Q4 2019 Earnings Call

Greetings and welcome to the P.P.G.R.E. financed trust fourth quarter 2019 earnings Conference call.

I'm all participants are they listen only mode. A brief question and answer session will follow the fall presentation. If anyone should require operator systems. During the conference. Please press star Zero and your telephone Keypad. As reminder, this conference is being recorded and it's now my pleasure to introduce your host Ms. separate Ginsberg, Vice President Secretary and General Counsel. Thank you.

You may begin.

Good morning, and welcome to TPG Real estate Finance Trust fourth quarter, 20, Nike Inc. Conference call.

I'm joined today by Gotta, Guggenheim, Chief Executive Officer, Thoughtfully, Chief financial and risk Officer.

Bob will share some comments about the corridor and then we'll open up the call for questions.

Last night, we filed our form 10-K and issued a press release with a presentation of our operating results all of which are available at our website under Investor Relations section.

I'd like to remind everyone that today's call may include forward looking statements, which are uncertain outside of the company's control actual results may differ materially for a discussion of some of the risks that could affect these results. Please see the risk factor section of our 10-K, we do not undertake any duty to update. These statements. We will also refer to certain non-GAAP measures.

This call and for a reconciliation you should refer to the press release and our 10-K with that it's my pleasure to it it's got to do that high Chief Executive Officer TPG. Both if that's true good morning. Thank you all for calling them.

We had a very strong year with an increase of GAAP and core earnings of 18, and 19% to $126 million in $128 million, respectively as compared to the prior year.

Additionally, we grew our equity base by 175 million in achieved and increasing gap in core earnings per share to $1.73 and a dollarsseventy six from $1.74. Both in 2018.

We achieved all this cost we had positive operating earnings coverage to our dividend. Despite a period of declining yields among all fixed income assets not only did like weren't dropped by 75 basis points during the year, but credit spreads continue to tighten.

<unk> increased origination exceedingly attentive cash management focus on reducing our financing cost we were able to more than counter to lower market yields that the market Delta.

Earnings, earning assets grew by 32% to $5.8 billion from the prior year.

Contributing to this growth we originated 2.9 billion of loans.

During the year and 654 million during the quarter with a weighted average spread a 335 basis points in 290 basis points respectively.

Subsequent to year end, we have closed and or are in the process of closing $858 million ones with a weighted average spread of 289 basis points.

We continue to fight the good Friday, reducing financing costs to offset neri narrowing asset spreads.

Recent capital markets activity in the theory Spade show strong demand for steel I was in corporate financings, which may indicate that this trend will continue we certainly hope it does.

To date, we've been successful maintaining high or Ob. However, we will always true I lower our lead to higher yields a cheap by taking on more credit.

Or pipeline too much leverage to our balance sheet.

Regarding our 100 personnel performing loan portfolio, we continue to focus on office and multifamily properties. During the year office properties increased to 52% of our portfolio 39 personnel and multi family properties declined from 25% to 20%, we do very much like multifamily or more.

Selective evaluations have increased well stabilized yields in our view are declining properties are taking longer to lease up will stabilize threats have declined due to an abundance of new supply in many markets.

We continue to avoid breach, which now comprises less than 1% of our portfolio.

We and we have added a modest amount of hotel exposure during the year, which represented 13% in Europe.

To recap our 2019 highlights regroup we grew our equity base 575 million, while also increasing earnings earnings per share in book value, we extended and reduce the fee structure or close to one third of our credit facility outstanding say close yellow raising 1.2 billion.

Additional matched funding it seems that allows us to replace retain lungs with new loans for two years.

In the 10 quarter since our IPO, we make cumulative cash distributions to shareholders of 281 million or $4 in 14 cents per share. We do all these accomplishments since a validation of our investments and operating discipline in the foundation for additional growth [laughter].

Now I'll turn the call over to bustling thanks credit [noise].

For the complete TRG X. box score please refer to our form 10-K or supplemental both of which are available in the Investor Relations section of the web site.

Here's a quick review of some key financial and operational items for the year in the quarter liquidity at year end was 359.7 million driven largely by Undrawn capacity in our credit facilities occasioned by the October closing about third CRM CLL.

Also available to US is approximately 105.7 million of net equity in our portfolio of high grade CRT that securities.

Financing capacity at year end to support our loan origination business was 4 billion.

In 2019, we added a 750 million dollar credit facility from Barclays. We extended facilities with Morgan Stanley JP, Morgan and Goldman Sachs.

And reduced fees and credit spreads on most of our facilities.

