Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

______________________________

FORM 10-Q

______________________________

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended: September 30, 2018

Commission File Number 001-38124

______________________________

GRANITE POINT MORTGAGE TRUST INC.

(Exact Name of Registrant as Specified in Its Charter)



Maryland		61-1843143
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)



590 Madison Avenue, 38th Floor New York, New York		10022
(Address of Principal Executive Offices)		(Zip Code)

(212) 364-3200

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer o		Accelerated filer x
Non-accelerated filer o		Smaller reporting company o
		Emerging growth company x

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 5, 2018, there were 43,456,234 shares of outstanding common stock, par value $0.01 per share, issued and outstanding.

Table of Contents

GRANITE POINT MORTGAGE TRUST INC.

INDEX



		Page
	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)	1
	Condensed Consolidated Balance Sheets at September 30, 2018 and December 31, 2017	1
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2018 and 2017	2
	Condensed Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2018 and 2017	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2018 and 2017	4
	Notes to the Condensed Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	43
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	44
Item 1A.	Risk Factors	44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	44
Item 3.	Defaults Upon Senior Securities	44
Item 4.	Mine Safety Disclosures	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
Index of Exhibits		45
Signatures		46

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

(in thousands, except share data)



	September 30, 2018			December 31, 2017
ASSETS
Loans held-for-investment	$	2,708,338		$	2,304,266
Available-for-sale securities, at fair value	12,830			12,798
Held-to-maturity securities	30,526			42,169
Cash and cash equivalents	148,228			107,765
Restricted cash	5,320			2,953
Accrued interest receivable	8,188			7,105
Deferred debt issuance costs	5,400			8,872
Prepaid expenses	1,335			390
Other assets	14,771			12,812
Total Assets⁽¹⁾	$	2,934,936		$	2,499,130
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Repurchase agreements	$	1,281,255		$	1,521,608
Securitized debt obligations	653,184			—
Convertible senior notes	140,124			121,314
Accrued interest payable	5,620			3,119
Unearned interest income	117			197
Dividends payable	18,276			16,454
Other liabilities	9,710			6,817
Total Liabilities	2,108,286			1,669,509
10% cumulative redeemable preferred stock, par value $0.01 per share; 50,000,000 shares authorized and 1,000 and 1,000 shares issued and outstanding, respectively	1,000			1,000
Stockholders’ Equity
Common stock, par value $0.01 per share; 450,000,000 shares authorized and 43,456,234 and 43,235,103 shares issued and outstanding, respectively	435			432
Additional paid-in capital	832,535			829,704
Accumulated other comprehensive income	32			—
Cumulative earnings	75,178			28,800
Cumulative distributions to stockholders	(82,530		)	(30,315		)
Total Stockholders’ Equity	825,650			828,621
Total Liabilities and Stockholders’ Equity	$	2,934,936		$	2,499,130

____________________

(1)

The condensed consolidated balance sheets include assets of consolidated variable interest entities, or VIEs, that can only be used to settle obligations of these VIEs, and liabilities of the consolidated VIEs for which creditors do not have recourse to Granite Point Mortgage Trust Inc. At September 30, 2018 and December 31, 2017, assets of the VIEs totaled $827,958 and $46,068, and liabilities of the VIEs totaled $653,755 and $0, respectively. See Note 3 - Variable Interest Entities for additional information.

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

(in thousands, except share data)



	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2018			2017			2018			2017
Interest income:
Loans held-for-investment	$	46,424		$	29,655		$	127,576		$	77,213
Available-for-sale securities	294			265			851			767
Held-to-maturity securities	757			940			2,478			2,792
Cash and cash equivalents	85			4			141			10
Total interest income	47,560			30,864			131,046			80,782
Interest expense:
Repurchase agreements	14,304			12,060			45,432			22,309
Securitized debt obligations	6,693			—			10,568			—
Convertible senior notes	2,216			—			6,601			—
Revolving credit facilities	152			—			372			—
Note payable to affiliate	—			437			—			4,067
Interest expense	23,365			12,497			62,973			26,376
Net interest income	24,195			18,367			68,073			54,406
Other income:
Fee income	—			—			1,446			—
Total other income	—			—			1,446			—
Expenses:
Management fees	3,111			3,130			9,434			6,717
Servicing expenses	616			333			1,568			962
General and administrative expenses	3,904			3,388			12,141			7,561
Total expenses	7,631			6,851			23,143			15,240
Income before income taxes	16,564			11,516			46,376			39,166
Benefit from income taxes	(1		)	(2		)	(2		)	(3		)
Net income	16,565			11,518			46,378			39,169
Dividends on preferred stock	25			25			75			25
Net income attributable to common stockholders	$	16,540		$	11,493		$	46,303		$	39,144
Basic earnings per weighted average common share (See Note 17)	$	0.38		$	0.27		$	1.07		$	0.27
Diluted earnings per weighted average common share (See Note 17)	$	0.37		$	0.27		$	1.04		$	0.27
Dividends declared per common share	$	0.42		$	0.32		$	1.20		$	0.32
Weighted average number of shares of common stock outstanding:
Basic	43,456,234			43,234,254			43,426,109			43,234,252
Diluted	50,651,612			43,234,254			50,616,264			43,234,252
Comprehensive income:
Net income attributable to common stockholders	$	16,540		$	11,493		$	46,303		$	39,144
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities	32			32			32			128
Other comprehensive income	32			32			32			128
Comprehensive income attributable to common stockholders	$	16,572		$	11,525		$	46,335		$	39,272

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)

(in thousands, except share data)



	Common Stock
	Shares	Amount		Additional Paid-in Capital		Accumulated Other Comprehensive (Loss) Income			Cumulative Earnings			Cumulative Distributions to Stockholders			Total Stockholders’ Equity

Balance, December 31, 2016	—	$	—	$	392,608	$	(112	)	$	35,495		$	—		$	427,991
Capital contributions from Two Harbors Investment Corp.	—	—		254,785		—			—			—			254,785
Distributions to Two Harbors Investment Corp.	—	—		—		—			(60,000		)	—			(60,000		)
Net income	—	—		—		—			39,169			—			39,169
Other comprehensive income before reclassifications	—	—		—		128			—			—			128
Amounts reclassified from accumulated other comprehensive income	—	—		—		—			—			—			—
Net other comprehensive income	—	—		—		128			—			—			128
Issuance of common stock, net of offering costs	43,071,000	431		181,444		—			—			—			181,875
Common dividends declared	—	—		—		—			—			(13,835		)	(13,835		)
Preferred dividends declared	—	—		—		—			—			(25		)	(25		)
Non-cash equity award compensation	164,103	1		685		—			—			—			686
Balance, September 30, 2017	43,235,103	$	432	$	829,522	$	16		$	14,664		$	(13,860	)	$	830,774

Balance, December 31, 2017	43,235,103	$	432	$	829,704	$	—		$	28,800		$	(30,315	)	$	828,621
Net income	—	—		—		—			46,378			—			46,378
Other comprehensive income before reclassifications	—	—		—		32			—			—			32
Amounts reclassified from accumulated other comprehensive income	—	—		—		—			—			—			—
Net other comprehensive income	—	—		—		32			—			—			32
Common dividends declared	—	—		—		—			—			(52,140		)	(52,140		)
Preferred dividends declared	—	—		—		—			—			(75		)	(75		)
Non-cash equity award compensation	221,131	3		2,831		—			—			—			2,834
Balance, September 30, 2018	43,456,234	$	435	$	832,535	$	32		$	75,178		$	(82,530	)	$	825,650

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

(in thousands)



	Nine Months Ended
	September 30,
	2018			2017
Cash Flows From Operating Activities:
Net income	$	46,378		$	39,169
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of discounts and net deferred fees on loans held-for-investment	(9,282		)	(5,551		)
Amortization of deferred debt issuance costs on convertible senior notes and securitized debt obligations	2,373			—
Equity based compensation	2,834			686
Depreciation of fixed assets	4			—
Net change in assets and liabilities:
Increase in accrued interest receivable	(1,083		)	(2,041		)
Increase in prepaid expenses	(945		)	—
Increase in other assets	(1,963		)	(4,959		)
Increase in accrued interest payable	2,501			1,676
(Decrease) increase in unearned interest income	(80		)	307
Decrease in other payables to affiliates	—			(21,374		)
Increase in other liabilities	2,893			4,970
Increase in 10% cumulative redeemable preferred stock	—			1,000
Net cash provided by operating activities	43,630			13,883
Cash Flows From Investing Activities:
Originations, acquisitions and additional fundings of loans held-for-investment, net of deferred fees	(839,668		)	(759,905		)
Proceeds from repayment of loans held-for-investment	444,878			1,793
Principal payments on held-to-maturity securities	11,643			4,862
Decrease in due from counterparties	—			229
Net cash used in investing activities	(383,147		)	(753,021		)
Cash Flows From Financing Activities:
Proceeds from repurchase agreements	871,608			1,431,366
Principal payments on repurchase agreements	(1,111,961		)	(407,269		)
Proceeds from issuance of securitized debt obligations	651,374			—
Proceeds from convertible senior notes	18,247			—
Proceeds from revolving credit facilities	49,394			—
Repayment of revolving credit facilities	(49,394		)	—
Proceeds from note payable to affiliate	—			110,653
Repayment of note payable to affiliate	—			(676,827		)
Decrease (increase) in deferred debt issuance costs	3,472			(6,977		)
Proceeds from issuance of common stock, net of offering costs	—			181,875
Proceeds from capital contribution from Two Harbors Investment Corp.	—			254,785
Payments for distributions of capital to Two Harbors Investment Corp.	—			(60,000		)
Dividends paid on preferred stock	(75		)	(25		)
Dividends paid on common stock	(50,318		)	—
Net cash provided by financing activities	382,347			827,581
Net increase in cash, cash equivalents and restricted cash	42,830			88,443
Cash, cash equivalents and restricted cash at beginning of period	110,718			56,279
Cash, cash equivalents and restricted cash at end of period	$	153,548		$	144,722

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GRANITE POINT MORTGAGE TRUST INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued

(in thousands)



	Nine Months Ended
	September 30,
	2018			2017
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest	$	60,472		$	24,699
Cash received for taxes, net	$	(5	)	$	(4	)
Noncash Activities:
Acquisition of TH Commercial Holdings LLC from Two Harbors Investment Corp. in exchange for common and preferred shares (See Note 1)	$	—		$	651,000
Dividends declared but not paid at end of period	$	18,276		$	13,835

The accompanying notes are an integral part of these condensed consolidated financial statements.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 1. Organization and Operations

Granite Point Mortgage Trust Inc., or the Company, is a Maryland corporation that focuses primarily on directly originating, investing in and managing senior floating-rate commercial mortgage loans and other debt and debt-like commercial real estate investments. The Company is externally managed by Pine River Capital Management L.P., or PRCM. The Company’s common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “GPMT”.

The Company was incorporated on April 7, 2017 and commenced operations as a publicly traded company on June 28, 2017, upon completion of an initial public offering, or the IPO. Concurrently with the closing of the IPO, the Company completed a formation transaction, or the Formation Transaction, pursuant to which the Company acquired the equity interests in TH Commercial Holdings LLC, or the Predecessor, from Two Harbors Investment Corp., or Two Harbors, a publicly traded hybrid mortgage real estate investment trust (NYSE: TWO). In exchange, the Company issued 33,071,000 shares of its common stock, representing approximately 76.5% of its outstanding common stock after the IPO, and 1,000 shares of its 10% cumulative redeemable preferred stock to Two Harbors. Upon the completion of the Formation Transaction, the Predecessor became the Company’s wholly owned indirect subsidiary. On November 1, 2017, Two Harbors distributed to its common stockholders the 33,071,000 shares of the Company’s common stock it had acquired in connection with the Formation Transaction, allowing the Company’s market capitalization to be fully floating.

The Company has elected to be treated as a real estate investment trust, or REIT, as defined under the Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal income tax purposes. As long as the Company continues to comply with a number of requirements under federal tax law and maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income taxes to the extent that the Company distributes its taxable income to its stockholders on an annual basis and does not engage in prohibited transactions. However, certain activities that the Company may perform may cause it to earn income which will not be qualifying income for REIT purposes. The Company has designated one of its subsidiaries as a taxable REIT subsidiary, or TRS, as defined in the Code, to engage in such activities.

Note 2. Basis of Presentation and Significant Accounting Policies

Consolidation and Basis of Presentation

The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted according to such SEC rules and regulations. However, management believes that the disclosures included in these interim condensed consolidated financial statements are adequate to make the information presented not misleading. The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at September 30, 2018 and results of operations for all periods presented have been made. The results of operations for the three and nine months ended September 30, 2018 should not be construed as indicative of the results to be expected for future periods or the full year.

The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; inter-company accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation.

All entities in which the Company holds investments that are considered VIEs for financial reporting purposes were reviewed for consolidation under the applicable consolidation guidance. Whenever the Company has both the power to direct the activities of an entity that most significantly impact the entity’s performance, and the obligation to absorb losses or the right to receive benefits of the entity that could be significant, the Company consolidates the entity.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amount and timing of allowances for loan losses and impairments and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the condensed consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., valuation changes to the underlying collateral of loans due to changes in capitalization rates, leasing, credit worthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders, overall economic conditions, the broader commercial real estate market, local geographic sub-markets or other factors) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from its estimates and the differences may be material.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Significant Accounting Policies

Included in Note 2 to the Consolidated Financial Statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 is a summary of the Company’s significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the Company’s consolidated financial condition and results of operations for the three and nine months ended September 30, 2018.

Formation Transaction

On June 28, 2017, the Company completed the Formation Transaction, through which the Company acquired the equity interests in the Predecessor from Two Harbors. In accordance with Accounting Standards Codification (ASC) 805, Business Combinations, the Predecessor is considered the acquiring or surviving entity, meaning the historical assets and liabilities of TH Commercial Holdings LLC included in the condensed consolidated balance sheets are recorded at the Predecessor’s historical carryover cost basis. As a result of the Formation Transaction, the Company is considered a continuation of the Predecessor’s business operations and its historical results of operations and cash flows are included in the Company’s condensed consolidated financial statements. In consideration for the contribution, Two Harbors received 33,071,000 shares of the Company’s common stock and 1,000 shares of cumulative redeemable preferred stock with an aggregate liquidation preference of $1,000 per share.

Securitized Debt Obligations

In the second quarter of 2018, the Company financed a pool of its commercial real estate loans through a collateralized loan obligation, or CLO, retaining the subordinate securities in its investment portfolio. The securitization was accounted for as a financing arrangement and consolidated on the Company’s condensed consolidated financial statements. The securitized debt obligations not retained by the Company, which are nonrecourse to the Company beyond the assets held in the CLO, are recorded at outstanding principal balance, net of any unamortized deferred debt issuance costs, on the Company’s condensed consolidated balance sheets.

Offsetting Assets and Liabilities

Certain of the Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default of either party to the agreement. Under certain of these agreements, the Company and the counterparty may be required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparty.

Under U.S. GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. The Company presents repurchase agreements subject to master netting arrangements or similar agreements on a gross basis. Regardless of whether or not the Company pledges or receives any cash collateral in accordance with its repurchase agreements, the Company does not offset financial assets and liabilities with the associated cash collateral on its condensed consolidated balance sheets.

The following table presents information about the Company’s repurchase agreements that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018			December 31, 2017
Gross amounts of repurchase agreements	$	1,281,255		$	1,521,608
Gross amounts offset in the consolidated balance sheets	—			—
Net amounts of repurchase agreements presented in the consolidated balance sheets	1,281,255			1,521,608
Gross amounts not offset against repurchase agreements in the consolidated balance sheets ⁽¹⁾:
Financial instruments	(1,281,255		)	(1,521,608		)
Cash collateral received (pledged)	—			—
Net amount	$	—		$	—

____________________

(1)

Amounts presented are limited in total to the net amount of liabilities presented in the condensed consolidated balance sheets by instrument. Excess cash collateral or financial assets that are pledged to counterparties may exceed the financial liabilities subject to a master netting arrangement or similar agreement. These excess amounts are excluded from the table above, although separately reported within restricted cash or due from counterparties in the Company’s condensed consolidated balance sheets.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Recently Issued and/or Adopted Accounting Standards

Under the Jumpstart Our Business Startups Act, or the JOBS Act, the Company meets the definition of an “emerging growth company.” The Company has irrevocably elected to opt out of the extended transition period for complying with new or revised U.S. accounting standards pursuant to Section 107(b) of the JOBS Act. As a result, the Company will comply with new or revised accounting standards on the relevant dates on which adoption of such standards is required for non-emerging growth companies. Based on the market value of the Company’s common stock that is held by non-affiliates as of June 30, 2018, the Company will no longer qualify as an “emerging growth company” as of December, 31 2018.

