Description

GPMT is a special situation that is trading off for purely technical reasons (recent spin-off). After the shareholder base turns over this should trade up ~10%-20% and in the interim you clip a healthy dividend.

This is a very simple, timely situation with a clear technically-driven entry point – as such, my write-up will be brief.

Situation:

GPMT is a very simple business with very clear NAV/BV support at the $19+ level. It was previously part of TWO which IPO’d 23% of the shares in GPMT in June 2017 (and retained the remaining 77%). The original IPO pricing range was $20-21, it priced below the range at $19.50, and subsequently traded in a tight range around $19. Earlier this month, the remaining 77% of shares owned by TWO were distributed to their shareholders, and as those shares are hitting the accounts of TWO holders we are predictably seeing a lot of technical selling that has pushed the price well below the tight range that it had traded in prior to the distribution. Once we are through with the bulk of the selling (happening now), it should move back up to $19 and beyond (as TWO overhang is now gone).

Historical Trading:

This traded in a very tight ~$18.80 – 19.30/sh range for its entire existence until the spin was announced in mid-September (that was the original drop). On November 2nd, shares were distributed and predictably GPMT sold off on high volume:

Business Description:

This is a really simple business. It’s a REIT that is a pool of predominantly floating rate, first mortgages on offices/multifamily/other commercial real estate. It’s externally managed by Pine River who gets a 1.5% base fee and 20% of returns over an 8% hurdle (consistent fee structure to comps). It currently yields L+519, properties have a 64% LTV, debt levels aren’t excessive (62% of capitalization, so 1.6 to 1 net debt-to-equity), and will benefit from rising rates. Current dividend is 7.3% or 6.7% if this was trading @ BV. Mgmt has guided to a Q4 div of $0.38-0.40/sh which would equate to an 8.9% yield or 8.1% if this was trading @ BV.

It’s worth reiterating that this is a very vanilla portfolio – it’s not a specialty finance business like an NLY that has meaningful non-prime assets with duration risk and uses tons of leverage, nor is it like CLNS with a bunch of esoteric assets thrown in the mix. And by no means am I intending to pick on NLY/CLNS – I’m just highlighting that it should be pretty clear to anyone that spends 5 mins on this that a fair value is in the $19+ range – you don’t need to build an extensive model or think about esoteric interest rate risks – this is an important factor in getting this to re-rate back up in a short timeframe.

Valuation:

At the very least I don’t see why this won’t trade right back up to the ~$19 range it traded to before the spin-off was announced. BV has remained stable q/q and it is now a more liquid entity without a TWO overhang. I also think there is a case to be made for a valuation closer to ~$21 which would be more in-line with peers that trade at a premium to BV (best peer in terms of portfolio mix is BXMT which trades at 1.2x BV given exposure to rising rates).

Comps here are ARI (Apollo-managed), ACRE (Ares-managed), BXMT (Blackstone-managed), KREF (KKR-managed), LADR (internal) and STWD (Starwood-managed). With the exception of LADR and to a lesser-extent ARI, they have similar compensation structures and similar portfolio mix of floating, LTV levels, etc. If we ignore LADR/ARI, the comps typically trade close to BV outside of major periods of market stress like Feb 2016. Currently they trade at a small ~10% premium to BV in aggregate as people are getting excited about rising rates and investors position more towards floating rate portfolios. As a relative newcomer with a less prestigious manager GPMT will probably continue to trade at a discount to the group, but trading below BV when others are in the 1.00-1.25x BV range seems unlikely once the technical selling is complete.

Catalyst

Technical selling abating

Guided dividend raise in Q4