Q3 2021 TPG RE Finance Trust Inc Earnings Call
Greetings and welcome to the T. P. G. R E Finance Trust's third quarter 2021 earnings call. At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Mind you. This conference is being recorded I would now like to turn the conference over to your host Ms. Deborah Ginsberg, Vice President Secretary for T. V. G. R. E Finance Trust. Thank you you may begin.
Thanks Melissa.
Good morning, and welcome to TPG Real estate Finance Trust conference call for the third 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 Yes.
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.
I'd like to remind everyone that today's call may include forward looking statements, which are uncertain and outside of the company's control actual results may differ materially for a discussion of some of the risks that could affect results. Please see the risk factors section of our 10-Q we.
We do not undertake any duty to update these statements. We will also refer to certain non-GAAP measures on this call and for reconciliations you should refer to the press release and our 10-Q.
With that I will turn the call over to Matt Coleman President of TPG Real estate Finance Trust.
Thank you Debra and thanks to everyone for joining this morning's call I am pleased to report another strong quarter for TRT acts.
During the third quarter, we saw strong performance from all parts of our business, including origination the loan portfolio and capital markets.
Starting with the originations we continued to execute our multifamily focused investment strategy targeting markets with strong employment income and education characteristics.
For the quarter, we closed seven loans with a total commitment amount of $482 $9 million.
<unk> loans were in Tampa, a market that demonstrates the positive demographic trends we seek.
Including in migration accelerated by Covid.
As a result, the increased demand for multifamily product has led to strong rent growth, resulting in compelling lending opportunities for us.
Life Sciences, the other asset classes, where we focused our origination strategy and attention.
Well this is an asset class with newer heightened focus among many of our peers. This is a sector, where our lending activity dates back almost to our inception, when we closed our first life science alone in 2015.
It's also an asset class, where we have significant strategic advantages, including substantial lab space ownership through Tpg's real estate private equity business launched.
A long standing senior advisor and executive relationships and substantial insights through TPG as health care group.
During the third quarter, we closed one life science learn to a best in class sponsor and one of the best Submarkets in San Diego.
This loan is our sixth to this borrower, reflecting the value of long standing direct relationships and repeat business.
Following the end of the quarter, we had four additional closings and we have four more loans in the closing process, including that activity year to date closed and in closing originations now exceed $1 $8 billion.
One of the loans, we closed after quarter end as our first post COVID-19 hospitality loans, while we're still carefully watching the lingering effects of the pandemic on the hospitality space. We chose this loan is our hotel reentry point.
Because the assets located in a very strong market. The loan is secured by a well established property with a strong pre COVID-19 operating history.
The transaction was an acquisition with significant fresh sponsor equity.
Although the lending market is competitive we continue to source compelling risk reward opportunities that deliver roe's in line generally with pre pandemic returns.
The relationships connectivity and intellectual capital resident within PPG continued to provide us competitive advantages in sourcing market selection and asset specific insights.
Turning to the loan portfolio interest collections continue to be very strong in excess of 99%.
The only loan in our portfolio that is not correct is the defaulted retail loan in southern California.
We received full repayments during the quarter of $418 million across two multifamily loans and one office loan.
Subsequent to quarter end, we received full repayment of $160 million loans secured by a mixed use asset in Houston, which was sold by our borrower in a transaction that closed last week.
We originated this loan in 2018 to refinance a construction loan and provide capital for lease up and stabilization.
Ill Covid may have slightly delayed the sponsors completion of its business plan. This is a good example of the nice natural lifecycle of our transitional loans and the active investment sales market and capital markets for high quality real estate.
Finally on October 4th we sold one hotel loan for par less transaction costs, which will enable us to redeploy that capital into higher yielding new loan investments.
I'd now like to provide a brief update on the two assets we've covered on prior calls our retail loan in southern California, and our land positions in Las Vegas.
Regarding the retail alone we continue to work with the sponsors to sell the underlying real estate and that process is actively underway I expect to have a further update next quarter.
Turning to Las Vegas, we've entered into a contract with Clark County, Nevada, which owns and operates the adjoining Mccarran International Airport to sell the 17 acres south parcel for $55 million.
We expect the sale to close before Thanksgiving.
Simultaneously, we've launched a process to sell the 10 acre north parcel timing on that process remains a bit more fluid, but we're encouraged by the robust economic recovery in Las Vegas.
Across the portfolio, we're seeing strong operating performance and we're pleased with these individual loan and already Oh resolutions, which free up equity that can generate future earnings.
In that vein, we continue to have substantial available liquidity was approximately $254 million of free cash on hand, combined with relatively low leverage, which we can use to fuel future originations and portfolio growth.
I will now turn it over to Bob to cover our third quarter results in more detail.
Thanks, Matt and good morning, everyone. We reported yesterday for the quarter ended September 30th GAAP net income of $29 $3 million net income attributable to common shareholders of 26 million or <unk> 32 per diluted share.
And distributable earnings of $27 million or 33 cents per diluted share, which represents a 1.4 or five times coverage to our current common dividend and one two times coverage to the some of our current common dividend and the dividend on our series C preferred stock.
Net interest margin decreased two 2% our weighted average loan coupon declined 462% from $4 67, and the weighted average floor of our loan book declined to 133% from $1 four 4%.
All primarily due to loan repayments of $464 million and lower coupon new originations of $433 6 million, along with deferred fundings of approximately $37 million.
Book value per common share increased quarter over quarter to $16.15 from $16 <unk>.
Due to earnings exceeding dividends paid on our common and preferred shares.
We increased in September our quoted quarterly dividend on common shares by 20% to 24 cents per share from 20 per share, which generates a yield to current book value of five 9% in the yield the current share price of approximately seven 3%.
