TPG RE Finance Trust Inc (TRTX) 2021 Q1 法說會逐字稿

Greetings, welcome to TPG Real Estate Finance Trust's first quarter 2021 earnings conference call. (Operator Instructions). Please note this conference is being recorded. I would now like to turn the conference over to Deborah Ginsberg, General Counsel. Thank you. You may begin.

Good morning and welcome to TPG Real Estate Finance Trust's conference call for the first quarter of 2021. I'm joined today by Matt Coleman, President; Bob Foley, Chief Financial Officer; and Peter Smith, Chief Investment Officer. Matt and Bob will share some comments around the corner -- quarter, excuse me, and then we'll open up the call for questions. Yesterday evening we filed our form 10-Q and issued a press release with the presentation of our operating results, all of which are available on our website in the investor relations section.

I'd 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 risks that could affect results, please see the risk factors section of our 10-Q and 10-K. We do not undertake any duty to update these statements and we will also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and our 10-Q. With that, I turn the call over to Matt Coleman, President of TPG Real Estate Finance Trust.

Thank you, Deborah. Good morning and thank you for dialing in. TRTX had a busy and productive first quarter. As we reported last night, we generated GAAP net income attributable to common stockholders of $24.2 million for the quarter, or $0.30 cents per diluted common share and distributable earnings of $21.7 million or $0.27 cents per diluted share. Book value increased to 16.61 per share. That's up from 16.50 at the end of Q4 2020, in part because we reduced our CECL reserve by $4 million to $58.8 million at quarter end or 118 basis points of total loan commitments. During the first quarter, we made substantial progress on the strategic goals and initiatives that we articulated on our last call. First, we said that we were going to restart the originations engine and we've done that. We closed a $45 million multi-family loan in Indianapolis prior to quarter end and we subsequently closed a $47 million multi-family loan in St. Petersburg, Florida, immediately following quarter end.

Additionally, we have under term sheet seven loans with an aggregate commitment amount of $589 million split roughly equally between multi-family and life sciences. Recent macro metrics show the strength of the continuing recovery manifesting in robust real estate capital markets, increased investor optimism, abundant liquidity, and relatively high levels of transaction volume. Against that backdrop, we have an active originations pipeline with more than $5.5 billion of first mortgage loan opportunities under consideration.

And we have substantial liquidity to support our investing activity, with more than $290 million of unrestricted cash on the balance sheet as of March 31st and approximately $310 million of cash in CLOs available for investment in eligible collateral. In today's highly competitive lending markets, TPG sponsorship remains a competitive advantage for us, giving our teams access to the firm's immense intellectual capital, deep sets of relationships and networks, and powerful market insights. As we've reentered the lending markets, our disciplined view on credit has remained the same. Our focus is on quality assets, markets, and sponsors, and these remain core principles for us.

With respect to our second area of strategic focus, we're continuing to optimize our capital structure and we made important progress on this front during the first quarter. We priced and closed TRTX 2021-FL4, a $1.25 billion managed CRE CLO with a 24-month reinvestment period and a weighted average interest rate at issuance of LIBOR plus 160 basis points; that's before transaction costs. Importantly, FL-4 includes an approximately $309 million ramp, almost all of which is planned to be utilized in connection with our already identified pipeline. Following the closing of FL-4, 84% of our liabilities are now non-marked to market, up from about 45% in early 2020 and 64% as of year end 2020.

Finally we've continued our active asset management initiatives and our portfolio is performing very well. We reduced our CECL reserve, as I mentioned, by $4 million at the end of the first quarter, reflecting the resiliency of the loan portfolio, borrower support where needed, and our increasingly optimistic view of macro economic conditions. Interest collections for the quarter exceeded 99% with our one defaulted retail loan in Southern California being our sole non-accrual loan. As a result, Q1 risk ratings were stable compared to Q4 2020 at 3.1.

