TPG RE Finance Trust, Inc. (NYSE:TRTX) Q1 2024 Earnings Call Transcript

TPG RE Finance Trust, Inc. (NYSE:TRTX) Q1 2024 Earnings Call Transcript May 1, 2024

TPG RE Finance Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, ladies and gentlemen, and thank you for standing by. Welcome to TPG Real Estate Finance Trust First Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. It is now my pleasure to turn the call over to the company. Thank you. You may begin.

Unidentified Company Representative: Good morning and welcome to TPG RE Finance Trust conference call for the first quarter of 2024. We are joined today by Doug Bouquard, Chief Executive Officer; and Bob Foley, Chief Financial Officer. Doug and Bob will share some comments about the quarter and then we will open the floor for questions. Yesterday evening, the company filed its Form 10-Q and issued press release and earnings supplemental with a presentation of operating results, all of which are available on the company’s website in the Investor Relations section. As a reminder, today’s call may include forward-looking statements which are uncertain and outside of the company’s control. Actual results may differ materially.

For a discussion of risks that could affect results, please see the Risk Factor section of the Company’s Form 10-Q and Form 10-K. The Company does not undertake any duty to update these statements, and today’s call participants will refer to certain non-GAAP measures, and for reconciliations you should refer the press release and the Form 10-Q. At this time, I’ll turn the call over to Doug Bouquard, Chief Executive Officer. Doug

Doug Bouquard: Thank you, Chris. Good morning and thank you for joining the call. Since the beginning of the year, the economy and labor markets continue to be remarkably resilient across the U.S. The market remains highly confident in the soft landing for the U.S. economy and global demand for risk assets remained strong. More recently, however, inflation has proved challenging to tame and the interest rate market has adjusted its expectations for rate cuts in 2024 over the past few weeks. Further, the 10-year treasury yield has moved nearly 80 bps during the first four months of the year and is now approaching 4.7%. Within broad credit markets, corporate credit spreads are at multiyear tights, while real estate credit spreads have rallied in certain areas, but do continue to underperform on a relative basis.

Once again, this combination of factors provides mixed signals to real estate investors. On one hand, broad market demand for risk assets, a strong economy and low unemployment should provide tailwinds for real estate valuation. And we do see these trends flowing through in our portfolio. On the other hand, a volatile and elevated interest rate environment tends to reduce transaction activity, put pressure on values and increase the financial burden on borrowers. This uncertainty is compounded by the shifts we are seeing within the real estate credit landscape from a lending perspective. Banks continue to retreat from direct lending and pivot their attention to loan on loan financing, which does benefit TRTX by providing attractive funding sources for its loan portfolio and new originations.

We continue to invest TRTX’s balance sheet with these competing forces in mind and our quarterly results reflect our strategic position. During the first quarter of the year, our approach to capital deployment and risk management remain consistent with prior quarters. Given the market backdrop, we continue to focus on: one, maintaining elevated levels of liquidity; two, proactively risk managing our investment portfolio and then three, continuing to position our balance sheet to be able to take advantage of the dislocation of lending markets in 2024 and beyond. Over the past quarter, TRTX’s performance reflects both the dedicated focus of our asset management team and the benefits of TPG’s broad global investment platform. Our loan portfolio is 100% performing and both our CECL reserve and risk ratings reflect very modest change over the past quarter.

From a property type perspective, 50% of our loan portfolio is multifamily. Despite the pressures on values within the multifamily sector, we continue to see ample liquidity for both debt and equity transactions. While we acknowledge the Fed’s signaling to slow rate cuts may put pressure on both near-term values and borrowing costs, we remain confident in the long-term underlying fundamentals of the housing sector broadly. In terms of new investments during the quarter, we originated three senior mortgage loans totaling $116 million 100% of which these loans are secured by multifamily properties. We continue to prefer lending in this sector given the downside protections available in today’s market environment. From a liquidity and leverage perspective, we ended the quarter with $370 million of liquidity across both cash and other available liquidity channels and a debt to equity ratio of 2.21.

While the discount to book value at our current share price has compressed since we last spoke, we continue to believe that this discount is significant and that our shares offer a compelling value proposition at today’s price. To that end, on April 25th, our Board of Directors approved a share repurchase plan of up to $25 million demonstrating the Board and management’s confidence in the value of TRTX shares. In summary, the past quarter represented an important turning point for TRTX as we begin to deploy capital with a slightly more offensive bet. The resources and deep experience of TPG’s real estate debt investment platform grants us unique insights into valuation shifts and capital flows across the real estate landscape. While we acknowledge elevated borrowing costs may increase financial stress on our borrowers, we remain confident in our ability to navigate the ever-evolving real estate credit landscape and are pleased with how our company is positioned to create long-term shareholder value.