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, which is a comprehensive revenue recognition standard that supersedes virtually all existing revenue guidance under U.S. GAAP. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. As a result of the issuance of ASU No. 2015-14 in August 2015 deferring the effective date of ASU No. 2014-09 by one year, the ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption prohibited. The Company has evaluated the new guidance and determined that interest income and gains and losses on financial instruments are outside the scope of ASC 606, Revenues from Contracts with Customers. As a result, the adoption of this ASU did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

Lease Classification and Accounting

In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize on their balance sheets both a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. The Company has determined this ASU will not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

Measurement of Credit Losses on Financial Instruments

In June 2016, the FASB issued ASU No. 2016-13, which changes the impairment model for most financial assets and certain other instruments. Allowances for credit losses on available-for-sale, or AFS, and held-to-maturity, or HTM, debt securities will be recognized, rather than direct reductions in the amortized cost of the investments. The new model also requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, HTM debt securities, loans, and other instruments held at amortized cost. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018. The Company is evaluating the adoption of this ASU to determine the impact it may have on its condensed consolidated financial statements, which at the date of adoption, is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings.

Accounting for Share-Based Payments to Nonemployees

In June 2018, the FASB issued ASU No. 2018-07 to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Under the guidance, equity-classified nonemployee awards will be measured on and fixed at the grant date, rather than measured at fair value at each reporting date until the date at which the nonemployee’s performance is complete. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. The Company is evaluating the adoption of this ASU to determine the impact it may have on its condensed consolidated financial statements.

Fair Value Measurement Disclosure Requirements

In August 2018, the FASB issued ASU No. 2018-13, which eliminates, adds and modifies certain disclosure requirements for fair value measurements. Under the guidance, entities are no longer required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies are required to disclose (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the end of the reporting period and (2) the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted. Early adoption of this ASU did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

SEC Disclosure Update and Simplification

In August 2018, the SEC adopted a final rule that eliminates or amends disclosure requirements that have become duplicative, overlapping, or outdated in light of other SEC disclosure requirements, U.S. GAAP, or changes in the information environment. However, the guidance also added requirements for entities to include in their interim financial statements a reconciliation of changes in stockholders’ equity for each period for which an income statement is required (both year-to-date and quarterly periods). The final rule is effective for all filings made on or after November 5, 2018. However, the SEC staff said it would not object to a registrant waiting to comply with the new interim disclosure requirement until its Form 10-Q for the quarter that begins after the effective date. As a result, the Company plans to adopt the new interim disclosure requirement in its Form 10-Q for the three months ended March 31, 2019. The Company has determined this final rule will not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.

Note 3. Variable Interest Entities

In the second quarter of 2018, the Company financed a pool of its commercial real estate loans through a CLO, which is considered a VIE for financial reporting purposes and, thus, was reviewed for consolidation under the applicable consolidation guidance. Because the Company has both the power to direct the activities of the CLO that most significantly impact the entity’s performance, and the obligation to absorb losses or the right to receive benefits of the entity that could be significant, the Company consolidates the CLO.

As of December 31, 2017, the Company was the sole certificate holder of a trust entity that holds a commercial mezzanine loan. The trust is considered a VIE for financial reporting purposes and, thus, was reviewed for consolidation under the applicable consolidation guidance. Because the Company had both the power to direct the activities of the trust that most significantly impact the entity’s performance, and the obligation to absorb losses or the right to receive benefits of the entity that could be significant, the Company consolidated the trust. The loan held by the trust was repaid during the three months ended March 31, 2018. As a result, the Company no longer consolidates the trust on its condensed consolidated financial statements.

The following table presents a summary of the assets and liabilities of all variable interest entities consolidated on the Company’s condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018		December 31, 2017
Loans held-for-investment	$	820,257	$	45,890
Accrued interest receivable	2,441		178
Other assets	5,260		—
Total Assets	$	827,958	$	46,068
Securitized debt obligations	$	653,184	$	—
Accrued interest payable	571		—
Total Liabilities	$	653,755	$	—

The Company is not required to consolidate VIEs for which it has concluded it does not have both the power to direct the activities of the VIEs that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant. The Company’s investments in these unconsolidated VIEs include CMBS, which are classified within available-for-sale securities, at fair value, and held-to-maturity securities on the condensed consolidated balance sheets. As of September 30, 2018 and December 31, 2017, the carrying value, which also represents the maximum exposure to loss, of all CMBS in unconsolidated VIEs was $43.4 million and $55.0 million, respectively.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 4. Loans Held-for-Investment

The Company originates and acquires commercial real estate debt and related instruments generally to be held as long-term investments. These assets are classified as loans held-for-investment on the condensed consolidated balance sheets. Additionally, at December 31, 2017 the Company was the sole certificate holder of a trust entity that held a commercial mezzanine loan. The underlying loan held by the trust was consolidated on the Company’s condensed consolidated balance sheet and classified as loans held-for-investment. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the trust. Loans held-for-investment are reported at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless the assets are deemed impaired.

The following tables summarize the Company’s loans held-for-investment by asset type, property type and geographic location as of September 30, 2018 and December 31, 2017:



	September 30, 2018
(dollars in thousands)	Senior Loans ⁽¹⁾			Mezzanine Loans			B-Notes			Total
Unpaid principal balance	$	2,684,269		$	31,964		$	14,702		$	2,730,935
Unamortized (discount) premium	(156		)	—			—			(156		)
Unamortized net deferred origination fees	(22,441		)	—			—			(22,441		)
Carrying value	$	2,661,672		$	31,964		$	14,702		$	2,708,338
Unfunded commitments	$	441,538		$	—		$	—		$	441,538
Number of loans	71			3			1			75
Weighted average coupon	6.3		%	11.1		%	8.0		%	6.3		%
Weighted average years to maturity ⁽²⁾	2.1			2.2			8.3			2.1



	December 31, 2017
(dollars in thousands)	Senior Loans ⁽¹⁾			Mezzanine Loans			B-Notes			Total
Unpaid principal balance	$	2,220,361		$	88,945		$	14,845		$	2,324,151
Unamortized (discount) premium	(169		)	(9		)	—			(178		)
Unamortized net deferred origination fees	(19,752		)	45			—			(19,707		)
Carrying value	$	2,200,440		$	88,981		$	14,845		$	2,304,266
Unfunded commitments	$	337,623		$	1,580		$	—		$	339,203
Number of loans	53			5			1			59
Weighted average coupon	5.9		%	9.7		%	8.0		%	6.0		%
Weighted average years to maturity ⁽²⁾	2.3			2.0			9.1			2.4

____________________


(1)	Loans primarily secured by a first priority lien on commercial real property and related personal property and also includes, when applicable, any companion subordinate loans.

(2)

Based on contractual maturity date. Certain loans are subject to contractual extension options which may be subject to conditions as stipulated in the loan agreement. Actual maturities may differ from contractual maturities stated herein as certain borrowers may have the right to prepay with or without paying a prepayment penalty. The Company may also extend contractual maturities in connection with loan modifications.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)



(dollars in thousands)	September 30, 2018				December 31, 2017
Property Type	Carrying Value		% of Loan Portfolio		Carrying Value		% of Loan Portfolio
Office	$	1,356,705	50.1	%	$	1,223,642	53.1	%
Multifamily	430,156		15.9	%	356,016		15.4	%
Hotel	398,218		14.7	%	274,416		11.9	%
Retail	302,151		11.2	%	254,786		11.1	%
Industrial	221,108		8.1	%	195,406		8.5	%
Total	$	2,708,338	100.0	%	$	2,304,266	100.0	%



(dollars in thousands)	September 30, 2018				December 31, 2017
Geographic Location	Carrying Value		% of Loan Portfolio		Carrying Value		% of Loan Portfolio
Northeast	$	1,012,429	37.4	%	$	896,361	38.9	%
West	654,097		24.2	%	509,088		22.1	%
Southwest	599,696		22.1	%	454,088		19.7	%
Southeast	323,433		11.9	%	346,623		15.0	%
Midwest	118,683		4.4	%	98,106		4.3	%
Total	$	2,708,338	100.0	%	$	2,304,266	100.0	%

At September 30, 2018 and December 31, 2017, the Company pledged loans held-for-investment with a carrying value of $2.6 billion and $2.2 billion, respectively, as collateral for repurchase agreements and securitized debt obligations. See Note 10 - Repurchase Agreements and Note 11 - Securitized Debt Obligations.

The following table summarizes activity related to loans held-for-investment for the three and nine months ended September 30, 2018 and 2017.



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2018			2017			2018			2017
Balance at beginning of period	$	2,483,606		$	1,739,253		$	2,304,266		$	1,364,291
Originations, acquisitions and additional fundings	249,532			393,425			851,662			771,473
Repayments	(24,199		)	(303		)	(444,878		)	(1,793		)
Net discount accretion (premium amortization)	4			6			22			(11		)
Increase in net deferred origination fees	(3,990		)	(5,858		)	(11,994		)	(11,568		)
Amortization of net deferred origination fees	3,385			1,431			9,260			5,562
Allowance for loan losses	—			—			—			—
Balance at end of period	$	2,708,338		$	2,127,954		$	2,708,338		$	2,127,954

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

The Company evaluates each loan for impairment at least quarterly by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. Risk factors include property type, geographic and local market dynamics, physical condition, leasing and tenant profile, projected cash flow, loan structure and exit plan, loan-to-value ratio, project sponsorship, and other factors deemed necessary. Risk ratings are defined as follows:


1 –	Lower Risk


2 –	Average Risk


3 –	Acceptable Risk


4 –	Higher Risk: A loan that has exhibited material deterioration in cash flows and/or other credit factors, which, if negative trends continue, could be indicative of future loss.


5 –	Impaired/Loss Likely: A loan that has a significantly increased probability of default or principal loss.

The following table presents the number of loans, unpaid principal balance and carrying value (amortized cost) by risk rating for loans held-for-investment as of September 30, 2018 and December 31, 2017:



(dollars in thousands)	September 30, 2018					December 31, 2017
Risk Rating	Number of Loans	Unpaid Principal Balance		Carrying Value		Number of Loans	Unpaid Principal Balance		Carrying Value
1	7	$	235,532	$	234,727	6	$	414,695	$	413,314
2	63	2,326,386		2,305,166		50	1,840,638		1,822,134
3	5	169,017		168,445		3	68,818		68,818
4	—	—		—		—	—		—
5	—	—		—		—	—		—
Total	75	$	2,730,935	$	2,708,338	59	$	2,324,151	$	2,304,266

The Company has not recorded any allowances for losses as it is not deemed probable that the Company will not be able to collect all amounts due pursuant to the contractual terms of the loans.

Note 5. Available-for-Sale Securities, at Fair Value

The following table presents the face value and carrying value (which approximates fair value) of AFS securities as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018		December 31, 2017
Face value	$	12,798	$	12,798
Gross unrealized gains	32		—
Gross unrealized losses	—		—
Carrying value	$	12,830	$	12,798

On September 30, 2018, the Company’s AFS securities had contractual maturities of less than one year.

At September 30, 2018 and December 31, 2017, the Company pledged AFS securities with a carrying value of $12.8 million and $12.8 million, respectively, as collateral for repurchase agreements. See Note 10 - Repurchase Agreements.

At September 30, 2018, the Company’s AFS securities were in an unrealized gain position. At December 31, 2017, the Company’s AFS securities had a carrying value equal to their face value.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Evaluating AFS Securities for Other-Than-Temporary Impairments

In evaluating AFS securities for other-than-temporary impairments, or OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and will not be more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in other comprehensive income. If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings. The Company did not record any other-than-temporary credit impairments during the three and nine months ended September 30, 2018 and 2017 as expected cash flows were greater than amortized cost for all AFS securities held.

Gross Realized Gains and Losses

Gains and losses from the sale of AFS securities are recorded as realized gains (losses) in the Company’s condensed consolidated statements of comprehensive income. The Company did not sell any AFS securities during the three and nine months ended September 30, 2018 and 2017.

Note 6. Held-to-Maturity Securities

The following table presents the face value and carrying value of HTM securities by collateral type as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018		December 31, 2017
Face value	$	30,526	$	42,169
Unamortized premium (discount)	—		—
Carrying value	$	30,526	$	42,169

On September 30, 2018, the Company’s HTM securities had contractual maturities of less than one year.

At September 30, 2018 and December 31, 2017, the Company pledged HTM securities with a carrying value of $30.5 million and $42.2 million, respectively, as collateral for repurchase agreements. See Note 10 - Repurchase Agreements.

Evaluating HTM Securities for Other-Than-Temporary Impairments

In evaluating HTM securities for OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred and the credit loss is recognized in earnings. The Company did not record any other-than-temporary credit impairments during the three and nine months ended September 30, 2018 and 2017, as expected cash flows were greater than amortized cost for all HTM securities held.

Note 7. Cash, Cash Equivalents and Restricted Cash

Cash and cash equivalents include cash held in bank accounts and cash held in money market funds on an overnight basis.

The Company is required to maintain certain cash balances in restricted accounts as collateral for the Company’s repurchase agreements and with counterparties to support activities related to securities. As of September 30, 2018 and December 31, 2017, the Company had $5.3 million and $3.0 million, respectively, as collateral for repurchase agreements and by counterparties to support activities related to securities.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Company’s condensed consolidated balance sheets as of September 30, 2018 and December 31, 2017 that sum to the total of the same such amounts shown in the statements of cash flows:



(in thousands)	September 30, 2018		December 31, 2017
Cash and cash equivalents	$	148,228	$	107,765
Restricted cash	5,320		2,953
Total cash, cash equivalents and restricted cash	$	153,548	$	110,718

Note 8. Accrued Interest Receivable

The following table presents the Company’s accrued interest receivable by collateral type as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018		December 31, 2017
Loans held-for-investment	$	8,009	$	6,880
Available-for-sale securities	51		51
Held-to-maturity securities	128		174
Total	$	8,188	$	7,105

Note 9. Fair Value

Fair Value Measurements

ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 clarifies that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. The fair value hierarchy gives the highest priority to quoted prices available in active markets (i.e., observable inputs) and the lowest priority to data lacking transparency (i.e., unobservable inputs). Additionally, ASC 820 requires an entity to consider all aspects of nonperformance risk, including the entity’s own credit standing, when measuring fair value of a liability.

ASC 820 establishes a three-level hierarchy to be used when measuring and disclosing fair value. An instrument’s categorization within the fair value hierarchy is based on the lowest level of significant input to its valuation. Following is a description of the three levels:


Level 1	Inputs are quoted prices in active markets for identical assets or liabilities as of the measurement date under current market conditions. Additionally, the entity must have the ability to access the active market and the quoted prices cannot be adjusted by the entity.


Level 2	Inputs include quoted prices in active markets for similar assets or liabilities; quoted prices in inactive markets for identical or similar assets or liabilities; or inputs that are observable or can be corroborated by observable market data by correlation or other means for substantially the full-term of the assets or liabilities.


Level 3	Unobservable inputs are supported by little or no market activity. The unobservable inputs represent the assumptions that market participants would use to price the assets and liabilities, including risk. Generally, Level 3 assets and liabilities are valued using pricing models, discounted cash flow methodologies, or similar techniques that require significant judgment or estimation.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Following are descriptions of the valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models and significant assumptions utilized.

Available-for-sale securities. The Company holds AFS securities that are carried at fair value on the condensed consolidated balance sheet and are comprised of CMBS. In determining the fair value of the Company’s CMBS AFS, management judgment may be used to arrive at fair value that considers prices obtained from third-party pricing providers or broker quotes received using the bid price, which are both deemed indicative of market activity, and other applicable market data. The third-party pricing providers and brokers use pricing models that generally incorporate such factors as coupons, primary and secondary mortgage rates, rate reset period, issuer, prepayment speeds, credit enhancements and expected life of the security. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon internally developed models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels, and credit losses). The Company classified its CMBS AFS as Level 2 fair value assets at September 30, 2018 and December 31, 2017.

Recurring Fair Value

The following tables display the Company’s assets measured at fair value on a recurring basis. The Company does not hold any liabilities measured at fair value on its condensed consolidated balance sheets.



