GPMT US Equity☆

Item 7. 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 Annual Report on Form 10-K. In addition to historical data, this discussion contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. Our actual results may differ materially from those in this discussion as a result of various factors, including, but not limited to, those discussed in Part I - Item 1A Risk Factors, in this Annual Report on Form 10-K.

This section of this Annual Report on Form 10-K generally discusses 2020 and 2019 items and year-to-year comparisons between 2020 and 2019. Discussions of 2018 items and year-to-year comparisons between 2019 and 2018 that are not included in this Annual Report on Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, which discussion is incorporated by reference.

COVID-19 Pandemic

As of December 31, 2020, the COVID-19 pandemic remains ongoing, and, as a result, numerous countries, including the United States, have declared national emergencies and have reacted by instituting quarantines, restrictions on travel and temporarily closing non-essential businesses, including offices and hotels. Many states and local jurisdictions in the U.S. instituted varying degrees of “shelter-in-place” guidelines or orders and other measures designed to mitigate the impact of COVID-19. Such actions have resulted in significant macroeconomic disruptions and have adversely impacted many industries. In response, the U.S. government has implemented economic stimulus and interest rate cuts, among other actions. However, the ongoing pandemic may continue to adversely impact macroeconomic and market conditions, resulting in a period of global economic slowdown. The rapidly evolving and fluid nature of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions, and, as a result, present material uncertainty and risk with respect to us and the performance of our investments.

The full extent of the impact and effects of COVID-19 will depend on future developments, including, among other factors, the duration, severity and spread of the outbreak, along with the related travel advisories, quarantines and restrictions, the recovery time of the disrupted supply chains and industries, the impact of labor market interruptions, the impact of government interventions and uncertainty with respect to the duration of the global economic slowdown. For additional discussion with respect to the potential impact of the COVID-19 pandemic on our liquidity and capital resources, see Liquidity and Capital Resources below.

Our Company

Granite Point Mortgage Trust Inc. 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 operate as a real estate investment trust, or REIT, as defined under the Internal Revenue Code of 1986, as amended, or the Code. 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. We operate our business as one segment.

Through December 31, 2020, we were externally managed by Pine River Capital Management L.P., or the Former Manager. On October 10, 2020, we entered into a definitive agreement with the Former Manager pursuant to which we internalized our management on December 31, 2020, or the Internalization.

Internalization

Through December 31, 2020, we were externally managed by Pine River Capital Management L.P., or the Former Manager. On October 10, 2020, we entered into definitive agreements with the Former Manager, pursuant to which we internalized our management function, effective December 31, 2020, or the Internalization. Upon the effectiveness of the Internalization, among other things: (i) we made a one-time cash payment of $44.5 million to the Former Manager; (ii) we became an internally-managed REIT and hired 31 employees previously employed by the Former Manager, including our executives; (iii) the management agreement with the Former Manager, the Management Agreement, was terminated; and (iv) we will no longer pay management or incentive fees going forward, however, we will incur expenses associated with being an internally-managed REIT, including expenses related to compensation of our personnel, that were previously borne by the Former Manager.

2020 Activity

Operating Results:

•GAAP net loss of ($40.5) million, or ($0.73) per basic share, primarily driven by restructuring charges associated with the Internalization and an increase to the current expected credit loss, or CECL, reserve in the form of provision for credit losses recorded during 2020, mainly due to the adverse economic conditions related to the COVID-19 pandemic.

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•Distributable Earnings of $64.7 million, or $1.17 per basic share, which excludes the Internalization-related restructuring charges and the increase to the CECL reserve, as further described below.

•Book value per share of $16.92 as of December 31, 2020, inclusive of ($1.31) per share of total CECL reserve.

•Declared common dividends of $22.3 million, or $0.65 per share of common stock, inclusive of a $13.8 million, or $0.25 per share special dividend.

Portfolio Activity:

•Funded $364.2 million of total principal balance, inclusive of $239.0 million on prior loan commitments.

•Received loan repayments and principal amortization of $517.3 million.

•Portfolio of 103 loan investments as of December 31, 2020 with a weighted-average stabilized LTV at origination of 63.3% and a weighted-average all-in yield at origination of L+4.19%.

•Collected over 99% of contractual interest payments during the year, inclusive of loan modifications. Deferred and added to the principal $8.7 million of interest income during the year.

Financing Activity:

•Secured a $300 million strategic financing commitment in the form of five-year secured term loan facilities with an initial draw of $225 million, $75 million in additional delayed draw commitments and warrants to purchase up to approximately 6.1 million shares of common stock.

•Reinvested $134.4 million of loan prepayment proceeds in GPMT 2019-FL2.

Key Financial Measures and Indicators

As a commercial real estate finance company, we believe the key financial measures and indicators for our business are earnings per share on a generally accepted accounting principles, or GAAP, basis, dividends declared, Distributable Earnings and book value per share. For the three months ended December 31, 2020, we recorded earnings per share of $0.42, declared a regular quarterly cash dividend of $0.20 per share of common stock and a special cash dividend of $0.25 per share of common stock, and reported Distributable Earnings of $0.33 per share. Our book value as of December 31, 2020 was $16.92 per share, inclusive of ($1.31) of total CECL reserve. For the year ended December 31, 2020, we recorded a net loss of ($0.73) per share, declared total dividends of $0.65 per share and reported Distributable Earnings of $1.17 per share.

As further described below, Distributable Earnings is a measure that is not prepared in accordance with GAAP. We use Distributable Earnings to evaluate our performance, excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan portfolio and operations. In addition, Distributable Earnings is a performance metric we consider, along with other measures, when declaring our common stock dividends.

Earnings Per Share and Dividends Declared Per Common Share

The following table sets forth the calculation of basic and diluted earnings per share and dividends declared per share:

Year Ended

December 31,

Basic and diluted loss per common share $ (0.73) $ 1.32

Special dividend declared per common share $ 0.25 $ —

Dividend declared per common share $ 0.40 $ 1.68

Distributable Earnings

Beginning with this Annual Report on Form 10-K, and for all subsequent reporting periods ending on or after December 31, 2020, we have elected to present Distributable Earnings, a measure that is not prepared in accordance with GAAP, as a supplemental method of evaluating our operating performance. Distributable Earnings replaces our prior presentation of Core Earnings with no changes to the definition. In order to maintain our status as a REIT, we are required to distribute at least 90% of our taxable income as dividends. Distributable Earnings is intended to serve as a general proxy for our taxable income, though it is not a perfect substitute for it, and, as such, is considered a key indicator of our ability to generate sufficient income to pay our common dividends and in determining the amount of such dividends, which is the primary focus of income-oriented investors who comprise a meaningful segment of our stockholder base. We believe providing Distributable Earnings on a supplemental basis to our net (loss) income and cash flow from operating activities, as determined in accordance with GAAP, is helpful to stockholders in assessing the overall performance of our business.

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We use Distributable Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments we believe are not necessarily indicative of our current loan portfolio and operations. For reporting purposes, we define Distributable Earnings as net (loss) income attributable to our stockholders, computed in accordance with GAAP, excluding: (i) non-cash equity compensation expense; (ii) depreciation and amortization; (iii) any unrealized gains (losses) or other similar non-cash items that are included in net income for the applicable reporting period (regardless of whether such items are included in other comprehensive income or loss or in net income for such period); and (iv) certain non-cash items and one-time expenses. Distributable Earnings may also be adjusted from time to time for reporting purposes to exclude one-time events pursuant to changes in GAAP and certain other material non-cash income or expense items approved by a majority of our independent directors. The exclusion of depreciation and amortization from the calculation of Distributable Earnings only applies to debt investments related to real estate to the extent we foreclose upon the property or properties underlying such debt investments.

While Distributable Earnings excludes the impact of the unrealized non-cash current provision for credit losses, we expect to only recognize such potential credit losses in Distributable Earnings if and when such amounts are deemed non-recoverable. This is generally at the time a loan is repaid, or in the case of foreclosure, when the underlying asset is sold, but non-recoverability may also be concluded if, in our determination, it is nearly certain that all amounts due will not be collected. The realized loss amount reflected in Distributable Earnings will equal the difference between the cash received, or expected to be received, and the carrying value of the asset, and is reflective of our economic experience as it relates to the ultimate realization of the loan. During the year ended December 31, 2020, we recorded a $53.7 million of provision for credit losses, which has been excluded from Distributable Earnings consistent with other unrealized gains (losses) and other non-cash items pursuant to our existing policy for reporting Distributable Earnings as referenced above.

Distributable Earnings also excludes the impact of the restructuring charges recorded during the year ended December 31, 2020. These charges were related to our Internalization, discussed above, which we view as a one-time event. In assessing the reporting of Distributable Earnings, we determined that, consistent with our policy, the restructuring charges should be included within certain one-time expenses as referenced above. During the year ended December 31, 2020, we recorded $46.3 million of restructuring charges, which have been excluded from the Distributable Earnings.

Distributable Earnings does not represent net (loss) income or cash flow from operating activities and should not be considered as an alternative to GAAP net (loss) income, or an indication of our GAAP cash flows from operations, a measure of our liquidity, or an indication of funds available for our cash needs. In addition, our methodology for calculating Distributable Earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures, and, accordingly, our reported Distributable Earnings may not be comparable to the Distributable Earnings reported by other companies.

The following table provides a reconciliation of GAAP net (loss) income attributable to common stockholders to Distributable Earnings (in thousands, except share and per share data):

Year Ended

December 31,

Reconciliation of GAAP net income to Distributable Earnings: (unaudited)

Adjustments for non-distributable earnings:

Provision for credit losses 53,710 —

Restructuring charges 46,252 —

Diluted Distributable Earnings per share of common stock $ 1.17 $ 1.32

The presentation for the comparative period has been reorganized to conform with the 2020 presentation of Distributable Earnings. This reorganization has no impact on Distributable Earnings.

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Book Value Per Common Share

The following table provides the calculation of our book value per share:

Year Ended

December 31,

Shares:

Book value per share as of December 31, 2020 includes the impact of an estimated allowance for credit losses of $72.2 million, or $1.31 per common share. See Note 2 – Basis of Presentation and Significant Accounting Policies of the notes to our consolidated financial statements included in this Annual Report on Form 10-K for a detailed discussion of allowance for credit losses.

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 availability and cost of financing for us, 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 and available as a source of refinancing of our assets. 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. We continue to monitor the effects on each of these factors in light of the COVID-19 pandemic and how they will affect the results of our operations.

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 so that we develop a well-diversified investment portfolio. Additionally, our 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. The COVID-19 pandemic has resulted in significant disruptions in financial markets, uncertainty about the overall macroeconomic outlook and a dislocation in the commercial real estate sector, including reduced borrower demand, higher lending rates, increased capitalization rates on properties and significantly lower transaction volume. The dislocation in capital markets and decline in real estate sale transaction and refinancing activities have negatively impacted, and will likely continue to negatively impact, the volume of loan repayments and prepayments, which are a significant source of our liquidity and could make it more difficult for us to originate new loan investments.

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. Much 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 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 continue to actively explore additional types of funding facilities in order to further diversify our financing sources. The COVID-19 pandemic has resulted in significant disruptions in financial markets and uncertainty about the overall macroeconomic outlook. Declines in economic conditions could negatively impact real estate and real estate capital markets, which could make it more difficult for us to obtain or maintain financing.

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We finance pools of our commercial real estate loans through collateralized loan obligations, or CLOs, retaining the subordinate securities in our investment portfolio. Our CLOs are accounted for as financings with the non-retained securitized debt obligations recognized on our consolidated balance sheets.

