Granite Point Mortgage Trust Inc. (GPMT) CEO John Taylor on Q4 2020 Results - Earnings Call Transcript

Granite Point Mortgage Trust Inc. (NYSE:GPMT) Q4 2020 Earnings Conference Call March 5, 2021 10:00 AM ET

Company Participants

Chris Petta - IRO

John Taylor - President and CEO

Stephen Alpart - VP, Chief Investment Officer and Co-Head of Originations

Marcin Urbaszek - CFO and Head of IR

Steven Plust - VP and COO

Conference Call Participants

Doug Harter - Credit Suisse

Jade Rahmani - Keefe, Bruyette, & Woods, Inc.

Charlie Arestia - JPMorgan Chase & Co.

Stephen Laws - Raymond James

Arren Cyganovich - Citi Group

Operator

Good morning. My name is Chad, and I will be your conference facilitator. At this time, I would like to welcome everyone to Granite Point Mortgage Trust’s Fourth Quarter and Year-End 2020 Financial Results Conference Call. All participants will be in a listen-only mode. After the speakers’ remarks, there will be a question-and-answer period. Please note today's call is being recorded.

I would now like to turn the call over to Chris Petta with Investor Relations for Granite Point. Please go ahead.

Chris Petta

Thank you, and good morning, everyone. Thank you for joining our call to discuss Granite Point's fourth quarter and year end 2020 financial results. 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.

The press release and financial tables associated with today's call are filed yesterday with the SEC and our Form 10-K was filed this morning. 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 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 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.

John Taylor

Thank you, Chris. And good morning everyone. We would like to welcome you all to our fourth quarter and year-end 2020 earnings call. I'm joined today by Steve Alpart, our CIO and Co-Head of Originations; Marcin Urbaszek, our CFO, Steve Plust our COO and Peter Morral, our Co-Head of Originations and newly appointed Chief Development Officer. We hope everyone continues to be safe and healthy, as we all navigate the ongoing impacts of the pandemic.

2020 was a challenging year for all on many fronts, particularly those arising from the global pandemic. Despite the disruptions to the overall economy and the commercial real estate market in particular, our strategy centred around delivering attractive risk adjusted returns while providing significant downside protection has been proving out, even through the severe market dislocations.

Our defensively positioned and well diversified investment portfolio consisting of 99% senior first mortgage floating rate loans has performed well despite the market turbulence. Through our active management of both sides of our balance sheet, since the onset of the pandemic, we have proactively delevered our financing facilities, improved our liquidity position, and worked with our borrowers to help them navigate business plan interruptions at their properties.

We believe our performance last year, as evidenced by the $1.17 per share of distributable earnings generated by our business has demonstrated the resilience of our investment and financing strategy during even the most volatile and uncertain markets.

Despite the significant challenges, we accomplished a great deal during 2020. Driven by the strong credit quality of our loans and our proactive asset management strategy, we received 99% of contractual interest payments and experienced no realized principle credit losses. We also benefited from our strong relationships with our financing partners and their trust in our conservative credit philosophy and the quality of our assets and borrowers.

We work proactively with our lenders to methodically delever our credit facilities. This deliberative approach enabled us to be patient and secure a $300 million flexible strategic financing commitment at attractive terms to better position the company to take advantage of emerging investment opportunities in the current environment and for future growth prospects as they develop.

With the enhanced liquidity and balance sheet stability, our Board reinstated our quarterly dividend in the second half of 2020, as our portfolio continues to generate strong earnings and cash flows. Additionally, in December, the Board declared a special cash dividend of $0.25 per common share, in addition to the regular quarterly dividend of $0.20 per share, reflecting the performance of our business.

Lastly, we achieved a significant milestone, by completing our transition to an internally managed commercial mortgage REIT at the end of the year. Internalization carries many benefits, including lower expenses, better transparency, and alignment of interests with our stockholders, while achieving greater economies of scale as we grow our business.

Our actions last year were designed to position Granite Point for strong performance in 2021 and beyond. Our priorities for this year include redeploying our excess liquidity into attractive investments to support our earnings and dividends. Further diversifying our funding sources and increasing the proportion of credit non mark-to-market financing, and continuing the active management of our portfolio.

We have already made notable progress towards these goals. Granite Point is re-entering the loan origination market, along with the improvement in the broader capital markets, including that for commercial real estate CLOs, there has been an accelerating uptick in real estate transaction and lending activity that has so far been predominantly focused on select property types, but is expanding.

Granite Point has an established reputation as a strong counterparty in the lending market. And as a result, over time, we've closed a meaningful number of repeat transactions with our borrowers. Over the last few years, we have proven our ability to generate a large volume of attractive investment opportunities meeting our underwriting and return criteria.

