TPG RE Finance Trust Inc (TRTX) 2021 Q4 法說會逐字稿

Greetings. Welcome to the TPG Real Estate Finance Trust Fourth Quarter 2021 Earnings Conference Call. (Operator Instructions)

Please note, this conference is being recorded. I will now turn the conference over to your host, Deborah Ginsberg. Thank you. You may begin.

Good morning, and welcome to TPG Real Estate Finance Trust Conference Call for the Fourth Quarter of 2021. I'm joined today by Matt Coleman, President; Bob Foley, Chief Financial Officer; and Peter Smith, Chief Investment Officer. Bob and Matt will share some comments about the quarter, and then we'll open up the call for questions.

Yesterday evening, we filed our Form 10-K and issued a press release to 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 discussion of some of the risks that could affect results, please see the Risk Factors section of our 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-K.

With that, I will turn the call over to Matt Coleman, President of TPG Real Estate Finance Trust.

Thank you, Deborah, and thanks to everyone for joining this morning's call. I'm pleased to be covering another strong quarter for TRTX, and an excellent 2021 overall. Before I dive into the specifics of our performance, I first want to address the successful conclusion of our CEO search process.

As we announced in late January, we've hired Doug Bouquard as a TPG partner and the CEO of TRTX. Doug has spent his entire 18-year career up to this point at Goldman Sachs, where he most recently served as a Managing Director and Head of U.S. Commercial Real Estate Debt in the Global Markets Division.

In this role, he had oversight of the firm's commercial real estate debt origination activities, including securitized lending, balance sheet lending and commercial real estate warehouse financing as well as commercial real estate securities issuance. In addition to Doug's strong background in real estate credit, we've gotten to know him well over the last several months and believe that he will be a great cultural fit at TPG. Doug's appointment is an important next step for TRTX, and I look forward to welcoming him as the CEO of the company and as a TPG partner, when he formerly joins the firm in late April.

Now turning to 2021 and Q4 performance. Over the course of last year, TRTX made significant strides across a number of dimensions. We grew our loan portfolio by nearly 9%, realized interest collections in excess of 99%, maintained an attractive 67% weighted average LTV and closed $1.9 billion of new originations across themes and strategies demonstrating strong secular and demographic tailwinds.

We also had important achievements on the capital markets front, closing a $1.3 billion CRE CLO in Q1 of last year, followed by the issuance of nearly $200 million of 6.25% Series C preferred stock, which we used to redeem in full our 11% Series B preferred stock. These accretive financings, together with our investing activity drove strong earnings in 2021, allowing us to increase our quarterly dividend rate by 20% in the third quarter of last year.

Looking at Q4 of last year specifically, we closed 10 new first mortgage loans with total commitments of approximately $650 million. Consistent with prior quarters in 2021, our investing activity was concentrated in multifamily and life sciences, although we closed also one hotel loan and one traditional office loan, both in strong markets and with favorable transaction dynamics. We'll continue to focus on those themes that we've articulated while also looking for idiosyncratic deals in other sectors that present compelling risk-reward opportunities.

In addition to our theme-based investing strategy, repeat borrowers and the strength of the TPG platform were distinctive competitive advantages for us in 2021. Of our new loans, more than $785 million in an excess of 40% were to repeat borrowers. 2022 originations have also gotten off to a strong start, and our pipeline is robust. Since the beginning of the year, we've closed 3 loans with an additional 6 executed term sheets, bringing closed and in-process origination activity to more than $543 million across 9 deals. Pro forma for these closings, 47.4% of our portfolio will have been originated post-COVID. And as Bob will further describe, we closed a new CLO last week, and a new credit facility yesterday.

Turning now to the portfolio. Performance continues to be strong with fourth quarter interest collections of 99.3% with our L.A. retail loan remaining our only nonpayer. Also, as a reminder, the Las Vegas land that we took back at the end of 2020 was comprised of 2 different parcels, one towards the north end of the strip and adjacent to the McCarran Airport. In November of last year, we sold the South parcel of our Las Vegas land position to McCarran International Airport for $55 million of total consideration or $3.15 million per acre, generating a $15.8 million gain on sale.

