TPG RE Finance Trust Inc (TRTX) 2017 Q3 法說會逐字稿

Good day, and welcome to the TPG Real Estate Finance Trust 2017 Third Quarter Earnings Conference call. (Operator Instructions) Please note, this event is being recorded. I would now like to turn the conference over to Evelyn Infurna of ICR. Please go ahead.

Good morning, and welcome to TPG Real Estate Finance Trust's third quarter conference call. On the call today are Greta Guggenheim, Chief Executive Officer and Bob Foley, Chief Financial and Risk officer. Greta and Bob will share some comments about the quarter and we'll then open up the call for questions. Last night, the company filed its Form 10-Q and issued a press release with supplemental earnings presentation detailing its operating results. All of, which are available on our website in the Investor Relations section. I would like to remind everyone that 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 some of the risk that could affect the company's operating results, please see the Risk Factors section of the companies perspective filed on July 21 with the SEC. The company does not undertake any duty to update forward-looking statements. During this call the company will also refer to center non-GAAP measures. For Reconciliations of non-GAAP measures, please refer to the press release, the Form 10-Q and the earning supplemental, all of which are posted on our website and have been filed with the SEC.

With that, it is my pleasure to turn the call over to Greta Guggenheim, Chief Executive Officer of TPG Real Estate Finance Trust.

Good morning, and thank you for joining us on the Inaugural public company earnings call for TPG Real Estate Finance Trust. I'm pleased to host this call and share the results of a highly successful first quarter as a public company. But first we'd like to thank both our founding shareholders who have been with us from the beginning and our new public company shareholders for their continued support and confidence in our investment strategy and platform.

Last night, we reported GAAP net income and core earnings of $0.35 per share for the third quarter and new originations totaling $775 million with a weighted average loan-to-value ratio of 63%.

For the 9 months ended September 30, we closed $1.5 billion of new loan originations. Subsequent to quarter end, we originated $294 million including closed loans and loans in the process of closing. This steady deployment of equity capital greatly facilitates our progression to achieving a fully ramped dividend.

Since inception, our focus has been to directly originate large floating-rate first mortgage loans on transitional assets in primary and select secondary markets. This strategy provides us with exposure to high quality real estate in the most liquid and relevant market. Over 80% of our loans are in the top 25 metropolitan areas. Our $3.4 billion portfolio consists primarily of 49 floating-rate first mortgage loans, with a weighted average as is loan-to-value ratio of 59%.

The $775 million of loan closings in the third quarter represents our strongest quarterly production since inception. These 7 new origination have an average size of $111 million, which is consistent with last quarter. Additionally, 74% measured by loan commitment are located in the top 10 U.S. markets. These loans are secured by assets that we expect to be stabilized in 1 to 2 years, including assets that are in lease up and light transitional assets, meaning assets requiring a low level of capital expenditure and accordingly, a low level of future fundings. None of these originations are construction loans and are all senior secured first mortgage loans.

This is also true of our originations subsequent to quarter end. Importantly, the weighted average credit spread for third quarter originations was an attractive 420 basis points, representing a strong risk adjusted return for loans of this nature. Our originations through September 30 represent a 60% increase over the same period in 2016.

We're especially pleased with our quarterly results because they were achieved despite the dual headwinds of a continued tight spread environment and historically high loan repayments during the second quarter totaling $802 million. This level of repayments is roughly 4x greater than our historical average. The timing difference between the receipt of the second quarter repayments is our high volume of redeployment in the third quarter masks the earning power of our loan portfolio. Had we invested on July 1, the initial fundings associated with the $775 million of originations, we estimate the earnings per share contribution would have been $0.11. It is important to note that we do not expect elevated levels of repayments in coming quarters. Regarding my comment on tighter spreads, the competitive intensity among existing players in the transitional lending space has not changed materially. We are in a competitive environment.

That said, credit structures remain disciplined and advance rate are relatively stable. The effects of competition are most pronounced and evident in the spreads compression we've seen in the market. But there's an offset to this, which is the competition among the banks that lend to TRTX. As Bob will discuss in a few minutes, we've been able to reduce our borrowing cost helping to offset some of the spread compression we've seen on the asset side of our balance sheet.