Credit Risk

We are subject to varying degrees of credit risk in connection with our target investments. We try 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, including as a result of the COVID-19 pandemic, could occur that could adversely impact our operating results.

We employ a long-term, fundamental value-oriented investment strategy and we aim to, on a loan-by-loan basis, construct an investment portfolio that is well-diversified across property types, geographies and sponsors. However, any potential negative impacts on our business as a result of the COVID-19 pandemic may be heightened by the fact that we are not required to observe specific diversification criteria, which means that our investments may be relatively concentrated in certain property types, geographical areas or loan categories that may be more adversely affected by the pandemic than others. For example, certain of our loans are secured by office, industrial, multifamily, hotel and retail properties. Federal and state mandates implemented to control the spread of the virus, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders, have negatively impacted, and are expected to continue to negatively impact the hotel and retail industries, which could adversely affect our assets secured by such properties. Also, changes in how certain types of commercial properties are operated to facilitate social distancing and other measures intended to control the impact of the pandemic have impacted, and are likely to continue to impact, our investments secured by these properties.

Operating Expenses - Investment Management and Corporate Overhead

We incur significant general and administrative costs, including certain costs related to being a public company and, prior to the Internalization, costs incurred under the Management Agreement.

Under the Management Agreement, we paid all costs and expenses the Former Manager incurred on our behalf in order to operate our business prior to the Internalization, as well as compensation costs for certain personnel that provided services to us under the Management Agreement prior to the Internalization. Prior to the Internalization, we paid the Former Manager a quarterly base management fee equal to 0.375% (a 1.50% annual rate) of our equity and an incentive fee, which was payable, if earned, as defined in the Management Agreement.

We continue to monitor the COVID-19 pandemic and its impact on our operating partners, financing sources, borrowers and their tenants, and the economy as a whole. The magnitude and duration of the COVID-19 pandemic, and its impact on our operations, liquidity and availability of financing, are uncertain and continue to evolve. To the extent that our borrowers and their tenants, property sponsors and financing sources continue to be impacted by the COVID-19 pandemic, it could have a material adverse effect on our liquidity and capital resources. Given the current highly uncertain environment, we may incur additional operating expenses for a period of time, which may be material, related to actively managing our investment portfolio, our funding sources and exploring additional financing and capital sources to help us to continue to manage through this period of economic uncertainty and market dislocation.

Market Conditions

Prior to the COVID-19 pandemic, the commercial real estate debt markets offered 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 were 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 from 2007 to 2009 for traditional providers of financing in this market, such as banks and insurance companies, limited the capacity of available funding for certain types of commercial real estate loans that comprise a large part of our target investments. The COVID-19 pandemic continues to generate a high degree of uncertainty with respect to the overall economic environment along with the negative impact it has had on many segments of the commercial real estate market, including a significant decline in real estate transaction volume combined with dislocations in the financing markets. We believe that, over time, as the markets return to more normalized levels of activity and the ultimate economic recovery takes place, U.S. commercial real estate will continue to be viewed as an attractive asset class and will provide us with the opportunities consistent with our investment strategy to invest our capital and generate attractive, risk-adjusted returns for our stockholders over the long-term. Certain segments of the commercial real estate market, such as lodging and retail, have been affected more significantly than others, resulting in multiple retail sector bankruptcies, for example, as more consumer demand has shifted to internet related purchases. This retail property stress has benefited the industrial sector, which has seen increased demand for “last-mile” distribution sites in certain markets. The lodging sector has also experienced significant dislocation and the general market expectation is that it will take a while for it to recover considering the social distancing and further shut-down recommendations by local and state officials in select locations. The multifamily sector has performed relatively well through this crisis, though the future path may be

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dependent to a degree on interest rate levels and additional federal government stimulus. Office properties have performed well, though there has been a noticeable slowdown in leasing activity, but the longer-term impact of the COVID-19 pandemic remains uncertain considering remote working and other potential operational changes by the tenants.

Due to the ongoing COVID-19 pandemic in the United States and globally, most of our borrowers, sponsors, their tenants, the properties serving as collateral on our loan investments and the economy as a whole have been, and will continue to be, adversely affected. The magnitude and duration of the COVID-19 pandemic and its impact on our borrowers and their tenants, cash flows and future results of operations could be significant and will largely depend on future developments, which remain highly uncertain and cannot be predicted. Although there are effective vaccines for COVID-19 that have been approved for use, distribution of the vaccines did not begin until late 2020, and a majority of the public will likely not have access to a vaccination until sometime in 2021. Accordingly, given the ongoing nature of the outbreak, at this time we cannot reasonably estimate the magnitude of the ultimate impact that COVID-19 will have on our business, financial performance and operating results. The prolonged duration and impact of the COVID-19 pandemic could materially disrupt our business operations and impact our financial condition and performance, liquidity and ability to pay dividends, including the dividend on our common stock, which was temporarily suspended in the first quarter of 2020 and reinstated in the third quarter of 2020.

The COVID-19 pandemic has resulted in significant disruptions in financial markets, business shutdowns and uncertainty about how the United States and global economy will perform over the near term. Possible future declines in rental rates and expectations of future rental concessions, including free rent to renew tenants early, retain tenants who are up for renewal or attract new tenants or rent abatements for tenants severely impacted by the COVID-19 pandemic may result in decreases in cash flows to our borrowers and potentially in defaults in paying debt service on outstanding indebtedness to us, which could adversely impact our results of operations and financial performance. Declines in economic conditions could negatively impact real estate and real estate capital markets and result in lower occupancy, lower rental rates and declining values in our portfolio, which could adversely impact the value of our investments, making it more difficult for us to pay dividends or meet our financing obligations in the future.

Allowance for Credit Losses

In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. ASU 2016-13 significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaced the incurred loss model with a Current Expected Credit Loss, or CECL, model for instruments measured at amortized cost, and requires entities to record allowances for available-for-sale, or AFS, debt securities rather than reduce the amortized cost, as they did under the other-than-temporary impairment model. It also simplified the accounting model for purchased credit-impaired debt securities and loans. In addition, the new model applies to off-balance sheet credit exposures, such as unfunded loan commitments. ASU 2016-13 was adopted through a cumulative-effect adjustment to cumulative earnings as of January 1, 2020.

The allowance for credit losses required under ASU 2016-13 is a valuation account that is deducted from the amortized cost basis of related loans and debt securities on our consolidated balance sheets, and which reduces our total stockholders’ equity. The initial allowance for credit losses recorded on January 1, 2020 was reflected as a direct charge to cumulative earnings; however, going forward, changes to the allowance for credit losses are recognized through net income on our consolidated statements of operations. While ASU 2016-13 does not require any particular method for determining the allowance for credit losses, it does specify the allowance should be based on relevant information about past events, including historical loss experience, current portfolio, market conditions and reasonable and supportable forecasts for the duration of each respective loan. In addition, other than a few narrow exceptions, ASU 2016-13 requires that all financial instruments subject to the CECL model have some amount of allowance for credit losses to reflect the GAAP principal underlying the CECL model that all loans, debt securities and similar assets have some inherent risk of loss, regardless of credit quality, subordinate capital or other mitigating factors.

Our loans typically include commitments to fund incremental proceeds to our borrowers over the life of the loan. Those future funding commitments are also subject to an allowance for credit losses. The allowance for credit losses related to future loan fundings is recorded as a component of other liabilities on our consolidated balance sheets and not as an offset to the related loan balance. This allowance for credit losses is estimated using the same process outlined below for our outstanding loan balances and changes in this component of the allowance for credit losses will similarly flow through our consolidated statement of operations.

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Our implementation process included a selection of a credit loss analytical model, completion and documentation of policies and procedures, changes to internal reporting processes and related internal controls and additional disclosures. A control framework for governance, data, forecast and model controls was developed to support the CECL process. The allowance for credit losses is estimated on a quarterly basis and represents management’s estimates of current expected credit losses in our investment portfolio. Pools of loans with similar risk characteristics are collectively evaluated while loans that no longer share risk characteristics with loan pools are evaluated individually. Estimating an allowance for credit losses is inherently subjective, as it requires management to exercise significant judgment in establishing appropriate factors used to determine the allowance and a variety of subjective assumptions, including (i) determination of relevant historical loan loss data sets, (ii) projecting the expected timing and amount of future loan fundings and repayments, (iii) assessing the current credit quality of loans and operating performance of loan collateral, (iv) selecting the forecast for macroeconomic conditions and (v) determining the reasonable and supportable forecast period. The allowance for loan losses also includes qualitative adjustments to bring the allowance to the level management believes is appropriate based on factors that have not otherwise been fully accounted for, including adjustments for foresight risk, input imprecisions and model imperfections. Foresight risk reflects the inherent imprecision in forecasting economic variables, including determining the depth and duration of economic cycles and their impact on relevant economic variables. Input imperfection factors address the risk that certain model inputs may not reflect all available information such as changes in the level and quality of experience held by certain borrowers or limitations in data available for certain loan portfolios. Model imprecision considers known model limitations not yet fully reflected in the quantitative estimate. The determination of the appropriate qualitative adjustment is based on management's analysis of current and expected economic conditions and their impact on the portfolio, as well as a qualitative assessment of the lending environment, including underwriting standards. Management recognizes the sensitivity of various assumptions made in the quantitative modeling of expected losses and may adjust reserves depending upon the level of uncertainty that currently exists in one or more assumptions.

Considering the lack of historical Company data related to any realized loan losses since our inception, we elected to estimate our allowance for credit losses by using a probability-weighted analytical model that considers the likelihood of default and loss-given-default for each individual loan. The analytical model incorporates a third-party licensed database with historical loan losses from 1998 to 2020 for over 100,000 commercial real estate loans. Our allowance for credit losses reflects its estimates of the current and future economic conditions that impact the performance of the commercial real estate properties serving as collateral for our loan investments. These estimates include unemployment rates, interest rates, price indices for commercial property and other macroeconomic factors impacting the likelihood and magnitude of potential credit losses for our loans during their anticipated term. We license certain macroeconomic financial forecasts from a third-party to inform our view of the potential future impact that broader macroeconomic conditions may have on the performance of our loan portfolio. The forecasts are embedded in the licensed analytical model that we use to estimate our allowance for credit losses. We may use one or more of these forecasts in the process of estimating our allowance for credit losses. Selection of these economic forecasts requires significant judgment about future events that, while based on the information available to us as of the balance sheet date, are ultimately unknowable with certainty, and the actual economic conditions impacting our portfolio could vary significantly from the estimates we made for the periods presented. At the time of adoption of ASU No. 2016-13, in determining our initial allowance for credit losses estimate, we employed a macroeconomic forecast that largely reflected our views at the time and projected stable economic conditions over the reasonable projection period. Significant inputs to our estimate of the allowance for credit losses include loan specific factors such as debt service coverage ratio, or DSCR, loan-to-value ratio, or LTV, remaining loan term, property type and others. In certain instances, for loans with unique risk characteristics, we may instead elect to employ different methods to estimate loan losses that also conform to ASU 2016-13 and related guidance.

Upon adoption of ASU No. 2016-13 on January 1, 2020, based on our loan portfolio, pre-COVID-19 economic environment and management’s expectations for future economic and market conditions at the time, we recorded, as a cumulative-effective adjustment to the cumulative earnings in our consolidated statement of equity, an initial allowance for credit losses of approximately $18.5 million, or approximately $0.34 per common share. In addition, we recorded an incremental allowance for credit losses for the year ended December 31, 2020 of approximately $53.7 million, or $0.97 per common share, resulting in a cumulative year-to-date CECL impact of $72.2 million or $1.31 per common share, largely reflecting the changed expectations for macroeconomic and commercial real estate market conditions as a result of the COVID-19 pandemic.