Across borrowings under our loan repurchase in warehouse credit facilities, the weighted average spread declined year over year by 15% to two to 166 basis points. This is testament to the power of TPG, and garnering leading edge pricing and terms from our lending partners.

In 2020 other forms of term financing are likely to return to our balance sheet what appear for the first talk.

Further increases in term funding arrangements will reduce our reliance on credit facilities and less than our exposure to mark to market risk.

Yearend, we again boosted our non marks market liabilities to more than half of our total funded loan portfolio borrowings.

Loan repayments in 2019 totaled 1.9 million <unk> billion, and we expect similar levels for 2020, although we've experienced no repayments year to date.

Repayments will create capital recycling opportunities for our to see yellows, which totaled 1.8 billion and have a blended borrowing spread of LIBOR, plus 144 basis points and play an important role in supporting quality loan originations those reinvestment periods run through November 2020 in October 2021, and permit run.

Investment of new loans or existing loans that meet our eligibility requirements.

2019 alone we agree invested 514.7 million of FL to capital and expect to do even more in 2020 with folks yellows.

Low cost not mark to market financing helps us originate wells sponsored well structured lower risk loans and preferred property types and markets.

Leverage at year end was 2.93 to one level, we maintain most of the year.

We are less levered than many of our peers, which affords us latitude to adjust in response to market conditions, the composition of our investment portfolio and our risk appetite.

We maintain our leverage by pairing new debt capital raises with disciplined equity issuance in 2019, we raised 175 million of accreted primary equity.

Credit remains our bellwether for 2019 originations LTV actually declined to 63.9% from 66.7 year over year and portfolio wide LTV was virtually unchanged at 65.4%.

Risk ratings were stable at 2.9 after five years and business, we've had no loss impairments loan loss reserves.

In terms of rates all of our loans are floating rate and have LIBOR floors, which at year end had a portfolio wide average of 1.63%.

Fully 45% of our floor as measured by loan PB you PB, we're in the money at yearend all of our liabilities are floating rate too.

Our portfolio floating rate, primarily investment grade CRT securities generated approximately 11 cents per share of net interest margin in 2019, demonstrating our team's ability to use its commercial real estate and capital markets savvy to create incremental income while prepositioning newly raised to recycled capital for deployment and.

New loan originations. These investments were valued approximately 1 million above amortized cost at yearend.

Finally, Cecil or current expected credit losses, which took effect on January onest of this year.

Cecil shifts accounting for credit losses to a forecast model from an incurred model and requires lenders to record upfront a loan loss reserve that reflects its estimate the life of loan losses.

With few exceptions, the forecasted loss must be greater than zero.

Since we've incurred no losses and recorded no loan loss reserves since inception, we look to a third party data base attracts performance default and loss data for more than 100000 loans over the past two decades to help us develop our loss estimate.

Using a loss given default model. The current estimate of our initial Cecil reserve as of January 1st is approximately 18.5 million were 33 basis points of aggregate loan commitments, which equates to 24 cents per share book value.

For further information please refer to our form 10-K or ask a question about this morning.

With that Red and I would be happy to take questions operator.

Thank you we will now be conducting a question and answer session. If he would like to ask a question. Please press star one on your telephone keypad.

Information tonal indicate your line is in the question Q. You May proceed start to if you'd like to some of your question from the Q [laughter] participants you think speaker equipment may be necessary to pick up your handset before pressing the star keys, one monetize only fall for your questions.

Our first question comes from the line of Steve Delaney with JMP Securities. Please proceed with your question.

Morning, guys congratulations on a strong 2019.

As they as the calendar changes I'm wondering grado, if you're seeing anything different in borrower behavior or the makeup of your borrower base.

Types of one request compared to what we were seeing 12 to 15 months ago. When you started 2019.

Well I.

I feel like we're seeing more bar request from financial sponsors that they have a tremendous amount of dry powder.

It reached 326 billion or a new peak the last peak within I think in 2008 in terms of fundraising during the year 19. They raised 151 billion and 2008, what's that last you know high watermark of 148, so theres tremendous.

I'm out of investment activity from the financial sponsors I would also say there's been a very large demand oh, there's been very large demand created by the new Triple I mean, the public non traded Reits a one very large one that we all know in particular is raising some.

More than the EUR 2 billion, a month and with leverage can invest 6 billion a month and a lot of this investment activity. We think well, we'll just have to gravitate to office because it's one of the larger asset classes. So interestingly in the here in particularly in the fourth car quarter, we saw more financial sponsors and we.

Saw more office, 72% of our originations in the fourth quarter, where in office properties and that financial sponsors. Coincidentally. This is the same bars and office.