While the origination volume in 2021, will depend on a variety of factors, we expect that the pace of our new originations will significantly depend on the amount of loan repayments we received over the course of the year.

As we previously announced on February 4th, we entered into a new credit agreement with Goldman Sachs, which provided us with about $349 million of term matched and non-mark-to-market financing, while repaying all previously outstanding borrowings on our Goldman Sachs repurchase facility.

This transaction illustrates the strength of our lender relationships and the credit quality of our loan. It also brings the percentage of our credit non-mark-to-market financing to 51% of loan level borrowings, which we expect to grow further over the course of the year.

In addition, with respect to diversifying our funding sources, we've consistently viewed the CLO market as an attractive source of funding, providing us with non-mark-to-market term matched and non-recourse financing at a competitive cost of funds. Having been a repeat well respected issuer in the CLO market provides us with the ability to be opportunistic in our overall balance sheet management strategy.

Subject to market conditions, we are positioned to and would anticipate accessing the CLO market during this year to further diversify our funding sources and improve our cost of funds, while increasing our non- mark-to-market borrowings.

The credit characteristics of our overall portfolio remain resilient. The ultimate credit outcome for our investments and other market participants will depend significantly on the recovery path of the overall economy and the commercial real estate sector in particular.

We will continue to actively manage our investments in any potential credit events. We are pleased by the performance of our portfolio to-date, believe that there's a lot of value embedded in it, and are quite encouraged by the continuing support of collateral properties by our borrowers.

I'm very proud of our entire team's efforts and the resulting performance of our business last year. With the recent developments around COVID-19 vaccines and their distribution and the expectation of continued monetary and fiscal support, we are optimistic about the future ahead for the economy and commercial real estate, while understanding the ongoing near-term challenges.

Our Board of Directors and the management team are excited about the future of Granite Point, and are confident that we can deliver attractive returns for our stockholders over time, now as an internally managed REIT.

I would now like to turn the call over to Steve Alpart to discuss our portfolio and recent activities in more detail.

Stephen Alpart

Thank you, Jack. And thank you all for joining our call this morning. Over the course of 2020 and into early 2021, our portfolio has performed very well considering the major economic and real estate market challenges caused by the pandemic. Our interest collections have remained strong during 2020, running at about 99% of contractual payments through February.

We ended the year with a portfolio of outstanding principal balance of $3.9 billion across 103 loans, with about $500 million in future funding obligations, which account for only about 11% of our total commitments. Reflecting the light to moderate transitional nature of the business plan we typically underwrite.

Our future funding obligations have declined over the course of the year as a result of fundings, repayments, limited opportunistic loan sales earlier this year and select loan modifications that extinguish either a portion or all of the future funding commitments on amended loans.

During the fourth quarter, we funded $51 million of loan balances on prior commitments, which brought our total fundings for the year to $239 million. We feel very comfortable with the level and pace of these future funding and continue to finance them with our lenders.

As overall market sentiment stabilized and improved over the course of last year, we began to see transaction and financing activity slowly reemerge in the real estate sector on select property types. And these positive trends are further progressing in 2021.

Consistent with these improving market conditions, our volume of loan repayments increased in the second half of the year and we received about $195 million of pay offs in the fourth quarter alone, bringing our total repayments for the year to about $517 million. Given the significant market dislocations last year, we believe these repayments demonstrate the strength and quality of our portfolio.

So far in the first quarter of this year, we have realized about $70 million of repayments and are very hard to predict, we anticipate that the pace of our loan repayments in the near term should be similar to what we have experienced over the last couple of quarters, but below our historical pace of about 25% annually.

We remain highly engaged with our borrowers and are working collaboratively with those experiencing delays and business plans resulting from the pandemic. During the fourth quarter, we modified 12 loans with an aggregate principal balance of about $685 million and deferred $4.2 million of interest, which was capitalized and added the principal. Most of these modifications are related to loans that have been previously invented, and we are gratified to see these borrowers continue to support their properties.

In aggregate, during 2020, we modified 46 loans with a total principal balance of about $1.8 billion and deferred and added the principal balance, approximately $8.6 million of interest income.

As of December 31st, 2020, we had 41 of these 46 loans remaining in our portfolio. Of these 41 loans, 11 had active interest deferrals at December 31st.

As we discussed previously, most of our modifications involve a combination of payment deferrals, reallocation of reserve accounts and where appropriate, amendments to certain extension conditions, in conjunction with an additional equity investment by the sponsor at the time of the amendment and or other forms of ongoing credit support.

Our loans have secure by high quality properties located in strong markets owned by institutional sponsors with significant equity to protect. We will continue to work with them as we move forward.