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 an amortized cost on our consolidated balance sheets.

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

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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 fluctuations in interest rates. To the extent that this applies to us, we may choose to actively manage this risk through the use of hedging strategies.

Critical Accounting Policies and Use of Estimates

The preparation of financial statements in accordance with GAAP requires us to make certain judgments and assumptions, based on information available at the time, of our preparation of the financial statements, in determining accounting estimates used in preparation of the statements. Our significant accounting policies are described in Note 2 - Basis of Presentation and Significant Accounting Policies to the consolidated financial statements, included under Item 8 of this Annual Report on Form 10-K. Our most critical accounting policies involve decisions and assessments that could affect our reported assets and liabilities, as well as its reported revenues and expenses. We believe that all of the decisions and assessments used to prepare our financial statements are based upon reasonable assumptions given the information available at that time. The accounting policies and estimates that we believe are most critical to a stockholder’s understanding of our financial results and condition are discussed below.

Revenue Recognition

Interest income from loans receivable is recognized over the life of each investment using the effective interest method and is recorded on an accrual basis. Recognition of fees, premiums and discounts associated with these investments is deferred until the loan is advanced and is then recorded over the term of the loan as an adjustment to yield. Income accrual is generally suspended for loans at the earlier of the date at which payments become more than 90 days past due or when recovery of income and principal becomes doubtful. Income is then recorded on the basis of cash received until accrual is resumed when the loan becomes contractually current and performance is demonstrated to be resumed. In addition, for loans originated, the related origination expenses are similarly deferred; however, expenses related to loans acquired are included in general and administrative expenses as incurred.

Loans Held-for-Investment and Provision for Credit Losses

Loans held-for-investment are reported at cost, net of any provision for credit losses, unamortized acquisition premiums or discounts, loan fees and origination costs, as applicable.

In June 2016, the Financial Accounting Standards Board, or FASB, issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. ASU 2016-13 significantly changed how entities measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. ASU 2016-13 replaced the incurred loss model under existing guidance with a Current Expected Credit Loss, or CECL, model for instruments measured at amortized cost, and requires entities to record allowances for AFS debt securities rather than reduce the carrying amount, as they did under the other-than-temporary impairment model. It also simplified the accounting model for purchased credit-impaired debt securities and loans. In addition, the new model applies to off-balance sheet credit exposures, such as unfunded loan commitments. ASU 2016-13 was effective for fiscal years beginning after December 15, 2019 and was adopted through a cumulative-effect adjustment to cumulative earnings as of January 1, 2020.

The CECL reserve required under ASU 2016-13 is a valuation account that is deducted from the amortized cost basis of related loans and debt securities on our consolidated balance sheets, and reduces our total stockholders’ equity. The initial CECL reserve recorded on January 1, 2020 was reflected as a direct charge to cumulative earnings; however, subsequent to the initial CECL reserve, changes to the CECL reserve were recognized through net income on our consolidated statements of operations. While ASU 2016-13 does not require any particular method for determining the CECL allowance, it does specify that the allowance should be based on relevant information about past events, including historical loss experience, current portfolio, market conditions and reasonable and supportable forecasts for the duration of each respective loan. In addition, other than a few narrow exceptions, ASU 2016-13 requires that all financial instruments subject to the CECL model have some amount of loss reserve to reflect the GAAP principal underlying the CECL model that all loans, debt securities and similar assets have some inherent risk of loss, regardless of credit quality, subordinate capital or other mitigating factors.

Our loans typically include commitments to fund incremental proceeds to our borrowers over the life of the loan. Those future funding commitments are also subject to a CECL reserve. The CECL reserve related to future loan fundings is recorded as a component of other liabilities on our consolidated balance sheets, and not as an offset to the related loan balance. This CECL reserve is estimated using the same process outlined below for our outstanding loan balances, and changes in this component of the CECL reserve will similarly flow through our consolidated statements of operations.

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Our implementation process included selection of a credit loss analytical model, completion and documentation of policies and procedures, changes to internal reporting processes and related internal controls and additional disclosures. A control framework for governance, data, forecast and model controls was developed to support the CECL process. Estimating a CECL reserve requires significant judgment and a variety of subjective assumptions, including: (i) determination of relevant historical loan loss data sets; (ii) the expected timing and amount of future loan fundings and repayments; (iii) the current credit quality of loans and operating performance of loan collateral and our expectations of performance; and (iv) expectations for macroeconomic conditions over the relevant time period.

Considering the lack of historical company data related to any realized loan losses since its inception, we elected to estimate our CECL reserve by using a probability-weighted analytical model that considers the likelihood of default and loss-given-default for each individual loan. The analytical model incorporates a third-party database with historical loan losses from 1998 to 2020 for over 100,000 commercial real estate loans. Additionally, in determining our initial CECL reserve estimate, we employed a macroeconomic forecast that projects a stable overall economic scenario over the reasonable projection period. Significant inputs to our estimate of the CECL reserve include loan specific factors, such as DSCR, LTV, remaining loan term, property type and others. In certain instances, for loans with unique risk characteristics, we may instead elect to employ different methods to estimate loan losses that also conform to ASU 2016-13 and related guidance.

Upon adoption of ASU No. 2016-13 on January 1, 2020, we recorded an initial CECL reserve of approximately $18.5 million, or approximately $0.34 per share, which is an equivalent to approximately 0.37% of our aggregate loan commitment balance of $4.4 billion at December 31, 2019. In addition, we recorded an incremental allowance for credit losses for the year ended December 31, 2020 of approximately $53.7 million, or $0.97 per common share, resulting in a cumulative year-to-date CECL impact of $72.2 million, or $1.31 per common share, largely reflecting the changed expectations for macroeconomic and commercial real estate market conditions as a result of the COVID-19 pandemic.

Credit performance of our portfolio is monitored regularly, with more intense analysis and oversight done on a quarterly basis, and each loan is evaluated by assessing the risk factors of each loan and assigning a risk rating based on a variety of factors. 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 probability of principal loss.

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

Income Taxes

Our financial results are generally not expected to reflect provisions for current or deferred income taxes, except for those taxable benefits or provisions recognized by our TRS or any excise tax we are subject to for failing to distribute the minimum required amount. We estimate, based on existence of sufficient evidence, the ability to realize the remainder of any deferred tax asset our TRS recognizes. Any adjustment to such estimates will be made in the period such determination is made. Additionally, we will be subject to a 4% nondeductible excise tax on any amount by which distributions paid by us in any calendar year are less than the sum of 85% of our ordinary income, 95% of our capital gain net income and 100% of our undistributed income from previous years. We plan to operate in a manner that will allow us to qualify to be treated as a REIT for U.S. federal income tax purposes. As a result of our expected REIT qualification, we do not generally expect to pay U.S. federal corporate level taxes. However, many of the REIT requirements are highly technical and complex. If we were to fail to meet the REIT requirements, we would be subject to U.S. federal, state and local income taxes.

Summary of Results of Operations and Financial Condition

Our GAAP net income (loss) attributable to common stockholders was $23.1 million and ($40.5 million) (or $0.39 and ($0.73)) per diluted weighted average share, respectively) for the three months and year ended December 31, 2020, respectively, as compared to GAAP net income attributable to common stockholders of $17.6 million and $70.1 million ($0.32 and $1.32 per diluted weighted average share, respectively) for the three months and year ended December 31, 2019, respectively. The GAAP net loss for the year ended December 31, 2020 was primarily a result of an increase in the provision for credit losses recognized in accordance with ASU 2016-13 adopted on January 1, 2020 and the one-time restructuring charges related to the Internalization. The increase in the provision for credit losses was magnified by the significant deterioration in the forecasts of macroeconomic conditions during the first and second quarter of 2020, due to the economic and market dislocation caused by the COVID-19 pandemic. The GAAP net loss for the year ended December 31, 2020 was also impacted by realized losses on sales of certain loans held-for-sale completed during the second and third quarters of 2020. The GAAP net income for the three months ended December 31, 2020 benefited from a partial release of the provision for credit losses, which was related to loan prepayments and somewhat improved macroeconomic forecasts, and a decrease in other operating expenses.

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The following table presents the components of our comprehensive income (loss) for the three months and year ended December 31, 2020 and 2019 and year ended December 31, 2018:

(in thousands, except share data) Three Months Ended Year Ended

Income Statement Data: December 31, December 31,

Interest income: (unaudited)

Loans held-for-sale — — 895 — —

Interest expense:

Senior secured term loan facilities 5,301 — 5,446 — —

Other income (loss):

Provision for credit losses 8,531 — (53,710) — —

Realized losses on sales — — (16,913) — —

Expenses:

Incentive fees — — — 244 —

Provision for (benefit from) income taxes 608 — 593 (4) (2)

Weighted average number of shares of common stock outstanding:

Comprehensive income (loss):

Other comprehensive income, net of tax:

Unrealized gain on available-for-sale securities — — (32) 224 (192)

Other comprehensive income — — (32) 224 (192)

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The following table presents the primary components of our balance sheets as of December 31, 2020 and 2019:

Balance Sheet Data:

Revolving credit facilities $ — $ 42,008

Senior secured term loan facilities 206,448 $ —

Results of Operations

Interest Income

Interest income decreased from $246.3 million to $237.7 million for the years ended December 31, 2019 and December 31, 2020, respectively, due to a significant decline in short-term interest rates, as well as repayments of loans held-for-investment of $517.3 million, partially offset by the in-the-money LIBOR floors on the majority of our loans, the origination of four commercial real estate loans with a principal balance of $125.2 million and additional fundings of $239.0 million provided on existing loan commitments during 2020. Interest income decreased from $64.7 million to $54.7 million for the three months ended December 31, 2019 and December 31, 2020, respectively, due to the aforementioned decline in short term-interest rates and a decline in portfolio balance.

Interest Expense

Interest expense decreased from $36.3 million and $137.0 million for the three months and year ended December 31, 2019, respectively, to $27.4 million and $112.9 million for the same periods in 2020, respectively, primarily due to a significant decline in short-term interest rates.

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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 months and year ended December 31, 2020 and 2019:

Three Months Ended December 31, 2020 Year Ended December 31, 2020

Interest-earning assets (2)

Loans held-for-investment/held-for-sale

Available-for-sale securities — — 8,034 646 8.0 %

Held-to-maturity securities — — 7,853 659 8.4 %

Interest-bearing liabilities

Borrowings collateralized by:

Loans held-for-investment/held-for sale

Available-for-sale securities — — 5,083 198 3.9 %

Held-to-maturity securities — — 4,773 210 4.4 %

Other unsecured:

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Three Months Ended December 31, 2019 Year Ended December 31, 2019

Interest-earning assets (2)

Loans held-for-investment

Interest-bearing liabilities

Borrowings collateralized by:

Loans held-for-investment

Other unsecured:

____________________

(1)Includes amortization of deferred debt issuance costs.

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

(3)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 majority of our interest-earning assets and liabilities have floating rates based on an index (e.g., 1-month U.S. LIBOR) plus a credit spread. As a result, our asset yields and cost of funds are impacted by changes in market interest rates and credit spreads on investments and borrowings, as well as changes in the mix of our investment portfolio credit spreads due to new originations, amendments of existing investments, additional fundings, upsizings and repayments.

The overall decrease in yields on our investment portfolio for the three months and year ended December 31, 2020, as compared to the same periods in 2019, was primarily driven by a significant decline in short-term interest rates and repayments of loans with higher spreads than those originated in 2019, partially offset by the in-the-money LIBOR floors on the majority of our loans. The overall decrease in cost of funds on our secured borrowings for the three months and year ended December 31, 2020, as compared to the same periods in 2019, was primarily driven by the decline in short-term interest rates.