We continue to market the North Parcel, and are pleased with the momentum that we're seeing in Las Vegas and the level of interest in this parcel. We expect to have an update for you in the next couple of quarters, and we'll update you when we have a definitive transaction.

There are also a couple of loans in the portfolio that we continue to watch. First, as we've talked about for the last few quarters, we're marketing for sale, the assets securing our only retail loan. That process is ongoing, and we anticipate having an update in the coming quarters. In addition, we moved 2 loans previously risk-weighted as 3s to 4s this quarter. Both are office deals with business plans that are behind schedule and slower-than-expected leasing. Neither is currently in default, but we're paying close attention to both.

As we reflect on 2021, we're pleased with the progress made at TRTX across originations, capital markets and portfolio performance. As we sit here in early 2022, we're excited about the strength of the business, our ample liquidity of more than $300 million, and welcoming a new CEO. The lending environment remains competitive, but transaction volumes are high. And we are uniquely positioned with distinct competitive advantages to continue to grow our portfolio and our earnings.

I'll now hand it over to Bob to cover our 2021 and Q4 results in greater detail.

Thank you, Matt, and good morning, everyone. We reported yesterday for the quarter ending December 31, 2021, GAAP net income of $44.9 million, which was up $15.6 million or 53% versus the third quarter of the same year. Net income attributable to common stockholders of $41.1 million (sic) [$41.4 million] or $0.51 per diluted share, an increase of 58% versus the prior quarter, and distributable earnings of $18.5 million or $0.23 per diluted share.

For the full year, our ratio of distributable earnings to common dividends declared was 1.2:1. A quick comment regarding 2 nonrecurring items that flow through distributable earnings in the fourth quarter. First, the sale of 17 of our 27 acres of owned real estate on the Las Vegas Strip generated a book and tax gain of $15.8 million or $0.20 per share. We utilized a like amount of our $203.4 million of capital loss carryforwards to absorb all of that gain, which reduced our taxable income and our dividend requirement accordingly. Because the gain was not distributable, we reduced distributable earnings by $15.8 million or $0.20 per share.

Second, we concluded late in the fourth quarter that $8.2 million of the existing $10 million specific loan loss reserve against our sole retail loan was uncollectible, and we charged it off at year-end. The $10 million reserve was expensed in GAAP net income in the fourth quarter of 2020, but did not flow through distributable earnings at that time. This $8.2 million charge-off does not impact net income in the current quarter, but because it does constitute the realization of a loss previously recognized for GAAP purposes, it does flow through distributable earnings as a reduction. Excluding that $8.2 million charge-off, distributable earnings from our core lending business were $26.7 million during the fourth quarter of this year or $0.33 per diluted share.

Our net interest margin decreased 1.8%. Our weighted average loan coupon declined to 4.49% from 4.62%, and the weighted average floor of our loan portfolio declined to 1.10% from 1.33% from the prior quarter due to loan repayments and loan sales totaling $523.6 million, and new originations with initial fundings of about $565 million with a weighted average rate floor of 10 basis points. Our book value per common share increased quarter-over-quarter by $0.22 to $16.37 per share from $16.15 per share due primarily to the $0.20 per share gain attributable to that Las Vegas land sale.

We increased in September our quarterly dividend on common shares to $0.24 from $0.20, which generates an annualized yield to current book value of 5.9% and yield to our current common share price of 8%. For the quarter, our credit loss benefit increased only slightly by $0.6 million due to continued operating performance across our loan book, loan repayments and sales totaling $524 million offset by general loan loss provision recorded in the quarter of $651.6 million for newly originated loans.

The write-off of $8.2 million of existing reserves I mentioned earlier relating to our nonperforming retail loan had 0 net impact on our credit loss for the quarter.