	Recurring Fair Value Measurements
	September 30, 2018
(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale securities	$	—	$	12,830	$	—	$	12,830
Total assets	$	—	$	12,830	$	—	$	12,830



	Recurring Fair Value Measurements
	December 31, 2017
(in thousands)	Level 1		Level 2		Level 3		Total
Assets
Available-for-sale securities	$	—	$	12,798	$	—	$	12,798
Total assets	$	—	$	12,798	$	—	$	12,798

The Company may be required to measure certain assets or liabilities at fair value from time to time. These periodic fair value measures typically result from application of certain impairment measures under U.S. GAAP. These items would constitute nonrecurring fair value measures under ASC 820. As of September 30, 2018 and December 31, 2017, the Company did not have any assets or liabilities measured at fair value on a nonrecurring basis in the periods presented.

Transfers between Levels are deemed to take place on the first day of the reporting period in which the transfer has taken place. The Company did not incur transfers between Levels for the three and nine months ended September 30, 2018 and 2017.

Fair Value of Financial Instruments

In accordance with ASC 820, the Company is required to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the condensed consolidated balance sheets, for which fair value can be estimated.

The following describes the Company’s methods for estimating the fair value for financial instruments.

•

Loans held-for-investment are carried at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless deemed impaired. The Company estimates the fair value of its loans held-for-investment by assessing any changes in market interest rates, shifts in credit profiles and actual operating results for mezzanine loans and senior loans, taking into consideration such factors as underlying property type, property competitive position within its market, market and submarket fundamentals, tenant mix, nature of business plan, sponsorship, extent of leverage and other loan terms. The Company categorizes the fair value measurement of these assets as Level 3.


•	AFS securities are recurring fair value measurements; carrying value equals fair value. See discussion of valuation methods and assumptions within the Fair Value Measurements section of this footnote.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

•

HTM securities, which are comprised of CMBS, are carried at cost, net of any unamortized acquisition premiums or discounts, unless deemed other-than-temporarily impaired. In determining the fair value of the Company’s CMBS HTM, management judgment may be used to arrive at fair value that considers prices obtained from third-party pricing providers or broker quotes received using the bid price, which are both deemed indicative of market activity, and other applicable market data. The third-party pricing providers and brokers use pricing models that generally incorporate such factors as coupons, primary and secondary mortgage rates, rate reset period, issuer, prepayment speeds, credit enhancements and expected life of the security. The Company categorizes the fair value measurement of these assets as Level 2.


•	Cash and cash equivalents and restricted cash have a carrying value which approximates fair value because of the short maturities of these instruments. The Company categorizes the fair value measurement of these assets as Level 1.

•

The carrying value of repurchase agreements that mature in less than one year generally approximates fair value due to the short maturities. As of September 30, 2018, the Company held $0.6 billion of repurchase agreements that are considered long-term. The Company’s long-term repurchase agreements have floating rates based on an index plus a spread and the credit spread is typically consistent with those demanded in the market. Accordingly, the interest rates on these borrowings are at market and thus carrying value approximates fair value. The Company categorizes the fair value measurement of these liabilities as Level 2.

•

Securitized debt obligations are recorded at outstanding principal, net of any unamortized deferred debt issuance costs. In determining the fair value of its securitized debt obligations, management judgment may be used to arrive at fair value that considers prices obtained from third-party pricing providers, broker quotes received and other applicable market data. If observable market prices are not available or insufficient to determine fair value due principally to illiquidity in the marketplace, then fair value is based upon internally developed models that are primarily based on observable market-based inputs but also include unobservable market data inputs (including prepayment speeds, delinquency levels, and credit losses). The Company categorizes the fair value measurement of these liabilities as Level 2.


•	Convertible senior notes are carried at their unpaid principal balance, net of any unamortized deferred issuance costs. The Company estimates the fair value of its convertible senior notes using the market transaction price nearest to September 30, 2018. The Company categorizes the fair value measurement of these assets as Level 2.

The following table presents the carrying values and estimated fair values of assets and liabilities that are required to be recorded or disclosed at fair value at September 30, 2018 and December 31, 2017.



	September 30, 2018				December 31, 2017
(in thousands)	Carrying Value		Fair Value		Carrying Value		Fair Value
Assets
Loans held-for-investment	$	2,708,338	$	2,739,079	$	2,304,266	$	2,322,259
Available-for-sale securities	$	12,830	$	12,830	$	12,798	$	12,798
Held-to-maturity securities	$	30,526	$	30,929	$	42,169	$	42,797
Cash and cash equivalents	$	148,228	$	148,228	$	107,765	$	107,765
Restricted cash	$	5,320	$	5,320	$	2,953	$	2,953
Liabilities
Repurchase agreements	$	1,281,255	$	1,281,255	$	1,521,608	$	1,521,608
Securitized debt obligations	$	653,184	$	659,621	$	—	$	—
Convertible senior notes	$	140,124	$	148,754	$	121,314	$	125,750

Note 10. Repurchase Agreements

As of September 30, 2018 and December 31, 2017, the Company had outstanding $1.3 billion and $1.5 billion of repurchase agreements with a weighted average borrowing rate of 4.36% and 3.78% and weighted average remaining maturities of 1.2 and 1.8 years, respectively.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

At September 30, 2018 and December 31, 2017, the repurchase agreement balances were as follows:



(in thousands)	September 30, 2018		December 31, 2017
Short-term	$	679,612	$	56,546
Long-term	601,643		1,465,062
Total	$	1,281,255	$	1,521,608

At September 30, 2018 and December 31, 2017, the repurchase agreements had the following characteristics and remaining maturities:



	September 30, 2018									December 31, 2017
	Collateral Type									Collateral Type
(dollars in thousands)	Loans			CMBS ⁽¹⁾			Total Amount Outstanding			Loans			CMBS ⁽¹⁾			Total Amount Outstanding
Within 30 days	$	—		$	—		$	—		$	22,032		$	—		$	22,032
30 to 59 days	—			28,262			28,262			—			34,514			34,514
60 to 89 days	—			—			—			—			—			—
90 to 119 days	—			—			—			—			—			—
120 to 364 days	651,350			—			651,350			—			—			—
One year and over	601,643			—			601,643			1,465,062			—			1,465,062
Total	$	1,252,993		$	28,262		$	1,281,255		$	1,487,094		$	34,514		$	1,521,608
Weighted average borrowing rate	4.36		%	4.58		%	4.36		%	3.78		%	3.77		%	3.78		%

____________________


(1)	Includes both AFS securities and HTM securities sold under agreements to repurchase.

The following table summarizes assets at carrying values that are pledged or restricted as collateral for the future payment obligations of repurchase agreements:



(in thousands)	September 30, 2018		December 31, 2017
Loans held-for-investment	$	1,738,790	$	2,202,049
Available-for-sale securities, at fair value	12,830		12,798
Held-to-maturity securities	30,526		42,169
Restricted cash	2,922		565
Total	$	1,785,068	$	2,257,581

Although the transactions under repurchase agreements represent committed borrowings until maturity, the respective lender retains the right to mark the underlying collateral to fair value. A reduction in the value of pledged assets due to credit or market events, depending on the agreement, would require the Company to fund margin calls or repurchase the underlying collateral.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

The following table summarizes certain characteristics of the Company’s repurchase agreements and counterparty concentration at September 30, 2018 and December 31, 2017:



	September 30, 2018							December 31, 2017
(dollars in thousands)	Amount Outstanding		Net Counterparty Exposure ⁽¹⁾		Percent of Equity		Weighted Average Years to Maturity	Amount Outstanding		Net Counterparty Exposure ⁽¹⁾		Percent of Equity		Weighted Average Years to Maturity
Morgan Stanley Bank	$	467,381	$	201,378	24	%	1.75	$	425,539	$	250,543	30	%	2.49
JPMorgan Chase Bank	403,347		143,192		17	%	0.70	285,457		215,068		26	%	1.32
Goldman Sachs Bank	195,937		71,879		9	%	0.59	252,734		86,091		10	%	1.33
Wells Fargo Bank	80,328		48,777		6	%	0.74	424,882		128,644		16	%	1.49
All other counterparties⁽²⁾	134,262		41,552		5	%	1.75	132,996		59,645		7	%	2.08
Total	$	1,281,255	$	506,778				$	1,521,608	$	739,991

____________________


(1)	Represents the net carrying value of the loans held-for-investment, AFS securities and HTM securities sold under agreements to repurchase, including accrued interest plus any cash on deposit to secure the repurchase obligation, less the amount of the repurchase liability, including accrued interest.


(2)	Represents amounts outstanding with one other counterparty as of both September 30, 2018 and December 31, 2017.

The Company does not anticipate any defaults by its repurchase agreement counterparties. There can be no assurance, however, that any such default or defaults will not occur.

Note 11. Securitized Debt Obligations

In the second quarter of 2018, the Company financed a pool of its commercial real estate loans through a collateralized loan obligation, or CLO, which is consolidated on the Company’s condensed consolidated financial statements. See Note 3 - Variable Interest Entities for additional information regarding consolidation of the CLO. The securitized debt obligations issued by the CLO are recorded at outstanding principal, net of any unamortized deferred debt issuance costs, on the Company’s condensed consolidated balance sheets. As of September 30, 2018, the outstanding amount due on securitized debt obligations was $653.2 million, net of deferred issuance costs, with a weighted average interest rate of 3.35% and weighted average remaining maturities of 2.0 years.

Note 12. Convertible Senior Notes

On December 12, 2017, the Company closed a private placement of $125.0 million aggregate principal amount of convertible senior notes due 2022. On January 10, 2018, an additional $18.8 million in notes were issued by the Company in connection with the exercise of the initial purchaser’s option. The net proceeds from the offering were approximately $139.5 million after deducting underwriting discounts and estimated offering expenses payable by the Company. The notes are unsecured, pay interest semiannually at a rate of 5.625% per annum and are convertible at the option of the holder into shares of the Company’s common stock. The notes will mature in December 2022, unless earlier converted or repurchased in accordance with their terms. The Company does not have the right to redeem the notes prior to maturity, but may be required to repurchase the notes from holders under certain circumstances. As of September 30, 2018, the notes had a conversion rate of 50.0548 shares of common stock per $1,000 principal amount of the notes. The outstanding amount due on the convertible senior notes as of September 30, 2018 and December 31, 2017 was $140.1 million and $121.3 million, respectively, net of deferred issuance costs.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Note 13. Commitments and Contingencies

The following represent the material commitments and contingencies of the Company as of September 30, 2018:

Management agreement. Upon the closing the IPO on June 28, 2017, the Company entered into a management agreement with PRCM. The Company pays PRCM a base management fee equal to 1.5% of the Company’s equity on an annualized basis, as defined in the management agreement. For purposes of calculating the management fee, equity means the sum of the net proceeds received by the Company from all issuances of its equity securities, plus its cumulative “core earnings” at the end of the most recently completed calendar quarter, less any distributions to stockholders, any amount that the Company has paid to repurchase its stock, and any incentive fees earned by PRCM, but excluding the incentive fee earned in the current quarter. As a result, equity for purposes of calculating the management fee may differ from the amount of stockholders’ equity shown in the Company’s financial statements.

Beginning in the fourth quarter of 2018, incentive fees, if earned, will be payable to PRCM, as defined in the management agreement. The incentive fee will be the excess of (1) the product of (a) 20% and (b) the result of (i) the Company’s “core earnings” for the previous 12-month period, minus (ii) the product of (A) the Company’s equity in the previous 12-month period, and (B) 8% per annum, less (2) the sum of any incentive fees paid to PRCM with respect to the first three calendar quarters of such previous 12-month period; provided, however, that no incentive fees are payable with respect to any calendar quarter unless “core earnings” for the 12 most recently completed calendar quarters in the aggregate is greater than zero.

For purposes of calculating base management and incentive fees, “core earnings” means net income (loss) attributable to common stockholders, excluding non-cash equity compensation expense, incentive fees earned by PRCM, depreciation and amortization, any unrealized gains or losses or other similar non-cash items that are included in net income for the applicable period (regardless of whether such items are included in other comprehensive income or loss or in net income), and one-time events pursuant to changes in U.S. GAAP and certain material non-cash income or expense items, in each case after discussions between PRCM and the Company’s independent directors and approved by a majority of the Company’s independent directors.

The initial term of the management agreement expires on June 28, 2020, and thereafter will automatically renew for successive one-year terms annually until terminated in accordance with the terms of the agreement. Upon termination of the management agreement by the Company without cause or by PRCM due to the Company’s material breach of the management agreement, the Company is required to pay a termination fee equal to three times the sum of the average annual base management fee and average annual incentive compensation, in each case earned by PRCM during the 24-month period immediately preceding the date of termination, calculated as of the end of the most recently completed fiscal quarter prior to the date of termination.

Employment contracts. The Company does not directly employ any personnel. Instead, the Company relies on the resources of PRCM and its affiliates to conduct the Company’s operations.

Legal and regulatory. From time to time, the Company may be subject to liability under laws and government regulations and various claims and legal actions arising in the ordinary course of business. Liabilities are established for legal claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts established for those claims. Based on information currently available, management is not aware of any legal or regulatory claims that would have a material effect on the Company’s consolidated financial statements and therefore no accrual is required as of September 30, 2018.

Unfunded commitments on loans held-for-investment. Certain of the Company’s commercial real estate loan agreements contain provisions for future fundings to borrowers, generally to finance lease-related or capital expenditures. As of September 30, 2018 and December 31, 2017, the Company had unfunded commitments of $441.5 million and $339.2 million on loans held-for-investment with expirations dates within the next three years.

Note 14. Preferred Stock

In connection with the Formation Transaction, the Company issued 1,000 shares of its 10% cumulative redeemable preferred stock to Two Harbors, which immediately sold such preferred stock to an unaffiliated third-party investor. The preferred stock ranks senior to the rights of holders of the Company’s common stock, but junior to all other classes or series of preferred stock that may be issued. The holders of the preferred stock are entitled to receive, when, as and if authorized and declared by the Company, cumulative cash dividends at the rate of 10% per annum of the $1,000 liquidation preference per share of the preferred stock. Such dividends accrue on a daily basis and are cumulative from and including the initial issue date of the preferred stock.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

The Company has the option at any time after five years from the initial issue date to redeem the preferred stock at a redemption price of $1,000 per share, plus any accrued and unpaid dividends. At any time after six years from the initial issue date, the Company will, at the request of any preferred stockholder, repurchase the holder’s preferred stock at a price of $1,000 per share, plus any accrued and unpaid dividends. During the three and nine months ended September 30, 2018, the Company declared dividends to the preferred stockholder of $25,000 and $75,000, respectively. During both the three and nine months ended September 30, 2017, the Company declared dividends to the preferred stockholder of $25,556.

Note 15. Stockholders’ Equity

Common Stock

On June 28, 2017, the Company completed the IPO of 10,000,000 shares of its common stock at a price of $19.50 per share, for gross proceeds of $195.0 million. Net proceeds to the Company were approximately $181.9 million, after accounting for issuance costs of approximately $13.1 million. Concurrently with the closing of the IPO, the Company issued 33,071,000 shares of its common stock to Two Harbors in exchange for the equity interests in the Predecessor, which became the Company’s wholly owned indirect subsidiary as a result of the transaction. On November 1, 2017, Two Harbors distributed to its common stockholders the 33,071,000 shares of the Company’s common stock it had acquired in connection with the Formation Transaction, allowing the Company’s market capitalization to be fully floating.

As of September 30, 2018, the Company had 43,456,234 shares of common stock outstanding. The following table presents a reconciliation of the common shares outstanding for the nine months ended September 30, 2018 and 2017:



	Number of common shares
Common shares outstanding, December 31, 2016	—
Issuance of common stock	43,071,000
Issuance of restricted stock ⁽¹⁾	164,103
Common shares outstanding, September 30, 2017	43,235,103

Common shares outstanding, December 31, 2017	43,235,103
Issuance of restricted stock ⁽¹⁾	221,131
Common shares outstanding, September 30, 2018	43,456,234

____________________


(1)	Represents shares of restricted stock granted under the 2017 Equity Incentive Plan, of which 321,134 restricted shares remained subject to vesting requirements at September 30, 2018.

Distributions to Stockholders

The following table presents cash dividends declared by the Company on its common stock since its IPO and Formation Transaction:



Declaration Date	Record Date	Payment Date	Cash Dividend Per Share
September 20, 2018	October 2, 2018	October 18, 2018	$	0.42
June 20, 2018	July 2, 2018	July 18, 2018	$	0.40
March 15, 2018	March 29, 2018	April 18, 2018	$	0.38
December 18, 2017	December 29, 2017	January 18, 2018	$	0.38
September 18, 2017	September 29, 2017	October 18, 2017	$	0.32

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Accumulated Other Comprehensive Income

Accumulated other comprehensive income at September 30, 2018 and December 31, 2017 was as follows:



(in thousands)	September 30, 2018		December 31, 2017
Available-for-sale securities
Unrealized gains	$	32	$	—
Unrealized losses	—		—
Accumulated other comprehensive income	$	32	$	—

Reclassifications out of Accumulated Other Comprehensive Income

The Company did not record any reclassifications out of accumulated other comprehensive income during the three and nine months ended September 30, 2018 and 2017.