Our convertible senior notes due 2022 and 2023 are unsecured and pay interest semiannually at a rate of 5.625% and 6.375%, respectively, per annum. The cost of funds associated with our convertible senior notes also includes amortization of deferred debt issuance costs.

Our senior secured term loan facilities due 2025 pay interest quarterly in arrears that accrues at the rate of (i) 8.00% per annum for any period for which accrued interest is paid in cash or (ii) 9.00% per annum for any period for which the borrowers elect to pay up to 50% of accrued interest in kind by adding such interest to the principal amount of the loans. If any amount under the term loan facilities is not paid when due, then such overdue amount would thereafter bear interest at a rate that is 4.00% per annum in excess of the interest rate otherwise payable on the term loan facilities. The cost of funds associated with our senior secured term loan facilities also includes amortization of deferred debt issuance costs and warrants.

Provision for Credit Losses

Consistent with the methodology used during the adoption of ASU 2016-13 on January 1, 2020, we continue to use a probability-weighted analytical model to estimate and recognize an allowance for credit losses on loans held-for-investment and their related unfunded commitments. Additionally, in determining the allowance for credit losses estimate through December 31, 2020, we employed third-party licensed macroeconomic forecasts, over the reasonable projection period, that include the impact of the COVID-19 pandemic on the overall economy and commercial real estate markets generally. Significant inputs to our estimate of the allowance for credit losses include loan specific factors such as DSCR, LTV, remaining

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loan term, property type and others. In certain instances, for loans with unique risk characteristics, we may instead elect to employ different methods to estimate loan losses that also conform to ASU 2016-13 and related guidance.

Allowance for credit losses related to off-balance sheet future funding commitments is recorded as a component of other liabilities. Changes in the provision for credit losses for both the assets and their related unfunded commitments are recognized through net income on the consolidated statements of comprehensive (loss) income. The following table presents the components of provision for credit losses for the three months and year ended December 31, 2020:

Three Months EndedDecember 31, Year EndedDecember 31,

Provision for credit losses on:

Available-for-sale securities — —

Held-to-maturity securities — —

Total provision for credit losses $ 8,531 $ (53,710)

During the year ended December 31, 2020, we recorded a provision for loan losses of $53.7 million, which increased our CECL reserve and reflects the macroeconomic impact of the COVID-19 pandemic on commercial real estate markets generally, as well as one loan with unique risk characteristics assessed individually for credit loss in our portfolio. For the three months ended December 31, 2020, the decrease in our estimate of expected credit losses was primarily driven by the changes in the composition of our investment portfolio as a result of loan repayments and the availability of more information regarding the somewhat improved macroeconomic forecasts employed in our loss estimation model. There was no provision for credit losses recorded for the three months and year ended December 31, 2019 under the impairment policy prior to the adoption of ASU 2016-03.

Due to new information available during the three months ended December 31, 2020, a first mortgage loan with a principal balance of $67.1 million and a carrying value of $58.8 million, collateralized by a hotel property located in the Midwest, was downgraded to a risk rating of “5” from a risk rating of “4” and management determined that our recovery of its loan principal is collateral-dependent. The collateral property’s cash flows have been adversely affected by market conditions driven by the COVID-19 pandemic and the related significant decline in business travel. Accordingly, this loan was assessed individually and we have elected to apply a practical expedient in accordance with ASU 2016-13, and an allowance for credit loss of $8.1 million was recorded for this loan using the discounted cash flow method of valuation to reduce the carrying value of the loan to the estimated fair value of the property less the cost to foreclose and sell the property. The loan had been previously modified, including a deferral and capitalization of interest of approximately $2.6 million as of December 31, 2020. In addition, we have also negotiated a new short-term extension of the modification with the borrower, which was accounted for as a troubled debt restructuring, or TDR, under GAAP. We are evaluating a variety of the potential options with respect to the resolution of this loan, which, among other things, may include a sale of the property, or of the loan, or a negotiated deed-in-lieu of foreclosure.

Realized Losses on Sales

During the year ended December 31, 2020, we sold loans for $193.6 million with an amortized cost of $210.5 million for realized losses of $16.9 million. We did not sell any loans during the three months ended December 31, 2020 and the three months and year ended December 31, 2019.

Fee Income

During both the year ended December 31, 2019 and December 31, 2020, we recognized $1.1 million in fee income related to fees charged for early prepayments of loans held-for-investment. No fee income was earned during the three months ended December 31, 2019 and December 31, 2020, respectively.

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Expenses

The following table presents the components of expenses for the three months and year ended December 31, 2020 and 2019:

Three Months Ended Year Ended

December 31, December 31,

Incentive fees $ — $ — $ — $ 244

Restructuring charges $ 2,570 $ — $ 46,252 $ —

Annualized other operating expense ratio 2.0 % 2.3 % 3.1 % 2.2 %

Prior to the Internalization, we paid the Former Manager a base management fee and, when applicable, an incentive fee. The base management fee was calculated based on our equity with certain adjustments outlined in the Management Agreement. The incentive fee was calculated based on historical “core earnings,” as defined in the Management Agreement, as well as our equity with certain adjustments outlined in the Management Agreement. Following the Internalization, we no longer incur management or incentive fees, but we incur expenses associated with being an internally managed REIT, including compensation expenses previously borne by the Former Manager.

We also incur servicing expenses related to the servicing of commercial real estate loans and other operating expenses. The increase in servicing expenses during the three months and year ended December 31, 2020, as compared to the same periods in 2019, was driven by the growth of our investment portfolio, as described above. The increase in our operating expense ratio during the three months and year ended December 31, 2020, as compared to the same periods in 2019, resulted primarily from an increase in expenses related to the personnel and infrastructure to support the operation and growth of our business and certain advisory and other professional fees.

Included in other operating expenses are direct and allocated costs incurred by the Former Manager on our behalf and reimbursed by us, including compensation paid to certain employees of the Former Manager. Also included in other operating expenses is compensation paid directly to certain of our executive officers pursuant to the terms of the employment agreements entered into with such executive officers in connection with the Internalization.

Portfolio Overview

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 consolidated balance sheets. Loans held-for-investment are reported at cost, net of allowance for credit losses, any unamortized acquisition premiums or discounts, loan fees and origination costs, as applicable.

During the three months ended December 31, 2020, we did not originate any loans. Other loan fundings included $51.0 million of additional fundings made under existing loan commitments. Proceeds from loan repayments during the three months ended December 31, 2020 totaled $195.6 million. We generated interest income of $54.7 million and incurred interest expense of $27.4 million, which resulted in net interest income of $27.4 million.

For the year ended December 31, 2020, we originated four loans with a total loan commitment amount of $200.4 million, of which $125.2 million was funded at origination. Other loan fundings included $239.0 million of additional fundings made under existing loan commitments. Proceeds from loan repayments totaled $517.3 million due primarily to the repayment in full of 16 loans totaling $498.2 million of unpaid principal balance. Loan sales during the year ended December 31, 2020 were $211.1 million. We generated interest income of $237.7 million and incurred interest expense of $112.9 million, which resulted in net interest income of $124.8 million. See Note 4 to our Consolidated Financial Statements included in this Annual Report on Form 10-K for details.

The following table details our loan activity by unpaid principal balance for the three months and year ended December 31, 2020:

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Three Months Ended Year Ended

December 31, December 31,

Loan originations $ — $ 125,169

Deferred interest capitalized $ 4,190 $ 8,700

____________________

(1)Additional fundings made under existing loan commitments

The following tables provide a summary of our portfolio as of December 31, 2020:

(dollars in thousands)

(dollars in millions)

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(dollars in millions)

54

(dollars in millions)

____________________

(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)Original term (years) is the initial maturity date at origination and does not include any extension options and has not been updated to reflect any subsequent extensions or modifications, if applicable.

(5)Initial loan-to-value ratio, or 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.

(6)Stabilized loan-to-value ratio, or 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.

Most of our loans are structured with an initial maturity term, typically three years, and several one-year extension options, which can be exercised by the borrower subject to meeting various extension conditions in accordance with the terms of the loan agreement. As part of our overall asset management strategy we have in the past entered into, and may in the future enter into, loan modifications with some of our borrowers. These amendments may include, among other things, modifying or waiving certain performance or extension conditions as part of the overall agreement.

Portfolio Management

During the three months and year ended December 31, 2020, we collected 99% of the contractual interest payments that were due under our loan agreements, after taking into consideration certain loans that have been modified mainly due to the impact of the COVID-19 pandemic.

We maintain strong relationships and an active asset management dialogue with our borrowers. We have utilized these relationships to address the impacts of the COVID-19 pandemic on our loans secured by properties experiencing business interruptions and pressure on operating cash flows, most significantly hotel and retail properties. As a result of the ongoing negative effects the pandemic has had on the economy, the real estate market as a whole and specific properties, some of our borrowers have indicated to us that they will be unable to execute their business plans on the original timeline, have had to temporarily close their properties by order of local authorities, have had tenants whose businesses were closed, or have experienced adverse business consequences, and have requested temporary interest forbearance (mainly deferrals and, to a lesser extent, waivers), or other modifications of their loans including extensions of term and modifications or waivers of certain extension conditions. We have been working closely with our borrowers to provide them with short-term relief to help manage through these market dislocations and business interruptions at their properties. During the three months ended December 31, 2020, we modified 12 loans with an aggregate principal balance of approximately $0.7 billion. During the year ended December 31, 2020, we modified 46 loans representing an aggregate principal balance of approximately $1.8 billion. One of these modifications was accounted for as a TDR under GAAP, as discussed above.

Our loan modifications typically include temporary reductions in the amount of cash interest collected, permit accrual of a portion of the interest due during the modification period to be repaid at a later date, permit the use of existing cash loan reserves to pay debt service due on our loans and other property-level expenses and/or modify or waive term extensions and certain performance tests or covenants. The loan modifications are often coupled with additional equity or other forms of credit support from the sponsors. All of the modified loans were performing and none were on nonaccrual status as of December 31, 2020. The total amount of interest income that was deferred and added to the principal during the three months and year ended December 31, 2020 was $4.2 million and $8.6 million, respectively.

We are generally encouraged by our borrowers’ initial response to the COVID-19 impact on their properties. We continue to work with them to address the circumstances caused by the pandemic while seeking to protect the credit attributes of our portfolio. However, these efforts may not be successful in all cases, and we may experience payment delinquencies, defaults, foreclosures or losses. While we believe the principal amounts of our loans are generally adequately protected by the underlying

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value of the collateral properties, there is a risk that we will not realize the entire principal amount of certain of our loan investments.

Other Portfolio Developments

During the three months ended December, 31, 2020, we placed a $22.3 million first mortgage loan collateralized by a mixed-use property located in the Northeast on nonaccrual status due to the adverse impact of the COVID-19 pandemic. As a result, we wrote-off accrued interest due on this loan in the amount of $0.8 million. As of December 31, 2020, the carrying value of the loan on nonaccrual status was $17.8 million.

On November 9, 2020, a $40.0 million first mortgage loan collateralized by a student housing property located in the Midwest reached its initial maturity without satisfaction of extension conditions. The loan was current with respect to payment of interest prior to its initial maturity date. We are in active discussions with the borrower regarding a modification, which may include waiving certain extension conditions and full deferral of interest for the duration of the extension period. The loan’s risk rating was category “4” at December 31, 2020.