Our reserve rate measured as a percentage of total loan commitments was 85 basis points compared to 103 basis points for the preceding quarter. And our book value per common share before giving effect to our CECL reserve was $16.97 versus $16.86 in the third quarter. Durable cost-efficient, flexible, long-dated capital is an essential component of our business model. Our cost of secured debt financing is among the lowest in our industry, which helps us compete for quality loans at modest LTV ratios in the markets and property types that are consistent with the themes Matt mentioned.

2021 and early '22 included significant capital markets activity by our team. In 2021, we issued TRTX 2021 FL4, a $1.3 billion CLO with a 2-year reinvestment period. We extended existing credit facilities with Morgan Stanley, BofA and Goldman Sachs for periods of up to 3 years. We issued $201.3 million of fixed-for-life 5-year redeemable preferred at a dividend rate of 6.25%. Proceeds were used to redeem $225 million of preferred stock outstanding with a dividend rate of 11%. During the first 7 weeks of this year, we extended the initial maturity date of our existing Wells Fargo secured facility for 3 years until April of 2025. We reduced its total commitment to $500 million from $750 million, but we did retain an option to increase the facility amount to $1 billion.

Last week, we closed TRTX 2022 FL5, a $1.1 billion managed CRE CLO with a 2-year reinvestment period, an advance rate of 84.4% and a weighted average interest rate at issuance of compounded SOFR plus 202 basis points. We also redeemed TRTX 2018 FL2, which in its post-reinvestment phase and amortized down to an advance rate of 74.5% from 79.5%, which in turn caused its weighted average cost of funds to increase. Roughly 45% of the FL2 collateral was refinanced in FL5, and the remaining 55% was financed on our balance sheet with an existing lender.

The absolute net ROEs of those 2 transactions was between 11% and 12%. Finally, yesterday morning, we closed a new $250 million revolving credit facility with a syndicate of 5 banks led by Bank of America, to provide short-term funding of up to 180 days for newly-originated loans and existing loans. This facility has a 3-year term and an interest rate of an ARC-compliant benchmark plus 200 basis points. This facility replaces a previous $160 million arrangement we had in place through mid-2020.

The cumulative benefits of these transactions is to equip us with a low-weighted average spread for our debt capital, reduce mark-to-market financing to approximately 24% of our liabilities and extend the weighted average life of our liabilities. We expect to further diversify our capital sources in 2022 to increase flexibility, reduce reliance on secured financing and further extend the tenor of our liabilities.

At quarter end, our debt capital base was 70.4% non-mark-to-market. And pro forma for the issuance of FL5, the redemption of FL2 and the financing related thereto, the ratio of non-mark-to-market borrowings to total borrowings at year-end was 76%, slightly above our target of 75%. During the quarter, we utilized $91.3 million of reinvestment capacity in our CLOs created by loan repayments to term fund 6 separate loans. These CLOs continue to offer cost-efficient non-recourse non-mark-to-market financing for the bulk of our loan book. Syndication of senior repair pursue interests and tailor term loans with or without AB note structures are financing techniques we use and have used in the past to fund less homogeneous loans.

Warehouse facilities allow us the speed and the flexibility to provide quick financing solutions to our borrowers while retaining the option to fund our investments by other means after closing. Capital recycling continued in the fourth quarter via the sale at par of a first -- of a performing first mortgage loan secured by a portfolio of 7 select service hotels, generating $87.3 million of sales proceeds, and the sale of that 17-acre land parcel at the southern end of the Las Vegas Strip. The sales price was $55 million. It generated $54.4 million of cash for reinvestment. We registered a gain on sale of $15.8 million.

That sale recovered 1.23x, the $12.8 million write-off we recorded in December of 2020 when we acquired this parcel and the related North parcel via a deed-in-lieu of foreclosure. If and when we sell the North parcel, we intend to utilize a portion of our remaining $187.6 million of capital loss carryforwards to absorb any gain that might result from a sale. These 2 transactions repatriated net cash proceeds of $92.5 million available for reinvestment in new first mortgage transitional loans.

