TPG RE Finance Trust Inc (TRTX) 2024 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the TPG Real Estate Finance Trust first-quarter 2024 earnings conference call. (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.

Good morning, and welcome to TPG RE Finance Trust Conference Call for the first quarter of 2024. We're 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 a 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 Factors 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 to the press release and the Form 10-Q.

At this time, I'll turn the call over to Doug Bouquard, Chief Executive Officer. Doug?

Thank you, Chris. Good morning and thank you for joining the call. Since the beginning of the year, the economy and labor markets continued to be remarkably resilient across the US. The market remains highly confident, a soft landing for the US economy, and global demand for risk assets remains 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 lower 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 positioning.

During the first quarter of the year, our approach to capital deployment and risk management remains 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 in 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 a 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 synced spend 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 the 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 2.2 points.

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 25, 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 and equity 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 will turn it over to Bob for a more detailed summary of this quarter's performance.

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 non-performing 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 non-cash 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 lost data embedded in the (inaudible) database and model we use 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 on 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. Offices 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% in 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 a mere 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 in our capital base, we remain focused on maintaining high levels of non-mark-to-market non-recourse term financing. At quarter end, such arrangements represented 77.1% of our borrowings as compared to 73.5% at December 31. Our total leverage declined further to 2.2 to 1 from 2.5 to 1 at December 31. We had $4.7 billion of 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 deploy into loans during the quarter roughly $196.2 million of reinvestment cash. The reinvestment windows are now closed for all three of our extant CRE CLOs, although we remain able to substitute and exchange loans under certain circumstances.

Regarding liquidity, we maintain high levels of immediate and near-term liquidity, roughly 9.7% of total assets. Cash and near-term liquidity were $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 with $235.5 million due to loan repayments and receipt of a $26 million servicer receivable in connection with the 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 tenor; and significant liquidity through a balanced stance versus the market.

And with that, we'll open the floor to questions. Operator?

(Operator Instructions) Stephen Laws, Raymond James.

Hi, good morning. Congrats on a nice start to the year, Bob and Doug. Nice to see the stability here over the last couple of quarters.

I 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?

Good morning, Stephen, 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 CLO, which actually generated about $11 million or $12 million of cash.

We were -- 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 financing. And the coupon on the loan didn't change. Its resonance is now different, CLO, not a bank financing arrangement. And I'm going to ask Doug to address your question about investment activity.

Thanks, Stephen. On the investment side, look, we're excited about the fact that we're viewing activity more on offense and have a very active pipeline currently. If you look at our originations in the first quarter, which were 100% multi-family, 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, '22.

You still need [to recalculate that] one. But frankly, we're being selective. And I had mentioned earlier in my remarks about the sort of mixed signals that we're getting from both -- that sort of macro picture and also locally within real estate. So it will be a respectful of where we are with the market cycle, but we are definitely able to play offense, and we will continue to pursue new investment opportunities to help drive earnings growth for the company.

Great. Appreciate the color on both of those topics. 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 [have everything] 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 clients. What are the commitment fees that you would have to pay if you extend it? And then 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?

Sure. 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 borrowed 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 matched-term non-recourse financing, hence all of the note on note and CLO financings that we've done since 2018.

Bank financing does remain 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 of evaluating each of our counterparty relationships and in 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 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 experienced today will continue to be satisfied.

I hope that answers that question. And with that, I'll ask Doug -- he's got a comment about the financing markets more generally.

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 strong as we've seen it, frankly, a couple of quarters.

I think that's really driven by a few things. One is new banks continue to pull back on direct lending. 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 PRTX. I think, on the on the positive side, as we think about our pipeline through 2024 and beyond, that amount of demand is a really positive tailwind for our platform. That is a trend that we expect to continue over the coming quarters.

I think Doug's earlier comment about mixed signals in the market I think highlights this particular point, which is, demand by banks to provide financing is quite strong. I mean, we have a ton of inbound inquiry from our existing counterparties about borrowing more from them. The nature of the financing that they're providing to the CRE world has clearly shifted, as Doug described.

And honestly, spreads are coming in with respect to secured financing that can be obtained by lenders like us. The investment sales market for properties and the financing market for those transactions, that environment is a little more opaque and a little less clear right now, which is really the point that Doug was making earlier. There's an interesting technical thing going on right now where financing costs are coming in, but loan spreads are kind of all over the place.

Great. Really interesting comments, and I appreciate getting both of your thoughts on that. Thank you.

Thanks, Stephen.

Rick Shane, JPMorgan.

Hey, guys. Thanks for taking my questions. Steve actually covered a lot of the ground I was interested in on the facilities. One thing, looking at the extension of the Goldman facilities, spread stays the same. I am curious if there are there any changes to the terms that we should be aware of, any sort of refinement of the credit box going forward?

No, no material changes. We pay for financing on a pay-as-you-go basis. Goldman has been another very important business partner of ours. They were actually our first credit counterparty when we were a private company. And to your point about credit box, each -- we've talked about this before. We view our liability -- our portfolio liability providers, and the construction of that portfolio is being as important as constructing our investment portfolio.