One of the trends and large office properties is that you know beginning in 16, we saw the foreign investors pretty much leave the market and many domestic pension funds for full of office. So so it created some value or if there is some premium opportunities in office. So I think you're going to see a lot of.

It's dry powder and this non non traded public Reits. It go towards that I mean, our fourth quarter certainly indicates that so that's why not then.

That's great that's helpful. Because you're what you're telling me is your it's still private equity driven people with maybe you know five year type business plans as opposed to something shorter term or more speculative.

Yes, a lot of value add that there's a lot of them. If you look at the fundraising statistics a lot of it the majority of it went to opportunistic funds and then second was value and we're probably seeing most of our activity from the value add guys. Some from up right.

Thank you of course repayments as you know that's always the the gymnastics would be in a senior bridge lender I guess, some Bob you mentioned 1.9 billion and in the and 2019 and that you expect something similar it strikes me that you know 1.9 billion.

Basically 5 billion WPP at the ended the year would worked out almost 40% is is that what you're really trying to communicate that something in the high thirtys or 40% of beginning a U.P.B. is what we should expect [noise].

Yeah I.

No go ahead, I think I think that's right at that phone commitments that that is that is a little bit higher in percentage terms, we really look at it on a commitment basis.

Okay fine plants NCR, Yeah, and there were 5.65 0.7, because during the course of year will be funding up a portion of our unfunded commitments, which at year end were about $630 million.

I think that some of that market dynamics. The credit described in the fact that it's still a low rate environment or make you know refinancing or.

An attractive alternative to some borrowers and and investment sales volumes, although down over the peak in 2016 are still strong and so that a turnover that normal turnover in investor owned portfolios results in and repayments to us part of the trick and challenge and frankly benefit of our busy.

This model is that were off unable to convert repayments from refinancings into new loans with existing borrowers on the same property and you've heard US described before how we've been successful and doing that and I suspect you'll see that again in 2020, which would mean that are not run off would be lower than that that topline number.

I would tell you, it's it's slightly higher not a concerning level higher because we do look at a commitment and if you look at our lead payments. It hurt prepayments in 17. They were 32% of commitments 18 was a bit lower at 25, and then 19 would be 35 and six weeks.

In fact, our commitments to increase in 2020 that percentage. It's I mean, the dollar amount is the same should go down.

Great.

Thank you both of your comments.

Thank you Stephen.

Thank you. Our next question comes from the line as Stephen Laws with Raymond James. Please proceed with your question.

Hi, good morning credit Bob.

Good morning.

I guess following up there on a on Bob when your answer to it so want to Steves question, you know given the low rate environment and looking at the board yield per Oh, that's that's projected to go lower by quite a bit here I guess over the next year or two so when you think about compressing asset spreads on asset yields and coupled with the declining wide world.

How do you think about.

The outlook what is your behavior with with wide were floors and new loans.

On top of that from a bigger picture maybe is there a glass floor on asset yields where you know it it at wide words that 125 in spreads that to 75 over the you know as a 4% return on assets really attractive kind of how do you think about where asset yields trend from here.

Good morning season, I'm, just going to start real quick and then I'm going to handed over to Bob I think you're one of my we're addressing it in 2019, our weighted average floors were 190 basis points, so where well in the money on on our annual originations for the question is as why bar continues.

To to drop will we be able to keep such a high floor and the answer is no borrowers will don't want to floor, that's too far out of the money when they close the loan. So yes, I do expect as long as LIBOR declines and we have competitive pressures asset spreads could continue to decline.

But what we have seen it if you've noticed some of the capital markets activity year to date the demand for fixed income debt products secured by commercial real estate is exceedingly strong I mean, it's a frenzy right now and we've seen spreads come and dramatically with that the question is.

Does that translate into lower.

Repo and credit facility spreads or we're not sure, but that's where we may see compression, but the reality is yes. We are in a declining we are not immune to the declining yield environment that is affecting all fixed income assets.

Sure, Yes, I think to Grad. His point it is a very strong market right now to issue liabilities Oh, that's true in the bank market. It's true in the structured finance market I think it remains an open question as to whether fixed income investors.

We will continue to accept lower absolute that is all in returns.

If they do then then we could expect to see further spread compression.

If they don't especially in the AAA sector of the market, which is really really important then you may see a bottoming out of credit spreads on the liability side, which at the markets work as they have in the past with suggested credit spreads with would also flatten out on the asset side, but that that Uh huh.

Not seem to be happening right now or at least not yet.

Well I appreciate the color on that I wanted to get your.

But the are you in credit spots on that it's you know bigger picture you know CMBS I think increased on a net basis about 150 million clearly had dog.