The long-anticipated rise in short-term interest rates is here. Historically, rising rates benefit our net interest margin because of our high percentage of benchmark match floating rate assets and liabilities. This positive leverage to rates is temporarily dampened by high existing rate floors on a portion of our loan portfolio, which floors have provided strong interest earnings since short-term rates plummeted in early 2020. The pace at which we return to becoming fully and positively geared to rising rates, will be determined by the results of the race between the origination of new loans with low rate floors and the repayment of existing loans with high rate floors.

During 2021, we materially improved our rate profile. Between Jan 1 and December 31, the share of our loan book with rate floors of 50 basis points or less, grew from 0 to 33.7%, and the weighted average rate floor declined from 1.66% to 1.10%. Consequently, the risk to our net interest margin from a rapid rise in rates is steadily diminishing. If the forward curve is accurate, and our current internal projections for loan originations and repayments hold true, we expect those measures at year-end to be 71.9% and 53 basis points. Further, we expect the crossover point when short-term rates exceed our weighted average rate floor could occur in mid-2022.

A few words about credit. Loan originations in the quarter of $651.6 million reflect our 2 primary investment themes, multifamily and life sciences, both in top 25 markets located in high-growth low-tax states, primarily in the Southeast, Southwest and Western United States. At quarter end, our loan portfolio weighted average as-is LTV was 67.1% as compared to 66.4% for the prior quarter. This measure has remained remarkably consistent since 2018 when the as-is LTV ratio was 66.7%. Our risk ratings improved slightly quarter-over-quarter to 3.0 from 3.1. With the exception of our one nonperforming retail loan, 100% of our loan portfolio, or 68 of 69 loans, are current cash pay loans, and none are picking.

Due to strong originations and healthy loan repayments, we registered net growth in earning assets year-over-year of $394.6 million or 8.7%. At year-end, 37.7% of our loan portfolio was originated after March 31, 2021, which improves the sensitivity of our net interest margin during a period of rising rates. Finally, we have substantial investment capacity for growth and ample liquidity for offense or defense. At year-end, we held available cash of $245.6 million. We had available undrawn borrowing capacity of $60.3 million and unencumbered loan investments in real estate of $128.1 million. Our debt-to-equity ratio was 2.36:1. Our target remains 3.75:1.

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

(Operator Instructions)

Our first question is from Stephen Laws of Raymond James.

First, I want to touch on the Las Vegas asset a little bit. I know Matt and Bobby both mentioned this, but when we look at the gain recorded, should we look at the math similar? I mean can you talk about this asset compared to one that's sold? And are we looking at a $20 million or $25 million gain? Would that be realized this year? Or kind of what do you think the timing is on that?

I think it's a little hard to say, Stephen. I mean they're different assets. I mean in some ways, the center of development and the center of growth has shifted north. So that's a good thing. We like the location here. Convention Center adjacent across from Resort World. We like the momentum that we're seeing in Vegas. It's very different. It's -- the airport, obviously, ended up being a strategic buyer for the South. That's not the case here. At the same time, we don't have some of the land use restrictions in the North that we would have -- being airport adjacent. So I think we're very optimistic about robust per acre values in the north, but it's a little hard, I think, to handicap timing.

I think we've said we don't -- we do intend to be value maximizers here, but we don't intend to be long-term holders. So I think we're hopeful that over the coming quarters here, we'll have a more definitive update for you.

Great. And then shifting over to the origination side. Life sciences is up to almost 10%. Certainly, a significant increase from low single digits a year ago. At this pace, in your pipeline, how big do you see that getting? I mean 4 or 5 quarters from now, could we be at 20% plus? Or kind of where do you see that settling?