Note 16. Equity Incentive Plan

The Company’s 2017 Equity Incentive Plan, or the Plan, provides incentive compensation to attract and retain qualified directors, officers, advisors, consultants and other personnel, including certain personnel of PRCM and its affiliates. The Plan is administered by the compensation committee of the Company’s board of directors. The compensation committee has the full authority to administer and interpret the Plan, to authorize the granting of awards, to determine the eligibility of directors, officers, advisors, consultants and other personnel, including personnel of PRCM and its affiliates, to receive an award, to determine the number of shares of common stock to be covered by each award (subject to the individual participant limitations provided in the Plan), to determine the terms, provisions and conditions of each award (which may not be inconsistent with the terms of the Plan), to prescribe the form of instruments evidencing awards and to take any other actions and make all other determinations that it deems necessary or appropriate in connection with the Plan or the administration or interpretation thereof. In connection with this authority, the compensation committee may, among other things, establish performance goals that must be met in order for awards to be granted or to vest, or for the restrictions on any such awards to lapse.

The Plan provides for grants of restricted common stock, phantom shares, dividend equivalent rights and other equity-based awards, subject to a ceiling of 3,242,306 shares available for issuance under the Plan. The Plan allows for the Company’s board of directors to expand the types of awards available under the Plan to include long-term incentive plan units in the future. If an award granted under the Plan expires or terminates, the shares subject to any portion of the award that expires or terminates without having been exercised or paid, as the case may be, will again become available for the issuance of additional awards. Unless earlier terminated by the Company’s board of directors, no new award may be granted under the Plan after the tenth anniversary of the date that such Plan was initially approved by the Company’s board of directors. No award may be granted under the Plan to any person who, assuming payment of all awards held by such person, would own or be deemed to own more than 9.8% of the outstanding shares of the Company’s common stock.

During the nine months ended September 30, 2018 and 2017, the Company granted 19,175 and 14,103 shares of common stock, respectively, to its independent directors as compensation for their service on the Company’s board of directors, pursuant to the terms of the Plan. The estimated fair value of these awards was $17.86 and $19.47 per share on grant date, based on the closing price of the Company’s common stock on the NYSE on such date. The shares issued in 2017 vested immediately, and the shares issued in 2018 have a one year vesting period.

Additionally, during the nine months ended September 30, 2018 and 2017, the Company granted 201,956 and 150,000 shares of restricted common stock, respectively, to key employees of PRCM and its affiliates pursuant to the terms of the Plan and the associated award agreements. The estimated fair value of these awards was $17.33 and $19.50 per share on grant date, based on the closing market price of the Company’s common stock on the NYSE on such date. However, as the cost of these awards is measured at fair value at each reporting date based on the price of the Company’s stock as of period end in accordance with ASC 505, Equity, or ASC 505, the fair value of these awards as of September 30, 2018 was $19.28 per share based on the closing market price of the Company’s common stock on the NYSE on such date. The shares underlying the grants vest in three equal annual installments commencing on the first anniversary of the grant date, as long as the grantee complies with the terms and conditions of his or her applicable restricted stock award agreement.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

The following table summarizes the activity related to restricted common stock for the nine months ended September 30, 2018 and 2017:



	Nine Months Ended September 30,
	2018					2017
	Shares		Weighted Average Grant Date Fair Market Value			Shares		Weighted Average Grant Date Fair Market Value
Outstanding at Beginning of Period	150,000		$	19.50		—		$	—
Granted	221,131		17.38			164,103		19.50
Vested	(49,997	)	(19.50		)	(14,103	)	(19.47		)
Forfeited	—		—			—		—
Outstanding at End of Period	321,134		$	18.04		150,000		$	19.50

For the three and nine months ended September 30, 2018, the Company recognized compensation related to restricted common stock of $1.0 million and $2.8 million, respectively. For both the three and nine months ended September 30, 2017, the Company recognized compensation related to restricted common stock of $0.7 million.

Note 17. Income Taxes

The recently enacted tax law informally known as the Tax Cuts and Jobs Act, or the TCJA, significantly changes the U.S. federal income tax laws applicable to businesses and their owners, including REITs and their stockholders. These changes include, among other things, lowering the federal income tax rate applicable to corporations from 35% to 21% and repealing the corporate alternative minimum tax. The Company has completed its determination of the accounting implications of the TCJA on its tax accruals, and there is no impact recorded to the financial statements. Technical corrections or other amendments to the TCJA or administrative guidance interpreting the TCJA may be forthcoming at any time. While we do not anticipate a material effect on our operations, we continue to analyze and monitor the application of the TCJA to our businesses, our peers and the economic environment.

The Company has elected to be taxed as a REIT under the Code for U.S. federal income tax purposes. As long as the Company qualifies as a REIT, the Company generally will not be subject to U.S. federal income taxes on its taxable income to the extent it annually distributes its net taxable income to stockholders, and does not engage in prohibited transactions. The Company intends to distribute 100% of its REIT taxable income and comply with all requirements to continue to qualify as a REIT. The majority of states also recognize the Company’s REIT status. The Company’s TRS files a separate tax return and is fully taxed as a standalone U.S. C-corporation. It is assumed that the Company will retain its REIT status and will incur no REIT level taxation as it intends to comply with the REIT regulations and annual distribution requirements.

The following table summarizes the tax provision recorded at the taxable subsidiary level for the three and nine months ended September 30, 2018 and 2017:



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2018			2017			2018			2017
Current tax (benefit) provision:
Federal	$	—		$	(2	)	$	(1	)	$	(5	)
State	—			—			2			2
Total current tax (benefit) provision	—			(2		)	1			(3		)
Deferred tax benefit	(1		)	—			(3		)	—
Total benefit from income taxes	$	(1	)	$	(2	)	$	(2	)	$	(3	)

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s condensed consolidated financial statements of a contingent tax liability for uncertain tax positions. Additionally, there were no amounts accrued for penalties or interest as of or during the periods presented in these condensed consolidated financial statements.

Note 18. Earnings Per Share

The Company has calculated earnings per share only for the period common stock was outstanding, referred to as the post-formation period. The Company has defined the post-formation period to be the period beginning on June 28, 2017, the date the Company commenced operations as a publicly traded company, and thereafter. Earnings per share is calculated by dividing the net income for the post-formation period by the weighted average number of shares outstanding during the post-formation period.

The following table presents a reconciliation of the earnings and shares used in calculating basic and diluted earnings per share for the three and nine months ended September 30, 2018 and 2017:



	Three Months Ended				Nine Months Ended
	September 30,				September 30,
(in thousands, except share data)	2018		2017		2018		2017
Numerator:
Net income attributable to common stockholders - basic	$	16,540	$	11,493	$	46,303	$	11,662
Interest expense attributable to convertible notes ⁽¹⁾	2,207				6,576		—
Net income attributable to common stockholders - diluted	$	18,747	$	11,493	$	52,879	$	11,662
Denominator:
Weighted average common shares outstanding	43,135,100		43,084,254		43,103,600		43,084,252
Weighted average restricted stock shares	321,134		150,000		322,509		150,000
Basic weighted average shares outstanding	43,456,234		43,234,254		43,426,109		43,234,252
Effect of dilutive shares issued in an assumed conversion of the convertible senior notes	7,195,378		—		7,190,155		—
Diluted weighted average shares outstanding	50,651,612		43,234,254		50,616,264		43,234,252
Earnings Per Share
Basic	$	0.38	$	0.27	$	1.07	$	0.27
Diluted	$	0.37	$	0.27	$	1.04	$	0.27

____________________


(1)	Includes a nondiscretionary adjustment for the assumed change in the management fee calculation.

Note 19. Related Party Transactions

The following summary provides disclosure of the material transactions with affiliates of the Company.

The Company does not have any employees and is externally managed by PRCM under the terms of a management agreement entered into in connection with closing of the IPO and Formation Transaction on June 28, 2017. Under the management agreement, PRCM and its affiliates provide the Company with the personnel and resources necessary to operate the Company’s business. In exchange, the Company pays PRCM a base management fee that is equal to 1.5% of the Company’s equity on an annualized basis as well as an incentive fee, which will be payable, if earned, beginning in the fourth quarter of 2018, in accordance with the terms of the management agreement. For purposes of calculating the management fee, equity is adjusted to exclude any common stock repurchases as well as any unrealized gains, losses or other items that do not affect realized net income (loss), among other adjustments, in accordance with the management agreement. The Company incurred $3.1 million and $9.4 million as a management fee to PRCM for the three and nine months ended September 30, 2018, and $3.1 million and $3.2 million as a management fee to PRCM for the three and nine months ended September 30, 2017, respectively. See further discussion of the base management fee and incentive fee calculations in Note 13 - Commitments and Contingencies.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Condensed Consolidated Financial Statements (unaudited)

Prior to the IPO and Formation Transaction, the Predecessor was allocated its proportionate share of management fees incurred by Two Harbors under the management agreement that Two Harbors has with PRCM Advisers. Under its management agreement with PRCM Advisers as in effect during the relevant period, Two Harbors paid PRCM Advisers a base management fee equal to 1.5% of its adjusted equity on an annualized basis. The Predecessor was allocated management fees incurred by Two Harbors of $3.5 million for the period from January 1, 2017 through June 27, 2017.

During the three and nine months ended September 30, 2018, the Company reimbursed PRCM for certain direct and allocated costs incurred by PRCM on behalf of the Company. These direct and allocated costs totaled approximately $1.4 million and $4.3 million, respectively. During both the three and nine months ended September 30, 2017, direct and allocated costs totaled approximately $1.1 million. In addition, during the three and nine months ended September 30, 2017, certain direct and allocated operating expenses were paid by Two Harbors to PRCM Advisers and other third-party vendors and included in the Company’s condensed consolidated statements of comprehensive income. These direct and allocated costs totaled approximately $0.2 million and $4.4 million for the three and nine months ended September 30, 2017, respectively. Expenses during the period may have been different had the Predecessor not been a subsidiary of Two Harbors during those periods.

The Company has contractual relationships with the majority of its third-party vendors and pays those vendors directly. The Company will continue to have certain costs allocated to it by PRCM under the management agreement for compensation, data services, technology and certain office lease payments.

The Company recognized $1.0 million and $2.8 million of compensation during the three and nine months ended September 30, 2018 related to restricted common stock issued to employees of PRCM and the Company’s independent directors pursuant to the Plan. See Note 16 - Equity Incentive Plan for additional information.

During the nine months ended September 30, 2017, the Company financed certain of its loans held-for-investment through a revolving note payable to TH Insurance Holdings Company LLC, or TH Insurance, a captive insurance company and indirect subsidiary of Two Harbors and a member of the Federal Home Loan Bank of Des Moines, or the FHLB. In exchange for the note with TH Insurance, the Company received an allocated portion of TH Insurance’s advances from the FHLB and pledged to the FHLB a portion of its loans held-for-investment as collateral for TH Insurance’s advances. The affiliate note payable reflected terms consistent with TH Insurance’s FHLB advances. During 2017, the note payable to TH Insurance was in effect to assist with cash management and operational processes as the investments in the Company’s portfolio pledged to the FHLB were released and transitioned to its repurchase facilities. The affiliate note payable matured on October 27, 2017 and was repaid in full.

The terms of these transactions may have been different had they been transacted with an unrelated third-party.

Note 20. Subsequent Events

On October 12, 2018, the Company closed an underwritten public offering of $125 million aggregate principal amount of convertible senior notes due 2023. The Company also granted the underwriters a 30-day option to purchase up to an additional $18.75 million aggregate principal amount of the notes to cover over-allotments, $6.6 million of which closed on October 24, 2018. The notes are unsecured, pay interest semiannually at a rate of 6.375% per annum and are convertible at the option of the holder into shares of the Company’s common stock. The notes mature in October of 2023, unless earlier converted or repurchased in accordance with their terms. The Company will not have the right to redeem the notes prior to maturity, but may be required to repurchase the notes from holders under certain circumstances. The notes have an initial conversion rate of 48.8496 shares of common stock per $1,000 principal amount of the notes (equivalent to an initial conversion price of $20.47 per share), subject to adjustment.

Events subsequent to September 30, 2018, were evaluated through the date these financial statements were issued and no additional events were identified requiring further disclosure in these condensed consolidated financial statements.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended December 31, 2017.

Our Company

We are a Maryland corporation that focuses primarily on directly originating, investing in and managing senior floating-rate commercial mortgage loans and other debt and debt-like commercial real estate investments. We were formed to continue and expand the commercial real estate lending business established by Two Harbors Investment Corp., or Two Harbors, a publicly traded hybrid mortgage real estate investment trust. In the first quarter of 2015, Two Harbors established its commercial real estate lending business, TH Commercial Holdings LLC, collectively with its subsidiaries, our Predecessor. Concurrently with the closing of our initial public offering, or the IPO, on June 28, 2017, we completed a formation transaction, or the Formation Transaction, pursuant to which we acquired from Two Harbors the equity interests in our Predecessor, including its portfolio of commercial real estate debt investments and related financing. In exchange, we issued 33,071,000 shares of our common stock and 1,000 shares of our 10% cumulative redeemable preferred stock to Two Harbors. Upon the completion of the Formation Transaction, the Predecessor became our wholly owned indirect subsidiary. On November 1, 2017, Two Harbors distributed to its common stockholders the 33,071,000 shares of our common stock it had acquired in connection with the Formation Transaction, allowing our market capitalization to be fully floating. We are externally managed by Pine River Capital Management L.P., or PRCM, or our Manager.

We are a long-term, fundamental value-oriented investor. We construct our investment portfolio on a loan-by-loan basis, emphasizing rigorous credit underwriting, selectivity and diversification, and assess each investment from a fundamental value perspective relative to other opportunities available in the market. Our primary target investments are directly originated floating-rate performing senior commercial mortgage loans, typically with terms of three to five years, usually ranging in size from $25 million to $150 million. We typically provide intermediate-term bridge or transitional financing for a variety of purposes, including acquisitions, recapitalizations, refinancings and a range of business plans including lease-up, renovation, repositioning and repurposing of the property. We generally target the top 25, and up to the top 50, metropolitan statistical areas in the United States, or MSAs. We believe that those markets provide ample supply of high credit quality properties to lend against, sufficient numbers of owners and sponsors with institutional attributes, and adequate market liquidity. We believe this approach enables us to deliver attractive risk-adjusted returns to our stockholders while preserving our capital base through diverse business cycles.

Our origination strategy relies on our extensive and longstanding direct relationships with a wide array of national, regional and local private owner/operators, private equity firms, funds, REITs, brokers and co-lenders. Our team’s reach across the United States and active dialogue with market participants has produced a significant volume of investment opportunities since our Predecessor’s formation, and our reputation as a reliable counterparty has led to multiple investment opportunities with repeat clients. We have deep experience in the commercial real estate finance markets, with each of the senior members of our team of commercial real estate professionals having over 20 years of experience in commercial real estate debt markets.

We believe that the U.S. commercial real estate debt markets offer enduring investment opportunities. A significant amount of commercial real estate debt is scheduled to mature over the next five years, and there is a sustained need for acquisition, repositioning and recapitalization loans. We expect that traditional lenders, including banks which have historically accounted for approximately half of the market, will not be able to meet borrower demand due to structural and regulatory constraints. As a result, we believe that there are significant opportunities to originate floating-rate senior commercial real estate loans on transitional properties at attractive risk-adjusted return.

We have elected to be treated as a REIT for U.S. federal income tax purposes. To qualify as a REIT, we are required to meet certain investment and operating tests and annual distribution requirements. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders, do not participate in prohibited transactions and maintain our intended qualification as a REIT. However, certain activities that we may perform may cause us to earn income which will not be qualifying income for REIT purposes. We have designated one of our subsidiaries as a taxable REIT subsidiary, or TRS, as defined in the Code, to engage in such activities, and we may form additional TRSs in the future. We also operate our business in a manner that will permit us to maintain our exclusion from registration under the Investment Company Act of 1940, as amended, or the Investment Company Act.

Our Portfolio

As of September 30, 2018, our investment portfolio consisted of 75 commercial real estate loans and two commercial mortgage-backed securities, or CMBS, having an aggregate principal balance of $2.7 billion and $43.3 million, respectively, with an additional $441.5 million of potential future funding obligations, diversified across geographies, property types, structures and credits.