Station volume alone largely offset repayments, but utilized or ATM to raise a little less than 40 million can you maybe talk about how you look at the investment opportunities on new loans, the CMBS opportunity or or or really is that still more of a cash management tool.

And then the need for new capital as you think about putting money to work in having a team in place.

We continue to like the loan opportunities, we're seeing and as we mentioned our current signed and closed and signed up loans totaled 858 million. So we clearly have been seeing some this year that are attractive for us. So we would always prefer a good quality.

Loan.

Two.

Vesting in CMBS and that's really for a couple of reasons. One that's what we do best in what our team is is a train to do and into generally speaking on alone. We can finance will finance that roughly.

Anywhere from 75 to low 80%, whereas to get the comparable yield on a C. Allow bond you have to apply more leverage so you get less equity put to work for the for the same yield so we'd rather have more equity.

<unk> leverage in alone frankly, although the benefit to the COO is highly liquid and it's a you know has a lot of lot of structural subordination and equity behind you. So theres pros in constant boat, but but I guess that you know preferences to do lungs right. So that's a good said.

The way I think to the rest of your question Stephen about.

Capital needs. So we did a tap the equity markets twice last year once in the spring with an overnight and then again late in the year through our ATM, which is for us at least an extremely efficient way to raise just in time equity to support our growth.

And so I would expect that we would continue to.

To take advantage of that program as market conditions permit.

And then the last thing I would add in terms of capital raising is that that securities portfolio that we own.

Throws off a very attractive or are we as credit described.

But it's also a near immediate a source of capital to recycle into loans and as I mentioned, we have slightly more than $100 million invested.

In the in that asset class right now and so that can be fairly easily rolled into the loan transactions. So as you think about what our future sources of capital our for growth I think that's the right order to think about.

Great. Thank you both for that and my last question at this point I.

I think I saw in the deck that for rated loans declined to 200 million from about 260 million.

That do a repayment or did you mark up on a four loans back to a three are you can you talk about you know I know, it's a small percentage the portfolio, but can you talk about the the improvement there and the decline of four rated loans.

Sure well, we had one loan with an outstanding balance of around $60 million that we sold in the fourth quarter and it was like a four rated loans.

The reason we sold it.

Was that many fold one we got slightly over par so that's always good.

No.

The Barber had not completed its business plan and in fact was very slow in doing it is <unk> dot became distracted with growth prospects in Europe in other markets and through our really.

I would say very focused asset management, we just identified a you know a shortfall in the renovation budget and his falling down on doing things. He would have to do I have to say, it's one of those rare examples where I've seen an asset with tremendous potential and very strong.

As it is an even stronger future equity value threatening that's where the borrower works against his own best interests. I mean does he did improve it would say 70 construction apartment building that he was going to send 14000 per unit and upgrading and he didn't do a couple of units and the resi got on the upgrade.

Do you Miss far exceeded what we underwrote and what his business plan was yet he could not get out of it sounds like.

And frankly this was a tough decision for us because we would have loved I mean I love is the wrong word one strategy would have been to hit the ball in town and receive an extra 400 basis points in terms of default interest on a deal that we knew had strong credit I mean intrinsic value. The fact that we sold.

It over par jumped at our home, but you know had intrinsic value, but but you know so that would have been a great earning asset we would have had to spend legal time on it but we would have also had to Ben.

Answering tons of questions on these earnings call about this one asset for the until you know we sold that asset I mean, I'm, just saying that because I've read some of our competitor 30 to call report, but yes.

I mean on one hand, I could have said, it's best for shareholders breasted charge, a higher you know we're entitled to Baltic at a higher rate interest and then maybe some degree to get to own. The fact that because as tremendous equity value. My guess is he would ultimately for taxes the equity value was so strong but.

No, but we decided to sell it because we could and we got to you know a strong return on it we had other places to deploy capital.

Hi, Good morning winner Circle, no I really appreciate the color on that but lots of interesting sop to think about that.

I lied I do have one more question lastly, Bob can you touch on operating expenses. The 9.2 million was below the previous two quarters, how should we think about that running going forward.

I think it's a pretty good run rate, though we disclosed in the mdna what the components of that change. We're you know a typical expenses. We've we've really really managed with a fine tooth comb. Our servicing expenses have have declined steadily year over year, we've generated some real strong efficiencies there.

What we've maintained our very diligent.

Approach to our loan assets as credit just described on that one multifamily job. So I think we're in a good run right now yeah honestly the variable over time is going to be amortization of stock comp expense.

Which.

We would expect with.