As we've explained before, our strategic plan for 2021 is at the intersection of the initiatives I've just gone through, active asset management of the loans in our portfolio, robust originations focused on compelling underlying credit and optimizing our capital structure. We're proud of the progress that we've made in the first quarter and we look forward to updating you on further accomplishments as we move forward. With that, I'll turn the call over to Bob to discuss our first quarter results in more detail.

Thanks, Matt. Good morning, everyone. We hope that everyone, especially our guests on the West Coast, enjoy this more civilized start time of 10:00 AM Eastern.

With respect to operating results, we reported yesterday for the quarter ended March 31st GAAP net income of $32 million, GAAP net income allocable to common shareholders of $24.2 million or $0.30 cents per diluted share, and distributable earnings, formerly known as core earnings, of $21.7 million or $0.27 cents per diluted share, and that covered our common dividend at a ratio of 1.4 times. Net interest margin declined quarter over quarter by $2.7 million due to fourth quarter loan repayments and the charge off of approximately $500,000 of deferred financing costs associated with loans that were contributed to TRTX 2021-FL4 which, as Matt said, closed on March 31st. Our operating expenses remain consistent with pre-COVID levels. Book value per share increased to 16.61 per share, up $0.11 cents for two reasons. First, earnings outstripped dividends paid on our common and preferred stock and, second, because we released $4 million of our general CECL reserve or $0.05 per share.

Our CECL reserve declined primarily due to steadily improving operating performance, especially in our hotel loans, which at quarter end represented about 15% of our portfolio, combined with improved macro economic assumptions that drive our CECL model. At quarter end our CECL reserve was 118 basis points of our total loan commitments versus 127 basis points for the prior quarter. With regard to capital markets, TRTX is a leading CRE CLO issuer and collateral manager, based on $4.4 billion of CRE CLO issuance since 2018. We have a strong track record across three separate transactions, a large base of repeat investors familiar with and confident in our ability to prudently originate, carefully asset manage, and transparently report on our institutional quality loans and our TPG affiliation is also very helpful.

Accordingly, in late March, we issued a $1.25 billion managed CRE CLO with a 24-month investment period and a $308.9 million ramp feature, which allows us to contribute new multifamily loans for up to six months from closing. Since April 1st, we have used 83.4 million of the ramp and expect it will be fully utilized by June, if not sooner. FL-4 is important because it further strengthens our already solid balance sheet, it lengthens the duration of our liabilities, it increases to 84% our ratio of non-marked to market liabilities, and through a combination of high advance rate and low cost of funds it enables high-quality loan originations at market-competitive loan spreads that produce risk appropriate ROEs consistent with pre-COVID levels.

To augment our CRE CLOs and supportive loan originations, we continue to have approximately 3.2 billion of committed credit facilities with seven distinct counterparties. During the quarter, we extended our $500 million credit facility with Morgan Stanley and we are currently in discussions with Goldman Sachs and the Bank of America about doing the same with their credit facilities during the third quarter of this year. With regard to credit, risk ratings remained unchanged at 3.1 quarter over quarter. In fact, they've been consistent since early 2020. Hotel performance continues to improve, affordable multi-family properties continue to perform well, and office is holding steady. Pages 11 and 12 of our earnings supplemental provide extensive disclosure regarding interest collections, pick interest and loan modifications. The takeaways: We collected 99.4% of scheduled interest of which only 1.2% was non-cash PIK interest. Our PIK balance at quarter end was 5.5 million, only 12 basis points against our $4.6 billion loan portfolio. PIK interest accrued and recognized during the first quarter was $816,000, down 13% from the prior quarter, reflecting a decline in loan modifications that involve PIK interest. Cumulatively, we have executed 24 loan modifications since April 1st, 2020, primarily involving hotel properties, but only 11 remain in effect today. Our borrowers continue to support their properties with capital infusions when necessary. All of our modified loans are performing in accordance with their terms. Our sole retail loan remains in default and carries a $10 million specific loan loss reserve. We have one REO investment in Las Vegas. In both instances, our asset management team, supported by the broader TPG real estate team, is pushing steadily toward timely, positive resolutions.

