Q3 2019 Earnings Call
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I will now turn the conference over to your first Deborah against that you may now begin.
Good morning, and welcome to TPG Real estate Fund and Trust. That's Trust third quarter 2019 conference call I'm joined today by Gotta go get high Chief Executive Officer.
<unk>, Chief financial and risk officer.
Publishers, who comments about the corridor.
I'm going off the call for questions.
Yesterday evening, we filed our Form 10-Q and issued a press release with a presentation of our operating results all which are available on our website and 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.
Good discussion the from the risks that could affect results. Please see the risk factor section of our most recent 10-K, we do not undertake any duty to update. These statements. We will also refer to certain non-GAAP measures on this call. It's a reconciliation you should refer to the press release and I've said Q.
It's a pleasure to turn the call limited credit <unk>, Chief Executive Officer, TPG relative that's true banking Debra and good morning to all we had a strong third quarter with GAAP and core earnings of 44 cents and 45 cents per share, respectively and portfolio growth of earning assets to five point.
$7 billion.
This growth was achieved due to strong originations of $805 million during the quarter, which outpaced repayments of $512 million.
Our originations continue to grow year over year, and our 2.3 billion purchased 1.9 billion for the same period last year.
Our earnings reflect our ability to source lungs that adhere to our credit parameters. Our continued focus on investing our cash and our ability to reduce our cost of funds as well we have been successful in obtaining interest strike force $2 billion, a bar loans have low four floors at 21.
0.8% and 2.5% and the weighted average floor on our year to date originations is 1.93%.
Our weighted average spread for the quarter was 289 basis points over Ly Board, However, I'd like to point out that roughly half of these originations have floors that are on average over 20 basis points above current LIBOR, meaning they are in the money.
The third quarter weighted average LTV is 70% and our portfolio wide LTV is 66%. This LTV reflects the fact that we have only one construction on having a higher percentage of construction lunch, which we did not result in a lower overall reported LTB as they miss.
<unk> loan amount on construction loans are usually a small percentage of the total loan amount as compared to typical transitional assets.
Presently and subsequent to quarter end, we have $475 million of loans closed and then the process of clothing with a weighted average spread up 305 basis points and a weighted average LTV 60%.
We continue to be extremely focused on building and maintaining a portfolio with the strongest credit characteristics possible and focused on the most downturn, Brazil young property market and one cards.
We are not targeting hotels and construction loans as they are more vulnerable to negative macroeconomic environment.
Office and multifamily properties represent 70% of our portfolio and were 100% up our third quarter originations as well we have continued to focus on properties that can be stabilized at less than two years and have significant in place cash flow or will happen. The very near term based on the property lease up to exists.
<unk> current market occupancy and rent levels not pro forma levels.
Loans collateralized by office properties represent 45% of our portfolio.
Regarding office properties and issues potentially affecting their performance there has been a lot of discussion on week company. So let me hit that's directly.
We have minimal exposure to weed company a this leases represent 1.4% up our total portfolio square footage and 2.9% of our office assets rentable square footage spread among three loves.
The largest exposure as a percentage of our collateral square footage is in a class a Midtown Manhattan office building.
The week company lease represents 25% of the buildings total rentable square feet and encompasses 126000 square feet.
The week company will at least began in early two.
Falcon 17, and due to strong demand was twice subsequently expanded the leases currently 90 basis currently 95% occupied including its newest expansion space up 24000 square feet, which opened in August of this year.
We have analyze each property, assuming we company leases are turning our terminated and are very comfortable with our basis each of the lungs with we exposure has excellent sponsorship and very substantial invested equity.
[laughter] hunger for some of our loan portfolio is performing and we believe excellent what excellent quality, our overall risk rating at quarter end up 2.9, it's slightly above last quarter's writing up 2.8, they increase as a result of our policy that we start all loans originated in the quarter with a three.
Right.
An exception to this policy is yet we have refinancing existing Ci Archie loan that head and still deserves a superior right.