With that, I’ll turn it over to Bob for a more detailed summary of this quarter’s performance.

Bob Foley: Thanks, Doug. Good morning, everyone, and thank you for joining us. Our first quarter results reflect the benefit of a 100% performing loan portfolio, a further reduction in interest expense due to continued optimization of our liability structure, including the reduction of interest expense quarter-over-quarter of $7.4 million or $0.10 per share and nearly full deployment of approximately $247.2 million of reinvestment cash in our FL5 CRE CLO. For the quarter, GAAP net income attributable to common shareholders was $13.1 million as compared to $2.6 million for the preceding quarter. Net interest margin for our loan portfolio was $26.8 million versus $21.3 million in the prior quarter, an increase of $5.5 million or $0.07 per common share due to further optimization of our liability structure and the absence of higher cost financing for nonperforming loans, of which we have none.

Our weighted average credit spread and borrowings declined quarter-over-quarter to 195 basis points from 204 basis points. Distributable earnings were $23.3 million or $0.30 per share. Coverage in the quarter for the quarter of our $0.24 dividend was 1.25 times. Distributable earnings before realized credit losses was $23.3 million or $0.30 per share versus $24.4 million or $0.31 per share in the prior quarter due to an improvement in net interest margin offset by a reduction in noncash credit loss expense. Our CECL reserve increased slightly to $74.1 million from $69.8 million due primarily to worsening macroeconomic and generic loan default and loss data embedded in the TREP database and model we used to forecast our general CECL loan loss reserve.

We had no five rated loans, no specifically identified loans, thus no specific CECL loan loss reserve at quarter end. Our CECL reserve was 210 basis points versus 190 basis points in the prior quarter. Book value per share is $11.81 as compared to $11.86 last quarter due primarily to the slight increase in our CECL reserve. Multifamily now represents 50% of our loan portfolio. Office has declined 68% over the past nine quarters to 20.4%. Life sciences is 11.4%, hotel is 9.9% and no other property type comprises more than 3.3% of our portfolio. Regarding REO, we have five REO properties, one multifamily property and four office properties with a total carrying value of $192.4 million and a blended current annualized yield on cost of 6%. REO represents 5% of our total assets.

Using the substantial resources of TPG Real Estate, we made significant progress during the quarter in advancing value creation and realization strategies for each REO investment. Regarding our multifamily property in suburban Chicago, we’ve already improved leased occupancy by more than 10 points to 93%. Refer to footnote four of our financial statements for a snapshot of our REO portfolio. Regarding credit, our weighted average risk ratings were unchanged at 3.0. All of our loans were performing. We had a small number of changes in risk ratings during the first quarter. Refer to Page 52 of our Form 10-Q for more detail. Regarding liabilities and our capital base, we remain focused on maintaining high levels of non-mark-to-market, nonrecourse term financing.

At quarter end, such arrangements represented 77.1% of our borrowings as compared to 73.5% at December 31st. Our total leverage declined further to 2.21 from 2.5 to 1 at December 31st. We have $4.7 billion total financing capacity across 12 discrete financing arrangements. During the quarter, we extended the investment period under our existing secured credit facility with Goldman Sachs for two additional years through 2026 and tacked on a two-year term out provision through 2028. Our only scheduled debt maturity in 2024 is $1.8 million under a credit facility we expect to extend or repay and terminate during the second quarter. We were in compliance with all financial covenants at March 31, 2024. At quarter end, we had $51 million of reinvestment capacity available, which we used in mid-April.

We deployed into loans during the quarter roughly $196.2 million of reinvestment cash. The reinvestment windows are now closed for all three of our accident CRE CLOs, although we remain able to substitute and exchange loans under certain circumstances. Regarding liquidity, we maintain high levels of medium- to near-term liquidity, roughly 9.7% of total assets. Cash and near-term liquidity was $370.7 million at quarter end comprised of $188.1 million of cash in excess of our covenant requirements, $51 million of CLO reinvestment cash since deployed, and $116.6 million of undrawn capacity under our secured credit agreements. As of last Friday, our cash position in excess of covenant requirements was actually higher to $235.5 million due to loan repayments and receipt of a $26 million servicer receivable in connection with a loan sale that closed during the fourth quarter of 2023.

During the quarter, we funded $10.7 million of commitments under existing loans. At quarter end, our deferred funding obligations under existing loan commitments totaled only $163.8 million a mere 4.6% of our total loan commitments. In summary, a quarter characterized by strong operating performance, solid credit, further optimization of our liability structure in terms of cost, non-mark-to-market borrowings and extended tenure, and significant liquidity through a balanced stance versus the market. And with that, we’ll open the floor to questions. Operator?

