Q2 2021 TPG RE Finance Trust Inc Earnings Call
Thank you for standing by or on hold for the TPG Finance Trust second quarter 2021 earnings Conference call. At this time, we are gathering additional participants and should be underway. Shortly we appreciate your patience and ask that you continue to hold on.
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Good day and welcome to the TPG Ari Finance Trust second quarter 2021 earnings Conference call. Today's call is being recorded at this time I'd like to turn the conference over to Deborah Ginsberg General Counsel. Please go ahead.
Good morning, and welcome to TPG Real estate Finance Trust.
Conference call for the second quarter of 2021, I'm joined today by Matt Pullen, President, Absolutely Chief Financial Officer, and Peter Smith, Chief Investment Officer.
Bob will share some comments about the quarter and then we'll open up 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 of which are available on our website in the Investor Relations section.
To remind everyone that today's call may include forward looking statements, which are uncertain and outside of the company's control actual results may differ materially.
For a discussion of some of the risks that could affect results. Please see the risk factors section of our 10-Q, but do not undertake any duty to update these statements and we will also refer to certain non-GAAP measures on this call and for reconciliations you should refer to the press release and our 10-Q.
That I will turn the call over to Matt Coleman President of TPG Real estate Finance Trust.
Thank you Debra and thanks, everyone for joining the second quarter earnings call for TR T X.
I'm happy this morning to be covering another strong quarter for the company.
As I've done over the last few quarters I'll frame today's discussion along the dimensions of the 3 key strategic pillars that I first articulated at the beginning of the year.
Capital structure optimization renewed originations and portfolio performance consistent with proving out our book value.
But first I'll begin with a brief update on our CEO search T O T X as board of Directors and Representatives of TPG has established a search committee and retained an executive search firm. The committee's work is ongoing and we expect to have further updates for you over the coming quarters.
Now turning to our second quarter results and starting with capital markets.
We redeemed in full all $225 million other companies' outstanding 11% series B preferred stock.
Using a combination of cash on hand, and the proceeds of a new 201.3 million issuance of 6 on a quarter per cent series C preferred stock.
We were able to take advantage of a very robust capital markets lowering our preferred dividend rate by more than 43 per cent.
This issuance together with our 1 on a quarter $1 billion CRE CLO that closed on the last day of the first quarter puts us in a very competitive position with respect to our overall cost of capital available for new originations.
As a result of the new second quarter originations that I'll cover momentarily. We are also fully utilize the nearly $309 million ramp feature of the CLO.
Midway through the year, we're proud of our capital market's achievements, including the fact that now 82 per cent other company's debt obligations on non mark to market.
Moving now to new originations activity in the second quarter was robust we closed 9 loans, representing more than $750 million of commitments focused on multifamily.
It was 45 per cent of the total and life Sciences, approximately 44 per cent of the total.
Taking into accounts signed term sheets after quarter and we're now at more than $1.1 billion of originations year to date and our total loan portfolio.
Grew 6.7% quarter over quarter to more than $5.3 billion.
As always the relationships connectivity and intellectual capital resident within TPG broadly and TPG real estate more specifically afford us competitive advantages in sourcing market selection and asset specific insights.
As of the end of the second quarter. We continued to have substantial additional available liquidity of nearly $400 million, which we can use to fuel future originations and portfolio growth.
Finally, turning to our portfolio, we had interest collections of more than 99%, including 1.1% Pik for the quarter was the only non payer being the defaulted retail asset in southern California.
We're in the process of marketing that asset for sale and hope to have a further update reasonably near future.
With respect to our owned real estate in Las Vegas, we have selected a sales broker and are beginning to have discussions regarding the disposition of both land parcels.
We expect to have updates with respect to Las Vegas over the coming quarters as well.
During the second quarter, we had nearly $400 million of realizations largely in the form of loan repayments, including more than $290 million of office exposure across 3 loans net additional $32 million mixed used alone consisting of both office and industrial.
We also Opportunistically sold 1 hotel loan, which reduces our hotel exposure by approximately $60 million and will enable us to redeploy that capital into other assets more aligned with our current objectives.
At quarter end traditional office, excluding life science represented approximately 44 per cent of our portfolio.
Life Science represented 9%.
At hospitality was down to $12.7 per cent.
In general we saw strong performance across asset classes, Inc.
<unk> improved hotel performance.
Accordingly risk ratings were stable quarter over quarter, and we released approximately 3 and a half million dollars of Cecil reserve generally, reflecting the continued improving macro environment.
In the midst of this good performance, we are of course paying close attention to the spread of the Delta variant and the effects. It may have on the U S economy.
With that I'll turn it over to Bob to cover our financial resort results for the quarter.
Thanks, Matt and good morning, everyone.