Given we had new originations of 805 million in the quarter, which will automatically rated a three pursuant to our policy and we had repayments were $512 million, which were rated on average 2.4, our overall rating increase but please note that our loans with a poor rating declined by 69 million.
Due to everything.
We're extremely pleased with our portfolio and our quarterly performance. Despite the earnings headwinds of LIBOR, having declined from 2.4% at the beginning of the quarter to 2% at the end.
Library has continued to decline post quarter end and our floors will show their work during the next couple of quarters.
Our portfolio remains a very high quality, we continue to deploy our cash efficiently and our pipeline is strong as we enter the year end and 2020.
With that I'll turn the call over the ball.
Thank you grad up but if third quarter, we generated GAAP net income of 33 million were 44 cents per diluted share in core earnings of 33.4 million was 45 cents per diluted share on a per share basis, both increased one penny versus prior quarter, we declared a dividend of 43 cents per share covered approximately one.
Five times by our core earnings earnings.
Earnings growth was driven primarily by an increase in net interest margin of $2.7 million quarter over quarter, largely due to the earn in of our $755 million originations during the second quarter.
You will maintenance on unamortized origination fees from certain loan repayments and investment earnings from our short term investment portfolio.
Net loan growth $187.4 million [noise] was driven by the closing of six first mortgage loans, representing total commitments of 805.3 million an initial fundings of 654 million deferred fundings on existing loans at 45.2 million and repayments of 511.9 million.
For a new loan originations the average loan size was 134.2 million an increase of 42% over the prior quarter, our weighted average credit spread was 289 basis points as compared to 364 in the prior quarter and the weighted average LTV was 70.1%.
The weighted average spread of our loan portfolio at quarter end was 365 basis points compared to three seven so 377 basis points at June 30, due to the repayment of older vintage loans with wider credit spreads and the origination new loans with tighter credit spreads, reflecting current market conditions and our risk preference for loans with more in place.
Cash flow and less lift during the loan term.
Our third quarter originations the weighted average asset level, our OE was 9.2%.
At quarter end portfolio wide, our loan level leverage was virtually unchanged from the prior quarter, 76% versus 77%.
Overall debt to equity ratio was also virtually unchanged at 2.9 to one.
Just 2.90 to one.
Book value per share grew quarter over quarter by two cents due primarily to earnings in excess of dividends paid the sale of certain short term investments with estimated fair value is less than par and unrealized gains on our other short term investments.
Our capital markets team had a very busy quarter executing on our never ending strategy to reduce exposure to mark to market risk term out our liabilities and reduce our borrowing costs.
In mid August we redeemed as planned our first Crs yellow, which was issued in February of 2018 since the repayment of loans underlying issue liabilities render the transaction materially less efficient than other forms of term funding available to US also in August we closed a new $750 million secured revolving repurchase.
Please.
Or by increasing our loan portfolio, our loan repo, one warehouse financing capacity to $4.1 billion to $5 billion and the number of such Counterparties to seven.
That facility has an initial term is three years with two one your options to extend.
Contains the normal crts mark to market provisions that limit trigger events to collaterals specific matters, we continue to amend existing credit facilities to capture more attractive economic terms and we removed from a term loan facility about $269.7 million of loans that were largely slated for inclusion in TRG.
Next 2019 Dash F L three which gives us the same risk mitigation features but at a lower cost of funds and last but not least we settled last Friday on the largest crs yellow issued to date and $1.2 billion transaction with the two year reinvestment period and advance rate of 84.5%.
And a weighted average spread of LIBOR, plus 144 basis points before transaction costs today more than 50% of our liabilities. Our term funded non recourse to TR, TX and involve no mark to market provision and you'll continue to see more promotion on this front.
We utilize the reinvestment feature of that fell two to recycle approximately $168 million of loan repayments received during the quarter year to date through September Thirtyth, we recycle $269.2 million of capital and we expect to recycle low cost non mark to market capital in both of our currency yellows through the end.
Out of their reinvestment periods, which our November November 2020 in October 2021.
We disclosed this quarter the status of our work to implement Cecil the new accounting pronouncement that will take effect on January onest of next year.