Due to new information available during the three months ended December, 31 2020, a $67.1 million first mortgage loan collateralized by a hotel property located in the Midwest was downgraded to a risk rating of “5” from a risk rating of “4” and management determined that our recovery of its loan principal is collateral-dependent. The collateral property’s cash flows have been adversely affected by market conditions driven by the COVID-19 pandemic and the related significant decline in business travel. Accordingly, this loan was assessed individually and we have elected to apply a practical expedient in accordance with ASU 2016-03, and an allowance for credit loss of $8.1 million was recorded for this loan using the discounted cash flow method of valuation to reduce the carrying value of the loan to the estimated fair value of the property less the cost to foreclose and sell the property. The loan had been previously modified, including a deferral and capitalization of interest of approximately $2.6 million as of December 31, 2020. In addition, we have also negotiated a new short-term extension of the modification with the borrower, which was accounted for as a TDR under GAAP. We are evaluating a variety of the potential options with respect to the resolution of this loan, which, among other things, may include a sale or a negotiated deed-in-lieu of foreclosure. The estimate of the fair value of the hotel collateral was developed using a discounted cash flow model. This valuation required significant judgment, which included assumptions regarding estimates of property cash flow performance, capitalization rates, discount rates, occupancy rates and exit costs.

Financial Condition

As of December 31, 2020, our borrowings consisted of repurchase agreements collateralized by loans held-for-investment, securitized debt obligations issued by CLOs and collateralized by pools of loans held-for-investment, asset-specific financings collateralized by loans held-for-investment, long-term senior secured term loan facilities and long-term unsecured convertible senior notes.

As of December 31, 2020, we had outstanding $1.7 billion of repurchase agreements, and the term to maturity ranged from 122 days to approximately 2.0 years. Repurchase agreements had a weighted average borrowing rate of 2.25% and weighted average remaining maturities of 1.0 year as of December 31, 2020.

As of December 31, 2020, we had outstanding $927.1 million of securitized debt obligations with a weighted average borrowing rate of 1.84% and weighted average estimated remaining maturities of 0.7 years based on the maturities of the underlying collateral.

As of December 31, 2020, we had outstanding $123.1 million of asset-specific financings with a weighted average borrowing rate of 2.5% and weighted average estimated remaining maturities of 1.1 years based on the maturities of the underlying collateral.

As of December 31, 2020, the total outstanding amount due on the senior secured term loan facilities was $225.0 million, with a carrying value of $206.5 million, net of deferred issuance costs. Interest on the outstanding loans under the term loan facilities is payable quarterly in arrears and accrues at the rate of (i) 8.00% per annum for any period for which accrued interest is paid in cash or (ii) 9.00% per annum for any period for which the borrowers elect to pay up to 50% of accrued interest in kind by adding such interest to the principal amount of the loans. The term loan facilities will mature on September 25, 2025.

As of December 31, 2020, the total outstanding amount due on convertible senior notes was $271.3 million, net of deferred issuance costs. The notes are unsecured and pay interest semiannually at a rate of 5.625% per annum on the notes maturing in December 2022 and a rate of 6.375% per annum on the notes maturing in October 2023. As of December 31, 2020, these notes had a conversion rate of 50.7073 and 48.8496shares of common stock per $1,000 principal amount of the notes, respectively.

As of December 31, 2020, the debt-to-equity ratio with respect to our loans held-for-investment, defined as total debt, net of cash, divided by equity, was 3.2:1.0.

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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, asset-specific financings, revolving credit facilities, securitized debt obligations, the senior secured term loan facilities and convertible senior notes for the three months ended December 31, 2020, and the four immediately preceding quarters:

GAAP to Estimated Taxable Income

The following tables provide reconciliations of our GAAP net income (loss) to our estimated taxable income (loss) split between our REIT and taxable REIT subsidiaries for the years ended December 31, 2020 and December 31, 2019:

(dollars in millions) TRS REIT Consolidated

GAAP net income, pre-tax $ — $ (39.8) $ (39.8)

Permanent differences

Other permanent differences — (0.2) (0.2)

Temporary differences

Net accretion of OID and market discount — 0.6 0.6

Income from significant modifications — 3.0 3.0

Other temporary differences — 103.4 103.4

Estimated taxable income — 67.0 67.0

Dividend declaration deduction — (67.0) (67.0)

Estimated taxable income post-dividend deduction $ — $ — $ —

(dollars in millions) TRS REIT Consolidated

GAAP net income, pre-tax $ — $ 70.2 $ 70.2

Permanent differences

Other permanent differences — (0.7) (0.7)

Temporary differences

Net accretion of OID and market discount — 1.6 1.6

Income from significant modifications — 1.7 1.7

Other temporary differences — 4.6 4.6

Estimated taxable income — 77.4 77.4

Dividend declaration deduction — (77.4) (77.4)

Estimated taxable income post-dividend deduction $ — $ — $ —

The permanent tax differences recorded in 2020 and 2019 were principally related to recurring differences in compensation expense related to restricted stock dividends. Temporary differences were principally timing differences between GAAP and tax accounting related to restructuring charges, provision for credit losses and amendments to loans treated as “significant modifications” for tax under applicable Treasury regulations.

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Dividends

For the year ended December 31, 2020, we declared dividends totaling $0.65 per share. As a REIT, we are required to distribute at least 90% of our taxable income to stockholders, subject to certain distribution requirements. For the year ended December 31, 2020, we plan to satisfy the REIT distribution requirements in part with dividends paid in 2021. Furthermore, if we distribute less than the sum of: (a) 85% of our ordinary income for the calendar year; (b) 95% of our capital gain net income for the calendar year; and (c) any undistributed shortfall from our prior calendar year, or the Required Distribution, to our stockholders during any calendar year (including any distributions declared by the last day of the calendar year but paid in January of the subsequent year), then we are required to pay non-deductible excise tax equal to 4% of any shortfall between the Required Distribution and the amount that was actually distributed. Any of these taxes would decrease cash available for distribution to our stockholders. For the year ended December 31, 2020, we accrued an excise tax of $0.6 million. Excise tax payable is included in the line item “Other liabilities” in the consolidated balance sheets included in this Annual Report on Form 10-K. Excise tax expense is included in the line item “Provision for (benefit from) income taxes” in the consolidated statements of operations included in this Annual Report on Form 10-K. The following table presents cash dividends declared on our common stock since becoming a publicly traded company:

Declaration Date Record Date Payment Date Cash Dividend Per Share

The following table summarizes dividends declared since becoming a publicly traded company and their related tax characterization (per share amounts):

Tax Characterization of Dividends

____________________

(1)A portion of the dividend declared in the fourth quarter of 2019 and paid in the first quarter of 2020 was treated as a 2020 distribution for federal income tax purposes.

(2)For the years ended December 31, 2020 and 2019, ordinary dividends (non-qualified) are also the portion of dividends that may be eligible for the 20% qualified business income deduction under Internal Revenue Code Section 199A.

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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 meet other general business needs. We use cash to acquire our target investments, satisfy our obligations under our unfunded loan commitments on existing assets, repay principal and interest on our borrowings, make distributions to our stockholders and fund our operations. To date we have funded our business primarily through the issuance and sale of our common stock, borrowings from our secured financing agreements, issuance of securitizations, borrowings under our secured term loan facilities and the issuance and sale of convertible notes.

Our primary sources of liquidity include cash on our consolidated balance sheets, any approved but unused borrowing capacity under our financing facilities, the net proceeds of future public and private equity and debt offerings, payments of principal, including loan repayments and prepayments, loan sales, interest we receive on our portfolio of assets and cash generated from our operating results. We also have an option to draw up to an additional $75.0 million of proceeds on a delayed draw basis under the senior secured term loan facilities during the period ending March 25, 2021, which period may be extended for an additional six months to September 25, 2021 upon payment of an extension fee. As of December 31, 2020, we held: $261.4 million in cash and cash equivalents available to support our operations; $3.8 billion of loans held-for-investment; and $3.2 billion of outstanding debt in the form of repurchase agreements, securitized debt obligations, asset-specific financings, long-term senior secured term loan facilities and long-term unsecured convertible senior notes.

As of December 31, 2020, our balance sheet included $62.8 million in restricted cash related to funds available for reinvestment in our GPMT 2019-FL2 CLO securitization, which we have since largely redeployed. The reinvestment period for this CLO expired in February 2021. Going forward, principal repayments from loans financed through both of our outstanding CLOs will now be applied sequentially to the repayment of the senior-most outstanding notes of each respective CLO, and we will no longer be able to reinvest repayment proceeds from loans in GPMT 2019-FL2 to finance additional loans within that CLO.

In light of the COVID-19 pandemic and its severe impact on the economy, real estate and financial markets, we have taken several steps to increase our cash balances, such as opportunistically selling certain loans and entering into the $300 million financing commitment in the form of the five-year term loan facilities, in order to maintain an adequate level of liquidity to meet future outflows. As the duration and severity of COVID-19 remain unknown, we will continue to closely monitor the COVID-19 pandemic and its impact on us, our borrowers, our sponsors and their properties serving as collateral on our loans, our financing sources and the overall economy. Because the severity, magnitude and duration of the COVID-19 pandemic and its economic consequences continue to be highly uncertain, rapidly changing and challenging to predict, the pandemic’s impact on our operations and liquidity remains uncertain and difficult to predict.

Other than capital markets activities, loan repayments and prepayments typically comprise our largest source of incremental liquidity. As a result of the pandemic and its impact on the capital markets and overall economy, the pace of loan repayments and prepayments has slowed meaningfully, as compared to prior years. Loan repayments, as measured by principal amount repaid, were $778.5 million in 2019. For the year ended December 31, 2020, loan repayments totaled $537.0 million, and seven loans with an unpaid principal balance of $211.1 million were sold for $193.5 million. We currently anticipate the pace of loan repayments and prepayments to continue to be negatively affected by the ongoing effects of the pandemic and its impact on real estate transaction volume and market liquidity. We expect that the impact of the COVID-19 pandemic will likely continue to decrease our cash flow from operations as we seek to enter into loan modifications on certain of our loans permitting interest payments to be deferred and/or capitalized, and as we repay borrowings under our secured financing facilities.

We expect that the impact of the COVID-19 pandemic will likely continue to decrease our cash flow from operations as we enter into loan modifications on certain of our loans permitting interest payments to be deferred and/or capitalized, and as we repay borrowings under our secured financing facilities. Because of the COVID-19 pandemic, the pace of any such repayments and prepayments has also slowed meaningfully, and we currently anticipate the pace to continue to be negatively affected by the ongoing effects of the pandemic.

We remain focused on strengthening our balance sheet and enhancing our liquidity position to best position us to weather near-term market uncertainty, satisfy our loan future funding and financing obligations and to potentially make opportunistic new investments, which we expect will cause us to take, and in some instances has already caused us to take, some or all of the following actions: raise capital from offerings of equity and/or debt securities, on a public or private basis; borrow additional capital; post additional capital; sell assets; and/or change our dividend policy, which we will continue to evaluate in respect of future quarters based upon customary considerations, including market conditions and distribution requirements to maintain our REIT status.

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In the future, we may also use other additional sources of financing to fund the origination or acquisition of our target investments, including other financing 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 nonrecourse sale of senior loan interests. There can be no assurance that we will be able to consummate any such financing on a timely basis, or at all, or that the financing will be on commercially reasonable terms.

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

We are party to an equity distribution agreement under which we may sell up to an aggregate of 8,000,000 shares of our common stock from time to time in any method permitted by law deemed to be an “at-the-market” offering as defined in Rule 415 under the Securities Act of 1933, as amended, or Securities Act. As of December 31, 2020, 3,242,364 shares of common stock had been sold under the equity distribution agreement for total accumulated net proceeds of approximately $61.2 million. No shares were sold during the year ended December 31, 2020.