We reported yesterday for the quarter ending June 32021, GAAP net income of $32.4 million.
Net loss attributable to common stockholders of $21 million or 27 cents per diluted share.
And distributable earnings of $21.9 million or 27 cents per diluted share that represents 141 times coverage to our current common dividend and 1.17 times coverage to the some of our current common dividend.
The pro forma run rate quarterly dividend on our newly issued series C preferred stock.
Net interest margin increased quarter over quarter by $2 million, despite loan repayments of $334 million.
Book value per common share declined quarter over quarter to $16 <unk> per share.
Or 58 cents due almost.
Entirely to 1 time charges of $45 million incurred in connection with the redemption of our $225 million series B preferred stock that we issued in May of 2020.
Our seasonal reserve declined by $3.5 million or 4 cents per diluted share in response to improving domestic macroeconomic outlook that informs our loss given default model continued improvement in operating performance across our loan portfolio and especially among our hotel loans, which now represent 12, 7% of our loan portfolio.
The sale of a $67 million performing hotel loan and.
And a decline in our reserve rate to 104 basis points from 118 basis points books.
Book value per common share before giving effect to our seasonal reserve was $16.675 per share versus $17.37 per share in the first quarter.
In summary in terms of net income from operations before the series B redemption, our second quarter 2021 operating performance surpassed the first quarter.
Capital structure optimization remains the singular focus of our capital markets team.
In June we raised net proceeds of $194.4 million by issuing perpetual preferred stock at a sector, leading low dividend rate of 6 on a quarter per cent and immediately redeemed $225 million of the 11% series B preferred stock issued in May of 2020.
We slashed our coupon cost by 43% and replace temporary equity with permanent equity redeemable at our option after 5 years we.
We made a onetime cash make whole payment of 22, and a half million dollars and we wrote off unamortized warrant fair value and transaction costs of 22, and a half million dollars more detail regarding this important transaction is contained on page 16 of our earnings supplemental.
When paired with our highly cost efficient debt capital base we're in.
Now well positioned to grow our loan portfolio as we've demonstrated thus far this year by originating $1.1 billion of first mortgage loans and registering net loan growth in the second quarter of $335 million.
At quarter end, our stable debt capital base was 82% non mark to market and 77% matched term funded with CRC or with CRE CLO.
<unk> sector, leading levels to further extend the term structure of our liabilities after quarter end, we extended for up to 3 years, a $250 million secured credit facility with Goldman Sachs..1 of our 7 lender counterparties.
Lower cost longer term liabilities are a key ingredient in our ability to originate quality first mortgages at modest loan to values at quarter end.
Our weighted average as is LTV ratio was 66, 7% virtually unchanged from the prior quarter and.
And we continue to explore other forms of secured and corporate financing, we believe will be accretive.
Risk ratings remained unchanged at 3.1 quarter over quarter with positive migration in risk trends.
We upgraded to 3 from for our 2 operating resort hotel loans based on strong operating performance and a 4 loans single borrower residential condominium financing 2 or 3 from our 4 based on improving market conditions and progress against the business plan.
1 office loan was downgraded to a 3 from it to do to slow leasing activity.
Repayments included 3 office loans, and 1 mixed use loans with a weighted average risk rating of 2.9 and as mentioned earlier, we sold 1 hotel loan which was rated a 4 we collected 99, 3% of scheduled interest.
Our pick balance at quarter end was only $4.2 million a reduction of $1.4 million quarter over quarter. We expect further reductions in the second half of this year since only 1 of our loans as currently picking and all of our modified loans are performing.
At June 30, cash on hand for investment was $224.7 million plus undrawn availability on our credit facilities of $99.5 million re.
We investment capacity in our 2 CLO is tied directly to the volume of loan repayments, which are returning to pre COVID-19 levels at quarter end, we had $53.8 million of CLO reinvestment capacity immediately available after reinvesting $72.2 million during the quarter.
Unfunded loan commitments were $488.9 million only 9.2 of our total commitments, which reflects our continuing emphasis on loans with business plans that can be quickly achieved.
Involve modest future funding requirements and enable us to achieve a high utilization rate with our shareholders' capital.
At quarter end, our debt to equity ratio was 2.44 to 1 a decline of approximately 1 third of a turn of leverage due to the timing of loan repayments versus new originations and our decision to hold on leveraged for a short period approximately $70 million on loan investments.
Our current capital base can support substantial growth in earning assets based on a target debt equity ratio of 375 to 1.
Which we believe is appropriate given our very high proportion of non mark to market term borrowings and a current equity base of $1.4 billion total, earning assets could reach $6.5 billion.
To recap we delivered during the second quarter strong performance in operations capital markets and credit in fact, we outperformed the preceding quarter.