Cecil will materially change, our lenders determine and disclose their allowance for losses on financial assets not reported at fair value.
So requires lenders to record a current reserve based on forecasted losses over the life of the loan.
With the exception of riskless assets like Us treasuries Cecil presumes losses for all financial assets, including moderate Ltd. First mortgages on institutional quality properties, such as the loans, we originate accordingly, we expect to record a Cecil reserve.
Our initial reserve assessed against our entire loan portfolio balance at year end will be recorded effective January onest as a reduction in equity.
Changes in our seasonal adjustment in subsequent quarters will flow through our income statement in equity accounts.
Important factors influencing the Cecil Reserve will include the size of our loan portfolio and its risk profile actual losses incurred if any.
And current and projected future conditions in the commercial real estate markets and the macro economy.
At year end will provide more detail to you about our seasonal methodology, our reserve and our implementation progress and with that we'd be happy to take your questions. Thank you very much operator.
Thank you.
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Our first question is from Steve Delaney with JMP Securities. Please go ahead.
Thanks. Good morning. Appreciate you taking my question I'd like to start with the the weighted spread on new originations, we look back to the second quarter.
365 basis points was pretty much right on the portfolio with 370. So I was wondering if you could comment.
To 90 and granted we heard which you said about you know 20 basis points in the money. So you know even if we add that back we'd be like 310 versus down 50, or 60 basis points was there anything in the mix. We noticed it was heavy office anything in the mix that would you know attribute that.
Shift or are we just basically talking about the change in market pricing. Thank you.
I think this quarter roughly 80% of our loans were in gateway markets.
And the sponsorships are much more institutional the larger the assets and it's just more competitive we will really have dug in and focused on credit just given what's going on in the in the world economy I'm not that we haven't always Doug it on credit.
This quarter is we've always said, it's a little bit lumpy, we happened to have some two very large one is as Bob mentioned, our weighted average loan size went up and these were some 300 spreads I mean, when I look at our pipeline for next quarter were slightly above 300, but yes. It's a combination of factors one it's just.
How the dice rolled in terms of what close during the quarter into spreads are tight.
Particularly for the gateway markets.
That's that's helpful and you made a comment all floors. You know I was looking where LIBOR was to 40 at the end of 2018 down to 180, and maybe we have a couple more cuts who knows but it seems like I'm not trying to put words in your.
But is it lot let me ask it this way is it logical to think that.
When why bore is already decline materially that your ability to negotiate floors that are flat to the entry rate is.
It is it's easier to accomplish then if slide four was two and a half for three and the borrowers or praying for 100 basis points a release.
Yes, I think that's a fair comment it's it's easy yeah. Typically historically, we would regularly negotiate 25 basis points below the current LIBOR and for some bars, they would push even farther than that but now it's much easier to get as close to in the money as as possible because it so loud and I'd say.
What what what it feels like is that the industry gravitating to what the insurance companies have long done and that is just have minimum coupons, regardless of where are the indexes and it feels like that a little bit I. I hope I hope it's true [laughter].
Okay, that's helpful and less kind of more of a big picture you know portfolios up but you know two to five the funded portfolio at 5 billion and if we assume a couple of hundred in the fourth quarter. It puts you Bob to that would be 900 million or about 2020, 1% growth year over year from year end 18 to 19.
As you look at conditions and you look out to 2020 or do you see 2020 is being a year, where you can continue to grow your portfolio.
10, 15% consistent I guess, most importantly, with your current underwriting standards and the and the level of competition. That's it no I appreciate your comments.
Yes, I mean every year.
At this time and you know up through January like Oh, My Gosh, it's going to how are we going to make this production yet we have consistently increased and and I don't see any conditions in the marketplace that would prevent us from doing stuff now that being said it is an election year and we could have some.
Tumultuous activity in the market depending on on how that unfolds and also with the macro economic and geopolitical world there could be some shocks, but based on what we see now yes, I would expect our portfolio to continue to grow.
Thank you.