Yes. It's a good question. It has grown and it's grown purposely because it is one of those areas where we believe that there is something secular happening in that space. And it's also an area where we do think we've got some pretty distinct advantages. We've got real synergies with TPG's healthcare group. We've got a very talented senior adviser working with us who used to run TPG's biotech business. On the real estate private equity side of TPG, we're big owners, a top 10 owner in the United States of life sciences properties. And so we believe that we've got some real competitive advantages here.

That being said, we're going to look to maintain portfolio balance. These deals as with any deal are not without risk, conversions require real expertise. We're very market-picky. We've done this only with the most talented sponsors, and this is an area where our repeat business has been exceedingly high. And so I think for those reasons, Stephen, this may be capacity constrained to some degree because our criteria are strict around what we will and won't do as we think about the risk that we're taking on.

And so my guess is that when we layer on those criteria that we think point to attractive deals that this will, by nature, end up being somewhat size constrained. So I don't see this quadrupling in exposure size. I don't think that's what we're talking about here. We found some very distinctive areas where we can express a theme that we really believe in with really attractive risk reward. And as long as we can find that, we'll continue to do it. But we're not going to compromise those criteria just to grow in life sciences.

Our next question is from Tim Hayes of BTIG.

Congrats on getting the new CEO in place. Can you outline your top goals and strategic initiatives for the upcoming year? And I'm just curious if you think you can continue to grow while maintaining the same risk-adjusted returns and the underwriting that you feel comfortable with. And also just if you could put it into context -- I know Doug's not on the call to speak for himself, but given that he has an extensive background in CRE debt outside of just senior lending, if there's anything else that you could see making its way strategically into TRTX that hasn't historically been there?

Yes. It's a good question, Tim. It's a little hard to articulate Doug's strategic vision for him. But we obviously got to know him well during the process, and let me try even with that caveat. I think, first and foremost, Doug buys into exactly what we're doing and the strong team that we're doing it with and the investing philosophy that we've developed at TPG and that brings the earnings growth to this company that you've seen over the last year. So I think there's real alignment of strategic vision here. Obviously, Doug's got a real estate view on credit and talents that are extensive. And that can -- whether that is expressed in an actionable strategy or not, that can only inure to the company and to the firm's benefit. So those are characteristics of Doug that we find attractive.

I would caution against thinking at the outset without Doug having a chance to even be in the seat one day, this hiring represents a strategic shift. And if you look at what we've done over the last year, we think we can do more of this. Bob talked about the capacity that's resident within our existing capital structure. We're going to keep executing on the capital markets front. We grew the portfolio last year. It's certainly our intent to grow the portfolio with our existing strategies this year. We think we can continue driving earnings, ultimately driving dividend growth. And those are the things that Doug is going to help lead this company to do.

I think as to Doug's broader strategic vision, those will be questions better asked to him over the coming quarters. But I would just leave you, I think, with this notion that he buys into what we're doing, the way that we're doing it. And of course, he'll have new ideas and new insights and new ways of leading that we're all looking forward to seeing in action.

That definitely makes sense, and look forward to getting to know him better and hear his vision once he officially is onboarded. But Matt, you said that you think you can drive earnings and dividend growth, and I don't know if there is any time parameter around that. I don't know if that's 2022 or just broadly going forward. But the dividend -- if you look at kind of run rate earnings of $0.33, I know there's a lot of different variables ahead with growth expectations and rates and potential credit hiccups with a couple of loans you have your eyes on.

So a lot of moving parts, but really strong in-place dividend coverage now. Do you think you can continue to grow earnings and dividend growth? I'm just curious how you think about the dividend in the short term with some of these potential headwinds, and what you would need to see to make a recommendation to the Board to continue increasing from the current level?

It's a good question, Tim. I'm not sure that I'd characterize the situation that we're in now as facing a lot of headwinds. I mean we've got essentially a fully performing portfolio. We've got the one retail asset that we've talked about. We've got interest collections in excess of 99%. We're -- as Bob said, if our -- if the forward curve and our repayments forecasts hold, and those are both big assumptions. We've become positively levered to rising rates here in 1 quarter or 2. We've got plenty of dry powder. We've got a good stable of talented borrowers. We're developing new relationships and expanding our network all the time. So I think we're actually quite bullish about our ability to continue to grow the portfolio and drive earnings over the course of this year.