With regard to liquidity, at March 31st, cash on hand was $290.8 million, net of cash held to comply with our financial covenants. And the FL4 cash ramp was $308.9 million. Additional liquidity may result later this year if loan repayments increase in response to borrower success in achieving business plans, robust fixed income cap, fixed income markets, and a growing volume of investments sales transactions.

With regard to leverage, at quarter-end, our debt to equity ratio was 2.72:1, in line with the previous four quarters. We do expect that ratio will return to the normal range of 3.25 to 3.5 times as we originate new first mortgage loans and utilize our secure credit facilities to fund originations when our CLOs are fully invested,

We see several drivers of earnings in the current fiscal year, including growth in the loan portfolio fueled by our current liquidity and financing capacity. Redemption of the series B preferred stock remains a top priority for us and is an important benefit to our common shareholders. Cost savings are expected to be substantial but will vary depending upon the capital source or sources used to fund the redemption. We will incur one-time costs in connection with any full or partial redemption we undertake. And the third important factor, refinancing our current hotel borrowings, still on a non-mark-to-market basis, but in a materially lower coupon.

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

Thank you. If you would like to ask a question, (Operator Instructions).

Our first question is from Steven Laws with Raymond James. Please proceed.

Hi, good morning. Bob, appreciate the late start time, but also the PIK disclosure and the timely filing of the Q. So I appreciate all of that.

Touching on the quarter, can you kind of connect the dots on the other part of the equation? It sounds like pretty robust pipeline around $600 million. If I did my math correctly, the ramp feature for the CLO still has about $215 million remaining. What are your projections for second half repayments and where do you see the portfolio running from a total leverage or when we back out the 86% non-recourse? Where do we see total leverage running go-forward basis?

Matt, would you like to comment on repayments?

Sure. I think in -- with respect to repayments, Steven, we had no repayments in the first quarter. We had a modest level of projected repayments in the first quarter. I don't think there's very much to read into that. It was a very small end, so I think there's just some loan-specific idiosyncrasies there. Our overall projected repayments for the year remain just north of $950 million for the year. That's where they've been historically within a range, and that's consistent with previous estimates. They are, I think, a little more back ended as we now sit here in May and look at the remaining time left in the year, but the overall projections haven't changed.

With respect to leverage and the other components of your question, I'll let Bob address those.

Sure. So with respect to leverage seed and everyone else on the call, I think that the CLOs are very attractive because they provide cheap funding, they're very stable, and, frankly, advanced rate dominates over cost of capital when it comes to levered ROE. So being able to continue to lever a substantial portion of our loan investment portfolio in an advanced rate in excess of 80%, it's currently around 83% on average, is to us very attractive because it's stable and long-term.

As I said, we will use more of our pretty substantial repo capacity to fund additional investments during the year. That will bring up our overall debt to equity ratio. Advanced rates on repo are typically 5 to 7 points lower than they are on the CLOs, and their cost to fund, as we discussed last quarter, in this current market environment remains higher, materially higher than CLOs.

So in the aggregate, when you blend those together, I think you'll see in a more equilibrium status once we're more fully deployed that our total debt to equity is going to look more in the range of 3.25:1 or so, which if you look historically is within the range, although toward the high end of the range of where we've operated historically. And I think you'll see that.

It's difficult to predict precisely. We talked many times about the fact that the pace of originations is one thing, and with respect to Part A of your question, the pace of repayments is another important variable, but of course we have less control over that.

Great. No, that's helpful. And that leverage, given your high mix of CLOs, that's high end of the range, too. Or it is the high end.

Touching base on Las Vegas, can you give us an update on maybe timing of a resolution there and how you guys plan to look at exit strategies on that?

Sure. Let me make some specific comments-

As we said, we don't intend to be long-term holders of Las Vegas land. On the other hand, we will take those steps and undertake actions that are value maximizing within an acceptable timeframe. So we're actively engaged with the sales brokerage community to think about optimal exit strategy and timing. We have engaged a third-party property manager to help with ongoing operations, but I would say, overall, our views on timeline to disposition have not changed, which is that you should expect at least some partial resolution in the intermediate term, and we don't intend to be long-term holders of that land.