Thank you once again, if you wish to ask a question. Please press star one on your telephone and wait for your name to be announce.
Your next question comes from Stephen laws with Raymond James.
Please go ahead.
Hi, good morning.
Morning, Steve.
Okay, Great first.
Looking to the portfolio it looks like.
From comparing the cues that you had the the four rated loans secured by the Atlanta retail pay off I believe.
Maybe talk about that once that expected maybe talk about the.
Conversations with your borrowing leading up to that and then.
If you could provide any details on the the woodland hills retail loan that looks like you guys moved to for this quarter that would be great.
Sure well the Atlanta asset did repay.
Due to a sale of the asset by the sponsor. This was one where I would say that what are our.
What we referred to as our broken window policy referencing police Commissioner Bratton during the Giuliani years, our policy towards asset management really work. This asset a very yes, we had a great sponsor with substantial equity invested and that's what attracted to us and it was in a great part of that way.
In the bucket market, so very infill yet from almost from when we closed at the new leases signed did not meet their pro forma leasing and and and the rental rates. They were achieving wear off significantly and this really reflects what we saw nationally in the retail landscape and we.
We're very much on this loan.
Yeah.
Definitely weekly and what we were able to do because of provisions in our loan agreement was if they wanted to sign a lease below what the leasing guideline synta indicated they actually had to pay the loan down and so we got a little bit of a pay down every time, they signed a lease which got them more and more invest.
Did in the asset, which new so which is our goal so that they will always protect so given that it was a retail asset of course. It was one that we we you would worry about relative to other property types. That's why you don't see a lot of retail in our portfolio, but we had an excellent sponsorship I think they always would've done the right thing.
The way, but you need a little protection by by having the right provisions to require them to commit capital as their business plans are not being Matt.
And then the B the asset that was added up to four is a retail property.
And then great infill location in California.
It is oh.
He has not met its business plan. It's also a small loan at 33 million, but its with a repeat bar where that we've known for many years and they have held out for certain type of tenants, which has resulted in them being bear.
With a very low occupancy relative to market the markets close to 95% occupancy for for comparable properties ours is at 45% and I think.
He is just holding out for better tenants, it's a great type of retail and he's just repositioning it for higher in China.
Great appreciate the color on those two loans grew at a.
Bob on the financials can you maybe talk are there any.
Well early repayments or prepayment fees in the third quarter. Once it is a normal quarter from that standpoint, or how should we think about the the early repayment fees.
Well as you saw we had about $512 million of repayments.
In connection with a couple of those we one of which repaid slightly earlier than we expected we did have some unamortized.
Excuse me origination fees and a yield maintenance payment.
We also had some costs frankly associated with the financing of that asset and we also incurred some costs in terms of some of the other financing activity that we did during the quarter. So net net.
The impact on our earnings was [noise].
Excuse me was not that material most quarters, we'll have some very modest amount of.
Of yield maintenance or accelerated recognition of origination or exit fees, but generally those amounts aren't aren't material and they're fairly consistent.
Okay. So nothing no outliers this quarter from no major outliers this quarter.
And then I think Smith.
On the hinted at it in your comments, there, but as we think about.
Hello that that just priced <unk> any expenses that that maybe we're in the third quarter that elevated expenses or will we see those hit in Q4, and how do we think about.
You know redeployment into that vehicles more efficient from a capital standpoint, so redeployment and others as you know update on the subsequent events section looks like about 70 570 million of net fundings in October but.
But can you maybe.
Help me think about my model in how we should think about.
The pluses and minuses redeploying that capital from the COO.
Transaction the expenses coupled with the.
Sure Let me a attack the second portion of the question first and then all that expenses.
With respect to recycling of capital in both close the team here is really focused on that sort of like being a lending officer on a carrier you need to.
You need to time, the closing of your new loans that you want to go into this yellow in whole or in part.
To happen as close in time as possible to the repayments repayments are clearly much more challenging to control because the borrower controls them.
But we've got a lot of experience here in a really strong team and so we try to line those up pretty pretty quickly, but you should generally assume that loans that we originate.