As you know, of course, we don't give dividend guidance. And ultimately, this will be a decision for the Board. But we're cognizant that we paid a special dividend last year. It is not generally, I think, our aim to be paying special dividends. And so we'll put all of those things together in all of those factors and continue to closely monitor this with the Board.

Yes. Sorry, Matt, if I used the word headwinds. I think variables was really what I was trying to get at. So sorry if I kind of wasn't giving you guys credit for a lot of the things that are moving in the right direction right now. But that all makes sense.

Our next question is from Steve Delaney of JMP Securities.

And we look forward to meeting Doug on the first quarter call. I wanted to ask -- start with FL5, if I could, and 2 questions. Bob, you mentioned 11% to 12% ROE. Was that -- and you mentioned it about both the new CLO and the old CLO. Help just clarify that to me maybe what is your target ROE on the new CLO? Is that -- would be, I think, the most significant thing.

Sure. Steve, I apologize if I was unclear in my commentary. But the point I was trying to make was that the returns on FL5, on a truly net basis, that is to say net of all expenses, corporate overhead, et cetera, et cetera. It seeds 11%. And the loans that had previously been in FL2, in which we refinanced along 2 paths, some of those loans went into FL5 and the rest of them stayed on our balance sheet, but were financed in a different way. The returns, if you looked at those loans on a standalone basis are also in excess of 11%, again, on a fully loaded triple net basis. So it's not -- that's not a gross ROE or IRR. That's absolutely...

Net-net.

Yes.

All right. That's helpful. And the advance rate -- and this might help explain your mixing and matching with loans. I mean 84.4%, I mean that sounds like a lot of multifamily in the collateral mix. And am I thinking right there. Because that 84.4% gets you over 5x leverage on that particular initially going into...

That's right on that particular pool. And CLOs for us are an integral part of our financing

(technical difficulty)

component. And they're a very efficient way for us to finance segments of our portfolio, especially loans that are pretty, what I'll call, homogeneous, which, frankly, most of ours are. I think the people on the phone understand how we think about credit and how we underwrite.

And so multifamily is an important theme. It's one of the 2 principal themes that Matt discussed earlier on this call and which we have discussed consistently on prior calls. And so this transaction, FL5, had a pretty significant chunk of multifamily in it. It also had office and other property types as well. One of the themes that fixed-income investors, frankly, like about us and about our financing strategy, at least as it relates to CLOs, is that because these are corporate finance tools for the company as a whole, the composition of portfolios of loans that constitute individual CLOs look unsurprisingly very much like the portfolio -- of the company's portfolio taken as a whole.

So that from their standpoint, they don't feel like there's any adverse selection or cherry-picking, right? So yes, there were a lot of multifamily loans in the pool. I expect there will continue to be as some of the loans in that pool repay and are replaced by other loans that we originate because we expect to continue to be relatively active in the multifamily space. Multifamily statistically has lower loss severities and default rates than other types of commercial property and therefore, all else being equal, heavy multifamily pools result in better subordination levels and higher advance rates.

Yes. Okay. One final thing, if I could. Thank you for the explanation of the tax laws and the -- importantly, the need to run that $8 million through -- $0.10 per share through distributable EPS even though it wasn't really a current period event to [speak]. The shares are down about 5% or so. I think as the analysts, as we can get our notes out, we will be very -- make very clear that this was not so much of an operating miss versus the prior quarter, but more just sort of a one-time thing.

And apologies, but when we first went through the materials, we didn't pick it up as specific as you explained it on the call. So we'll do our best to kind of get that clarified. Related to that, though, these are [of course] -- these are capital losses, right, associated with the COVID disruption in your securities portfolio. I'm just curious, you've got a ton of this left. Are there any strategies going forward -- any investment strategies that could in part be designed to try to utilize that tax benefit?