As a result, we achieved a 10% asset level estimated ROE on our originations this quarter. Further, as our financing options grow as a public company, based on track record and size, we expect to continue to diversify our liability structure to provide a competitive advantage in originating loans and sustaining our return on equity.

We are pleased with our third quarter performance. We delivered solid core earnings that we expect will ramp from here. Our overall strong performance is a testament to the momentum generated by our experience team of career balance sheet lenders, our extensive industry relationship, our consistent focusing on credit and our TPG sponsorship. As many of you may have heard me say before, the benefits of TPG sponsorship are substantial. TPG's Real Estate Equity Group has investments in over 1,000 domestic properties, which provides us access to in-depth local market property and sponsor knowledge as well as loan referrals. Additionally, TPG's portfolio of 200-plus companies provides specific credit information regarding key tenants and properties we're evaluating. I promise not to repeat this every quarter, but it does provide a critical competitive advantage to our platform.

We look forward to building on our first public quarter in the quarters and in the years to come. We have a great team of solid capital base and a robust pipeline. This allows us to be very selective as we expand our book-of-business. We're prospering in the current macroenvironment and are well-positioned to thrive in the rising rate environment that many are predicting, which as you know is accretive to our earnings. And we're committed to distributing capital to our shareholders in the form of steadily rising dividends.

With that, I'll turn the call over to Bob to review our financial results and capital position.

Thank you, Greta. Good morning, everyone. As a reminder, details of our operating performance, loan portfolio, capital base and other key performance indicators are contained in our Form 10-Q and earning supplemental, which were filed last light with the SEC and posted to our website.

For our first quarter as a public company, and our 11th full quarter of operations, TRT posted GAAP net income and core earnings of $20.8 million with $0.35 a share as compared to $25.3 million or $0.52 per share for the preceding quarter. The quarter-over-quarter difference of $4.5 million was due primarily to a decline in exit fee and other income related to loan repayments, which in the second quarter were an all-time high of $802 million and a temporary dip in interest income due to those repayments. We declared in September, and paid in October, a cash dividend of $0.33 per common share, which translates into a 6.7% annualized yield on our quarter-end book value. This level of dividend is fully consistent with the dividend re-ramp strategy we outlined during our ITO road show. We expect to steadily increase our dividend as we fully deploy our equity capital and continue to grow our loan investment portfolio. Book value per share at the end of the third quarter was $19.80 as compared to pre-IPO book value of $20.20 per share. Difference in book value primarily represents dilution from the issues of 11.65 million shares in connection with the IPO. A bridge of our book value per share quarter-over-quarter can be found on page 5 of our earnings supplemental.

During the third quarter, we originated 7 loans totaling $775 million of new commitments, our biggest quarter ever. Our quarter-over-quarter growth rate was 28.8%, and we added net loan assets of $636.1 million. Initial fundings totaled $637.1 million, and deferred findings in connection with pre-existing loan commitments totaled $66.8 million for a total capital deployment of $703.9 million.

Our estimated asset level return-on-equity for third quarter originations was 10%. The earnings benefit of these new origination will be fully realized during the fourth quarter. For our new originations, the weighted average loan-to-value ratio was 62.9% as compared to 66.8% in the second quarter.

For our entire portfolio, the comparable measure was 59.2%. The weighted average credit spread was 421 basis points as compared to 395 basis points in the prior quarter. For our entire portfolio the comparable measure is 488 basis points. Property types included multi-family, office and mixed-use. 5 loans involve collateral in top 10 markets and 2 were located in markets 11 through 26.

To recap, we originated more loans than ever before, at a wider credit spread and a lower loan-to-value ratio than in the preceding quarter. This is a clear example of our team's ability to optimize risk and return.

Loan payments totaled $67.8 million. We expect a more typical repayment pace in 2018. A reminder investment pace in net asset growth. We focus on year-over-year patterns, since the timing of loan originations and repayments can and do fluctuate for reasons beyond a lender's control. Our liquidity position at quarter end was strong. In addition to cash balances of $65 million, we had available to us to fund new investments $147 million of immediately available undrawn capacity under our secured repurchase agreements plus $1.2 billion of available financing capacity under our 5 repurchase agreements and 1 secured warehouse credit facility, which together totaled $2.7 billion of commitments.