While the real estate capital markets have decidedly begun to recover, we expect property fundamentals to follow, but the pace and extent of the recovery to vary by sector and market. As a result, we are closely monitoring a few loans with an aggregate principal balance of about $240 million, most of which have been particularly affected by the pandemic.

This group includes loans secured by a Minneapolis hotel, a mixed used property in New York, a student housing property in Kentucky, and a retail property in California. The hotel loan is a $67 million senior loan collateralized by a well located, fully renovated property. This hotel has been adversely affected by market conditions and the related significant decline in business travel, as a result, we downgraded this loan to a risk rating of five at the end of the year.

We are in ongoing discussions with the borrower and are evaluating the variety of potential options. We remain in active communication with all of these borrowers and are monitoring the situation very closely. Overall, we feel very good about the credit quality of our well diversified portfolio and believe that it will deliver strong results over time.

As Jack said earlier, we are now in a position to take advantage of new investment opportunities and have begun to evaluate new loan originations across property sectors. We are in the process of building our pipeline and assessing potential new loan investments and have begun quoting new transactions. We expect to be closing new loans at some point during the second quarter of 2021. Our pace of new loan originations in 2021 will largely depend on the volume of loan repayments and the availability of attractive investment, meeting our desired return and credit characteristics.

With that, I will now turn the call over to Marcin for a more detailed review of our financial results.

Marcin Urbaszek

Thank you, Steve. Good morning, everyone, and thank you for joining us today. Before I discuss our fourth quarter financial results, I'd like to highlight, that beginning with this quarter and similar to a number of our publicly traded commercial mortgage REIT peers, we have adopted distributable earnings as a key non-GAAP financial measure, and as a replacement for core earnings. This is only a change in terminology and the calculation itself and reconciliation to GAAP earnings is the same as it was for core earnings.

Turning to our financial results, yesterday afternoon, we reported fourth quarter GAAP net income of $23.1 million or $0.42 per basic share, which included $8.5 million or $0.16 per share, decrease in our CECL reserve, and $2.6 million or $0.05 per share of additional restructuring charges related to our internalization process, which closed on December 31st.

The decrease in our CECL reserves was mainly driven by the decline in the outstanding balance of our portfolio and somewhat improved macroeconomic forecast employed in our analysis. At year-end our allowance for credit losses was $72.2 million or $1.31 per share, and represented about 163 basis points of our total loan commitments.

For full year 2020, we reported a GAAP loss of $40.5 million or $0.73 per basic share, which mainly reflects charges related to our internalization of $46.3 million or $0.84 per share, and provision for credit losses of $53.7 million or $0.97 per share recorded during the year. These items more than offset the strong earnings generated by our portfolio in 2020.

Distributable earnings for the fourth quarter were $18.4 million or $0.33 per share, and excluded the non-cash provision for credit loss benefit and the internalization related restructuring charges. Our book value at year-end was $16.92 per common share, which was largely unchanged versus the prior quarter, and include $1.31 per share of cumulative impact of CECL.

In December, our Board of Directors declared a regular common stock cash dividend of $0.20 per share, and a nonrecurring special cash dividend of $0.25 per share, both of which were paid in January of 2021. The special dividend was related to the distribution of a portion of our undistributed taxable income accumulated over the course of 2020.

Our net interest income for the fourth quarter decreased by about $6.5 million or $0.12 per share to $27.4 million, mainly for two reasons. First, our average portfolio balance declined quarter-over-quarter and second, our interest expense increased due to the first full quarter recognition of costs associated with our term loan financing, which closed late in September.

For the full year, our net interest income improved by about $15.5 million from 2019. Mainly driven by a decrease in interest expense as LIBOR declined significantly over the course of the year. In 2020, our interest income benefited from the LIBOR floors embedded in our loans. As our portfolio is 98% floating rate with an average floor of 156 basis points as of December 31st. About 87% of our loans have LIBOR floors of at least 1%.

In the near-term, we expect to continue to profit from the wider net interest margin supported by the LIBOR floors. As we receive more loan repayments and originate new investments, our net interest spread is likely to compress over time as LIBOR floors or newly originated loans will be generally had closer to current rates consistent with market standards.

Our total operating expenses declined significantly in Q4 mainly related to the recognition of the majority of internalization related costs in the prior quarter. Going forward as an internally managed REIT, we will no longer incur any management or incentive fees. Instead, we will be reporting compensation related expenses beginning in the first quarter of 2021.

We ended the year with about $260 million in cash on hand and as of March 3rd had approximately $235 million in cash. Plus our option to draw an additional $75 million in term loan proceeds through September of this year which is subject to payment of an extension fee.