Mike at warehouse for a short period of time on a repo or other facility but.
The liabilities of these clothes are really attractive not just from a cost standpoint, but in terms of non mark to market and non recourse and term.
So we want to use those first and we will so that should be your decision role when you think about modeling.
The company's results are I would recommend that that be your decision rule.
With respect to your question about expenses.
These transactions as I've mentioned before are not inexpensive beat but even on an all in fully amortized basis.
The cost of funds is extremely attractive it is.
The the premium one pays for term funding. These liabilities is is very small in comparison to to repo financing and it's cheaper frankly than some other term funding financing that that we've executed frankly are that we've observed some of our competitors execute.
Most of the costs are deferred and amortized over the life of the deal I mentioned that we did move some collateral around in order to among our existing credit facilities.
Position them for inclusion NFL, three and there are some deferred financing costs related to where those loans were previously financed that is expensed during the quarter and that was expense during the third quarter.
But in the aggregate not material.
Right well grounded Bob Thanks, very much your comments thank you.
Thank you. Your next question comes from Rick Shane with JP Morgan. Please go ahead.
Hey, guys. Thanks for taking my question this morning.
What is the portfolio crosses into the $5 billion range and we're starting to see sort of in were steady state of repayments.
Im curious, where you think equilibrium in terms of portfolio size in terms of your ability to originate and balance repayments sort of creeps into the picture.
I think regarding repayments.
I think this year at least for us feels like it's going to be.
Somewhat higher and that has been historically as a percentage of commitments are repayment at the end of your commit commitments are repayments are not really an outlier I mean, we have had precedent in prior years, but but it is on.
On the margin higher I I believe this I believe it's a result of the fact that we still have some pretty good credit spreads on our portfolio in bars are taking advantage of loring their floors, potentially and getting tighter spreads and the mortgage.
Broker community is exceedingly active to try to talk borrowers into refinancing bridge loans with bridge loans. So that's how they changed their fee [laughter], but so hopefully the repayments will will decline in in the <unk> you start in next year and the future, but we don't have a.
Perfect projection for that and I think that our originations will continue to increase they have increased every year and we expect them to to to just based on the pipeline. We see on the loan activity that we're seeing and this last quarter. We we were successful in increasing our average long sites and I think that will.
Also help as we continued to do that to continue to grow the portfolio, So where do we stabilized I mean, it's it's a lot more than wherever you are now I mean, we all look at look at Blackstone is.
As the Beacon. So you know I think thats, certainly a possibility and where where we are just making sure that our growth is prudent and from a credit perspective, and accretive and we will not grow for growth sake.
Got it look I think you guys have proven to be disciplined overtime and we've all known each other very long time, and I think thats, a hallmark of the entire team.
Probably you touched upon something interesting, which is that one wage should continue to scale the business.
Ease through larger loan size and that makes sense, just the balance sheet stands and your ability to fund those loans increases in the concentration risk.
Diminishes.
What are the trade offs.
You see associated with making larger loans.
Well from a risk management standpoint, we're very mindful that our weighted average loan size stays within a certain range of our equity base and you know so that's that's one thing we're very mindful of it that's first and foremost.
The the trade offs have historically.
Been spread because you were competing with the securitize single borrower market, then we're competing with more directly with Blackstone and Brookfield and the players that go after over large loans, but we're not we're not yeah. Certainly at this stage, we're not going to take on the loan sizes that we see those.
Players doing we had the largest long wait on its 350 million, that's pretty pretty big for us. So I think <unk> yeah.
The 150 to 200 million is a perfect size for us and keeps us out of the size of the big guys that that are really going exceedingly tight on their on their spreads.
Great. Thank you guys for taking my questions. This morning.
Thank you Rick.
Thank you we have reached the end of the question and answer session and I'll now turn the call I've attorneys Guggenheim for closing remarks.
Thank you all for joining us today, where we're very excited to close out the year and begin 2020, and a new decade of origination and growth.
That concludes today's conference and you May now disconnect. Your lines at this time. Thank you for your participation.
Okay.
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