Our next question is from Tim Hayes with BTIT. Please proceed.

Yeah. Hey, good morning, guys. Hope you're doing well.

I guess just want to touch on the pipeline a little bit more, and I completely understand that the ROE you're earning on loans that will go into the CRE/CLO are probably superior to those that will be financed otherwise given the attractive cost of funds and advance rates there. But just curious what kind of all-in coupons on loans in the pipeline look like and what the ROEs you believe you'll be able to achieve once the ramp up feature has been fully utilized, and how that kind of compares to the portfolio average.

Morning, Tim. Hope you're well. If you look at our loans under term sheet now, we're looking at weighted average spreads that are a little bit north of 360 basis points. And I think, as I said, it is a competitive market out there, and I think we are probably not alone in seeing spread and overall yield compression. That being said, as we've commented on, and as you alluded to, the financing markets have remained very attractive and robust for us as borrowers as well. And so I think you're seeing a little bit of a change in the composition of returns, but if you look at our loans that are signed up now, we're not seeing returns on equity that are materially different than pre-COVID levels.

I'll let Bob perhaps address financing post-ramp and the impact that, that could have on ROEs.

Thank you, Matt. Tim, we agree with you that on an individual, granular loan basis, a loan, frankly at any spread financed in a CLO is going to generate a higher-levered ROE than financed on repo. But this is a $5 billion company, and I think we should all look at what the levered returns are across the company as a whole. And the reality is, given the size of our loans, the average size is slightly north -- it's right around $90 million, we typically cut our loans into participations. And a portion of that loan is likely to be in one or more of our CLOs. And the controlling participation would typically remain on one of our credit facilities. And that's a common practice throughout the industry.

But clearly, as we fill our CLOs, they're still available to us as loans repaid, for those deals that have open reinvestment periods, which would be FL4, our newest CLO, and FL3, through October, November of this year. And then we look to the credit facilities to be a supplement to that. But at this point, it's less than 20% of our total liability base.

So ROEs today are comparable to what they were pre-COVID. Credit spreads have changed a bit, libor floors are currently different. Peter can comment on that. They're lower. But we feel comfortable with our ability to continue to engineer appropriate risk-adjusted ROEs for the company and its shareholders.

Okay. That's helpful, Bob. Appreciate it.

And one of your peers -- I'm curious how terms and structures on these loans compare to any pre-COVID loans as well. Because one of your peers recently noted that they're seeing more lender-friendly terms on new loans, with kind of the same observations on spreads as you guys, as well. But mentioned that attachment points were coming in a bit, and I don't believe they said anything about covenants. So I'm just curious how structures have held up or are trending in the pipeline that you're seeing.

Peter, do you want to address what you're seeing in the market, and what we're seeing in our own pipeline?

Yeah, sure. I think structure is still holding in relatively well. Sure, we lost a year during COVID. But in 2019, the first quarter of 2020, it was still a relatively competitive market. I think we do a lot of repeat business, so we've already determined what the structure is. And generally, people are getting relatively decent market terms at low interest rates. And so they're not necessarily as focused on structure.

And if you've already gone through it, as I said on the repeat borrower side of the world, if you've already gone through a highly structured deal, that those things sort of stick. So for a lot of our deals, we're not seeing really much -- actually, not seeing really any deterioration of structure. And our sponsors generally get it. They're institutional-type sponsors, and they're experienced. They kind of know what's going on, and they sign documents accordingly.

Got it, got it. Okay. Appreciate the color there as well.

And then, you mentioned just the series B preferred you have outstanding, and how that's a goal is to complete the redemption of those securities. Just wondering if you could provide maybe a target range on when you might look to do that? And I understand the capital markets might play a big role in that, and we don't have crystal balls. But if we stayed at kind of where we're at right now, the capital markets backdrop, just a target range for you guys to pay down those or redeem those preferreds.