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. From December 31, 2019 to December 31, 2020, our debt-to-equity ratio, defined as total debt, net of cash, divided by equity, remained level at 3.2:1.0. 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 our focus on senior floating-rate mortgage loans, we currently expect that such leverage will be, on a debt-to-equity basis, within a range of 3.0:1.0 and 3.5:1.0 ratio on a company basis, however, our leverage may vary depending on market conditions and any steps we may take to strengthen our balance sheet and enhance our liquidity position. 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, 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.

Unused borrowing capacity on our uncommitted financing facilities may be a potential additional source of liquidity to finance unpledged commercial real estate loans held-for-investment and unpledged funded loan commitments on our existing loans held-for-investment that are pledged on such facilities. Given the uncommitted nature of such financing facilities, obtaining liquidity on such unpledged loans and unpledged funded loan commitments is at varying degrees of 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.

As of December 31, 2020, we had repurchase agreements in place with five counterparties (lenders) and an asset-specific financing facility with one counterparty to finance loans held-for-investment. We continue to evaluate additional counterparties to manage and reduce counterparty risk. Under our repurchase agreements, our counterparties may make margin calls because of a perceived decline in the value of our assets collateralizing the given secured financing arrangement due to a credit event, or under a limited number of our repurchase agreements, market events. To cover a margin call, we may transfer cash to such counterparty. 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.

During the year ended December 31, 2020, we did not experience any material restrictions to our funding sources, although we did voluntarily terminate our short-term secured revolving credit facility and we entered into agreements with three of our secured credit facility lenders, representing an aggregate $1.4 billion of our secured credit facilities at the time, to temporarily suspend credit mark provisions and pre-approve certain loan modifications to certain of our assets, primarily in exchange for cash repayments and pledging additional loan collateral, thereby reducing the amount we are able to borrow against such assets and mitigating risks associated with any potential future margin calls. During the three months ended December 31, 2020, we extended the credit facility modification agreement with one of the lenders in exchange for further deleveraging. We are in frequent, constructive dialogue with the providers of our secured credit facilities regarding our management of their collateral assets in light of the impacts of the COVID-19 pandemic. Our team has extensive asset management experience managing loans through various economic and credit cycles, and we maintain a relationship with a third-party rated special servicer as part of our overall asset management strategy. There can be no assurance that we have adequate capacity to satisfy any potential margin call or that we would be able to enter into amendments to our agreements that prevent a foreclosure on any margin call.

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

Repurchase facilities:

Asset-specific financings:

____________________

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

(2)We retain options to increase the maximum facility capacity amount up to a maximum of $350 million, subject to customary terms and conditions.

Subsequent to December 31, 2020, as described in further detail below, certain borrowings under the repurchase facility with Goldman Sachs Bank USA have been refinanced by entering into a new credit agreement with Goldman Sachs Bank USA providing us with $349.3 million of non-mark-to-market, term-matched financing.

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 December 31, 2020:

•Unrestricted cash cannot be less than the greater of $30.0 million and 5.0% of recourse indebtedness. As of December 31, 2020, our unrestricted cash, as defined, was $261.4 million, while 5.0% of our recourse indebtedness, as defined, was $47.9 million.

•Tangible net worth must be greater than the sum of 75.0% of tangible net worth as of December 31, 2020 and 75.0% of net cash proceeds of additional equity issuances, which calculates to $782.3 million. As of December 31, 2020, our tangible net worth, as defined, was $0.9 billion.

•Target asset leverage ratio cannot exceed 77.5% and our total leverage ratio cannot exceed 80.0%. As of December 31, 2020, our target asset leverage ratio, as defined, was 68.9% and our total leverage ratio, as defined, was 76.5%.

•Minimum interest coverage must be greater than 1.5:1.0. As of December 31, 2020, our minimum interest coverage, as defined, was 2.0:1.0.

During the third quarter of 2020, we amended our repurchase facilities and our asset-specific financing facility to, among other things, exclude the impact of CECL reserves under ASU 2016-13 from the calculation of the tangible net worth and leverage ratio financial covenants. Any realized losses, including amounts deemed non-recoverable, will be included in the calculation of such covenants. The foregoing summary of the amendments is not complete and is qualified in its entirety by reference to the full and complete text of the repurchase facility amendments, copies of which are attached as exhibits to this Annual Report on Form 10-K.

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 individually pledged or restricted as collateral for the future payment obligations of repurchase agreements, asset-specific financings, revolving credit facilities and securitized debt obligations as of December 31, 2020 and December 31, 2019:

Available-for-sale securities, at fair value — 12,830

Held-to-maturity securities — 18,076

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Although we generally intend to hold our target investments as long-term investments, we have opportunistically sold, and may again in the future 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 loan sale transactions are subject to longer timelines than securities trades 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. Additionally, we cannot provide any assurance that the recent economic impact of the COVID-19 pandemic would not make it more difficult to sell certain of our assets or that it would not have a material impact on the value of our assets.

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 market 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. Since many of our assets are financed with repurchase agreements, asset-specific financings and CLO securitizations, a significant portion of the proceeds from sales of our assets, prepayments and scheduled amortization would be used to repay balances under these financing arrangements.

The following table provides the maturities of our repurchase agreements, asset-specific financings, revolving credit facilities, securitized debt obligations, long-term senior secured term loan facilities and convertible senior notes, net of deferred debt issuance costs, as of December 31, 2020 and December 31, 2019:

Five years and over — —

For the year ended December 31, 2020, our restricted and unrestricted cash and cash equivalents balance increased by approximately $169.4 million to $329.2 million, respectively. The cash movements can be summarized by the following:

•Cash flows from operating activities. For the year ended December 31, 2020, operating activities increased our cash balances by approximately $20.3 million, primarily driven by our financial results for the year.

•Cash flows from investing activities. For the year ended December 31, 2020, investing activities increased our cash balances by approximately $341.6 million, primarily driven by repayments of loans held-for-investment and sales of loans held-for-sale, partially offset by additional fundings provided on existing loan commitments.

•Cash flows from financing activities. For the year ended December 31, 2020, financing activities decreased our cash balance by approximately $192.4 million, primarily driven by net repayments of repurchase agreements and revolving credit facilities, partially offset by proceeds from the senior secured term loan facilities and the issuance of warrants to purchase common stock.

Corporate Activities

Senior Secured Term Loan Facilities and Warrants to Purchase Shares of Common Stock

On September 25, 2020, we, as a guarantor, and certain of our subsidiaries, as borrowers, entered into a five-year senior secured term loan credit agreement with certain investment vehicles managed by Pacific Investment Management Company LLC, providing for up to $300.0 million of new senior secured term loan facilities and warrants to purchase up to 6.066 million shares of our common stock, $0.01 par value per share. On September 28, 2020, we borrowed $225.0 million under the initial term loan facility. The remaining $75.0 million of commitments under the term loan facilities are available to us on a delayed draw basis during the sixth-month period ending March 25, 2021, which period may be extended for an additional six months upon payment of an extension fee. A portion of the warrants exercisable for approximately 1.516 million shares of common stock are subject to (i) vesting on a pro rata basis as draws occur under the delayed draw term loan facility or (ii) forfeiture on a pro rata basis to the extent of commitments under the delayed draw term loan facility that are ultimately terminated or undrawn. Interest on the outstanding loans under the term loan facilities is payable quarterly in arrears and accrues at the rate of (i) 8.00% per annum for any period for which accrued interest is paid in cash or (ii) 9.00% per annum for any period for which the

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borrowers elect to pay up to 50% of accrued interest in kind by adding such interest to the principal amount of the loans. The term loan facilities will mature on September 25, 2025.

The loans outstanding under the term loan facilities are non-amortizing and may be voluntarily repaid, in whole or in part, at any time, subject to certain prepayment premiums if they are repaid prior to September 25, 2023.

The foregoing descriptions of the term loan credit agreement and the various components are not complete and are qualified in their entirety by reference to the full text of the Term Loan Credit Agreement, the Form of Warrant, the Investor Rights Agreement and the Amendments, which are attached as exhibits to this Annual Report on Form 10-K.

None of the warrants have been exercised as of December 31, 2020.

See Note 12 - Senior Secured Term Loan Facilities and Warrants to Purchase Shares of Common Stock of the notesto our consolidated financial statements included in this Annual Report on Form 10-K for additional details regarding this transaction.

Indenture and Credit Agreement

On February 4, 2021, we, through an indirect subsidiary, as issuer, entered into an indenture and credit agreement with Goldman Sachs Bank USA providing for a loan of 349.3 million to finance certain assets that were previously financed under the repurchase facility with Goldman Sachs Bank USA. The facility is non-amortizing and may be voluntarily repaid, in whole, on any payment date, subject to a prepayment premium if repaid prior to February 10, 2022. The facility’s term is matched to that of the underlying mortgage assets, not to exceed February 9, 2025. In addition, the facility is non-recourse, except with respect to customary carveouts for bad acts and does not contain mark-to-market provisions.

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 December 31, 2020, we had unfunded commitments on commercial real estate loans held-for-investment of $503.7 million to be used for future fundings to borrowers, generally to finance lease-related or capital expenditures.

Aggregate Contractual Obligations

The following table summarizes the effect on our liquidity and cash flows from contractual obligations for repurchase agreements, asset-specific financings, senior secured term loan facilities, convertible senior notes, interest expense on borrowings, our non-cancelable office leases and unfunded commitments on commercial mortgage loans held-for-investment:

Due During the Year Ended December 31,

Senior secured term loan facilities — — — — 205,647 — 205,647

____________________

(1)Interest expense on borrowings calculated based on rates at December 31, 2020.

(2)Allocation of unfunded commitments on loans held-for-investment is based on the earlier of the commitment expiration date or the loan maturity date.

We are also party to contracts that contain a variety of indemnification obligations, including with brokers, underwriters and investors in the securities we issue in connection with our CLOs. The maximum potential future payment amount we could be required to pay under these indemnification obligations may be unlimited.

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Recently Issued Accounting Standards

Refer to Note 2 of the notes to the consolidated financial statements included in Item 8 of this Annual Report on Form 10-K.

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 consolidated financial statements are prepared in accordance with 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.

Other Matters

We intend to conduct our business so as to maintain our exempt status under, and not to become regulated as, an investment company under the Investment Company Act. If we failed to maintain our exempt status under the Investment Company Act and became regulated as an investment company, our ability to, among other things, use leverage would be substantially reduced and, as a result, we would be unable to conduct our business as described in Item 1, “Business - Government Regulation” of this Annual Report on Form 10-K. Accordingly, we monitor our compliance with both the 55% Test and the 80% Tests of the Investment Company Act in order to maintain our exempt status. As of December 31, 2020, we determined that we maintained compliance with both the 55% Test and the 80% Test requirements.

We calculate that at least 75% of our assets were qualified REIT assets, as defined in the Code, for the year ended December 31, 2020. We also calculate that our revenue qualifies for the 75% source of income test and for the 95% source of income test rules for the year ended December 31, 2020. Consequently, we met the REIT income and asset tests. We also met all REIT requirements regarding the ownership of our common stock and the distribution of our net income. Therefore, for the year ended December 31, 2020, we believe that we qualified as a REIT under the Code.

Changes to the tax laws are likely to occur, and we intend to continue to monitor such changes.

Item 7A. 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 using our 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. However, many of those risks have been magnified by the continuing economic disruption and capital markets volatility resulting from the COVID-19 pandemic.