And everybody's credit box a little bit different, but when stitched together, what we want and what we have is a mosaic that works for our business. In the case of Goldman, we're pretty simpatico. I wouldn't say that there's been a change in credit profile at all. And those decisions are made, honestly, on a deal-by-deal basis.

Got it, okay. That makes sense. And yes, obviously, given the history with Goldman, that's a significant renewal. Look, the other question is you sort of change your footing and start to move back into making more loans. I'm curious what you're finding in the market, and is capital deployment going forward going to be idiosyncratic every quarter?

Are we going to hear about some deployment and it's going to be very much a story? Hey, we found this opportunity, this is why we love it. Or is it going to be thematic; there is something in the market that you're going to be targeting, whether it's geo or property type of work? Like I said, a thematic approach to reemerge in the market.

I would take it, really, for us at the top of the list. We do think about investing in the real estate space from a thematic lens, and that's really kind of [going across] our debt and equity platform. One, as we think about themes, we really, I would say, are very much trying [to think, I would say], ones that we've mentioned, our sort of [biased] housing and actually doing all of that.

Again, multifamily values are down from the peak, but where we can make new loans today, 65 LTV, acknowledging that fee is now potentially 15% to 20% lower, that's a particularly attractive entry point. So that's really one.

And I would say, two, from a team perspective, we kind of get a little more granular. You're really out there looking at new investments, I think there's kind of two areas that I think are particularly attractive for us to really focus on. One is new acquisition activity is obviously going to be a big draw, I think where we see feel fresh capital coming in, reflecting today's market values that's attractive.

And then I would say, secondly, if there was a part of the market that's probably most interesting and it continues to be the trafficking within the area of where regional banks had been lending, I think it still is probably -- the store that's obviously out there very broadly about banks pulling back.

But acknowledging that, of all the outstanding commercial real estate debt held by banks, about 75% resides in the regional banks. And those regional banks continue to generally, I would say, not pull up. And we've seen that in Q1 as we're out there competing on loans.

So again, I really view it as a bias towards housing, one; second, a bias towards new acquisitions. And then as we think about capital deployment going forward, we will position the balance sheet where we can navigate, what I was trying to say, some sort of mixed signals that we're getting from the market front. And that's exactly kind of how we think about liquidity and what we think about the new investments.

Doug, that's really helpful. I am curious, as you start to look at multifamily, if you would just give some sort of context where cap rates were previously, where you see deals getting done today? And that's it for me. Thank you, guys.

Sure. I mean, look, I think multifamily obviously is a very, very heavily debated sector. Right now, it's given all the -- right at the heart of the confluence of some of the macro trends with interest rates and inflation. I think that we're seeing new transactions get done.

Generally speaking, have been in the sort of mid to high fives cap rate range that -- it feels like from a liquidity perspective as multifamily cap rates get into the sixes, there is a lot of liquidity on the equity side. And I think as cap rates get, let's call it, inside of 5.25 is where I would say that liquidity climbs up.

So again, viewed as the sort of midpoint is to pick a number of [5.75]. And that's -- again, which allows us to be making loans from a risk perspective at stabilized debt yields in the 7.5% to 8.5% range, again, depending on the property type and depending on the specifics to that certain asset.

Got it. Thank you very much.

Thank you.

Eric Dray, Bank of America.

Hey, guys. Good morning. Most of mine have been covered, but I just wanted to ask about how -- have conversations with borrowers changed at all over the last month? Is kind of the rate outlook has changed a bit and kind of what you're hearing from your portfolio borrowers?

No, I think it's a great question. I think that broadly, the narrative was obviously the slowing of expected rate cuts combined with, I would say, the sort of what it feels like over the past few weeks, a little bit of a slowdown in transaction activity. I think that's been kind of more of the dialogues that we've been hearing about.

Relative to our current portfolio, I've seen a very [modest] 100% performing -- I think that we generally would characterize the borrowing universe as still looking through the long term. It's effectively where long-term rates will settle and still kind of leaning positive in terms of their ability to kind of weather the storm with elevated SOFR in the near term. And that's -- I'd say that's the best way to characterize the mindset.

So as that evolves, of course, I have to keep you updated, but that's kind of where the market is right now. And again, we're definitely at a creation point, narrative wise, just kind of what's going on within macro. And I would say that despite our intimate knowledge of what's going on in the ground within the real estate sector, given our sort of broad lens through which we invest, keeping an eye frankly on what the Fed is doing and saying, I think, is really important and we're very attuned to that.

All eyes are on 2:15 PM Eastern Time today.

Definitely. Okay, awesome. And then real quick, just I guess, for modeling purposes. I mean, do you think that the $0.30 DE that you posted this quarter -- I mean, is that where you guys think the portfolio can kind of maintain here in the next few quarters or any one-time things to call out?