Net loan growth was $335 million on the strength of $753 million of new originations offset by resurgent loan repayments of $358 million, we have a strong loan originations pipeline.
We have a healthy distributable earnings coverage of 1.4 times, our current common dividend rate and we have significant capacity for growth supported by current by our current capital base.
So with that we'll open the floor to questions operator.
Thank you if you would like to ask a question you may signal by pressing star 1 on your telephone keypad.
If you're using a speaker phone. Please make sure your mute function is turned to allow your signal to reach our equipment.
Again star 1 for questions well take our first question from Don <unk> with Wells Fargo.
Hey, Matt.
I was wondering if you could talk a little bit about what you're seeing other real estate debt and equity markets in terms of Delta.
Yeah, you know investors are making changes how you were thinking about it and you know what part of your portfolio are you watching a little closer.
Yeah, Good morning, John and thanks for joining.
So it is something that we're certainly paying attention to.
We're seeing I think the beginnings of the intersection of public policy and public health adds a federal state and local governments think about how to how to best attack. This.
That being said I think.
It is reasonably early it is in all honesty, a little hard to tell we're not I think as it relates to our portfolio of performance at the moment.
We're frankly not seeing.
Negative impacts however.
It is concerning Ah I think as we think about return to office.
And people had been thinking I think about after labor day is a real bellwether an indicator for what return to office might look like broadly.
It certainly raises some questions and it is something that we're that we're paying close attention to although as I said, we're not currently seeing a direct measurable negative impacts on our portfolio or performance.
Got it and then.
Can you talk about what market the 1 office.
<unk> learned was down quite a bit on and also why you sold the hotel loan.
Okay.
I'm sure that that 1 office.
Sorry that 1 office markets are Orange County, and we just we just saw a slowdown in leasing.
So that that was a move from a from a 2 to 3.
The hotel loan I think presented an interesting opportunity with a with a pending maturity.
We were able to achieve a dollar price of 98 cents.
And while there was not a specific reserve against it.
The the impact on releasing reserve was was quite positive and other net basis accretive to book value.
And so it was a it was a good opportunity to do to execute at a very attractive price.
<unk>.
Got it thank you.
We will take our next question from Tim Hayes with B T I D.
Hey, good morning, guys. Thanks for taking my questions.
My first 1 just spreads on new loans this quarter were a bit wider than the portfolio average. Despite you guys focusing on some more stable asset types, where there I would assume there's more competition 2 of the 3 loans you highlighted in the deck for bridge loans and there was that 1 moderate transitional loan you hive.
Lighting, but where the other 3 largely moderate transitional or construction loans I'm. Just curious how you were able to get a bit wider spread and a LIBOR floor above where spot LIBOR is while focusing on more defensive asset types.
Oh sure, but why don't we have Peter address that.
Sure sure. Thanks. Thanks.
I think what we're seeing in the quarter is is really just a continued sort of focus on being selective on the deals on the deals that we're seeing we are seeing a lot of opportunities in areas right now and you know Gen. Generally we had it in there.
First and second quarter, we really had a lot of capital to invest and.
And we're focused on on on really getting getting money out on deals quickly that we liked and that and that we wanted to compete a little bit heavier we're being a little more selective right now as Matt pointed out is that we're about 1 billion $1 billion to into the into the year well on our way of achieving our goals for the year. So we're candidly, we're just seeing a lot more.
Selective in the second half of <unk>.
Of the first on the first half of the year on the second second quarter. So we are seeing seeing a lot of opportunity.
And multifamily has been our focus right now than 60, a little over 60% of closed and signed up deals followed by lifestyle, and which has been actually pretty strong for us as well generally with repeat borrowers and long term relationships and speaking of repeat borrowers over 50% of our.
Of our loans closed to date have been with sponsors that we've transacted with previously.
That really helps quite a bit because it lowers lowers risk and also makes them more efficient execution. These are guys that we know well we know their capabilities they have.
Have a good familiarity with their track record net debt really helps us and we plan to continue that going forward.
Okay.
Thanks, and if I were to add to that yeah yeah.
Yeah go ahead I was just going to say tell me if I were to if I were to add to that I mean, I think we're continuing to see spreads that are that are marginally better than they were pre pandemic. We're obviously seeing a significantly lower base rate and you know, we're seeing because of that very attractive financing options for ourselves I mean, I think if you were going to if you were going to draw the trends out of that.
That is that is where the trends are.
I see.
Okay Fair enough and then you know as that relate to <unk> activities. So far you guys are off to a pretty good start but can you maybe just give us some color on the loans that have closed or are in the process of closing here you know are they.
Kind of fitting that are you staying in the multifamily life Science Lane again, how does like the level of transition and kind of spread in LTV.