Yes. Great question, Steve. We do have considerable unused capital loss carryforwards remaining. That number is about $188 million. As I mentioned, if and when we sell the North parcel in Las Vegas, and if it results in a gain, we would certainly use a portion of those carryforwards to absorb that gain. In terms of other applications, I can assure you that the team here has spent quite a bit of time since mid-2020 exploring that. It is a complex situation. It's a potentially very valuable asset, although the code sharply circumscribes the circumstances in which you can utilize them. Clearly, they have to be used against capital events and lenders generally speaking, don't have a lot of capital events.

But there are strategies we have explored and continue to explore them. All of them will need to hold true to the basic investing precepts that Matt described earlier. So I think there's more to come on that, but it's a valuable -- potentially valuable off-balance sheet assets.

And I'm certain real estate equity ownership would be one of those asset classes that would likely meet the tests, I would think anyway.

(Operator Instructions) Our next question is from Don Fandetti of Wells Fargo.

Bob, can you talk a little bit about the 2 office loans that slipped to 4 ratings? And what your sort of comfort level is the book is protected on those assets? And I don't know if it's maybe just like a lag after the pandemic, but just want to get your thoughts on that.

Sure. I think there are a couple of levels of response to that. Let me go first. And I think Matt and perhaps Peter might have some helpful commentary as well. First, we review every loan in our portfolio, every quarter as we have discussed previously, and we assign or reassign the risk ratings that we think are appropriate based on our current understanding of the situation.

I think you'll recall in early 2020 when COVID arrived, we immediately downgraded every hotel in our book, independent of its performance because we've been doing this for a long time, and we knew that hotels would be adversely impacted. If you look at the performance of those hotels since it's been pretty impressive, strongest in the resorts strong in the Select Serve and full-time business travelers segment and pretty good but slow in the group segment, where we have at least one hotel?

So we're not shy about being aggressive/conservative about how we rate our loans. So in these 2 particular instances, both business plans are behind. Business plans in the transitional lending space are often off track. Sometimes they're ahead, sometimes they're behind. That in and of itself doesn't give great cause for concern. I think that we have a view about office that is still -- we -- our view is that the office situation is still developing and will take some time to ripen. And so in any instance where we see signs that business plans are a little bit slow, we're really going to dig in. And that process concluded in us downgrading these 2 assets, and Matt and Peter can talk in more detail about that.

In terms of -- do we feel like we're fairly valued, our CECL reserve is intended at each quarter end to provide an adequate cushion or loan loss reserve across the portfolio taken as a whole. And frankly, that's an assertion that Matt and I sign to at the end of each quarter, and we did yesterday afternoon before we filed our 10-K last night. But each of them and all of the loans in our portfolio, frankly, get a lot of attention from us, but these 2 in particular -- and we have a relatively small number of 4-rated loans, but they garner more attention because they probably deserve it. Matt?

No. I think you said it well, Bob. I don't have a lot to add unless Peter would.

I guess, Bob, where were those loans? What markets? And can you just give us a little color on when they started deteriorating on the business plan. Is that something that just happened this quarter? Or has it been kind of building and it got a little more intense?

No. I think one is in New York and the other's in Philadelphia. And I think that in each instance -- I mean in each instance, we're looking not only at what's happening with our collateral but also what's happening in those markets. And there are some broader themes in office generally that may impact -- it may impact either. One of the loans has a fairly near-term maturity, and the borrower is working to refinance it. The other loan involved a more extensive business plan. And the leasing market for the last number of quarters has been slow. And that's not unique to New York, and it's not unique to the submarket where this property is located. It's fairly commonplace across the office terrain nationally.

Our next question is from Rick Shane of JPMorgan.