We never provide guidance, but I think that backwarding into that number and its composition, I think it's pretty easy to see what's being generated by the loan book and what's being generated by our small REO portfolio. So we've been pretty clear about our dividend policy and our view about sustainable levels of distributable earnings and so on. We're comfortable with our current position but can't provide any guidance.

Yes, I mean, just to give perhaps a little bit more context, which is helpful, as you think about the levers that we have to grow earnings, I would just kind of take (inaudible) of what our balance sheet looks like. First and foremost, we have a substantial cash balance that combined with other available liquidity channels totals approximately $371 million currently.

Secondly, we are out there with a pipeline of potential investments that we could potentially pursue over the coming quarters. From a new investment perspective that of course can drive earnings. And then lastly, again, to the [bond covenant], we have approximately 5% REO. And frankly, as we navigate through those assets and maximize value, that also can be recycled into newer loan investments, which will also grow earnings over time. So we view that as the broader our qualitative pitch on that one.

Okay, great. Thank you, guys

Thank you, Eric.

We appreciate it.

Chris Muller, JMP Securities.

Guys, thanks for taking the questions and congrats on a great start to the year. So following up on some of the prior questions, now that you guys are back to lending and the portfolio is cleaned up, should we expect to see some portfolio growth in the back half of this year? Or will it be more of a flattish-type portfolio? And I guess the root of the question is, how aggressively do you guys wanted to match repayments with new loans over the coming quarters? Thanks.

I'd say that we're -- from a strategic perspective, we've really built the balance sheet [to start with] what I would describe as an all-weather outcome here, again, acknowledging those mixed signals. Where we are currently sitting today, I would say it leans more towards the offensive.

So from a deployment perspective, I would expect us to be able to find new investments in the coming quarter. So as we think about kind of repayments, repayments so far definitely have slowed. And that will be one of the byproducts, frankly, of both elevated rates but also more probably elevated rate fall right now. But I would say, generally speaking, as I mentioned earlier about the three levers that we have to grow, earnings, I would describe our ability and appetite to generate new investments is ramping up at the top of the list to be able to [grow our company].

Got it, that's helpful. And then the other one I have, some of your CLO financing out of the reinvestment periods, can you give your thoughts on if a new CLO is possible in 2024 and just how you guys are viewing that market today?

Yes, sure. I mean, I think there has, of course, been a handful of CRE CLOs done recently in the market. It's a very interesting dynamic right now where the available financing that we're being provided from this bank balance sheet continues to be more attractive than what we see within the CRE CLO market. Given that we're active really in both worlds, we're always looking on a daily basis. So frankly, the sort of delta between what kind of advance and spread in terms we can get from banks on their balance sheets versus what the bond market will bear.

Simply put, we will continue to optimize that going forward. I would say spot right now, again, to my commentary on banks, just seem to have a lot of demand to put capital out there, restrained on pulling out direct lending capital. And they definitely have a lot of demand to be providing loan-on-loan financing for us.

So I think that's really how we're looking at it. But when we think about the CRE CLO market, CRE CLO is of course -- ROE, important part of our capital structure. They do provide, frankly, a lot of flexibility from a financing perspective. And they do, of course, offer the benefits of mass-term non-mark-to-market non-recourse financing.

So as we balance advanced and spread, there also is the structural side of things. But you'll get -- I think, at this point, CRE CLO spreads have really kind of lagged and they kind of haven't -- what I had been mentioning earlier about these (inaudible) corporate credit spreads. [Culture dictates], but we really haven't seen CRE CLO spreads move back to, frankly, where they were.

You think about the tights over the last three or four years. I mean, AAAs were really as tight as about, let's call it approximately at that time, Libor plus 80. Now we're still seeing CRE's AAA spreads in the mid to high 100s, best case. So we're still looking at a lot of compression to happen on CRE CLO spread segment.

Very helpful. Thanks for taking the questions.

Rick Shane, JPMorgan.

Hey, guys. Thanks for taking my follow up. Having asked so many questions over time about repurchases, I think I'd be remiss not to address that. It's nice to see you guys announce a repurchase. I'm curious how you will approach that. That's a $25 million allocation. Do you expect it to be pretty consistently in the market? Or is that something that will just be there very defensively if you see some really bad days?

I think, on the on the share repurchase side, first and foremost, it's a tool in our toolkit, which we acknowledge and have acknowledged over time as a really powerful way for us to both generate earnings for the company.

And I also think it's a real statement about the fact that with the credit quality of our current book relative to book value, buying shares at today's market price does look very attractive. In terms of going forward, all I can say at this point, Rick, is that it will continue to be a tool in our toolkit. And I expect that over time, we will continue to use this as a potential way to drive earnings for the company.

Okay, great. Thank you for taking the question, guys.

Thanks, Rick. We appreciate it.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to management for closing remarks.

I just wanted to thank everyone for taking the time this morning to call and look forward to speaking to all of you next quarter. Thank you very much.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.