Per to do what you've been closing through the first half of the year.
Very similar.
These I think these trends that you're seeing year to date or are trends that are continuing.
We've got a in addition to those we've got about $4.5 billion are in our pipeline now and I would say.
Very similar in terms of LTV and spread and you're not seeing really a change in that.
And strategic focus for US we're focused on high growth markets with great demographics, obviously, we're focused on on multi and life science.
And you know those those strategic thrust on well I think characterized the current pipeline as well.
Okay. Thanks for the color there and then you know just on the dividend I mean, you guys have I know that you probably declare the dividend in September for the next quarter, but I mean, it's a board decision understand but you use a lot of the heavy lifting has been done here you issued the series CS to refinance this.
Series BS you you kind of rightsize the cost of capital there he didn't CRE CLO.
<unk> started deploying a lot more capital than you were you.
Before the first quarter. So I'm just curious why in your opinion, what you need to see further before kind of resetting the dividend to reflect that.
On the core earnings power of the platform and if the Delta Varian as something that might kind of prohibit you guys will give you a little bit of pause before doing something like that.
Yeah.
Obviously, where we're always carefully looking at the relationship between distributable taxable income and our current dividend.
And we do make dividend recommendations to the board as a general matter.
We have taken an approach to our dividend, where we're looking for smooth steady and sustainable changes to the extent that we make a change.
There are a number of factors that feed into that the macro outlook as you as you highlight I think our capital market's achievements do.
Do factor into that as well.
Credit performance of the portfolio, which we're encouraged by and obviously the earnings power that comes from new originations, which were also encouraged by so I think it is premature at this point to say anything and as you know we don't give guidance, but we will of course be discussing our dividend level with the board over the coming quarters.
Alright, that's a that's helpful. Thanks, Matt I'll hop back in the queue.
Uh huh.
Thanks, Kevin.
As a reminder, star 1 for questions well go next to Rick Shane with J P. Morgan.
Good morning, everybody and thanks for taking my questions on it.
If we look at the business model historically I would have described it as are we.
There's an ROE formula, it's sort of L plus 6 and a half to 7.5% with perhaps a 0.5 to 0.6 beta to LIBOR.
When we think about the current environment and the construct do you think that that.
Framework has changed is the spread to LIBOR in terms of Aro lower now, but could we see better correlation as we come off a low base rates, particularly if your customers are your borrowers are swapping and lock in their rates and <unk>.
Pending the duration potentially of your loans.
Yeah, why don't I start with a general observation and then I'll turn it over to Bob as well.
I think in general as I as I said, a few moments ago. When you think about the composition of our ROE right. Now we are we are spread heavy and base rate light.
And given our leverage model and the fact that both our assets on our liabilities on our floating rate.
We do think Theres some theres some earnings upside if if rates were to rise.
But why don't I turn it over to Bob for more specifics.
Yeah, Thanks, Matt and good morning, Rick.
You know that.
Question is a good 1 and it gets to the magic page.
That we're all familiar with.
That's right I think right now we are in a position where we're still benefiting from.
No high LIBOR floors, and that will persist for a while but at least as long as our vintage.
Vintage loan book is still outstanding.
But everyone in the space is transitioning, albeit at different rates from a sort of high floor to a lower floor environment spreads have widened a bit to compensate for that and so you'll see over the next number of quarters each company in this space.
Transitioning it's the components of its ROE will shift the real question is will the total Roe.
You know increase remain unchanged or decrease and that will vary we believe.
Company by company, and frankly to some extent, it's going to be dependent upon.
The future direction of interest rates and the real estate markets. The future directed direction of interest rates seems you know.
Flow for awhile, but none of us know.
The 1 thing I would say Rick is that the pace of repayments and the behavior of transitional borrowers generally is is less.
Yield curve dependent than it is investment and business.
Plan dependent.
So that's not to say that borrowers of ours don't hedge but generally speaking there are a lot less focused on rate than they are on their business plan.
And so we don't expect there to be a material change in the volume.
Noting rate transactions that we have access to over the next number of quarters.
Got it okay. That's very helpful and I think look on it frankly explains what is a conservative payout.
Payout ratio as well.
Yes.
Guys can you hear me that's it for me.
Okay. Thanks, Rick Thanks.
Thanks.
For the simple questions.
That will conclude our question and answer session. At this time I would like to turn on the call back over to Mr. Coleman for any additional or closing remarks.
Thank you Katie.
As you will have heard on this morning's call. We're pleased with our results and achievements in the first half of the year, our balance sheet together with the strength of our team positions us well for a busy and successful second half of the year. We look forward to speaking with you again next quarter. Thank you.
Yeah.
That concludes today's call. We appreciate your participation.
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