $93M. Regardless of this decrease consequence, it was capable of increase its pre-tax consequence due to the shortage of non-recurring bills. Actually, whereas Granite Level recorded virtually $75M in credit score loss provisions and realized losses on the sale of investments in addition to virtually $50M in restructuring expenses, it was comparatively clean crusing in 2021.

That being mentioned, the corporate’s internet revenue of $68.4M was boosted by roughly $11M in non-recurring good points. You additionally see the popular inventory dividend was simply $0.8M however that’s clearly attributable to the actual fact the popular shares have been solely issued late within the yr. There have been roughly 4.6M most well-liked shares excellent as of the tip of 2021, however the firm issued a further 3.63M most well-liked shares in January leading to a present share rely of simply over 8.2M most well-liked shares. These securities have a professional forma worth of $205M (based mostly on the $25 par worth per most well-liked share) and as the popular dividend is $1.75 per most well-liked share per yr, the normalized quantity in most well-liked dividends payable in any given yr is simply over $14M.

Granite Level Mortgage used the proceeds of those most well-liked shares to repay a portion of the 8% senior secured mortgage. This can be a good transfer as the corporate used fairness with a 7% price of capital to repay debt with a value of capital that’s greater. Though solely $50M was repaid (and a $3M reimbursement penalty was due), this can be a good transfer as it’ll save Granite Level lots of of 1000’s of {dollars} per yr: It’ll scale back its curiosity bills by $4M whereas $50M in most well-liked fairness will price simply $3.5M.

Though the REIT has a superb historical past of managing its dangers, typically it does need to incur a loss. Within the first quarter of 2022, one of many loans associated to an workplace property which was already recorded as a non-accrual mortgage, was settled leading to a $10M loss to Granite Level. A provision of $8M had already been recorded so there shall be a further impression of roughly $2M.

Whereas a $10M loss on a $54M senior mortgage is not nice, it does present that even when a mortgage goes bitter, the senior collectors are normally capable of maintain the harm restricted. As of the tip of 2021, the portfolio consisted for about 99% of senior first mortgage loans with a median LTV ratio of 63.5%. The breakdown of the LTV ratios within the picture beneath reveals that roughly 80% of the portfolio has an LTV ratio of lower than 70% with simply 2% of the loans having an LTV ratio exceeding 75%. This does not imply Granite Level is resistant to defaults, but it surely does point out it ought to be capable of maintain mortgage losses comparatively restricted.

One other vital function of the mortgage portfolio is the floating fee as about 98% of the loans are floating fee with a median markup of simply over 4% on the LIBOR fee.

The Collection A most well-liked shares are engaging

As defined in my earlier article: the brand new most well-liked shares have been priced on Nov. 22 and the popular dividend was mounted at $1.75 per yr for a most well-liked dividend yield of seven%.

The popular dividend shall be mounted for about 5 years (till Jan. 15, 2027) the place after it’ll turn into a floating dividend with a three-monthly reset based mostly on the Secured In a single day Funding Price (‘SOFR’) plus a 5.83% unfold. With the SOFR at 0.3%, this means the popular dividend can be reset at 6.13% of the $25 par worth, or $1.5325 per share per yr. After all, it is nonetheless a great distance till the efficient reset date in January 2027 however this instance helps to set the expectations.

The popular share got here out of the gate slightly robust and inside a month after the difficulty date, it was buying and selling at a 4% premium to par, at $26/share. However because the rates of interest began to extend, Granite Level’s most well-liked shares began to go down in worth to regulate to the online rate of interest atmosphere. On Wednesday, the popular shares closed at $23.30 for a yield of seven.51% based mostly on the $1.75 annual most well-liked dividend till January 2027.

I feel the popular dividends get pleasure from a superb protection ratio as we noticed that even after filtering out the one-time parts, the revenue would possible exceed $55M. Which suggests the annual most well-liked dividend price of simply over $14M remains to be very properly coated.

Shifting over to the steadiness sheet, we see Granite Level lowered the leverage as its fairness ratio (fairness versus complete guide worth) elevated from 22.67% to 25.4% primarily below the impulse of a smaller steadiness sheet and the difficulty of the popular shares.

As of the tip of 2021, the overall worth of the popular shares was $116M ($1M in 10% most well-liked shares which will be referred to as from June 2022 on) and $115M of the just lately issued most well-liked shares Collection A) which represented simply over 11% of the fairness. If we would come with the current problem of three.6M further most well-liked shares, we are able to assume the overall worth of the popular shares is $206M on an fairness worth of $1.1B for a ratio of round 18%.

Funding thesis

I am comfy with each the protection ratio of the popular dividends in addition to the asset protection stage however I am not satisfied the present most well-liked dividend of seven.51% is one of the best I can do within the present market as as an illustration the New York Mortgage most well-liked shares are yielding in extra of 8% whereas the popular shares from non-mortgage REITs like International Internet Lease and Necessity Retail REIT are yielding round 7.1%-7.7% as effectively.

Whereas this most well-liked problem from Granite Level Mortgage Belief positively is attention-grabbing, I do not assume it’s a “should purchase now” as the present sell-off on the popular share market will create different alternatives.