Be stable to growing over time as the company grows and continues to succeed.

Great. Thanks to both for your comments. This morning I appreciate it thank you for dialing in.

Thank you. Our next question comes from the line of Jason Weaver with Compass point. Please proceed with your question.

Hi, Good morning. According Jay I was wondering if you can comment on leverage specifically the trajectory on moving towards your target level, three and a half times, what would you need to see to get comfortable moving much closer to that or is it really just a function of pricing in the origination mandates that you see you can win.

Hi, Thank Jason it's largely a function of the latter yeah. We've.

Yeah, we're we're very comfortable with our leverage position right now and given the strong credit performance of our portfolio. We always we think on a standalone basis. It can certainly supporting more leverage.

Then it currently bears.

But we want to do that in a thoughtful way I think we demonstrated that we can.

You can raise financing debt financing at extremely competitive levels really at market leading levels.

So as our portfolio continues to grow I think you'll see us deployed or utilize some more leverage we frankly got some untapped capacity in our credit facility is right now that we would use first so you should expect to see a little more leverage than we currently have employed.

As you've seen has been pretty consistent around three to one.

Sure Alright. Thank you that's helpful and then on the LIBOR floor for a percentage can you give an idea of the proportion of loans overall with those and what the weighted average strike is currently I know you mentioned 190 for the 2019 originations, but just looking for the overall stats for the portfolio sure for for the portfolio as a whole first.

All of our loans have floors and their strike rates, obviously very on two things one was LIBOR at the time alone was originated and to what were the negotiating dynamics with each borrower at that time, a though the average a LIBOR floor in our portfolio right now is 1.63%.

Okay. Thank you.

Then one final one on your comments on multifamily, it's obviously a sector, but a lot of supply coming online driving lower take up and higher initial vacancy rates are there any other factors that limit your risk appetite there.

No I mean, I think it took it perhaps it's also that that spreads.

Got it over tied on multifamily as well probably too tight on in in many instances so its everyone likes multifamily but.

Because we we have a significant loan portfolio, we can see which markets have slowing business plans and others, who may not have a lot experience in those markets may have a difference spread appetite than we do for those assets.

Alright, Thank you for taking my questions.

Hi, Thank you Jason.

Thank you once again, if he would like to ask a question. Please press star one on your telephone keypad for participants using their equipment may be necessary to pick up your handset before pressing the star keys.

Our next question comes from the line of Charlie arrested with JP Morgan. Please proceed with your question.

Hi, Good morning, it's Charlie on for Rick Today, I, just wanted to ask about Ltvs. It looks like they came down a little bit this quarter and.

The portfolio weighted average is still in the mid Sixtys, but there's a few of your largest loans that are are higher up in the kind of low to mid Seventys range, where do you see the equilibrium there and should we expect to see more loans up and the seventies, nor does it really depend on the alone and property type.

Yeah, it's they [noise].

There is a correlation between I would say LTV.

And in place that yield so or stabilized in place that yields we found leverage. It has has been pushed mostly on multifamily or where you know you where there are stabilized that yields are you know in the seven and a half kinda kind of range people are willing to go and including ourselves up to.

Now, let's say an 80% on some of those and these are brand new apartments in you know coming off the construction facilities already and Lisa.

That will stabilize at a very attractive debt yield so.

I think for us as we lapped construction lending, which skews a portfolio leverage down even though in our view it may have more risk inherent risk in the asset, but we we.

Pretty much scaled back that over the last several years.

And focused more on existing cash flowing assets, our leverage has gone up and.

I do feel that it's most levels, we see or sort of in that you know 60, you know very fewer are below 60. These [laughter], let's call. It 60 to 75, and then and for good quality multifamily, 80% range right. So multifamily has historically.

At the highest LTV in our portfolio and frankly, others and that's a testament largely to its stable operating performance and the fact that the financing market for multi families. The deepest of all property types just look at the.

Enormous presence at the Gses.

The multifamily business its lowest in lodging and it's in the middle his office credit described earlier that proportion.

Of our all of our portfolio devoted ought to office has stepped up in response to the market dynamics. She described.

So what that means is all else being equal our LTV portfolio watch it stepped down a little bit and it has.

So if we do more multifamily you should expect to see it go up we do more office or anything other than multifamily actually it's going to go down [noise].

Great that's really helpful. Thank you.

Thank you there no further questions at this time I'd like to turn the call back over to Miss Guggenheim for any closing remarks.

Well. Thank you all for joining today and we very much enjoyed sharing our performance in 2019 with you and we look forward to a great 2020 and beyond.

[noise] [noise]. Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.