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Q&A Session

Operator: [Operator Instructions]. Our first question is from Stephen Laws with Raymond James.

Stephen Laws: Congrats on a nice start to the year, Bob and Doug. Nice to see the stability here over the last couple of quarters. Wanted to touch on the CLO. I think it was around $50 million of replenishment capacity at quarter end. Did that get filled with a loan that was funded on a bank line or were there some originations post-quarter end? Can you talk to that and maybe more generally kind of your origination pipeline and how you think about moving leverage from the current 2.2 over the course of this year?

Bob Foley: Good morning, Steven, and thanks for joining us. With respect to the $51 million of CLO cash that we deployed in April after quarter end, in that particular instance, we actually took an existing loan that had been financed with the bank and deposited it into the CLO, which actually generated about $11 million or $12 million of cash. We had borrowed less from our bank counterparty with respect to that loan than there was cash in the CLO. So, we ended up netting about $11 million or $12 million on our balance sheet cash as a consequence of that redeployment. And the cost of funds was clearly lower in the CLO than it was on the bank finance. And the coupon on the loan didn’t change. Its resonance is now different. It’s CLO not a bank financing arrangement. And I’m going to ask Doug to address your question about investment activity.

Doug Bouquard: Thanks, Stephen. So, on the investment side, we’re excited about the fact that we’re contributing more offensive and have a very active pipeline currently. If you look at our originations in the first quarter, which were 100% multifamily, we do still favor that sector particularly now being able to deploy capital at what is a lower LTV combined with obviously values are lower than where they were in 2021, 2022. So, we still lean towards housing, one. But two, we’re being selective and I think I mentioned earlier in my remarks about the sort of mixed signals that we’re getting from both the sort of macro picture and then also locally within real estate. So, we’re being respectful of where we are within the market cycle, but we are definitely able to play offense and we’ll continue to pursue new investment opportunities to help drive earnings growth for the company.

Stephen Laws: Bob, I wanted to touch base on the debt side. And you mentioned this in your prepared remarks about the Morgan Stanley facility that matures, I think, at the end of this week. You really don’t have anything drawn down on it, right? So curious to your thoughts on the pros and cons of extending it versus letting it expire. Even without it, you still have excess of $1 billion of capacity on your bank lines. What are the commitment fees that you would have to pay if you extend it? And larger picture debt covenants coverage ratios, I know it reverted back to 1.4 at quarter end and you’re in compliance with that. Can you maybe update us on where you stand with the ratio?

Bob Foley: Sure. So first, with respect to our particular arrangement with Morgan Stanley, Morgan Stanley has been an important financing partner of ours since we went public in 2017. We’ve got a great relationship with them and they with us. I think we don’t have much borrow with them right now for two reasons. One is, we haven’t recently found a commonality between our credit box and theirs. And two, our financing focus has for a number of years now shifted strongly in favor of non-mark-to-market, match term, non-recourse financing. Hence, all the note-on-note and CLO financings that we’ve done since 2018. Bank financing has remained an important part of our financing strategy because it is very flexible and it moves quickly.

But we have spent a considerable amount of time over the last several quarters, evaluating each of our counterparty relationships and determining where it makes sense to continue and where it may not make sense for us to continue. And then, so that’s that. With respect to financial covenants, we did we were in compliance at quarter end as we have been in each of the previous quarters. We had, as you pointed out, obtained from all of our lenders because we have harmonized financial covenants across all of our borrowing arrangements, a waiver arrangement that allowed our debt service coverage ratio to temporarily fall below 1.4 times. We’re above that. We’re very low-levered at this point and we would expect as we invest more and perhaps use more leverage that since we don’t use a ton of leverage, the interest coverage even at the high benchmark rates that we experience today will continue to be satisfied.

So, hope that answers that question. And with that, I’ll ask Doug, Scott to comment about the financing markets more generally.

Doug Bouquard: Yes. And Steve, I think you do bring up a really important trend that we’re seeing as I think about the first quarter. The demand from the banks for loan-on-loan business is definitely as strong as we’ve seen it frankly in a couple of quarters. And I think that’s really driven by a few things. One is banks continue to pull back on direct lending. And if they are going to be doing direct lending, they’re generally pivoting more towards CMBS execution rather than actually a long-term balance sheet investment. And then secondly, capital rules continue to kind of push banks towards providing back leverage to platforms like TRTX. So, I think on the positive side as we think about our pipeline through 2024 and beyond, that amount of demand, I think, is a really positive tailwind for our platform and is a trend that we expect to continue over the coming quarters.