During the quarter we increased our debt financing capacity by $503.5 million, through upsizing 2 of our secured repurchase agreements by a total of $253.5 million and closing during the quarter with Bank of America Merrill Lynch a secured warehouse facility with an initial commitment amount of $250 million that may be expanded to $500 million. Commitment fees on that second $250 million are due only when the commitment is expanded, allowing us to pay as you go. Assuming a targeted asset level -- leverage of 3:1, our estimated current potential new investment capacity is approximately $1.4 billion. In August, we refinanced and terminated our private bilateral static CLO, established in late December 2014 when TRTX was formed.

Due to repayments of underlying loans, the CLO notes have been reduced to levels where the CLO would soon being non-accretive. We reduced our cost of funds by 25 basis points and maintain our leverage at approximately 72% on the remaining $138.5 million of loans. For capital efficiency, and to speed deployment of the IPO proceeds, we intentionally borrowed less than the full amount of leverage approved by our lenders against each loan investment originated in the third quarter. We see evidence of this in 2 data points. First, our asset level leverage which we define as borrowings divided by the unpaid principal balance of low investments, which declined quarter-over-quarter to 61.9% from 65.3% and at quarter end, we had $147 million of immediately available undrawn capacity under our secured repurchase agreements. We're using these funds to close and fully leverage loan investments we have closed or will close during the fourth quarter. We reduced our weighted average cost of funds during the quarter by 9 basis points, driven by the CLO cleanup and our ability to borrow against newly originated loans investments and steadily declining credit spreads. We continue to explore other financing options to reduce our cost of funds, diversify our capital sources, extend the duration of our liabilities and enhance our financing flexibility to manage risk, and further enhance our competitiveness as a direct originator of transitional first mortgage loans. Portfolio risk as measured by our internal risk rating system remained unchanged from the prior quarter at 2.6 on a scale of 1 to 5, which -- with 1 being the highest quality. We review our entire loan portfolio several times each quarter and we assign fresh risk ratings quarterly. At September 30, there were no loans on nonaccrual status nor were any impaired. Consequently, we did not record a reserve for loan losses in the quarter nor have we since inception. Rising interest rates help us since 99% of our loan investment and all of our funded liabilities are floating-rate tied to LIBOR. A 100 basis points increase in LIBOR is estimated to generate an additional $0.12 per share of annual net interest income. All in all, our team produced a very strong quarter. And with that, Greta and I would be happy to entertain your questions. Thanks again. Operator.

(Operator Instructions) Our first question will come from Rick Shane of JP Morgan.

Bob, can you just go over the portfolio size by loan category on terms of bridge, transitional and construction?

Sure, Rick. Good morning, and thanks for dialing in so early. We -- the best place to look for this information is on page 45 in this quarter's Q, where we do provide loan-by-loan information including the type of loan. I think, as people know, we classify our loans basically on the basis of how much lift or business plan execution is involved. At the end of the third quarter, we had about $1.587 billion of bridge loans, about $690 million of construction loans. That number doesn't really change quarter over quarter. We aren't origination new construction loans; we're simply funding up on existing commitments. We had about $572 million of what we term moderate transitional loans and we had about $574 million of light transitional loans. And those numbers are all in commitment and you can sort those out again from that table on page 45.

And in case anybody is curious, and I suspect everyone will be doing the math, the quarter-over-quarter changes in commitment amount were bridge $396 million, construction went down about $9 million, moderate transitional went about $168 million and light transitional went up by about $153 million for net growth of about $707 million.

(Operator Instructions) And our next question will come from Steve Delaney of JMP Securities.

Greta, in your remarks you mentioned that you didn't expect elevated prepayments in coming quarters. Certainly, I take that to mean unlike the second quarter, which sounded like it was a record level. But could you give us some idea of when you look at your scheduled maturities for, say, the next 2 quarters combined because I realize timing is always uncertain. But maybe over the next 2 quarters, what might you expect in the way of dollar amount of repayments?

Sure. And let me just briefly comment on the high repayments in the second quarter, which as we mentioned were $802 million. The majority of those by far were loans paid off in full. And those were -- the 3 largest loans were originated in 2014 and we anticipated those repayments and they were fully reflected in our model. We -- and if you look at our historical average, it's in the low 200s, 211 million to be exact. And as we look forward in the next 3 quarters, it looks like the majority of our repayments will be partial repayments, and which are generally have less of an impact and they're primarily related to our construction condominium loans repaying at a very rapid pace. Those are winding down and as we've said before, we expect that those balances to go very low in the first half of the year. But so to answer your question, we think we'll go back towards our historical average plus or minus a little bit, but closer to the historical average as opposed to the second quarter.