Recent Market Conditions

Due to the current COVID-19 pandemic in the United States and globally, most of our borrowers, sponsors, their tenants, the properties serving as collateral on our loan investments and the economy as a whole have been, and will likely continue to be, adversely affected. See “COVID-19 Pandemic” in Part II, Item 7 of this Annual Report on Form 10-K for further discussion of the impact of the COVID-19 pandemic on market conditions.

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.

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The COVID-19 pandemic has significantly impacted the commercial real estate markets, causing reduced occupancy, requests from tenants for rent deferrals or abatement and delays in capital improvements on projects currently planned or underway. These negative conditions may persist into the future and impair our borrowers’ ability to pay principal and interest due to us under our loan agreements. We maintain an active dialogue and strong relationships with our borrowers as part of our overall asset management strategy. Through our asset management process, we focus on addressing potential impacts of the COVID-19 pandemic on our loans secured by properties experiencing cash flow strains. Certain of our borrowers have indicated that due to the impact of COVID-19 pandemic, they will be unable to timely execute their business plans, have had to temporarily close their businesses or have experienced other business challenges. As a result, they have requested, and in certain instances we have granted, temporary deferrals of interest payments or forbearance, or other modifications of their loans. Discussions we have had with our borrowers have addressed potential near-term loan modifications including repurposing of funds in certain reserve accounts, temporary deferrals of interest or performance tests and certain covenant waivers on loans collateralized by properties impacted by the COVID-19 pandemic. While we generally believe that the principal amount of our loans is typically sufficiently protected by the underlying collateral value, there is a risk that we will not realize the entire principal amount of certain of our loan investments.

Interest Rate Risk

Generally, the composition of our investments is such that rising interest rates increase our net income, while declining interest rates will decrease net income, subject to the impact of contractual interest rate floors. As of December 31, 2020, approximately 98.5% of our portfolio by carrying value earned a floating rate of interest. The remaining approximately 1.5% of our portfolio earned 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 current repurchase agreements and securitized debt obligations are primarily floating rate, subject to contractual interest rate floors. 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 December 31, 2020. All changes in value are measured as the change from our December 31, 2020 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 (1)

Change in value of financial position:

Loans held-for-investment $ 4 $ 4 $ (45) $ (142)

Asset-specific financings (5) (5) 17 34

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(1)Changes in interest rates were limited to a decrease in rate to zero percent.

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.

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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 December 31, 2020. 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.

LIBOR Transition

It appears highly likely that LIBOR will be discontinued after December 31, 2021 or June 30, 2023, depending on the tenor. As of December 31, 2020, approximately 98.5% of our loans by principal balance/carrying value earned a floating rate of interest indexed to LIBOR, and 100.0% of our outstanding borrowings (excluding convertible notes and senior secured financing facilities) bear interest indexed to LIBOR. Some of these arrangements may not include robust fallback language that would facilitate replacing LIBOR with a clearly defined alternative reference rate after LIBOR’s discontinuation, and we may need to amend these before LIBOR is discontinued. Regardless, there can be no assurances as to what alternative base rates may be and whether such base rate will be more or less favorable than LIBOR and any other unforeseen impacts of the potential discontinuation of LIBOR. We intend to monitor the developments with respect to the potential phasing out of LIBOR and work with our lenders and borrowers to minimize the impact of any LIBOR transition on our financial condition and results of operations, but can provide no assurances regarding the impact of the discontinuation of LIBOR.

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 or, in severe cases, default. This risk is partially mitigated by various facts we consider during our rigorous underwriting and loan structuring process, which in certain cases include a requirement for our borrower to purchase an interest rate cap contract.

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 equity 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, including, but not limited to, the impacts of the COVID-19 pandemic discussed above.

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, such as repurchase agreements and asset-specific financings. Should the value of our investments pledged as collateral on our repurchase agreements significantly decrease, including, but not limited to, as a result of the impacts of the COVID-19 pandemic discussed above, our lenders may exercise their margin call rights, causing an adverse change in our liquidity position. If we fail to resolve such margin calls when due, the lenders may exercise their rights under such repurchase agreements, including requiring payment by us of our aggregate outstanding financing obligations and/or taking ownership of the loans securing such obligations, potentially on an unfinanced basis, thereby reducing our available liquidity. Additionally, if one or more of our repurchase agreement or asset-specific financing counterparties chose not to provide ongoing funding, including with respect to future funding obligations on existing loans financed with such counterparties, which such risks are

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increased as a result of the COVID-19 pandemic and its effects on the global and U.S. economies and commercial real estate markets, our ability to finance our investments and related future funding obligations would decline or exist at possibly less advantageous terms.

Extension Risk

We manage our assets based on a variety of assumptions and estimates, including among others, assumptions regarding the rate at which the borrowers will prepay our loans or extend. If prepayment rates decrease in a rising interest rate environment or extension options are exercised, the life of our loan investments could extend beyond the term of the secured financing agreements. The macroeconomic, commercial real estate and capital markets disruptions caused by the COVID-19 pandemic have resulted in, and will likely continue to result in, a decrease in prepayment rates and an increase in the number of our borrowers who exercise loan extension options. This could have a negative impact on our results of operations. In some situations, we may be forced to sell assets to maintain adequate liquidity, which could cause us to incur losses.

As part of our overall asset management strategy we have in the past entered into, and may in the future enter into, loan modifications with some of our borrowers. These amendments may include, among other things, modifying or waiving certain performance or extension conditions as part of the overall agreement, which are often coupled with additional equity or other forms of credit support from the sponsor. We work closely with our lending counterparties when negotiating and entering into loan modifications with our borrowers to ensure we maintain financing on modified assets. There can be no assurance that going forward we will be able to maintain financing on modified loans.

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, we:

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

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

•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 nonrecourse financing, when and where available and appropriate.

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Item 8. Financial Statements and Supplementary Data

GRANITE POINT MORTGAGE TRUST INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES

Page

Report of Independent Registered Public Accounting Firm 69

Consolidated Balance Sheets at December 31, 2020 and December 31, 2019 71

Notes to the Consolidated Financial Statements 75

Schedule IV - Mortgage Loans on Real Estate 102

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Report of Independent Registered Public Accounting Firm

To the Stockholders and the Board of Directors

of Granite Point Mortgage Trust Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Granite Point Mortgage Trust Inc. (the Company) as of December 31, 2020 and 2019, the related consolidated statements of comprehensive (loss) income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule listed in the Index at Item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 5, 2021 expressed an unqualified opinion thereon.

Adoption of New Accounting Standard

As discussed in Notes 2 and 4 to the consolidated financial statements, the Company changed its method for accounting for credit losses in 2020. As explained below, auditing the Company’s allowance for credit losses was a critical audit matter.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosures to which it relates.

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Allowance for Loan Losses - Loans held-for-investment

/s/ Ernst & Young LLP

We have served as the Company’s auditor since 2017.

Minneapolis, Minnesota

March 5, 2021

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GRANITE POINT MORTGAGE TRUST INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

ASSETS

Allowance for credit losses (66,666) —

Available-for-sale securities, at fair value — 12,830

Held-to-maturity securities — 18,076

LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities

Revolving credit facilities — 42,008

Senior secured term loan facilities 206,448 —

Stockholders’ Equity

Accumulated other comprehensive income — 32

____________________

(1)The 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 December 31, 2020 and December 31, 2019, assets of the VIEs totaled $1,255,932 and $1,387,148, respectively, and liabilities of the VIEs totaled $928,220 and $1,042,122, respectively. See Note 3 - Variable Interest Entities for additional information.

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

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GRANITE POINT MORTGAGE TRUST INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands, except share data)

Year Ended

December 31,

Interest income:

Loans held-for-sale 895 — —

Interest expense:

Senior secured term loan facilities 5,446 — —

Other (loss) income:

Provision for credit losses (53,710) — —

Realized losses on sales of loans held-for-sale (16,913) — —

Expenses:

Incentive fees — 244 —

Restructuring charges 46,252 — —

Provision for (benefit from) income taxes 593 (4) (2)

Basic (loss) earnings per weighted average common share $ (0.73) $ 1.32 $ 1.45

Diluted (loss) earnings per weighted average common share $ (0.73) $ 1.32 $ 1.42

Weighted average number of shares of common stock outstanding:

Comprehensive (loss) income:

Other comprehensive income, net of tax:

Unrealized gain (loss) on available-for-sale securities (32) 224 (192)

Other comprehensive (loss) income (32) 224 (192)

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

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GRANITE POINT MORTGAGE TRUST INC

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(in thousands, except share data)

Common Stock

Other comprehensive loss before reclassifications — — — (192) — — (192)

Net other comprehensive loss — — — (192) — — (192)

Common dividends declared, $1.62 per share — — — — — (70,461) (70,461)

Preferred dividends declared — — — — — (100) (100)

Cumulative effect of adoption of new accounting principle — — 13 — (13) — —

Other comprehensive income before reclassifications — — — 224 — — 224

Net other comprehensive income — — — 224 — — 224

Common dividends declared, $1.68 per share — — — — — (91,029) (91,029)

Preferred dividends declared — — — — — (100) (100)

Other comprehensive loss before reclassifications — — — (288) — — (288)

Net other comprehensive loss — — — (32) — — (32)

Issuance of warrants to purchase common stock — — 4,541 — — — 4,541

Common dividends declared, $0.65 per share — — — — — (36,064) (36,064)

Preferred dividends declared — — — — — (100) (100)

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

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GRANITE POINT MORTGAGE TRUST INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

Year Ended

December 31,

Cash Flows From Operating Activities:

Provision for credit losses 53,710 — —

Realized losses on sales of loans held-for-sale 16,913 — —

Net change in assets and liabilities:

Increase in accrued interest receivable (1,066) (1,055) (3,163)

Cash Flows From Investing Activities:

Principal payments on available-for-sale securities 12,798 — —

Proceeds from sales of loans held-for-sale 193,538 — —

Cash Flows From Financing Activities:

Proceeds from issuance of securitized debt obligations — 646,868 651,374

Principal payments on securitized debt obligations (117,925) (266,179) —

Proceeds from convertible senior notes — — 145,928

Proceeds from asset-specific financings 6,626 116,465 —

Proceeds from senior secured term loan facilities 205,647 — —

Proceeds from issuance of warrants to purchase common stock 4,541 — —

Proceeds from issuance of common stock, net of offering costs — 207,514 3,092

Dividends paid on preferred stock (100) (100) (100)

Supplemental Disclosure of Cash Flow Information:

Cash paid (received) for taxes $ — $ — $ (5)

Noncash Activities:

Transfers of loans held-for-investment to loans held-for-sale $ 210,452 $ — $ —

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

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Consolidated Financial Statements

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’s common stock is listed on the New York Stock Exchange, or NYSE, under the symbol “GPMT.”

Through December 31, 2020, the Company was externally managed by Pine River Capital Management L.P., or the Former Manager. On October 10, 2020, the Company entered into a definitive agreement with the Former Manager pursuant to which the Company internalized its management on December 31, 2020, or the Internalization.

The Company has elected to be treated as a 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 accompanying consolidated financial statements 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. The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles, or GAAP.

All entities in which the Company holds investments that are considered variable interest entities, or VIEs, 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.