As you noticed, it's very hard to engage in transaction timing prognostication. And there are a number of factors, some of which we control, some of which we don't control. It's certainly our corporate goal over the course of the year, perhaps sooner, to redeem that preferred security.

As we said on the last call, we will do it a, when the capital markets permit or support it, and b, at a time that we think is optimal for us in terms of replacing that capital with a much more efficient cost of capital. There are make-whole arrangements. I think readers and listeners who are familiar with the company are familiar what those are. But there is a make-whole, and so we want to optimize the timing and the cost of capital used to affect the redemption.

That totally makes sense. Can respect that for sure. But my last question is just kind of part B to that, and it has to do with the dividend.

And obviously, dividend coverage is very strong right now, and things seem to be trending in the right direction. Bob, you highlighted a couple of catalysts for earnings power here, which one, includes the series B preferred stock redemption. But then also the pipeline is very robust. You're growing the portfolio, and you have some good liquidity to do that. So that all bodes well for earnings power, in-place dividend coverage very strong.

Can you maybe just give us an update on how you're thinking about positioning that dividend and at what point, whether it's after the completion of addressing the series B preferreds, at what point you would look to maybe right-size it more in line with your core earnings power?

Sure. The answer to that question is clearly the result of the combination of vectors, and you've just mentioned most of them. We in the board discuss and study that issue all the time. I think that we want, and I think the market wants, a, an increase in the dividend, and that's what we're focused on; b, for it to be clearly stated and a sustainable increase, and probably a smooth one as well.

So I think that the redemption of the series B preferred stock is probably the biggest, most material driver of that, perhaps tied by or slightly followed by deployment. So I think those will be two leading indicators of when you might expect new news on an adjustment to the dividend.

But right now, our focus is on ensuring that we're comfortably covering the current state of dividend and making rapid and firm progress toward creating a higher and more sustainable dividend.

Our next question is from Charlie Arestia from JPMorgan. Please proceed.

Morning, guys. Thanks for taking the questions. Appreciate all the color so far.

Just wanted to kind of pull up a bit. Looking at the map of office loans on slide 9, it looks like there's a fair amount of exposure to New York, San Francisco, Atlanta, Los Angeles, kind of the large urban centers. And I realize that the office is probably the biggest question mark right now in terms of that longer-term outlook, really.

But thinking beyond the initial leases on the book today for your tenants that you're lending against, just curious to hear your thoughts on both collateral performance and also the origination outlook for those urban markets, given what I think is a pretty wide disparity in terms of the regional impacts from COVID?

Good morning, Charlie. I'll start with that and then Peter can add his color as well. First, as it relates to collateral performance, the office portfolio that we have is all entirely performing and paying with 100% interest collection in accordance with their terms.

We have, as we've talked about before, specifically with respect to the New York City office, we have reasonably limited exposure- just north of 17% measured by fully funded commitments. And as we've talked about with each of the individual credits, we like the lease coverage that we have and our tenant credit quality.

If you look at underlying performance, rent collections over the last 12 months across our office portfolio have been at 90-plus percent. So performance has been very strong.

As you allude to, office is an asset class that we are approaching with caution right now. We do have one office deal under application in the Fort Lauderdale market. A very strong sponsorship. A COVID recovery story that we like. Some development potential, perhaps, but a credit that we like. It is, however, an asset class, for all of the reasons that you allude to and uncertainty about emerging office usage as we come out of the pandemic, that we're approaching with caution.

With that, let me ask Peter to provide his color as well.

Yeah, you touch on a few things. We're certainly not running around trying to find a lot of office deals to do, primarily just because we don't really know what the end game's going to be, how much space people are going to need. And while we are being very cautious in what we look at on the office side of the world, we are focusing on sort of growth markets where there is a good story where you have a lot -- you know, Sunbelt states where you have a lot of increase in population and whatnot. And I think, what we've seen sort of historically from looking at our own book and also talking to a lot of landlords and asking a ton of questions, is none of the tenants right now are really, for the most part, extending their leases long term. A lot of them are doing a lot of short term renewals and whatnot, just to sort of figure it out.