Look, Steve Delaney explored a little bit what I want to talk about, which is FL5. Obviously, the spreads have had wider there, and we've seen a very, very active CLO market in the first part of the year. I'm curious [what] the market feedback is on CLO execution, and how you think about your capital approach to assets given what the CLO market...

Rick, you cut out a little bit, but I think you were asking how does CLOs fit into our financing strategy, and the base of widening spreads?

Yes. And just basically how you're going to approach things. If there are signals CLO market that are going to impact your approach to originations?

Sure. Well, I guess the first -- the fundamental premise is we don't originate for the CLO market or for any other market for that matter. We're a transitional first mortgage lender, and we hold our loans on our balance sheet. And so we make investment decisions that are driven by the factors Matt described earlier, whether it's location, property type, quality of sponsorship, quality of collateral, et cetera. We make investment decisions. And then we have a strategy for the company in terms of what's the most effective way to finance the business. .

And that gets to issues like term of our liabilities, cost of our liabilities, stability of our liabilities, the absence of recourse, the absence of mark-to-market provisions, the need in some instances to be able to move quickly to help solve our borrowers' financial needs quickly, which is why we do use -- we continue to use mortgage warehouse facilities, even though they typically only represent about 25% of our liability structure.

So all of those factors figure in. The CLO market for the last -- we were a very early entrant when the CLO market revived in early 2018. We've issued 5 transactions since then. We have found it to be a good place to finance a portion of our portfolio. What we're seeing in the market right now on the liability side was expected. We've seen spreads widen in all financial liability categories, including CRE CLOs. And honestly, we've seen widening in the mortgage warehouse market as well.

So that was not unexpected. And our view is, we're building a capital structure for the long term. For the last, I'd say, 24 months, we and our competitors who also access the CLO market, frankly, we're the beneficiaries of a situation where the CLO market was actually a less costly place to borrow on a non-recourse, non-mark-to-market basis than was the mortgage warehouse market, which is typically a cross pool with 25% recourse and mark-to-market provisions of some sort. And it feels over the last 3 or 4 months like that relationship has reversed. And frankly, it's returning to what its normal equilibrium is in our opinion.

So I don't see that what we're experiencing and others are experiencing in the CLO market in and of itself will have a meaningful impact on our investment strategy at all. And I know you're a careful observer of the financial markets. Spreads have continued to widen since we priced our transaction several weeks ago, and closed last week.

Got it. Look, it's a fair point. You don't want to make a bad loan because you can get good financing on it. You don't want to pass on a good loan because it's a little bit more difficult to finance. But at the same time, your -- the left side of your balance sheet doesn't exist in a vacuum from the right side. As this is percolating through the market, are you seeing better pricing discipline from -- on the origination side from your competitors?

Well, it's -- I seldom speak about our competitors because I only want to speak well about them. But you raise 2 good points. The first is this is a huge ecosystem that we're all part of. And when the cost of capital in some part of our ecosystem changes, the cost is going to change in another part. And there's a feedback loop, and it sometimes takes a little bit of time for it to be fully realized. But as the cost of equity and/or debt capital increases at some point in time, the cost of debt to property owners will increase, and that's just going to reverse through the whole ecosystem. So that's the first point. And so the answer is, we are seeing some of that sort of adjustment. And Peter and his team see it every day in the market.

The other thing that I would add is that the CLO market has been a pretty attractive place to finance assets, but it's not the only place to finance, and it's certainly not the only place we have financed assets. We have, and we continue to syndicate loans. We've done private bilateral term loan arrangements, and we've done note [unknown] financings. And that's just on the secured side of the world, and it doesn't even touch what's available and potentially available to companies like TRTX on the quasi unsecured and unsecured corporate side.

We have reached the end of the question-and-answer session. I will now turn the call back over to Matthew Coleman for closing remarks.

Great.

Thank you, Hillary. As you heard this morning, we're pleased with our 2021 accomplishments and the positioning of TRTX as we head into 2022. We look forward to speaking with you again next quarter. Thank you.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.