And lastly for me. Would you just -- it seems like the IPO was so long ago in terms of the team et cetera. But could you just remind us of the size of your origination team? And I'm curious, you've got good momentum. Are you looking to add anyone from either a geographic standpoint or just an overall headcount standpoint?

So we have -- excluding myself, we have 4 senior originators. That includes Peter Smith, our head of originations, but he is very active originator as well. And then we have a very deep bench of associates and analysts to assist them. And we feel we're in a very good place to scale -- continue to scale the business as we did last quarter. We have great professionals who've -- as we said on the IPO roadshow that have been doing this a very long time, so we feel we have more extensive relationships and are able to quickly evaluate deals that work and deals that don't. So the team really hasn't changed materially since the IPO.

And our next question will come from Arren Cyganovich from Citigroup .

You talked about diversifying your liability structure a bit more. Could you add some color around the different funding types you'd be targeting and what the -- how that would impact the cost of funds?

Well, I'll start and I'll have Bob expand upon this. But we consistently look at the Capital Market funding alternatives available to us. We rely primarily on our credit facilities from the major financial institutions that we've identified. And we consistently look to expand those as well but we're -- have spent a lot of time in this past quarter evaluating other capital market options to us. And some of which will be more available to us as we scale and grow the business and then some that are available to us now, which we are actively evaluating.

Arren, to amplify in that. Obviously, today we've been a secured borrower. There's some other secured financing tools available in the markets right now. I think everyone is paying careful attention to the revived CRE, CLO market, which we're studying very carefully, and the team here has substantial prior experience in structured finance generally and in CLO issuance in particular. So that's a possibility. And I would say in addition to that, as a public company there are clearly a variety of debt and dequity type products that were not available to us when were private but are available to us now as a public company either today or in the near future. And those would allow us to accretively lever our equity over time. So we're exploring a wide range of alternatives right now. To specifically answer the second part of your question, probably, the best analog on pricing would be the CLO market, where in our assessment pricing today is equivalent to or perhaps a little bit tighter than where we can borrow on a secured basis with our existing banks but they're clearly some advantages to CLOs in terms of the absence of mark-to-market risk and being on recourse and so on. And being match-term funded. So I hope that answers your question.

And in the commentary, Greta, I think you mentioned that the higher amount of earnings, if you were to start at all the investments at the beginning, the quarter would have added $0.11, did I catch that right? Are you saying $0.35 would've been $0.46 or is that inclusive of if you didn't have the repayment? I'm just little confused.

No, you had that right.

It's net.

(Operator Instructions) And our next question will come from Derek Hewett from BofA Merrill Lynch.

Derek for Ken Bruce this morning. Greta or Bob, could you talk about the outlook for new origination spreads given that the market for transitional real estate remains competitive? And really, is there any sort of variability in terms of the different loan categories specifically, it has kind of -- have you seen tighter spreads on light transitional loans versus, say, moderate transitional loans?

Well, I'll start general and then I'll get to the second part of your question. But the most dramatic spread tightening occurred really in the first half of the year and I would say mostly in the first quarter of the year. We continue to see some spread tightening but it's at a smaller level now, so it's hard to really quantify. But if you noticed, our weighted average spread of our originations in the third quarter actually increased from the second quarter to 421 basis points and that was with light and moderate transitional and bridge lending and no really truly heavy lift assets such as construction loans. So I think we've seen the spread tightening in all asset types. We also see it in construction lending, which is another reason we haven't gone into that but the primary reason being that we're focusing on assets that can be stabilized in 1 to 2 years. But the spreads have tightened across the board in all property types. There is interest in the -- the closer an asset is to stabilization, the higher the cash flow at hedge, you may attract banks and some LIBOR lending insurance companies, LIBOR-based lenders that -- within the insurance companies. But it therefore, it gets very competitive. But that's really with assets that I would call practically stable with very high debt yields.

Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Ms. Guggenheim for any closing remarks.

Well, thank you, again, for joining us this morning. Bob and I will be on the road in the coming weeks and we look forward to seeing many of you in our travels. Thank you.

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