So what we're seeing, I think, is when people start going back, which is happening faster in certain parts of the country, but when people start going back, we're targeting sort of a September time when we'll probably see a lot more people going into the office. I think people are going to reassess their space needs and figure out how their space is working for them then. So I think a lot of decisions are going to be made with respect to duration of new leases in 2022. And discussing with the landlords that are signing leases and new leases and whatnot, they're really trying to focus on holding the face rents within 5% or 10% of pre-COVID levels and basically spending a little more money on TIs or CapEx and then also a little more free rent.

But I think 2022 is where these tenants are really going to decide what their space needs are going to be and how the new use is. If people are going to be working four days a week in the office or three? Not really quite sure. But also the positive on this is a lot of these companies, they're reducing their space because it's something that's happened, not because they're losing a ton of money. I think when companies are doing poorly and losing a lot of money, I think they cut space a lot faster so I think people are going to be surprised at how many tenants renew or only slightly downsize. That's the general sense.

Yeah. And so to wrap that up, I think if you look at our current pipeline, and this is disclosed in our supplemental really on page three which is the highlights page, half of our pipeline right now is multifamily, 49% to be precise. Life sciences has been and we expect will continue to be a pretty substantial component of our origination activity going forward and, as both Peter and Matt said, given the uncertainty in the office space, the bar for new office loans for us is pretty high. Only one loan that we have signed up right now has cleared that bar.

(Operator Instructions) Our next question is from Steve Delaney with JMP Securities. Please proceed.

Hey, good morning folks and congratulations on the progress on financing and modifications. I was wondering, Matt, you've got the $600 million pipeline, and I think most of that was under term sheet, do you have a sense, give us a range of how much might close by June 30? Get a little sense for the pull through on that?

Yeah, I think that essentially all of that, Steve, should close by the end of the quarter.

Oh, wow. Okay.

I think the question is how much additionally can we sign up as well between now and then, that could close. Peter, you should jump in if you see any outliers, but these are all reasonably quick executions.

Great. That's better than I expected that I would hear, but thank you for that, for the clarity. Five modifications in the first quarter, $400 million of loans, is there a common theme there? Is it pretty much the same type of thing that you were doing in the second half of last year, just basically maybe deferring some interest and asking for some fresh cash? How would you describe the latest modifications? Thanks.

I would say that there is a tonal shift.

I think we're feeling like we're entering a more normalized state and that's not to say that we're totally out of the woods with respect to the pandemic, but I do think what's changed is the nature of the requests. There are fewer requests that have to do with run rate operations, fewer requests to repurpose reserves or accrue interest, for example, and more about addressing milestones or extension tests to deal with the pace of execution on underlying business plans. So I think that there is a... I don't know if that totally captures it, but I'm trying to convey that I think there's a sense of an atmospheric shift that we're feeling around the modification requests.

Yeah. I mean, I sense it's less about defense and more about offense from the sponsor, it sounds like to me.

I think that's right. I think there's a real sense of, I think, of the coming out of this and a real sense of getting closer to a path toward normalcy.

Yep. Okay, well that's great color. Thanks. And just one quick one, Bob, at the end of year-end, you estimated that the warrant dilution was about 3.25%. Stock, thankfully, is up 17% this year. I'm assuming that increases the dilution. Do you have an estimate for us, either March 31 or currently, sort of how you would peg an adjustment to the 16.61 figure?

Yeah, it would be down -- last quarter that dilutive effect was slightly more than 3% with the run in the stock price. If you were to do it on the screen price last night, it would be above 4% and approaching 5% dilution.

Okay, 4% to 5%. Okay, thank you all for the comments. Appreciate it.

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.

Thank you. To conclude, we're excited about our progress and our first quarter accomplishments. We obviously thank all of you for your interest in TRTX and we'll next speak at our next quarter end and perhaps sooner at various investor conferences during Q2. Thank you.

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