Our total debt to equity leverage on December 31st was 3.2 times largely unchanged from the prior quarter. And our recourse leverage which excludes our CLOs was at 2.2 times. Given current market conditions, we would anticipate our total leverage to be in the range of 3 to 3.5 times debt-to-equity depending on development in our portfolio.

Thank you again for joining us today. And I will now ask the operator to open the call to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-answer session. [Operator Instructions]. And the first question will come from Doug Harter with Credit Suisse. Please go ahead.

Doug Harter

Thanks. You mentioned that you'd be reentering the loan origination market. Can you just talk about your expectations for kind of deploying your capital position and kind of the outlook for [indiscernible], do expect to kind of replace run off to be able to net grow the portfolio? Just any thoughts on kind of how you view the outlook.

John Taylor

Hi Doug. Thank you for joining us. This is Jack, and I'll be happy to answer that question. So far as we mentioned, we've been focused on managing our portfolio and working with our borrowers and other counterparties. But with the increase in activity in the market fairly dramatically over the last month or so, we are quite comfortable going back in.

And with respect to the ramping up of our pipeline and the volume, I think we'll be looking -- first to answer your question, we will be replacing the runoff and we will be looking for portfolio growth later on in the year. Now, to be a little more specific, it is a moving target on the volume because this can depend on a variety of factors. One, that we mentioned earlier is the prepayment rate, that will be a significant driver of the origination volume.

Because as those loans repaid that will provide additional liquidity to make new loans to replace those. We have provided estimates in prior years about our rate of prepayments, saying that for portfolio, our experience over decades has been portfolio like this tends to repay at a rate of about 25% per year given the current situation, we would expect that to be a lower number, we've been experiencing it lower just to kind of bracket it even during last year albeit at the first couple of months were a more normal period. We were about half that volume, against our normal pace.

And so it would be reasonable to assume we'd be between below of half the volume and the 25% rate. But I think what we'll see as a transaction activity, and refinancing and acquisitions picks up during the course of the year, there'll be a gradual slope up in origination volumes. And then it'll be somewhere between call it the $500 million to $1 billion pace, probably more likely on the higher end.

Doug Harter

Great. And then you mentioned that, kind of hoping to kind of be able to issue with CLO this year. I guess, just how should we think about what to the extent that you're able to issue what financing would that replace, would that replace kind of warehouse lines, would that replace kind of the senior secured that you entered into in September, just thoughts on that.

John Taylor

It's primarily would be new originations plus warehouse lines. It can -- we're not signaling anything to the market, but it could also be partly refinance of existing CLO debt. So I would say primarily it'll be warehouse lines. And right now, that market is quite strong. I'll point out only a significant part to the pretty strong performance of the bridge loans in the existing CLO securitizations outstanding including ours.

And so the forward pipeline is strong, it's been well met by a strong demand from the investor base and it's actually even been opening up now to include more flexibility for ramp periods and also for reinvestment. So it's quite positive set of developments for the overall market. And as I said earlier, we've always positioned ourselves to be repeat issuers in that market and would hope to access that during the course of the year.

Doug Harter

Great. Thanks, Jack.

John Taylor

Thank you.

Operator

And the next question will be from Jade Rahmani with KBW. Please go ahead.

Jade Rahmani

Yes, thank you very much. Just starting with the cash flow statement. When I look at the fourth quarter, based on your 10-K, I calculate a negative $16 million of cash flow from operations with a negative $29 million or so working capital adjustment. So I just want to make sure does that include a payable to the external manager that would explain that difference, or is there anything else we should note that would have caused the cash flow in the fourth quarter to be negative?

Marcin Urbaszek

Hey, Jade, it’s Marcin. Yes, there was obviously a payable to the manager of $44.5 million in the fourth quarter. So and then obviously we have -- there’s a couple of other items in there, but.

Jade Rahmani

Okay. So I think that that's not a non-recurring expense and therefore cash flow from operations should be positive going forward.

Marcin Urbaszek

That would be the expectation, yes.

Jade Rahmani

And when we look historically at the management fees plus operating expenses and stock compensation, I think it was $10 million, $9.6 million in the fourth quarter. So annualized that would be $38.4 million. I think there could be some modest improvement to that. But for now, we're projecting around $40 million of G&A, about $35 million in operating expenses and $5 million in stock compensation. Is that reasonable to assume as a run rate for the company at its current size?

John Taylor

Look, it's hard to predict exactly what the numbers are going to be, when we announced the internalization, we said that we were anticipating kind of $30 million to $35 million run rate of expenses, excluding the non-cash equity comp. I would say that the non-cash equity comp has been running somewhere around $5 million to $5.5 million a year. It may go up a little bit this year.