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We focus on originating senior commercial mortgage loans backed by different types of commercial real estate properties located in various markets across the United States. We may, from time to time, invest in other debt and debt-like commercial real estate investments. Together, we refer to these investments as our target investments. Our target investments include:

Primary Target Investments

•

Senior Mortgage Loans. Commercial mortgage loans that are secured by real estate and evidenced by a first priority mortgage. These loans may vary in term, may bear interest at a fixed or floating rate (although our focus is floating-rate loans), and may amortize and typically require a balloon payment of principal at maturity. These investments may encompass a whole loan or may include pari passu participations within such a mortgage loan. These loans may finance stabilized properties or properties that are subject to a business plan that is expected to enhance the value of the property through lease-up, refurbishment, updating or repositioning.

Secondary Target Investments

As part of our financing strategy, we may from time-to-time syndicate senior participations in our originated senior commercial mortgage loans to other investors and retain a subordinated debt position for our portfolio in the form of a mezzanine loan or subordinated mortgage interest, as described below. Alternatively, we may opportunistically co-originate the investments described below with senior lenders, or acquire them in the secondary market.


•	Mezzanine Loans. Mezzanine loans are secured by a pledge of equity interests in the property. These loans are subordinate to a senior mortgage loan, but senior to the property owner’s equity.


•	Preferred Equity. Investments that are subordinate to any mortgage and mezzanine loans, but senior to the property owner’s common equity.


•	Subordinated Mortgage Interests. Sometimes referred to as a B-note, a subordinated mortgage interest is an investment in a junior portion of a mortgage loan. B-notes have the same borrower and benefit from the same underlying secured obligation and collateral as the senior mortgage loan, but are subordinated in priority payments in the event of default.


•	Other Real Estate Securities. Investments in real estate that take the form of CMBS or collateralized loan obligations, or CLOs, that are collateralized by pools of real estate debt instruments, which are often senior mortgage loans, or other securities. These may be classified as available-for-sale, or AFS, securities or held-to-maturity, or HTM, securities.

Based on current market conditions, we expect that the majority of our investments will continue to consist of senior commercial mortgage loans directly originated by us and secured by cash-flowing properties located in the United States. These investments typically pay interest at rates that are determined periodically on the basis of a floating base lending rate, primarily LIBOR plus a premium and have an expected term between three and five years.

We may opportunistically adjust our capital allocation to our target investments, with the proportion and types of investments changing over time depending on our views on, among other things, the current economic and credit environment. In addition, we may invest in assets other than our target investments, in each case subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exclusion from regulation under the Investment Company Act.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains, or incorporates by reference, not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, or the Exchange Act, and that are subject to the safe harbors created by such sections. Forward-looking statements involve numerous risks and uncertainties. Our actual results may differ from our beliefs, expectations, estimates, and projections and, consequently, you should not rely on these forward-looking statements as predictions of future events. Forward-looking statements are not historical in nature and can be identified by words such as “anticipate,” “estimate,” “will,” “should,” “expect,” “target,” “believe,” “intend,” “seek,” “plan,” “goals,” “future,” “likely,” “may” and similar expressions or their negative forms, or by references to strategy, plans, or intentions. These forward-looking statements are subject to risks and uncertainties, including, among other things, those described in our Annual Report on Form 10-K for the year ended December 31, 2017, under the caption “Risk Factors.” Other risks, uncertainties and factors that could cause actual results to differ materially from those projected are described below and may be described from time to time in reports we file with the SEC, including our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update or revise any such forward-looking statements, whether as a result of new information, future events, or otherwise.

Important factors, among others, that may affect our actual results include:


•	the general political, economic, and competitive conditions in the markets in which we invest;


•	defaults by borrowers in paying debt service on outstanding indebtedness and borrowers' abilities to manage and stabilize properties;


•	our ability to obtain financing arrangements on terms favorable to us or at all;

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•	the level and volatility of prevailing interest rates and credit spreads;


•	reductions in the yield on our investments and an increase in the cost of our financing;


•	general volatility of the securities markets in which we participate;


•	the return or impact of current or future investments;


•	allocation of investment opportunities to us by our Manager;


•	increased competition from entities investing in our target assets;


•	effects of hedging instruments on our target investments;


•	changes in governmental regulations, tax law and rates, and similar matters;


•	our ability to maintain our qualification as a REIT for U.S. federal income tax purposes and our exclusion from registration under the Investment Company Act;


•	availability of desirable investment opportunities;


•	availability of qualified personnel and our relationship with our Manager;


•	estimates relating to our ability to make distributions to our stockholders in the future;


•	hurricanes, earthquakes, and other natural disasters, acts of war and/or terrorism and other events that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investments;


•	deterioration in the performance of the properties securing our investments that may cause deterioration in the performance of our investments and, potentially, principal losses to us; and


•	difficulty or delays in redeploying the proceeds from repayments of our existing investments.

This Quarterly Report on Form 10-Q may contain statistics and other data that, in some cases, have been obtained or compiled from information made available by mortgage loan servicers and other third-party service providers.

Factors Affecting our Operating Results

The results of our operations are affected by a number of factors and primarily depend on, among other things, the level of our net interest income, the market value of our assets, credit performance of our assets and the supply of, and demand for, commercial real estate loans, other commercial real estate debt instruments and other financial assets available for investment in the market. Our net interest income, which reflects the amortization of origination fees and direct costs, is recognized based on the contractual rate and the outstanding principal balance of the loans we originate. The objective of the interest method is to arrive at periodic interest income that yields a level rate of return over the loan term. Interest rates vary according to the type of loan or security, conditions in the financial markets, credit worthiness of our borrowers, competition and other factors, none of which can be predicted with any certainty. Our operating results may also be impacted by credit losses in excess of initial anticipations or unanticipated credit events experienced by our borrowers.

Loan Originations

Our business model is mainly focused on directly originating, investing in and managing senior floating-rate commercial mortgage loans and other debt and debt-like commercial real estate investments. As a result of this strategy, our operating performance is subject to overall market demand for commercial real estate loan products and other debt and debt-like commercial real estate investments. We manage originations and acquisitions of our target investments by diversifying our investment portfolio across geographical regions and local markets, property types, borrower types, loan structures and types. We do not limit our investments to any number of geographical areas or property types for our originations and will continue to develop a well-diversified investment portfolio. Additionally, our CRE team has extensive experience originating and acquiring commercial real estate loans and other debt and debt-like commercial real estate investments, through a network of long-standing relationships with borrowers, sponsors and industry brokers.

Financing Availability

We are subject to availability and cost of financing to successfully execute on our business strategy and generate attractive risk-adjusted returns to our stockholders. The majority of our financing is in the form of repurchase agreements or other types of credit facilities provided to us by our lender counterparties. We mitigate this counterparty risk by seeking to diversify our lending partners, focusing on establishing borrowing relationships with strong counterparties and continuously monitoring them through a thoughtful approach to counterparty risk oversight. Additionally, as part of our broader risk management strategy, and to the extent available in the market, we intend to finance our business through other means which may include, but not be limited to, securitizations, note sales and issuance of unsecured debt and equity instruments. We will continue to actively explore these additional types of funding facilities in order to further diversify our financing sources.

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In the second quarter of 2018, we financed a pool of our commercial real estate loans through a collateralized loan obligation, or CLO, retaining the subordinate securities in our investment portfolio. The securitization was accounted for as a financing with the non-retained securitized debt obligations recognized on our balance sheet. The net proceeds from the securitized debt obligations were used to repay a portion of the outstanding balances of our repurchase facilities, to re-invest in our target assets and for other general corporate purposes.

During 2017, a portion of our portfolio was financed through a note payable to TH Insurance Holdings Company LLC, or TH Insurance, a captive insurance company and indirect subsidiary of Two Harbors and a member of the Federal Home Loan Bank of Des Moines, or the FHLB. In exchange for the note with TH Insurance, we received an allocated portion of TH Insurance’s advances from the FHLB and pledged to the FHLB a portion of our loans held-for-investment as collateral for TH Insurance’s advances. The affiliate note payable reflected terms consistent with TH Insurance’s FHLB advances. During 2017, the note payable to TH Insurance was in effect to assist with cash management and operational processes as the investments in our portfolio pledged to the FHLB were released and transitioned to our repurchase facilities. The affiliate note payable matured on October 27, 2017 and was repaid in full.

On December 12, 2017, we closed a private placement of $125.0 million aggregate principal amount of convertible senior notes due 2022. On January 10, 2018, an additional $18.8 million in notes were issued by the Company in connection with the exercise of the initial purchaser’s option. The notes are unsecured, pay interest semiannually at a rate of 5.625% per annum and are convertible at the option of the holder into shares of our common stock. The notes will mature in December 2022, unless earlier converted or repurchased in accordance with their terms. We do not have the right to redeem the notes prior to maturity, but may be required to repurchase the notes from holders under certain circumstances. As of September 30, 2018, the notes had a conversion rate of 50.0548 shares of common stock per $1,000 principal amount of the notes. The net proceeds from the offering were approximately $139.5 million after deducting underwriting discounts and estimated offering expenses. We intend to use these proceeds to originate and acquire our target assets and for general corporate purposes.

Credit Risk

We are subject to varying degrees of credit risk in connection with our target investments. We seek to mitigate this risk by seeking to originate or acquire assets of higher quality at appropriate rates of return given anticipated and unanticipated losses, by employing a comprehensive review and selection process and by proactively monitoring originated or acquired investments. Nevertheless, unanticipated credit losses could occur that could adversely impact our operating results.

Operating Expenses - Investment Management and Corporate Overhead

We incur significant general and administrative costs, including certain costs related to being a public company and costs incurred on our behalf by our Manager. We expect these costs to decline as a percentage of revenue as our company and portfolio grow. We rely on our Manager to provide or obtain on our behalf the personnel and services necessary for us to conduct our business because we have no employees of our own. Our Manager performs these services for us and provides us with a comprehensive suite of investment and portfolio management services.

Under our management agreement with PRCM, we pay all costs and expenses of PRCM incurred on our behalf in order to operate our business, as well as all compensation costs for certain personnel providing services to us under the management agreement, other than personnel directly involved in supporting the investment function. We also pay our Manager a quarterly base management fee equal to 0.375% (a 1.50% annual rate) of our equity and an incentive fee, which will be payable, if earned, beginning in the fourth quarter of 2018, as defined in the management agreement. See further discussion of the base management fee and incentive fee calculations in Note 13 - Commitments and Contingencies of the notes to the condensed consolidated financial statements.

Market Conditions

We believe that the commercial real estate debt markets offer compelling investment opportunities especially when approached fundamentally with a focus on strong credit and cash flow characteristics, and high quality borrowers and sponsors. These investment opportunities are supported by active real estate transaction volumes, continuous need for refinancing of legacy loans, and borrower and sponsor demand for debt capital to renovate, reposition or redevelop their properties. Additionally, the stricter regulatory environment after the financial crisis of 2007 to 2009 for traditional providers of financing in this market, such as banks and insurance companies, limits the capacity of available funding for certain types of commercial real estate loans which comprise a large part of our target investments. We believe that this reduced funding capacity in the market combined with strong demand from borrowers provides us with the opportunities consistent with our investment strategy to invest our capital and generate attractive risk-adjusted returns for our stockholders.

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Changes in the Fair Value of Our Investments

We intend to hold our target investments for the long-term, and as such they are carried at amortized cost on our condensed consolidated balance sheets. We evaluate our investments for impairment on a quarterly basis and impairments are recognized when it is probable that we will not be able to collect all amounts estimated to be collected at the time of origination of the investment. We evaluate impairment (both interest and principal) based on the present value of expected future cash flows discounted at the investment’s effective interest rate or the fair value of the collateral, if repayment is expected solely from the collateral.

Although we intend to hold our target investments for the long-term, we may occasionally classify some of our investments as available-for-sale. Investments classified as available-for-sale are carried at their fair value, with changes in fair value recorded through accumulated other comprehensive income, a component of stockholders’ equity, rather than through earnings. We do not intend to hold any of our investments for trading purposes.

Changes in Market Interest Rates

Although our strategy is to primarily originate, invest in and manage senior floating-rate commercial mortgage loans, from time-to-time we may acquire fixed-rate investments, which exposes our operating results to the risks posed by fluctuation in interest rates. To the extent that this applies to us, we may choose to actively manage this risk through the use of our Manager’s sophisticated hedging strategies.

Summary of Results of Operations and Financial Condition

As a result of our Formation Transaction on June 28, 2017, we are considered a continuation of our Predecessor’s business operations. Accordingly, our Predecessor’s historical results of operations and cash flows are included in our condensed consolidated financial statements and the following financial results discussion.

Our U.S. GAAP net income attributable to common stockholders was $16.5 million and $46.3 million for the three and nine months ended September 30, 2018, as compared to U.S. GAAP net income attributable to common stockholders of $11.5 million and $39.1 million for the three and nine months ended September 30, 2017. We have calculated earnings per share only for the period common stock was outstanding, referred to as the post-formation period. We have defined the post-formation period to be the period from the date we commenced operations as a publicly traded company on June 28, 2017 and on. Earnings per share is calculated by dividing the net income for the post-formation period by the weighted average number of shares outstanding during the post-formation period. Earnings per share for the three and nine months ended September 30, 2018 was $0.37 and $1.04 per diluted weighted average share, respectively.

With our accounting treatment for AFS securities, unrealized fluctuations in the market values of AFS securities do not impact our U.S. GAAP net income or taxable income but are recognized on our condensed consolidated balance sheets as a change in stockholders’ equity under “accumulated other comprehensive income.” For the three and nine months ended September 30, 2018, net unrealized gains on AFS securities recognized as other comprehensive income, net of tax, were $31,996. This, combined with U.S. GAAP net income attributable to common stockholders of $16.5 million and $46.3 million, resulted in comprehensive income attributable to common stockholders of $16.6 million and $46.3 million for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2017, net unrealized gains on AFS securities recognized as other comprehensive income, net of tax, were $31,996 and $127,983, respectively. This, combined with U.S. GAAP net income attributable to common stockholders of $11.5 million and $39.1 million, resulted in comprehensive income attributable to common stockholders of $11.5 million and $39.3 million for the three and nine months ended September 30, 2017, respectively.

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The following tables present the components of our comprehensive income for the three and nine months ended September 30, 2018 and 2017:



(in thousands, except share data)	Three Months Ended						Nine Months Ended
Income Statement Data:	September 30,						September 30,
	2018			2017			2018			2017
Interest income:	(unaudited)
Loans held-for-investment	$	46,424		$	29,655		$	127,576		$	77,213
Available-for-sale securities	294			265			851			767
Held-to-maturity securities	757			940			2,478			2,792
Cash and cash equivalents	85			4			141			10
Total interest income	47,560			30,864			131,046			80,782
Interest expense:
Repurchase agreements	14,304			12,060			45,432			22,309
Securitized debt obligations	6,693			—			10,568			—
Convertible senior notes	2,216			—			6,601			—
Revolving credit facilities	152			—			372			—
Note payable to affiliate	—			437			—			4,067
Total interest expense	23,365			12,497			62,973			26,376
Net interest income	24,195			18,367			68,073			54,406
Other income:
Fee income	—			—			1,446			—
Total other income	—			—			1,446			—
Expenses:
Management fees	3,111			3,130			9,434			6,717
Servicing expense	616			333			1,568			962
Other operating expenses	3,904			3,388			12,141			7,561
Total expenses	7,631			6,851			23,143			15,240
Income before income taxes	16,564			11,516			46,376			39,166
Provision for income taxes	(1		)	(2		)	(2		)	(3		)
Net income	16,565			11,518			46,378			39,169
Dividends on preferred stock	25			25			75			25
Net income attributable to common stockholders	$	16,540		$	11,493		$	46,303		$	39,144
Basic earnings per weighted average common share (See Note 17)	$	0.38		$	0.27		$	1.07		$	0.27
Diluted earnings per weighted average common share (See Note 17)	$	0.37		$	0.27		$	1.04		$	0.27
Dividends declared per common share	$	0.42		$	0.32		$	1.20		$	0.32
Weighted average number of shares of common stock outstanding:
Basic	43,456,234			43,234,254			43,426,109			43,234,252
Diluted	50,651,612			43,234,254			50,616,264			43,234,252

Comprehensive income:
Net income attributable to common stockholders	$	16,540		$	11,493		$	46,303		$	39,144
Other comprehensive income, net of tax:
Unrealized gain on available-for-sale securities	32			32			32			128
Other comprehensive income	32			32			32			128
Comprehensive income attributable to common stockholders	$	16,572		$	11,525		$	46,335		$	39,272

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(in thousands)	September 30, 2018		December 31, 2017
Balance Sheet Data:	September 30, 2018		December 31, 2017
	(unaudited)
Loans held-for-investment	$	2,708,338	$	2,304,266
Total assets	$	2,934,936	$	2,499,130
Repurchase agreements	$	1,281,255	$	1,521,608
Securitized debt obligations	$	653,184	$	—
Total stockholders’ equity	$	825,650	$	828,621

Results of Operations

The following analysis focuses on financial results during the three and nine months ended September 30, 2018 and 2017.