We currently operate in one reporting segment.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make a number of significant estimates. These include estimates of amount and timing of allowances for credit losses, fair value of certain assets and liabilities, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the 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 market capitalization rates, leasing, credit worthiness of major tenants, occupancy rates, availability of financing, exit plan, loan sponsorship, actions of other lenders, overall economic and capital markets conditions, the broader commercial real estate market, local geographic sub-markets or other factors) will occur in the near term. As of December 31, 2020, the COVID-19 pandemic remains ongoing, and as a result, numerous countries, including the United States, have declared national emergencies. Such actions have resulted in significant macroeconomic disruptions and have adversely impacted many industries. The ongoing pandemic may continue to adversely impact macroeconomic and market conditions, resulting in a period of global economic slowdown. The rapidly evolving and fluid nature of this situation precludes any prediction as to the ultimate adverse impact of COVID-19 on economic and market conditions. Although there are effective vaccines for COVID-19 that have been approved for use, distribution of the vaccines did not begin until late 2020, and a majority of the public will likely not have access to a vaccination until sometime in 2021. Accordingly, given the ongoing nature of the outbreak, at this time the Company cannot reasonably estimate the magnitude of the ultimate impact that COVID-19 will have on the Company’s business, financial performance and operating results. The Company believes the estimates and assumptions underlying its consolidated financial statements are reasonable and supportable based on the information available as of December 31, 2020. However, the significant degree of uncertainty over the ultimate impact COVID-19 will have on the global economy generally, and the Company’s business in particular, makes any estimates and assumptions as of December 31, 2020 inherently less certain than they would be absent the current and potential impacts of COVID-19. The Company’s actual results could ultimately differ from its estimates and such differences may be material.

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Consolidated Financial Statements

Significant Accounting Policies

Loans Held-for-Investment, Net

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 consolidated balance sheets. Additionally, the Company finances pools of its commercial real estate loans through collateralized loan obligations, or CLOs, which are considered VIEs for financial reporting purposes and, thus, are reviewed for consolidation under the applicable consolidation guidance. The Company has both the power to direct the activities of the CLOs 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, therefore, the Company consolidates the CLOs and classifies the underlying loans as loans held-for-investment. Interest income on loans held-for-investment is recorded on the consolidated statements of comprehensive (loss) income.

Loans held-for-investment are reported at cost, net of allowance for credit losses, any unamortized acquisition premiums or discounts, loan fees and origination costs, as applicable. Subsequent to the adoption of ASU 2016-13 on January 1, 2020, the Company uses a probability-weighted analytical model to estimate and recognize an allowance for credit losses on loans held-for-investment and their related unfunded commitments. The Company employed quarterly updated macroeconomic forecasts which reflect the impact of the COVID-19 pandemic on the overall U.S. economy and commercial real estate markets generally. These estimates may change in future periods based on available future macroeconomic data and might result in a material change in the Company’s future estimates of expected credit losses for its loan portfolio.

Interest income on loans held-for-investment is recognized at the loan coupon rate. Any premiums or discounts, loan fees, contractual exit fees and origination costs are amortized or accreted into interest income over the lives of the loans using the effective interest method. Generally, loans held-for-investment are placed on nonaccrual status when delinquent for more than 90 days or when determined not to be probable of full collection. Interest income recognition is suspended when loans are placed on nonaccrual status. Interest accrued, but not collected, at the date loans are placed on nonaccrual is reversed and subsequently recognized only to the extent it is received in cash or until it qualifies for return to accrual status. However, when there is doubt regarding the ultimate collectability of loan principal, all cash received is applied to reduce the carrying value of such loans. Loans held-for-investment are restored to accrual status only when contractually current or the collection of future payments is reasonably assured. The Company may make exceptions to placing a loan on nonaccrual status if the loan has sufficient collateral value and is in the process of collection or has been modified.

The allowance for credit losses is recorded in accordance with ASU, 2016-13, and is a valuation account that is deducted from the amortized cost basis of loans held-for-investment on the Company’s consolidated balance sheets. Changes to the allowance for credit losses are recognized through net (loss) income on the Company’s consolidated statements of comprehensive (loss) income. The allowance is based on relevant information about past events, including historical loss experience, current portfolio, market conditions and reasonable and supportable forecasts for the duration of each respective loan. All loans held-for-investment within the Company’s portfolio have some amount of expected loss to reflect the GAAP principal underlying the CECL model that all loans have some inherent risk of loss, regardless of credit quality, subordinate capital or other mitigating factors.

The Company’s loans typically include commitments to fund incremental proceeds to its borrowers over the life of the loan. Those future funding commitments are also subject to an allowance for credit losses. The allowance for credit losses related to future loan fundings is recorded as a component of other liabilities on the Company’s consolidated balance sheets, and not as an offset to the related loan balance. This allowance for credit losses is estimated using the same process outlined below for the Company’s outstanding loan balances, and changes in this component of the allowance for credit losses similarly flow through the Company’s consolidated statements of comprehensive (loss) income.

The allowance for credit losses is estimated on a quarterly basis and represents management’s estimates of current expected credit losses in the Company’s investment portfolio. Pools of loans with similar risk characteristics are collectively evaluated while loans that no longer share risk characteristics with loan pools are evaluated individually. Estimating an allowance for credit losses is inherently subjective, as it requires management to exercise significant judgment in establishing appropriate factors used to determine the allowance and a variety of subjective assumptions, including (i) determination of relevant historical loan loss data sets, (ii) the expected timing and amount of future loan fundings and repayments, (iii) the current credit quality of loans and operating performance of loan collateral and the Company’s expectations of performance, (iv) selecting the forecast for macroeconomic conditions and (v) determining the reasonable and supportable forecast period.

Considering the lack of historical Company data related to any realized loan losses since its inception, the Company generally estimates its allowance for credit losses by using a probability-weighted analytical model that considers the likelihood of default and loss-given-default for each individual loan. The analytical model incorporates a third-party licensed database with historical loan losses from 1998 to 2020 for over 100,000 commercial real estate loans. The Company licenses certain macroeconomic financial forecasts from a third-party to inform its view of the potential future impact that broader

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Consolidated Financial Statements

macroeconomic conditions may have on the performance of the loans held-for-investment. These macroeconomic factors include unemployment rates, interest rates, price indices for commercial property and other factors. The Company may use one or more of these forecasts in the process of estimating its allowance for credit losses. Selection of these economic forecasts requires significant judgment about future events that, while based on the information available to the Company as of the balance sheet date, are ultimately unknowable with certainty, and the actual economic conditions impacting the Company’s portfolio could vary significantly from the estimates the Company made for the periods presented. Significant inputs to the Company’s estimate of the allowance for credit losses include the reasonable and supportable forecast period and loan specific factors such as debt service coverage ratio, or DSCR, loan-to-value ratio, or LTV, remaining contractual loan term, property type and others. In addition, the Company also considers relevant loan-specific qualitative factors to estimate its allowance for credit losses. In certain instances, for loans with unique risk characteristics, the Company may instead elect to employ different methods to estimate loan losses that also conform to ASU 2016-13 and related guidance.

Prior to the adoption of ASU 2016-03, loans held-for-investment were reported at cost, net of any unamortized acquisition premiums or discounts, loan fees and origination costs as applicable, unless the assets were deemed impaired. Impairment was indicated when it was deemed probable that the Company would not be able to collect all amounts due pursuant to the contractual terms of the loan. Because the Company’s loans held-for-investment are collateralized by real property or are collateral dependent, impairment was measured by comparing the estimated fair value of the underlying collateral less estimated costs to sell to the amortized cost of the respective loan. If a loan was determined to be impaired, the Company would record an allowance to reduce the carrying value of the loan through a charge to provision for loan losses. Actual losses, if any, could ultimately differ from these estimates.

Available-for-Sale Securities, at Fair Value

From time to time, the Company may selectively invest in commercial mortgage-backed securities, or CMBS, representing interests in pools of commercial mortgage loans issued by trusts. In the past, the Company had designated investments in certain CMBS as available-for-sale, or AFS, because the Company had the ability to dispose of them prior to maturity. All assets classified as AFS would be reported at estimated fair value with unrealized gains and losses included in accumulated other comprehensive (loss) income.

Interest income on AFS securities is accrued based on the outstanding principal balance and contractual terms. Premiums and discounts associated with CMBS are amortized into interest income over the life of such securities using the effective yield method.

As part of the adoption of ASU 2016-13, effective January 1, 2020, the Company evaluates AFS securities to determine whether a decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit-related is recognized in other comprehensive (loss) income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the statement of comprehensive (loss) income, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the allowance for credit losses and the adjustment to net (loss) income may be reversed if conditions change. Changes in the allowance for credit losses are recorded as provision for credit loss expense. The Company did not hold any AFS securities as of December 31, 2020.

Prior to the adoption of ASU 2016-13 on January 1, 2020, on a quarterly basis, the Company evaluated its AFS securities to assess whether a decline in the fair value of an AFS security below the Company’s amortized cost basis was an other-than-temporary impairment, or OTTI. The presence of OTTI was based upon a fair value decline below a security’s amortized cost basis and a corresponding adverse change in expected cash flows due to credit related factors, as well as non-credit factors, such as changes in interest rates and market spreads. Impairment was considered other-than-temporary if an entity (i) intended to sell the security, (ii) was more likely than not be required to sell the security before it recovered in value or (iii) did not expect to recover the security’s amortized cost basis, even if the entity did not intend to sell the security. Under these scenarios, the impairment was other-than-temporary and the full amount of impairment recognized in earnings and the cost basis of the investment security was adjusted. However, if an entity did not intend to sell the impaired debt security and it was more likely than not that it would not be required to sell before recovery, the OTTI is separated into (i) the estimated amount relating to credit loss, or credit component, and (ii) the amount relating to all other factors, or non-credit component. Only the estimated credit loss amount was recognized in earnings, with the remainder of the loss amount recognized in other comprehensive (loss) income. The difference between the new amortized cost basis and the cash flows expected to be collected was accreted as interest income in accordance with the effective interest method.

Held-to-Maturity Securities

In the past, the Company designated investments in certain CMBS as held-to-maturity, or HTM, because the Company had both the ability and intent to hold them until maturity. All assets classified as HTM were reported at stated cost plus any premiums or discounts, which were amortized or accreted through the consolidated statement of comprehensive income using

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GRANITE POINT MORTGAGE TRUST INC.

Notes to the Consolidated Financial Statements

the effective interest method.

As part of the adoption of ASU 2016-13, effective January 1, 2020, the Company no longer records impairments for credit losses as adjustments to the amortized cost for HTM debt securities, but rather records an allowance for credit losses. The carrying values of debt securities are presented net of any allowance for credit losses. The Company did not hold any HTM securities as of December 31, 2020. Prior to the adoption of ASU 2016-13 on January 1, 2020, the Company evaluated its HTM securities, on a quarterly basis, to assess whether a decline in the fair value of an HTM security below the Company’s amortized cost basis is an OTTI. The presence of OTTI is based upon a fair value decline below a security’s amortized cost basis and a corresponding adverse change in expected cash flows due to credit related factors. Impairment was considered other-than-temporary if an entity did not expect to recover the security’s amortized cost basis. Impairment was recognized in earnings and the cost basis of the HTM security was adjusted.

Loans Held-for-Sale

The Company classifies certain loans as held-for-sale based on management’s intent to sell or otherwise dispose of them. Loans held-for-sale are reported at the lower of amortized cost or fair value. Fair value is determined under the guidance of ASC 820. Interest income on loans held-for-sale is recognized at the loan coupon rate and recorded on the consolidated statements of comprehensive (loss) income.

Cash and Cash Equivalents

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

Restricted Cash

Restricted cash includes certain cash balances the Company is required to maintain in restricted accounts as collateral for the Company’s repurchase agreements and with counterparties to support activities related to securities. Cash held by counterparties as collateral, which resides in non-interest bearing accounts, is not available to the Company for general corporate purposes, but may be applied against amounts due to securities and repurchase agreement counterparties or returned to the Company when the collateral requirements are exceeded or at the maturity of the repurchase agreement.

Accrued Interest Receivable