So, I think you're probably in the ballpark, but there will be some obviously variability on that.

Jade Rahmani

And on the cash side, is there any increased asset management expenses or other back office functions, administrative expenses we should be expecting? Or is that inclusive in the $30 million to $35 million that's already that you've already put out there?

John Taylor

No, that's inclusive of that. So I would say on a net-net basis, kind of apples to apples, the kind of core run rate cash expenses should be lower this year than in prior years.

Jade Rahmani

Okay, I think I've asked Jack this, on many of these past calls, just given the management teams history and the business and now you're internally managed, maybe it would be more open to other business strategies. Would you explore a CMBS conduit or perhaps an asset management vehicle, the stock is currently trading at about 65% of book value. One of the lowest of peers. So clearly the market is looking at number one, what the credit risk outlook is, but also to the current dividend yield. It's had a 7% yield and peers, the average is about 8.5% or so, so either the stock goes up because you raise the dividend or perhaps there's some other accretive way to grow earnings. Wondering what your thoughts are on those two potential business lines.

John Taylor

Hi, Jade, thank you. Yes, I do recall you having asked in the past, and I'm happy to answer now. We will, first and foremost, be looking at accessing, first off, the foundation for our growth, if you will, and our share price is protecting our existing credits, using our strong origination capabilities and redeploying the capital, improving our cost of funds and increasing earnings and dividends, and that should drive the share price.

And by the way proving out our credits, because we think that the portfolio is performing quite well and isn't recognized by the market yet.

That's the foundation though for any other expansion. And we believe that the floating rate market is for non-bank lenders is even more in demand more important to commercial real estate finance now than it has been in the past. So our primary focus will be there.

Having settled that we will, over time be looking at other opportunities. Peter Morral, is on call with us and the rest of the team, we’ll be taking a considered look at adjacent businesses, we're not signalling anything now there's nothing specific to discuss.

But we are -- now that we are in internally managed REIT, we have greater flexibility to pursue any number of avenues of additional growth.

The primary emphasis in the near term will be on approving out our credits, and increasing our earnings and dividends and focusing on our main book. And that'll be the strength from which we can utilize our really robust origination capabilities to expand our businesses.

Jade Rahmani

And have you gotten any inbound interest from asset managers looking to do potential joint ventures. Because perhaps in this current dislocated environments, there are outsized opportunities, some of which candidly, could include the contribution of loans, that in the near term in the existing GPMT portfolio, you mentioned the $800 million on the watch list could go through some turbulence, but the underlying assets can have a clear path to value creation. And given the LTV of the company could be an interesting investment opportunity.

I've been kind of amazed that the mortgage REITs this cycle have not bought back shares or been more creative in value creation strategies. And given you're one of the only internally managed companies does taking any REO -- taking any loans into REO, create the potential for outsized returns and maybe create joint ventures or some other strategies that can help, reap the benefits for GPMT shareholders.

John Taylor

So you had a lot in there, and let me address a couple of them, which I think are the essential ones. Sure, we've had some inbound inquiries, we do have the ability to provide outside capital sources with co-origination doesn't necessarily have to be joint ventures, but could be asset --- we can provide access to hard to access markets.

These are not things unless you've built out an intentional structure and team for accessing these markets, these loans use investments. It is very hard to access on a whole loan basis. So we can pursue that. Yes, there's value creation opportunities, which is always on a case by case basis. But there may be times where for loan scenario, we think it's better to sell it off.

There will be times where speculating by hypotheticals, but where we think is better to hold. And not to sell into the deepest profit of the market. Or maybe the second deepest, maybe 4-5 months ago was really just.

So we have that flexibility to do all those things. We've done them in the past, we've worked through portfolios, and what we've learned is right on point to what you just asked Jade, which is, there's no one answer to any particular part of your portfolio or even a particular asset.

In times like this you have to take a highly crafted, individualistic approach to each asset. But under your larger question, we are well in mind that we have a lot of value we can present to co-investors for example. They want to join in a wealth with us, and we have that inbounding with us.

Jade Rahmani

Thank you. The collections numbers you cited which seemed really strong, I say that's a vast every company that same thing. It's on contractual loan agreements which have been modified and I think you said that 46 loans have been modified, so that's roughly half of the portfolio.

Do you know what collections are relative to pre-COVID loans granted that some have repaid and you guys have had strong repayments? But maybe if you could give a sense of what that statistic would look like pre-COVID?

Stephen Alpart

Hey Jade, Steve. Good morning. I can give you a statistic for 2020, where we deferred about $8.6 million of interest payments. So that's about 3.5% of total collections, if we had not entered into those forbearance agreements. Pretty much all of those forbearance agreements were deferrals not waivers. Important to note that most of them we discussed on prior calls were partial forbearance and tended to be short-term, but for the year it was about 8.69 [Ph].