Interest Income

Interest income increased from $30.9 million and $80.8 million for the three and nine months ended September 30, 2017 to $47.6 million and $131.0 million for the same periods in 2018, due to the origination of 32 commercial real estate loans with a principal balance of $1.0 billion, additional fundings of $122.4 million provided on existing loan commitments and upsizings of $24.5 million, offset by repayments of $556.4 million during the period from September 30, 2017 to September 30, 2018.

Interest Expense

Interest expense increased from $12.5 million and $26.4 million for the three and nine months ended September 30, 2017 to $23.4 million and $63.0 million for the same periods in 2018, due to increased financing on the originations and acquisitions described above, as well as an increase in the proportion of total borrowings financed through repurchase agreements and securitized debt obligations (relative to the note payable to TH Insurance), increases in borrowing rates due to increases in LIBOR and the issuance of convertible senior notes.

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Net Interest Income

The following tables present the components of interest income and average annualized net asset yield earned by asset type, the components of interest expense and average annualized cost of funds on borrowings incurred by collateral type, and net interest income and average annualized net interest rate spread for the three and nine months ended September 30, 2018 and 2017:



	Three Months Ended September 30, 2018						Nine Months Ended September 30, 2018
(dollars in thousands)	Average Balance		Interest Income/Expense		Net Yield/Cost of Funds		Average Balance		Interest Income/Expense		Net Yield/Cost of Funds
Interest-earning assets ⁽¹⁾
Loans held-for-investment
Senior loans ⁽²⁾	$	2,578,633	$	45,215	7.0	%	$	2,435,521	$	122,871	6.7	%
Subordinated loans	46,800		1,209		10.3	%	61,245		4,705		10.2	%
Available-for-sale securities	12,798		294		9.2	%	12,798		851		8.9	%
Held-to-maturity securities	31,724		757		9.5	%	35,956		2,478		9.2	%
Other			85						141
Total interest income/net asset yield	$	2,669,955	$	47,560	7.1	%	$	2,545,520	$	131,046	6.9	%
Interest-bearing liabilities
Repurchase agreements and securitized debt obligations collateralized by:
Loans held-for-investment
Senior loans ⁽²⁾	$	1,774,037	$	20,679	4.7	%	$	1,677,411	$	54,875	4.4	%
Subordinated loans	9,581		125		5.2	%	13,253		452		4.5	%
Available-for-sale securities	8,388		91		4.3	%	8,411		254		4.0	%
Held-to-maturity securities	20,988		255		4.9	%	23,410		791		4.5	%
Other unassignable:
Convertible senior notes	140,059		2,215		6.3	%	139,868		6,601		6.3	%
Total interest expense/cost of funds	$	1,953,053	$	23,365	4.8	%	$	1,862,353	$	62,973	4.5	%
Net interest income/spread			$	24,195	2.3	%			$	68,073	2.4	%

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	Three Months Ended September 30, 2017						Nine Months Ended September 30, 2017
(dollars in thousands)	Average Balance		Interest Income/Expense		Net Yield/Cost of Funds		Average Balance		Interest Income/Expense		Net Yield/Cost of Funds
Interest-earning assets ⁽¹⁾
Loans held-for-investment
Senior loans ⁽²⁾	$	1,776,641	$	27,109	6.1	%	$	1,554,769	$	69,918	6.0	%
Subordinated loans	104,139		2,546		9.8	%	103,425		7,295		9.4	%
Available-for-sale securities	12,798		265		8.3	%	12,798		767		8.0	%
Held-to-maturity securities	43,442		940		8.7	%	44,630		2,792		8.3	%
Other			4						10
Total interest income/net asset yield	$	1,937,020	$	30,864	6.4	%	$	1,715,622	$	80,782	6.3	%
Interest-bearing liabilities
Repurchase agreements and note payable to affiliate collateralized by:
Loans held-for-investment
Senior loans ⁽²⁾	$	1,203,859	$	12,072	4.0	%	$	1,125,500	$	24,854	2.9	%
Subordinated loans	9,597		105		4.4	%	23,225		587		3.4	%
Available-for-sale securities	8,339		70		3.3	%	8,202		195		3.2	%
Held-to-maturity securities	26,086		250		3.8	%	27,006		740		3.7	%
Other unassignable:
Convertible senior notes	—		—		—	%	—		—		—	%
Total interest expense/cost of funds	$	1,247,881	12,497		4.0	%	$	1,183,933	26,376		3.0	%
Net interest income/spread			$	18,367	2.4	%			$	54,406	3.3	%

____________________


(1)	Average balance represents average amortized cost on loans held-for-investment, AFS securities and HTM securities.


(2)	Loans primarily secured by a first priority lien on commercial real property and related personal property and also includes, when applicable, any companion subordinate loans.

The increase in yields on both senior loans and subordinated loans for the three and nine months ended September 30, 2018, as compared to the same periods in 2017, was driven by increases in LIBOR, as the majority are floating-rate loans. The increase in cost of funds on both senior loans and subordinated loans for the three and nine months ended September 30, 2018, as compared to the same periods in 2017, was primarily the result of an increase in the proportion of total borrowings financed through repurchase agreements and securitized debt obligations (relative to the note payable to TH Insurance) and secondarily the result of increases in borrowing rates due to increases in LIBOR. The cost of funds associated with our repurchase agreements and securitized debt obligations also includes amortization of deferred debt issuance costs.

The increase in yields on AFS and HTM securities for the three and nine months ended September 30, 2018, as compared to the same periods in 2017, was driven by increases in LIBOR, as these CMBS are floating-rate assets. The increase in cost of funds associated with the financing of AFS and HTM securities for the three and nine months ended September 30, 2018, as compared to the same periods in 2017, was the result of increases in borrowing rates due to increases in LIBOR.

Our convertible senior notes were issued in December 2017, are unsecured and pay interest semiannually at a rate of 5.625% per annum. The cost of funds associated with our convertible senior notes also includes amortization of deferred debt issuance costs.

Fee Income

During the three and nine months ended September 30, 2018, we recognized $0.0 million and $1.4 million in fee income, respectively, related to penalty fees charged for early prepayments of loans held-for-investment. We did not recognize any fee income during the three and nine months ended September 30, 2017.

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Management Fees

We do not have any employees and are externally managed by PRCM under the terms of a management agreement entered into in connection with closing of the IPO and Formation Transaction on June 28, 2017. Under the management agreement, PRCM and its affiliates provide us with the personnel and resources necessary to operate our business. In accordance with the management agreement, we incurred $3.1 million and $9.4 million as a management fee to PRCM for the three and nine months ended September 30, 2018, respectively, and $3.1 million and $3.2 million as a management fee to PRCM for the three and nine months ended September 30, 2017, respectively. The management fee is calculated based on our equity with certain adjustments outlined in the management agreement. See further discussion of the base management fee calculation in Note 13 - Commitments and Contingencies of the notes to the condensed consolidated financial statements.

Prior to the IPO and Formation Transaction, our Predecessor was allocated its proportionate share of management fees incurred by Two Harbors under the management agreement that Two Harbors has with PRCM Advisers LLC, or PRCM Advisers, a subsidiary of PRCM. Under its management agreement with PRCM Advisers as in effect during the relevant period, Two Harbors paid PRCM Advisers a base management fee equal to 1.5% of its adjusted equity on an annualized basis. Our Predecessor was allocated management fees incurred by Two Harbors of $3.5 million for the period from January 1, 2017 through June 27, 2017.

Servicing Expenses

For the three and nine months ended September 30, 2018, we recognized $0.6 million and $1.6 million, respectively, in servicing expenses related to the subservicing commercial real estate loans, compared to $0.3 million and $1.0 million for the same periods in 2017. The increase in servicing expenses during the three and nine months ended September 30, 2018, as compared to the same period in 2017, was driven by the growth of our investment portfolio, as described above.

Other Operating Expenses

For the three and nine months ended September 30, 2018, we recognized $3.9 million and $12.1 million of other operating expenses, which represents an annualized expense ratio of 1.9% and 1.9% of average equity, respectively. For the three and nine months ended September 30, 2017, we recognized $3.4 million and $7.6 million of other operating expenses, which represents an annualized expense ratio of 1.6% and 1.7% of average equity, respectively. The increase in our operating expense ratio during the three and nine months ended September 30, 2018, as compared to the same periods in 2017, resulted primarily from an increase in expenses related to the personnel and infrastructure to support the operation and growth of our business, as well as certain expenses required to maintain a public company.

Included in other operating expenses for the three and nine months ended September 30, 2018 are direct and allocated costs incurred by PRCM on our behalf and reimbursed by us. For the three and nine months ended September 30, 2018, these direct and allocated costs totaled approximately $1.4 million and $4.3 million, respectively, compared to $1.1 million for each of the same periods in 2017. Included in these reimbursed costs was compensation paid to employees of Pine River serving as our principal financial officer, chief operating officer and general counsel of $0.1 million and $1.0 million for the three and nine months ended September 30, 2018, respectively. The allocation of compensation paid to employees of Pine River serving as our chief operating officer, principal financial officer and general counsel is based on time spent overseeing our company’s activities in accordance with the management agreement; we do not reimburse PRCM for any expenses related to the compensation of our chief executive officer or chief investment officer. Equity based compensation expense for the three and nine months ended September 30, 2018 also includes the amortization of the restricted stock awarded to our executive officers in conjunction with the Company’s 2017 Equity Incentive Plan, or the Plan (see discussion in Note 16 - Equity Incentive Plan), including our chief executive officer, chief investment officer, chief operating officer, principal financial officer and general counsel of $0.7 million and $2.2 million, respectively.

Also included in other operating expenses for the three and nine months ended September 30, 2017 are direct and allocated costs that were paid by Two Harbors to PRCM Advisers and other third-party vendors. These direct and allocated costs totaled approximately $0.2 million and $4.4 million for the three and nine months ended September 30, 2017, respectively.

Financial Condition

We originate and acquire commercial real estate debt and related instruments generally to be held as long-term investments. These assets are classified as loans held-for-investment on the condensed consolidated balance sheets. Loans held-for-investment are reported at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless the assets are deemed impaired. We also hold CMBS, representing interests in pools of commercial mortgage loans issued by trusts.

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The following tables provide a summary of our portfolio as of September 30, 2018:



(dollars in thousands)
Type	Maximum Loan Commitment		Principal Balance		Carrying Value		Cash Coupon ⁽²⁾	Yield ⁽³⁾	Original Term (Years)	Initial LTV ⁽⁴⁾		Stabilized LTV ⁽⁵⁾
Senior loans ⁽¹⁾	$	3,125,807	$	2,684,269	$	2,661,672	L+4.13%	L+4.91%	3.3	67.2	%	62.7	%
Subordinated loans	46,666		46,666		46,666		L+9.03%	L+9.33%	6.0	61.8	%	56.7	%
CMBS	43,324		43,324		43,356		L+7.15%	L+7.73%	2.8	74.1	%	74.0	%
Total/Wtd. Avg.	$	3,215,797	$	2,774,259	$	2,751,694	L+4.22%	L+5.00%	3.3	67.3	%	62.8	%



(dollars in millions)
Type ⁽¹⁾	Origination/ Acquisition Date	Maximum Loan Commitment	Principal Balance	Carrying Value	Cash Coupon ⁽²⁾	Yield ⁽³⁾	Original Term (Years)	State	Property Type	Initial LTV ⁽⁴⁾	Stabilized LTV ⁽⁵⁾
Senior	07/18	$144.3	$110.3	$108.7	L+3.34%	L+4.27%	2.0	CA	Retail	50.7%	55.9%
Senior	09/17	125.0	108.1	107.1	L+4.45%	L+5.03%	3.0	CT	Office	62.9%	58.9%
Senior	07/16	120.4	108.6	107.9	L+4.45%	L+4.99%	4.0	Various	Office	62.8%	61.5%
Senior	12/15	120.0	120.0	119.9	L+3.65%	L+4.43%	4.0	LA	Mixed-Use	65.5%	60.0%
Senior	04/16	89.0	89.0	89.0	L+3.70%	L+5.44%	3.0	NY	Industrial	75.9%	55.4%
Senior	05/17	86.7	78.5	77.7	L+3.50%	L+4.82%	4.0	MA	Office	71.3%	71.5%
Senior	11/16	82.3	55.6	55.2	L+3.25%	L+5.78%	3.0	OR	Office	66.5%	51.1%
Senior	10/17	74.8	43.9	43.4	L+4.07%	L+4.47%	4.0	DC	Office	67.0%	66.0%
Senior	11/17	73.3	68.8	68.0	L+4.45%	L+5.20%	3.0	TX	Hotel	68.2%	61.6%
Senior	06/16	68.4	56.3	56.0	L+3.87%	L+4.93%	4.0	HI	Retail	76.2%	57.4%
Senior	11/17	68.3	60.8	60.2	L+4.10%	L+4.73%	3.0	CA	Office	66.8%	67.0%
Senior	11/15	66.2	66.2	65.9	L+4.75%	L+4.67%	3.0	NY	Office	66.4%	68.7%
Senior	08/16	65.0	61.8	61.3	L+3.95%	L+5.54%	4.0	NJ	Office	60.8%	63.0%
Senior	04/18	64.0	64.0	63.4	L+3.78%	L+4.23%	3.0	GA	Hotel	68.8%	59.8%
Senior	12/16	62.3	62.3	61.1	L+3.30%	L+4.87%	4.0	FL	Office	73.3%	63.2%
Senior	01/17	58.6	44.1	43.8	L+4.50%	L+5.16%	3.0	CA	Industrial	51.0%	60.4%
Senior	01/17	56.2	56.2	55.7	L+4.75%	L+5.24%	4.0	SC	Office	67.6%	67.1%
Senior	11/15	54.3	45.6	45.5	L+4.55%	L+5.13%	4.0	MD	Office	80.0%	64.5%
Senior	09/17	54.0	53.1	52.7	L+4.38%	L+4.91%	3.0	NY	Industrial	68.7%	72.0%
Senior	05/17	52.0	36.0	35.6	L+4.70%	L+5.50%	3.0	HI	Hotel	60.8%	59.4%
Senior	12/15	51.5	50.0	50.0	L+4.65%	L+4.87%	4.0	PA	Office	74.5%	67.5%
Senior	09/18	50.1	19.2	18.7	L+3.25%	L+4.13%	3.0	IL	Office	47.9%	56.1%
Senior	05/18	50.0	49.4	49.0	L+3.60%	L+3.85%	3.0	TX	Multifamily	71.1%	71.4%
Senior	02/16	47.6	45.8	45.5	L+3.78%	L+4.72%	3.0	TX	Office	72.9%	70.4%
Senior	12/17	47.0	28.0	27.6	L+4.38%	L+5.26%	3.0	MA	Mixed-Use	72.9%	62.0%
Senior	08/17	47.0	37.6	37.2	L+3.65%	L+4.88%	3.0	LA	Multifamily	64.6%	60.9%
Senior	05/18	46.5	29.1	28.8	L+4.07%	L+4.63%	3.0	NY	Mixed-Use	57.0%	51.1%
Senior	06/17	45.0	45.0	44.6	L+4.50%	L+5.24%	3.0	CA	Hotel	54.7%	48.6%
Senior	08/18	44.8	37.3	37.0	L+2.93%	L+3.32%	3.0	TX	Multifamily	68.9%	63.6%
Senior	06/18	41.0	41.0	40.6	L+3.60%	L+4.06%	3.0	WY	Hotel	67.4%	62.3%
Senior	08/17	40.0	40.0	39.7	L+4.24%	L+4.40%	3.0	KY	Multifamily	79.8%	73.1%
Senior	05/18	38.8	30.9	30.6	L+3.55%	L+3.95%	3.0	MA	Office	47.0%	41.1%
Senior	06/18	38.1	33.5	32.9	L+7.76%	L+10.13%	1.0	PA	Office	55.6%	63.4%
Senior	12/17	37.2	31.6	31.3	L+3.90%	L+4.55%	3.0	CA	Office	69.8%	66.4%
Senior	11/16	37.0	34.4	34.1	L+4.27%	L+5.03%	3.0	NY	Multifamily	61.3%	56.9%
Senior	05/17	35.2	28.5	28.2	L+5.00%	L+5.97%	3.0	TX	Office	68.7%	65.1%
Senior	06/18	34.9	16.0	15.8	L+4.07%	L+4.75%	3.0	OH	Hotel	70.6%	57.4%
Senior	10/17	34.1	21.9	21.7	L+4.05%	L+4.69%	3.0	AZ	Office	62.6%	59.5%
Senior	05/17	33.8	27.3	27.1	L+4.40%	L+5.36%	3.0	AZ	Office	69.5%	59.0%
Senior	03/16	33.8	33.8	33.6	5.11%	5.26%	10.0	NJ	Office	74.9%	74.9%
Senior	10/16	32.2	27.0	26.8	L+4.55%	L+5.16%	3.0	CA	Office	68.6%	48.6%
CMBS	11/15	30.5	30.5	30.5	L+7.25%	L+8.06%	2.8	Various	Office	77.6%	77.5%
Senior	07/17	30.0	30.0	29.8	L+4.10%	L+4.58%	3.0	NY	Multifamily	76.5%	76.5%