Jade Rahmani

Okay, that's good to know. And what's the percentage of loans on nonaccrual currently?

Marcin Urbaszek

We currently have one relatively small loan on nonaccrual and it's the one that we highlighted earlier, which is the New York mix use asset.

Jade Rahmani

Okay. Great. I'll get back in the queue, in case there are other questions on the line.

Marcin Urbaszek

Jade, this is Marcin. I just want to clarify something, in your first question you refer to a watch list of about $800 million. I I'm not sure if I would -- that's how I would classify all those loans. I think, not all four rated loans are kind of watch list loans, they obviously have some elevated risk in them. And -- but, just because we put them as a four rating doesn't mean that we expect them to have a loss.

I think if you want to kind of think of a quote unquote watch list, I'll probably be more focused on the $200 some million of loans that Steve Alpart referred to in his prepared remarks, which we're obviously happy to discuss if anyone has any questions on that.

Jade Rahmani

Okay. Thanks very much.

Operator

And the next question will be from Charlie Arestia with JP Morgan. Please go ahead.

Charlie Arestia

Hey, good morning, guys. Thanks for taking the questions. I wanted to ask about your repo facilities. I'm looking at the maturities coming up in the next few months that are disclosed in your 10-K. As you mentioned, the Goldman facility was refinanced in February, but wondering if you can provide an update on those other facilities and kind of just more broadly, how conversations are going with your lenders. It seems anecdotally like the banks are pretty eager to increase utilization, but just curious to get your take on that?

Marcin Urbaszek

Hey, Charlie, it's Marcin. Good morning. Thanks for joining us. I would definitely agree with your last statement. I think there's a sentiment in the banking community is more bullish than it was banks, so you get to the business. So we feel very good about that and that's obviously part of the reason why we feel comfortable reentering the originations market, because obviously, when you make a loan, you have to find a way to finance it. So, it's all good news on that front.

Regarding to your question of maturities, obviously Goldman has a maturity in May. We refinanced all those assets with this new agreement, which we think is a great mark-to-market financing for us. It provides much more flexibility on the balance sheet. That facility is still outstanding, we will decide whether to extend it or terminate, it's likely we'll extend it to have more flexibility.

The other two Wells Fargo, we have an option to extend a facility which we intend to exercise, and we are in active discussions with Morgan Stanley, about extending that facility as well. Again, we've really haven't had any issues with our lenders in the past, we've always extended these facilities, and we are and in good standing and constructive dialogue with all of them. So I wouldn't worry about any of those.

Charlie Arestia

Okay, thanks, Marcin, I appreciate that. And then real quickly on the hotel property that was downgraded to five. Was this purely an issue of the cash flows being disrupted by COVID? Maybe I'm focusing too much on the new information available that you guys disclose. I'm just wondering if there's anything else there that we should be thinking about?

And then have you guys disclosed, what the new maturity of that loan is?

Stephen Alpart

Hey, good morning. It's Steve, I'll provide some just some color on the hotel asset. So, I think some of this has already been disclosed, but it's a well located, recently renovated full service Hotel in the Minneapolis market. Very strong institutional sponsorship with a significant equity investment. When we close this loan, our sponsor had just completed a major reno. So, the hotel looks really great business plan was to ramp operations as a rebranded hotel and ultimately sell the assets.

When the pandemic began, as we saw across the whole country, hotel operations were impacted. This impacted this hotel, it impacted the entire Minneapolis market. Since then, the borrower here has continued to make a significant and ongoing commitment, financial commitment to the asset.

But going to your question, and just given the situation, it seems prudent to move the risk ranking from four to five in Q4. That notwithstanding, we continue to have very productive conversations with the borrower. And just want to just highlight that it's a very high quality institutional asset and looks, it's a beautifully renovated hotel.

Charlie Arestia

Thanks, Steve. Appreciate the color.

Operator

And the next question comes from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws

Hi, good morning. Marcin, to follow-up on Charlie's question. The new government facility, can you talked about the cost of that to get the more attractive characteristics trying to think about how financing costs are going to trend here in the near-term, given the shift and mix of shifting financing facilities?

Steven Plust

Hey, Stephen, this is Steve Plust, good morning. It's about a $450 million transaction. The coupon with LIBOR 361. It'll increase our cost of funds slightly, but it accomplished some very important things for us. It provides match term non-recourse non mark-to-market financing for the assets. About a third of the assets are hotel and the other two thirds are assets that I would say wouldn't traditionally conformed to a CLO. So, we're happy to put those assets on long term non-recourse financing.