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(dollars in millions)
Type ⁽¹⁾	Origination/ Acquisition Date	Maximum Loan Commitment	Principal Balance	Carrying Value	Cash Coupon ⁽²⁾	Yield ⁽³⁾	Original Term (Years)	State	Property Type	Initial LTV ⁽⁴⁾	Stabilized LTV ⁽⁵⁾
Senior	06/18	29.3	18.4	18.1	L+3.40%	L+4.18%	3.0	CA	Office	69.1%	64.3%
Senior	06/18	29.0	29.0	28.7	L+3.55%	L+3.96%	3.0	TX	Multifamily	74.3%	68.2%
Senior	05/17	27.6	27.0	26.8	L+4.57%	L+5.19%	4.0	FL	Office	69.3%	68.5%
Senior	09/17	26.9	23.5	23.3	L+4.90%	L+5.52%	3.0	MA	Hotel	67.3%	63.9%
Senior	07/17	26.0	22.9	22.8	L+4.20%	L+4.86%	3.0	CA	Office	62.3%	64.2%
Senior	01/18	26.0	26.0	25.8	L+5.13%	L+5.58%	3.0	AZ	Hotel	65.8%	61.3%
Senior	06/18	25.9	12.5	12.3	L+3.50%	L+4.37%	3.0	PA	Industrial	72.1%	66.1%
Senior	09/18	25.5	21.1	20.8	L+3.87%	L+4.42%	3.0	NY	Mixed-Use	60.2%	59.3%
Senior	10/15	25.0	25.0	24.7	L+4.07%	L+5.76%	3.0	MO	Hotel	73.2%	57.8%
Senior	08/17	23.6	23.6	23.4	L+4.20%	L+4.50%	3.0	NY	Office	72.7%	66.7%
Senior	08/16	23.4	23.4	23.3	L+5.15%	L+5.42%	4.0	NY	Industrial	70.0%	67.6%
Senior	01/18	23.4	19.5	19.2	L+4.77%	L+5.50%	3.0	PA	Mixed-Use	66.8%	67.3%
Senior	03/18	23.0	23.0	22.8	L+4.05%	L+4.65%	2.0	FL	Office	60.8%	60.8%
Senior	06/18	22.8	16.1	15.9	L+4.21%	L+4.73%	3.0	FL	Retail	74.0%	69.4%
Senior	04/18	22.2	19.9	19.7	L+4.05%	L+4.46%	3.0	KS	Multifamily	72.1%	67.4%
Senior	08/17	21.9	15.4	15.3	L+4.77%	L+5.49%	3.0	PA	Office	66.7%	67.3%
Senior	07/17	21.5	19.6	19.5	L+4.15%	L+4.42%	3.0	GA	Multifamily	75.6%	75.2%
Senior	02/18	21.2	16.5	16.4	L+4.05%	L+4.54%	3.0	CA	Office	71.9%	62.0%
Senior	08/17	20.8	15.0	14.8	L+5.25%	L+6.12%	3.0	FL	Multifamily	74.1%	60.9%
Senior	10/16	20.0	17.7	17.5	L+4.85%	L+5.90%	3.0	NY	Multifamily	73.8%	62.5%
Senior	03/18	19.7	19.7	19.6	L+5.15%	L+5.71%	3.0	CA	Hotel	67.2%	60.0%
Senior	01/17	19.0	19.0	18.8	L+4.80%	L+5.27%	4.0	TX	Retail	70.4%	69.5%
Senior	04/18	18.7	18.7	18.6	L+4.29%	L+4.65%	3.0	NV	Multifamily	78.7%	66.1%
Senior	04/18	18.5	18.5	18.4	L+3.25%	L+3.53%	3.0	CA	Multifamily	77.1%	70.6%
Senior	04/18	18.5	18.5	18.4	L+3.25%	L+3.53%	3.0	CA	Multifamily	76.8%	64.0%
Senior	12/16	17.5	12.6	12.6	L+5.90%	L+6.97%	3.0	CA	Office	70.4%	65.8%
Mezzanine	08/15	17.0	17.0	17.0	L+8.75%	L+9.03%	2.0	FL	Hotel	70.7%	67.9%
Senior	07/18	16.6	10.5	10.4	L+3.75%	L+4.35%	3.0	CA	Office	77.1%	63.5%
Senior	09/18	16.6	16.6	16.5	L+2.85%	L+3.06%	3.0	SC	Multifamily	79.4%	72.2%
Senior	11/16	15.0	8.6	8.6	L+4.60%	L+5.46%	2.0	NY	Office	76.4%	66.5%
B-Note	01/17	14.7	14.7	14.7	8.00%	8.11%	10.0	HI	Hotel	41.4%	36.2%
CMBS	12/15	12.8	12.8	12.8	L+6.91%	L+6.95%	2.8	Various	Office	65.8%	65.8%
Mezzanine	08/15	9.9	9.9	9.9	L+9.50%	L+9.84%	5.0	GA	Office	73.3%	67.1%
Mezzanine	11/15	5.1	5.1	5.1	13.00%	12.50%	10.0	NY	Hotel	68.3%	58.0%
Total/Weighted Average		$3,215.8	$2,774.3	$2,751.7	L+4.22%	L+5.00%	3.3			67.3%	62.8%

____________________


(1)	“Senior” means a loan primarily secured by a first priority lien on commercial real property and related personal property and also includes, when applicable, any companion subordinate loans.


(2)	Cash coupon does not include origination or exit fees. Weighted average cash coupon excludes fixed rate loans.


(3)	Yield includes net origination fees and exit fees, but does not include future fundings, and is expressed as a monthly equivalent. Weighted average yield excludes fixed rate loans.


(4)	Initial LTV is calculated as the initial loan amount (plus any financing that is pari passu with or senior to such loan) divided by the as is appraised value (as determined in conformance with the Uniform Standards of Professional Appraisal Practice, or USPAP) as of the date of the loan was originated set forth in the original appraisal.

(5)

Stabilized LTV is calculated as the fully funded loan amount (plus any financing that is pari passu with or senior to such loan), including all contractually provided for future fundings, divided by the as stabilized value (as determined in conformance with USPAP) set forth in the original appraisal. As stabilized value may be based on certain assumptions, such as future construction completion, projected re-tenanting, payment of tenant improvement or leasing commissions allowances or free or abated rent periods, or increased tenant occupancies.

As of September 30, 2018, our borrowings consisted of repurchase agreements collateralized by our pledge of loans held-for-investment, AFS and HTM securities (CMBS) and certain cash balances, securitized debt obligations issued by a CLO and collateralized by a pool of loans held-for-investment and long-term unsecured convertible senior notes.

As of September 30, 2018, we had outstanding $1.3 billion of repurchase agreements, and the term to maturity ranged from from 39 days to approximately 1.75 years. Repurchase agreements had a weighted average borrowing rate of 4.36% and weighted average remaining maturities of 1.2 years as of September 30, 2018.

As of September 30, 2018, we had outstanding $653.2 million of securitized debt obligations with a weighted average borrowing rate of 3.35% and weighted average remaining maturities of 2.0 years.

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On December 12, 2017, we closed a private placement of $125.0 million aggregate principal amount of convertible senior notes due 2022. On January 10, 2018, an additional $18.8 million in notes were issued by the Company in connection with the exercise of the initial purchaser’s option. The notes are unsecured, pay interest semiannually at a rate of 5.625% per annum and are convertible at the option of the holder into shares of our common stock. The notes will mature in December 2022, unless earlier converted or repurchased in accordance with their terms. We do not have the right to redeem the notes prior to maturity, but may be required to repurchase the notes from holders under certain circumstances. As of September 30, 2018, the notes had a conversion rate of 50.0548 shares of common stock per $1,000 principal amount of the notes. The net proceeds from the offering were approximately $139.5 million after deducting underwriting discounts and estimated offering expenses, which were used to originate and acquire our target assets and for general corporate purposes. As of September 30, 2018, the outstanding amount due on convertible senior notes was $140.1 million, net of deferred issuance costs.

As of September 30, 2018, the debt-to-equity ratio with respect to our loans held-for-investment, AFS securities and HTM securities, which includes unsecured borrowings under convertible senior notes, was 2.5:1.0. We believe our debt-to-equity ratio provides unused borrowing capacity and, thus, improves our liquidity and the strength of our balance sheet.

The following table provides the quarterly average balances, the quarter-end balances, and the maximum balances at any month-end within that quarterly period, of borrowings under repurchase agreements, securitized debt obligations, the note payable to TH Insurance and convertible senior notes for the three months ended September 30, 2018, and the four immediately preceding quarters:



(in thousands)	Quarterly Average		End of Period Balance		Maximum Balance of Any Month-End
For the Three Months Ended September 30, 2018	$	1,953,052	$	2,074,563	$	2,074,563
For the Three Months Ended June 30, 2018	$	1,762,115	$	1,811,046	$	1,900,561
For the Three Months Ended March 31, 2018	$	1,634,541	$	1,664,201	$	1,685,529
For the Three Months Ended December 31, 2017	$	1,549,588	$	1,642,922	$	1,642,922
For the Three Months Ended September 30, 2017	$	1,247,881	$	1,502,722	$	1,502,722

Issuance of Common Stock

On June 28, 2017, we completed an IPO of 10,000,000 shares of our common stock at a price of $19.50 per share, for gross proceeds of $195.0 million. We received net proceeds of approximately $181.9 million, after accounting for issuance costs of approximately $13.1 million. Concurrently with the closing of the IPO, we issued 33,071,000 shares of our common stock to Two Harbors in exchange for the equity interests in our Predecessor, which became our wholly owned indirect subsidiary as a result of the transaction. On November 1, 2017, Two Harbors distributed to its common stockholders the 33,071,000 shares of our common stock it had acquired in connection with the Formation Transaction, allowing our market capitalization to be fully floating.

Liquidity and Capital Resources

Liquidity is a measure of our ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund and maintain our target investments and operations, make distributions to our stockholders and other general business needs. We use cash to acquire our target investments, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. Our primary sources of cash consist of unused borrowing capacity under our financing sources, securitizations, the net proceeds of future equity and debt offerings, payments of principal and interest we receive on our portfolio of assets and cash generated from our operating results. In the second quarter of 2018, we financed a pool of our commercial real estate loans through our first CLO securitization transaction. The net proceeds from the CLO issuance were used to repay a portion of the outstanding balances of our repurchase facilities, to re-invest in our target assets and for other general corporate purposes. We expect that our primary sources of financing will be, to the extent available to us, through (a) repurchase agreements and other types of credit facilities, (b) securitizations, (c) other sources of private financing, and (d) offerings of our equity or debt securities.

In the future, we may use other additional sources of financing to fund the origination or acquisition of our target investments, including other credit facilities, warehouse facilities, repurchase facilities and other secured and unsecured forms of borrowing. These financings may be collateralized or non-collateralized and may involve one or more lenders. We expect that these facilities will typically have maturities ranging from two to five years and may accrue interest at either fixed or floating rates. We may also finance our business through the non-recourse sale of senior loan interests.

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We may also seek to raise further equity capital and issue additional debt securities in order to fund our future investments. We may also seek to enhance the returns on our commercial real estate loan portfolio through additional securitizations, if available.

As of September 30, 2018, we held $148.2 million in cash and cash equivalents available to support our operations; $2.8 billion of loans held-for-investment, AFS securities and HTM securities; and $2.1 billion of outstanding debt in the form of repurchase agreements, securitized debt obligations and long-term unsecured convertible senior notes. During the three and nine months ended September 30, 2018, our debt-to-equity ratio increased from 2.2:1.0 to 2.5:1.0, predominantly driven by the origination of and increased financing on loans held-for-investment. We intend to use prudent amounts of leverage to increase potential returns to our stockholders. To that end, subject to maintaining our qualification as a REIT and our exclusion from registration under the Investment Company Act, we intend to use borrowings to fund the origination or acquisition of our target investments. Given current market conditions and our focus on senior floating-rate mortgage loans, we currently expect that such leverage will not exceed, on a debt-to-equity basis, a 3-to-1 ratio on a company basis. The amount of leverage we deploy for our target investments depends upon our assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the investments in our portfolio, the potential for losses in our portfolio, the gap between the duration of our assets and liabilities, including hedges, the availability and cost of financing the investments, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial real estate financing markets, our outlook for the level and volatility of interest rates, the slope of the yield curve, the credit quality of our investments, the collateral underlying our investments, and our outlook for investment spreads relative to LIBOR.

Our primary sources of liquidity include cash and cash equivalents. As of September 30, 2018, we held approximately $148.2 million in cash and cash equivalents. Potential additional sources of liquidity may be unused borrowing capacity on our unpledged commercial real estate loans held-for-investment. Obtaining such liquidity is at the discretion of our lending counterparties and may not be available to us when desired. Generally, unused borrowing capacity may be the result of our election not to utilize certain financing, as well as delays in the timing in which funding is provided for a specific investment. We monitor and forecast our available, or excess, liquidity on a daily basis. If borrowing rates and/or collateral requirements change in the near term, we believe we are subject to less earnings volatility than a more leveraged organization.

During the nine months ended September 30, 2018, we did not experience any restrictions to our funding sources, although balance sheet capacity of counterparties has tightened due to compliance with the Basel III regulatory capital reform rules as well as management of perceived risk in the volatile interest rate environment. We expect ongoing sources of financing to be primarily repurchase agreements, convertible notes, issuance of common stock, potential additional securitizations and similar financing arrangements. We will continue to explore other types of funding facilities to further diversify our financing sources. We plan to finance our assets with a moderate amount of leverage, the level of which may vary based upon the particular characteristics of our portfolio and market conditions.

As of September 30, 2018, we had repurchase agreements in place with five counterparties (lenders) and a revolving credit facility in place with one counterparty to finance loans held for investment, and two other asset-specific facilities to finance our CMBS, and we continue to evaluate additional counterparties to manage and reduce counterparty risk. Under our repurchase agreements, we are required to pledge additional cash as collateral to our lenders when the estimated fair value of the existing pledged collateral under such agreements declines and such lenders, through a margin call, demand additional collateral. Such counterparties may make margin calls because of a perceived decline in the value of our assets collateralizing the repurchase agreements due to credit or market events, depending on the repurchase agreement. To cover a margin call, we may pledge additional cash. At maturity, any cash on deposit as collateral is generally applied against the repurchase agreement balance, thereby reducing the amount borrowed. Should the value of our assets suddenly decrease, significant margin calls on our repurchase agreements could result, causing an adverse change in our liquidity position.

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An overview of our repurchase and revolving credit facilities that provide short- and long-term financing for our loans held-for-investment is presented in the table below:



	September 30, 2018
(in thousands)	Expiration Date ⁽¹⁾	Committed	Amount Outstanding		Unused Capacity		Total Capacity
Repurchase facilities:
Morgan Stanley Bank	June 28, 2020	No	$	467,381	$	132,619	$	600,000
JPMorgan Chase Bank	June 28, 2019	No	$	375,084	$	124,916	$	500,000
Goldman Sachs Bank	May 2, 2019	No	$	195,937	$	304,063	$	500,000
Citibank	June 28, 2020	No	$	134,262	$	115,738	$	250,000
Wells Fargo Bank ⁽²⁾	June 28, 2019	No	$	80,328	$	119,672	$	200,000
Revolving credit facilities:
Citibank	April 13, 2020	No	$	—	$	75,000	$	75,000

____________________


(1)	The facilities are set to mature on the stated expiration date, unless extended pursuant to their terms.


(2)	We retain an option to increase the maximum facility capacity amount up to $475 million, subject to customary terms and conditions.

We are subject to a variety of financial covenants under our lending agreements. The following represent the most restrictive financial covenants across the agreements as of September 30, 2018:


•	Unrestricted cash cannot be less than the greater of $30.0 million and 5.0% of recourse indebtedness. As of September 30, 2018, our unrestricted cash, as defined, was $148.2 million, while 5.0% of our recourse indebtedness, as defined, was $17.4 million.


•	Tangible net worth must be greater than the sum of 75.0% of tangible net worth as of June 28, 2017 and 75.0% of net cash proceeds of additional equity issuances, which calculates to $624.1 million. As of September 30, 2018, our tangible net worth, as defined, was $825.7 million.


•	Target asset leverage ratio cannot exceed 75.0% and our total leverage ratio cannot exceed 80.0%. As of September 30, 2018, our target asset leverage ratio, as defined, was 46.6% and our total leverage ratio, as defined, was 71.9%.


•	Minimum interest coverage must be greater than 1.5:1.0. As of September 30, 2018, our minimum interest coverage, as defined, was 2.0:1.0.

We may also be subject to additional financial covenants in connection with various other agreements we enter into in the normal course of our business. We intend to continue to operate in a manner which complies with all of our financial covenants.

The following table summarizes assets at carrying values that were pledged or restricted as collateral for the future payment obligations of repurchase agreements and securitized debt obligations as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018		December 31, 2017
Loans held-for-investment	$	2,559,046	$	2,202,049
Available-for-sale securities, at fair value	12,830		12,798
Held-to-maturity securities	30,526		42,169
Restricted cash	2,922		565
Total	$	2,605,324	$	2,257,581

Although we generally intend to hold our target assets as long-term investments, we may sell certain of our assets in order to manage our liquidity needs, to meet other operating objectives and to adapt to market conditions. Commercial real estate loans are subject to longer trade timelines than securities and, as a result, market conditions could significantly and adversely affect the liquidity of our assets. Any illiquidity of our assets may make it difficult for us to sell such assets if the need or desire arises. Our ability to quickly sell certain assets may be limited by delays due to the time period needed for negotiating transaction documents and conducting diligence. Consequently, even if we identify a buyer for our commercial real estate loans, there is no assurance that we would be able to quickly sell such assets if the need or desire arises.

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In addition, if we are required to liquidate all or a portion of our portfolio quickly, we may realize significantly less than the value at which we previously recorded our assets. Assets that are illiquid are more difficult to finance, and to the extent that we use leverage to finance assets that become illiquid, we may lose that leverage or have it reduced. Assets tend to become less liquid during times of financial stress, which is often the time that liquidity is most needed. As a result, our ability to sell assets or vary our portfolio in response to changes in economic and other conditions may be limited by liquidity constraints, which could adversely affect our results of operations and financial condition.

We cannot predict the timing and impact of future sales of our assets, if any. Because many of our assets are financed with repurchase agreements and revolving credit facilities, a significant portion of the proceeds from sales of our assets (if any), prepayments and scheduled amortization would be used to repay balances under these financing sources.

The following table provides the maturities of our repurchase agreements, securitized debt obligations and convertible senior notes as of September 30, 2018 and December 31, 2017:



(in thousands)	September 30, 2018		December 31, 2017
Within 30 days	$	—	$	22,032
30 to 59 days	28,262		34,514
60 to 89 days	—		—
90 to 119 days	—		—
120 to 364 days	686,948		—
One year and over	1,219,229		1,465,062
Three to five years	140,124		121,314
Total	$	2,074,563	$	1,642,922

For the three months ended September 30, 2018, our restricted and unrestricted cash and cash equivalents balance increased approximately $44.8 million to $153.5 million at September 30, 2018. The cash movements can be summarized by the following:


•	Cash flows from operating activities. For the three months ended September 30, 2018, operating activities increased our cash balances by approximately $16.6 million, primarily driven by our financial results for the quarter.


•	Cash flows from investing activities. For the three months ended September 30, 2018, investing activities decreased our cash balances by approximately $218.2 million, primarily driven by originations of loans held-for-investment, offset by repayments of loans held-for-investment and held-to-maturity securities.


•	Cash flows from financing activities. For the three months ended September 30, 2018, financing activities increased our cash balance by approximately $246.4 million, primarily driven by net proceeds from repurchase agreements, offset by the payment of the common stock dividends.

Off-Balance Sheet Arrangements

We have not participated in transactions that create relationships with unconsolidated entities or financial partnerships which would have been established for the purpose of facilitating off-balance sheet arrangements. Further, we have not guaranteed any obligations of unconsolidated entities or entered into any commitment or intent to provide funding to any such entities. However, as of September 30, 2018, we had unfunded commitments on commercial real estate loans held-for-investment of $441.5 million to be used for future fundings to borrowers, generally to finance lease-related or capital expenditures.

Dividends

We intend to make regular quarterly distributions to holders of our common stock. U.S. federal income tax law generally requires that a REIT annually distribute at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income, including capital gains. We intend to pay regular quarterly dividends to our stockholders in an amount equal to our REIT taxable income, if and to the extent authorized by our board of directors. Before we pay any dividend, whether for U.S. federal income tax purposes or otherwise, we must first meet both our operating requirements and debt service on our secured funding facilities, other lending facilities, repurchase agreements and other debt payable. If our cash available for distribution is less than our net taxable income, we could be required to sell investments or borrow funds to make cash distributions or we may make a portion of the required distribution in the form of a taxable stock distribution or distribution of debt securities.

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Inflation

Virtually all of our assets and liabilities are interest rate sensitive in nature. As a result, interest rates and other factors influence our performance far more so than does inflation. Changes in interest rates do not necessarily correlate with inflation rates or changes in inflation rates. Our financial statements are prepared in accordance with U.S. GAAP and our distributions will be determined by our board of directors consistent with our obligation to distribute to our stockholders at least 90% of our REIT taxable income on an annual basis in order to maintain our REIT qualification; in each case, our activities and balance sheet are measured with reference to historical cost and/or fair market value without considering inflation.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We seek to manage our risks related to the credit quality of our investments, interest rates, liquidity and market value while, at the same time, seeking to generate attractive risk-adjusted returns to our stockholders. While we are exposed to certain types of market risk in our business, we seek to actively manage them and rely on our Manager’s sophisticated risk management infrastructure and philosophy centered around quantifying and measuring various market risks on a continuous basis. We seek to be fairly compensated through the returns we earn on our investments for taking those risks and focus on maintaining liquidity and capital levels consistent with the risks to which we are exposed.

Credit Risk

We are subject to varying degrees of credit risk in connection with holding a portfolio of our target investments. The performance and value of our investments depend upon the sponsors’ ability to operate the properties that serve as our collateral so that they produce cash flows adequate to pay interest and principal due to us. We seek to manage credit risk by performing deep fundamental credit analysis of our potential investments. Credit risk is also addressed through our on-going review, and our investment portfolio is monitored for variance from expected defaults, severities, losses and cash flow on a monthly basis, with more intense analysis and oversight done on a quarterly basis.

Interest Rate Risk

Generally, the composition of our investments is such that rising interest rates increase our net income, while declining interest rates decrease net income. As of September 30, 2018, approximately 98.1% of our portfolio by carrying value earned a floating rate of interest. The remaining approximately 1.9% of our portfolio earns a fixed rate of interest. If interest rates were to decline, the value of these fixed-rate investments may increase and if interest rates were to increase, the value of these fixed-rate investments may fall; however, the interest income generated by these investments would not be affected by market interest rate fluctuations. The interest rates we pay under our repurchase agreements and securitized debt obligations are primarily floating rate. Accordingly, our interest expense generally increases as interest rates increase and decreases as interest rates decrease.

Our analysis of risks is based on our experience, estimates, models and assumptions. These analyses rely on models which utilize estimates of fair value and interest rate sensitivity. Actual economic conditions or our implementation of decisions may produce results that differ significantly from the estimates and assumptions used in our models.

The information presented in the following interest rate sensitivity table projects the potential impact of sudden parallel changes in interest rates on our financial results and financial condition over the next 12 months, based on our interest sensitive financial instruments at September 30, 2018. All changes in value are measured as the change from our September 30, 2018 financial position. All projected changes in annualized net interest income are measured as the change from our projected annualized net interest income based off current performance returns.



	Changes in Interest Rates
(in thousands)	-100 bps			-50 bps			+50 bps			+100 bps
Change in value of financial position:
Loans held-for-investment	$	983		$	533		$	(553	)	$	(1,106	)
Available-for-sale securities	5			3			(3		)	(5		)
Held-to-maturity securities	13			6			(6		)	(13		)
Repurchase agreements	(557		)	(279		)	279			557
Securitized debt obligations	(198		)	(92		)	138			275
Convertible senior notes	(5,112		)	(2,527		)	2,472			4,889
Total net assets	$	(4,866	)	$	(2,356	)	$	2,327		$	4,597

	-100 bps			-50 bps			+50 bps			+100 bps
Change in annualized net interest income:	$	(6,392	)	$	(4,307	)	$	3,746		$	7,491

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The interest rate sensitivity table quantifies the potential changes in annualized net interest income and portfolio value, should interest rates immediately change. The interest rate sensitivity table presents the estimated impact of interest rates instantaneously rising 50 and 100 basis points, and falling 50 and 100 basis points. The cash flows associated with the portfolio for each rate change are calculated based on assumptions, including yield on future originations and acquisitions, slope of the yield curve, and size of the portfolio. Assumptions made on the interest rate sensitive liabilities include anticipated interest rates, collateral requirements as a percentage of borrowings and amount and term of borrowing.

Certain assumptions have been made in connection with the calculation of the information set forth in the foregoing interest rate sensitivity table and, as such, there can be no assurance that assumed events will occur or that other events will not occur that would affect the outcomes. The base interest rate scenario assumes interest rates at September 30, 2018. The analysis utilizes assumptions and estimates based on management’s judgment and experience. Furthermore, while we generally expect to retain such assets and the associated interest rate risk to maturity, future originations, acquisitions and sales of assets could materially change our interest rate risk profile.

The information set forth in the interest rate sensitivity table above and all related disclosures constitutes forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. Actual results could differ significantly from those estimated in the foregoing interest rate sensitivity table.

Borrower Performance

In addition to the risks related to fluctuations in cash flows and investment values associated with movements in interest rates, there is also the risk of borrower non-performance on our floating-rate investments. If interest rates were to significantly rise, it is possible that the increased debt service costs may negatively impact operating cash flows on properties securing our commercial real estate loan investments, resulting in potential non-performance of our borrowers. This risk is partially mitigated by various facts we consider during our rigorous underwriting process, which in certain cases include a requirement for our borrower to purchase an interest rate cap contract. As of September 30, 2018, none of the commercial real estate loans in our portfolio were non-performing.

Capital Markets Risk

As a REIT, we are required to distribute a significant portion of our taxable income annually, which constrains our ability to accumulate significant operating cash flow and therefore requires us to utilize capital markets, both debt and equity, to finance our business. As a result, we are exposed to risks related to the capital markets and our related ability to raise capital through the issuance of our common stock or other equity instruments. We are also exposed to risks related to the debt capital markets, and our related ability to finance our business through borrowings under credit facilities or other debt instruments, such as securitizations or unsecured debt. We seek to mitigate these risks by monitoring the debt and equity capital markets to inform our decisions on the amount, timing, and terms of capital we raise.

Real Estate Risk

Our business strategy focuses on commercial real estate related debt investments. As a result, we will be exposed to the risks generally associated with the commercial real estate market, including occupancy rates, capitalization rates, absorption rates, and other macroeconomic factors beyond our control.

Additionally, commercial real estate debt investments may be affected by a number of factors, including, national, regional and local economic and real estate conditions, changes in business trends of specific industry segments, property construction characteristics, demographic factors, and changes to building codes. Any combination of these factors may affect the value of real estate collateral for investments within our investment portfolio and the potential proceeds available to a borrower to repay the underlying loans, which could cause us to suffer losses. We seek to manage these risks through our rigorous and fundamentally driven underwriting and investment management processes.

Liquidity Risk

Our liquidity risk is principally associated with our financing of longer-maturity investments with shorter-term borrowings in the form of repurchase agreements. Should the value of our investments pledged as collateral on our repurchase agreements significantly decrease, our lenders may exercise their margin call rights, causing an adverse change in our liquidity position. Additionally, if one or more of our repurchase agreement counterparties chose not to provide ongoing funding, our ability to finance our investments would decline or exist at possibly less advantageous terms. As such, we cannot assure that we will always be able to roll over our repurchase agreements or other sources of financing which require us to renew them on a periodic basis.

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Risk Management

To the extent consistent with maintaining our REIT qualification, we seek to manage risk exposure by closely monitoring our portfolio and actively managing the financing, interest rate, credit, and other risks associated with holding a portfolio of our target investments. Generally, with the guidance and experience of our Manager:


•	we manage our portfolio with focus on diligent, investment-specific market review, enforcement of loan and security rights, and timely execution of disposition strategies;


•	we actively employ portfolio-wide and investment-specific risk measurement and management processes in our daily operations, including utilizing our Manager’s risk management tools; and


•	we seek to manage credit risk through our rigorous underwriting due diligence process prior to origination or acquisition of our target investments and through the use of non-recourse financing, when and where available and appropriate.

Item 4. Controls and Procedures

A review and evaluation was performed by our management, including our Chief Executive Officer, or CEO, and Chief Financial Officer, or CFO, of the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that review and evaluation, the CEO and CFO have concluded that our current disclosure controls and procedures, as designed and implemented, were effective as of the end of the period covered by this Quarterly Report on From 10-Q. Although our CEO and CFO have determined our disclosure controls and procedures were effective at the end of the period covered by this Quarterly Report on Form 10-Q, a control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that it will detect or uncover failures within the Company to disclose material information otherwise required to be set forth in the reports we submit under the Exchange Act.

There was no change in our internal control over financial reporting that occurred during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

From time to time we may be involved in various legal claims and/or administrative proceedings that arise in the ordinary course of our business. As of the date of this filing, we are not party to any litigation or legal proceedings or, to the best of our knowledge, any threatened litigation or legal proceedings, which, in our opinion, individually or in the aggregate, would have a material adverse effect on our results of operations or financial condition.

Item 1A. Risk Factors

There have been no material changes to the risk factors set forth under the heading “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017, or the Form 10-K. The materialization of any risks and uncertainties identified in our Forward-Looking Statements contained in this Quarterly Report on Form 10-Q, together with those previously disclosed in the Form 10-K, or those that are presently unforeseen could result in significant adverse effects on our financial condition, results of operations, and cash flows. See Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements” in this Quarterly Report on Form 10-Q.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

None.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

Exhibits - The exhibits listed on the accompanying Index of Exhibits are filed or incorporated by reference as a part of this report. Such Index is incorporated herein by reference.

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Exhibit Number		Exhibit Index
3.1		Articles of Amendment and Restatement of Granite Point Mortgage Trust Inc.’s Charter (incorporated by reference to Exhibit 3.1 of Amendment No. 3 to the Company’s Registration Statement on Form S-11 (File No. 333-218197) filed with the SEC on June 20, 2017).
3.2		Amended and Restated Bylaws of Granite Point Mortgage Trust Inc. (incorporated by reference to Exhibit 3.2 of Amendment No. 1 to the Company’s Registration Statement on Form S-11 (File No. 333-218197) filed with the SEC on June 15, 2017).
3.3		Articles Supplementary for Cumulative Redeemable Preferred Stock of Granite Point Mortgage Trust Inc. (incorporated by reference to Exhibit 3.3 of Amendment No. 3 to the Company’s Registration Statement on Form S-11 (File No. 333-218197) filed with the SEC on June 20, 2017).
4.1		Indenture, dated as of October 12, 2018, between the Company and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K (File No. 001-38124) filed with the SEC on October 12, 2018).
4.2		Supplemental Indenture, dated as of October 12, 2018, between the Company and Wells Fargo Bank, National Association (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K (File No. 001-38124) filed with the SEC on October 12, 2018).
31.1		Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
31.2		Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
32.1		Certification of the Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
32.2		Certification of the Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith)
101		Financial statements from the Quarterly Report on Form 10-Q of Granite Point Mortgage Trust Inc. for the three months ended September 30, 2018, filed with the SEC on November 6, 2018, formatted in Inline XBRL: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Statements of Stockholders’ Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to the Condensed Consolidated Financial Statements. (filed herewith)

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



			GRANITE POINT MORTGAGE TRUST INC.
Dated:	November 6, 2018	By:	/s/ John A. Taylor
			John A. Taylor President, Chief Executive Officer and Director (Principal Executive Officer)
Dated:	November 6, 2018	By:	/s/ Marcin Urbaszek
			Marcin Urbaszek Chief Financial Officer (Principal Accounting and Financial Officer)