And the structure also gives us the ability to pull out 100 million of the loans in the pool that we think do in fact, conform to CLO profiles without any penalty. So, it's a very flexible structure for us and at a relatively modest cost of funds.

Stephen Laws

Great appreciate the color there Steve. Kind of thinking about the portfolio returns dividend policy. Marcin, can you touch on what undistributed taxable income was it spills forward to this year. And then Jack kind of how does the expect the board to view the dividend policy to, something, unintentional last year but maybe a more conservative in policy near-term are true up at the end of the year or more of a run rate dividend based on an outlook that can be sustained for 2021?

Marcin Urbaszek

Sure, Stephen. So, we were all there on $25 million of distributive taxable income into this year. Obviously, we paid out a $0.25 special dividend. So, we have some additional flexibility vis-à-vis the dividend for this year, obviously our earnings – our distributable earnings and Q4 was strong and covered the dividends quite nicely.

So, look, the policy is to make sure that the dividend is sustainable, stable and supported by core profitability of the business. We continuously discuss this with our board as we try to assess the performance of the portfolio and capital markets and obviously an overall environment.

So, I would say we feel pretty good about our earnings run rate. Obviously, we may have some as everybody else in this whole industry some credit events here and there. They are hard to predict. But from a coal profitability perspective, we feel pretty good in terms of where we are and I think, overtime, the dividend should closely track that, once we want to go through the period of uncertainty.

Stephen Laws

Great, thanks for the comments, this morning.

Marcin Urbaszek

Thank you.

Operator

And the next question comes from Arren Cyganovich with Citi. Please go ahead.

Arren Cyganovich

Thanks. Just looking through your portfolio, you have a handful of loans that have now been marked to carrying values that are in excess of a couple of percent of the original principal value. These ones, just I guess, the hotel example that that you just marked down are created reserved for this quarter? How are you coming up with the valuations for the carrying values? And does this suggest that the value of that property now is through the principal amount, and is that just a kind of, I imagine, there's not a ton of transactions to really follow to get a true value of that property. I'm just trying to think about the potential risk there. And hear a little bit more about the process that you go through?

Stephen Alpart

Sure. The carrying value, is a function of various discounts and fees related to the property as well as the reserves that the CECL reserves that we have across the portfolio. We're required to have reserves kind of across the board, on all assets. So that's part of our overall allowance analysis that we go through every quarter with the modelling exercises, then that we go through and review all the results of all the long. So primarily, those are the differences between principal and carrying value.

Arren Cyganovich

Yes, but the ones that are more drastically reduced some of them are 10%, 12% of the reduction. I guess it suggests given the initial LTVs that are in 60s now that you would be pretty well protected for the most part. I guess the big discounts that you have associated with those is that truly a function of what you view the collateral value to be? Or is it there other things that are driving that bigger discount associated with those?

Marcin Urbaszek

It's a function of the overall analysis on the reserves, which obviously value and LTV is one of the inputs into the overall analysis and the model. I think, if you just step back and think about overall, how these reserves work. And what the ultimate performance of the portfolio may be.

I think it's pretty safe to assume that their reserves tend to be concentrated, in a subset of loans rather than evenly across the whole portfolio as all loans than the loans have kind of varying credit characteristics and different property types and things like that.

So, again, it's a function of the analysis that we do, where obviously value is one of the inputs, but it's not the only input. It's obviously cash flow and sponsorship market and property type and all and a bunch of other inputs that we use.

Arren Cyganovich

Okay, thank you.

Operator

The next question is a follow-up from Jade Rahmani with KBW, please go ahead.

Jade Rahmani

Thank you very much. I think the big item on everyone's mind right now is interest rates. And I forgot to ask that. So how do you think that changes the commercial real estate outlook, it sounds like you're seeing an uptick in transaction volumes. And you said, select property types, which I assume means industrial and single family rental, the invoke property types, and maybe multifamily as well due to rates.

But overall, rates are up quite meaningfully. And it seems like there's the potential for rates rising further, especially if the stock market is signalling a strong economy. How does that change the way you're looking at the outlook for commercial real estate?

John Taylor

Hi Jade, this is Jack. So there is a general perception over market cycles that the horizon the long end of interest rates will drive capitalization rates up. And in fact, many of the statistics don't bear that out. I like to look at this and therefore values. I do think that for longer term, say 10-year fixed rate assets arise in interest rates would put pressure on some refinancing, but it depends on when those loans were made, and how they're performing.

The rise in rates, is a function of the -- I would say tremendous support both monetary and fiscal, this has been provided -- that has been provided to the markets and to the economy. And we are looking at a support for commercial real estate through those actions.

The -- it's not like – well, let say it's a support both for the tenant base and for the operators and ultimately, for the lenders and investors and securities are backed by these loans. So and I would say that the rise in rates maybe proportionally because of the very, very small base it's got up from, but we're still we're not talking about tremendously high interest rates. And if the short end goes up, our portfolio for example benefits from that.

But, I will say that it's really all a function of the liquidity supply, which is a positive for commercial real estate all around, including as an inflation hedge.

Jade Rahmani

Thanks for that. Do you think that pricing in the CLO market has adjusted over the last couple of weeks?

John Taylor

Yes. Well, it firmed up quite a lot. It is -- I would describe it in maybe understated way is a vibrant market. And, there's a lot of supply in the CLO market, especially compared to say the CMBS market currently. That's for a number of reasons, one being that the, I think I mentioned the bridge loan, the loans from the bridge loan markets that were put into CLOs have outperformed and are doing quite well. The structures of the preexisting CLO issuances are holding up well with very minimal losses. And when I refer to structures, there's a deal re-capitalization tests and things like that, but the fundamental structure is that the issuer retains, there's embedded equity from the borrower's so let's call it the average loan is in at 65% LTV.

There's that equity plus the retention of the bonds when beneath the investment grade by the issuer, providing a very strong alignment of interest. And this has been recognized by the outperformance the positive structure has been recognized by the investor community. And so while there's been a lot of issuance that has occurred already this year, and we expect to continue, it's being met by very robust demand as well.

As people search for yield, this is considered a very attractive, secure place to get more yield, it requires some technical expertise. And that's reward on the part of the investors and that's rewarded with it.

With respect to issuers like Granite Point, having well inside of all the costs well inside of LIBOR 200 with bond spreads, under bonds themselves being in the say 115 to 120 range is a very positive environment.

Jade Rahmani

And sorry if I missed it, but in response to Stephen Laws question. What did you say the cost of the Goldman facility was?

Marcin Urbaszek

It's LIBOR 360. It's a little over a half point in fee, but as Steve Plust pointed out, and by the way, he was referring to the aggregate loan balance, the bond issuance, if you will, because it's just like a capital warehouse facility, the private CLO, some people refer to it as 349. And, as he pointed out, we're able to reduce that cost. If we so choose by taking out we have the right to take out over 100 million of those loans and put them into a CLO securitization issuance without prepay penalty.

Jade Rahmani

Okay. So the cost would be LIBOR 10 basis points plus 360, so it's 370 and just amortize the 50 basis points of fee its over three years or so?

Marcin Urbaszek

You bet. Yes 55 basis points.

Jade Rahmani

Is 18 plus 370. So the all in cost is something like 390 basis points.

Marcin Urbaszek

Right.

Jade Rahmani

Okay. So I'm looking at a sheet of loan spreads that Cushman Wakefield nicely sends out. And when I look at floating rate, three to five year mortgages on Plain Vanilla office at an over 65 basis points. The spreads are somewhere in 250 to 325 basis point range before fees. So that seems pretty close to the cost of this Goldman’s facility?

John Taylor

Your existing loan book has higher spreads than where we're currently at.

Stephen Alpart

Hey, Jade it's Steve. Obviously, it depends tremendously on what type asset you're talking about what we're seeing in the bridge space right now. And it seems like a lot of folks are talking about coupons versus spreads, but we're seeing we're probably seeing multifamily depending on the deal in the low to mid threes. We're probably seeing office. It was a lot of office product two months ago in the fours. Some of that now is in the threes as well. But for the stuff that I think we're looking at something in the twos or even high teens, is a little below what we're seeing right now.

John Taylor

And that's coupon before fees.

Stephen Alpart

Coupon before fees, with LIBOR floors that vary by deal, but let's just say 25 basis point LIBOR floor for something in that area.

Jade Rahmani

Okay, so do you think that ROEs in the 10% to 12%, gross ROEs are achievable on a leverage basis?

John Taylor

Yes, there's obviously a lot of variables in terms of spreads and floors and fees and liability pricing. But I would say when you kind of put it all together, we're seeing levered returns that are probably at or near where they were pre pandemic.

Jade Rahmani

Okay. Great. Thanks so much for taking all the questions. Really appreciate it.

Stephen Alpart

Sure. Thanks for joining.

Operator

Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Jack Taylor for any closing remarks.

John Taylor

Thank you, Chad. And thank you, everybody, for joining us today. We really appreciate you taking the time and spending your hour with us to hear about our company. I want to particularly wish everybody out there in the Granite Point community and beyond a very safe and healthy period of time going forward, hopefully towards the final months or so of the pandemic. So good health and prosperity to you all. And thank you again.

Operator

And thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.