Our seasonal reserve declined modestly by $300000 due to continued improvement in operating performance across our loan book.
The reclassification to held for sale at quarter end and the subsequent sale on October 4th at par of an $88 million of hotel loan offset by the general loan loss reserve related to $482 9 million of newly originated loan commitments with longer duration than our existing loans.
Our reserve rate, excluding one specifically reserved loan was 84 basis points compared to 85 basis points for the preceding quarter.
Book value per common share before giving effect to our seasonal reserve was $16.86 versus $16.75 in the second quarter.
Optimization of our capital structure and thoughtful loan portfolio construction contribute to efficient utilization of your shareholders' equity.
At quarter end, our stable debt capital base was 78% non mark to market and 75% term funded with CRE CLO.
During the quarter, we extended our credit facilities with Goldman Sachs for three years and bank of America for one year.
Weighted average spread for loan portfolio borrowings was 161%.
Low cost long term liabilities are a key ingredient in our ability to originate quality first mortgage loans at moderate loan to values.
During the quarter, we utilized $367 8 million of reinvestment capacity Nf L. Three NFL for created by loan repayments received during the third quarter to term fund six separate loans in the following property types multifamily, 53% hotel at 44% and office 3%.
Generally the cost of funds in our CLO is equal to or less than our secured credit facilities and the advanced rate is higher.
Reinvestments improve our ROE and mitigate our financing risk.
Due to this reinvestment activity and including the sale at par on October 4th of that $88 million of hotel loan only one of our eight remaining hotel loans at quarter end was financed outside our clo's.
All of our hotel loans remained financed on a non mark to market basis.
Two other capital recycling efforts will soon bear fruit the sale of the south parcel of our Las Vegas land Oreo and the short sale repayments of our only non accrual loan a $21 $2 million carrying value retail loan in southern California.
We expect to utilize existing capital loss carryforwards to absorb any gains that may result from the sale of our south parcel or the north parcel in the future.
Loan originations of $483 million reflect our continuing focus on multifamily and life Sciences properties in top 25 markets.
<unk> and high growth low tax states, primarily in the southeast southwest and Western United States. The ratio of funded commitment to total commitment was 90% <unk>.
Consistent with prior quarters, and reflecting our emphasis on shorting on financing shorter business plans with less execution and market risk.
This keeps a high proportion of shareholder capital at work.
Due to our strong origination space in 2021 fully 24% of our loan portfolio was comprised of post COVID-19 loans.
At quarter end, our loan portfolio weighted average has is LTV ratio was 66, 4% virtually unchanged from the 66, 7% for the prior quarter risk ratings remained unchanged at 3.1 quarter over quarter. We collected 99, 4% of scheduled interest we expect our only non accrual.
The loan will be repaid shortly.
<unk> balance at quarter end was only $3 5 million a reduction of $700000 quarter over quarter due to pik repayments of almost $1 million outpacing new pik accruals of a mere $200000 all of our modified loans are performing.
We have substantial investment capacity and defensive capital due to $254 $3 million of available cash available undrawn borrowing capacity of $47 4 million unencumbered loan investments of $154 2 million that are eligible to be pledged under our existing financing arrangements.
And a debt to equity ratio currently stands at two four to one as compared to our target in excess of three and a half to one.
So with that we'll open the floor to questions Melissa.
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Our first question comes from the line of Tim Hayes with BTG. Please proceed with your question.
Hey, everyone. This is you got eastern Saggy on for Tim Hayes, Thanks for taking the questions.
Just wanted to start I know the dividend was just rates in September and you talked about taking a conservative approach on that front, but you know.
As we just saw another quarter of you all had only covering the dividend with distributable earnings could you touch on what the trajectory of the dividend going forward could we see an increase for the fourth quarter, possibly early next year.
Good morning, Ethan and thanks for joining it's Matt.
As you know, we don't give dividend guidance. We do however regularly review the dividend with our board and that's something that will that will keep doing.
In the regular cadence of meeting with them. So I think beyond that it's hard to be much more specific obviously were pleased by the healthy coverage that we saw this quarter.
Alright, yeah, I understand that.
Alright. My next question just for me so.
Originations this quarter were highly focused on multifamily in life Sciences, two really competitive asset classes right. Now do you have a target allocation for these sectors and how should we think about the impact on your portfolio yield as the concentration mix favors more defensive assets where yields are tighter.
Well, we don't have a.
We don't have a target I mean, we do see a high proportion of multifamily loans paying off also as you would expect with the healthy real estate capital markets that were seeing and so if you. If you compare the portfolio mix to about a year ago, you actually don't see that much change in in multifamily although it does.
Obviously make up a higher percentage of repayments.
And and new originations and it is reflective.
Of where we think theres good relative risk reward along with other asset classes.
You heard me say in my remarks, we did our first post COVID-19 hospitality loans.
As you know we've done quite a bit of life sciences and earlier in the year. We did we did some traditional office as well. So we're not we're not focused exclusively but we do like the overall risk reward that we see in the mix of originations that we reported.
If you if you look at overall yields on the portfolio as a as I said, we're continuing to see yields that are in line with pre COVID-19 a lot of that has to do with the healthy and a very accretive financings that were able to get on the liability side.
Which Bob and his team have have so ably led and which we've talked about before.
But we are seeing.
Spreads that when combined with that financing.
We are generating returns in a row that our that remained generally in line with what we've seen historically.
Great. Thank you so much and then I'll just ask one last quick question.
You guys are increasing exposure in the west just which markets are most attractive and are you able to get more spread in those geographies.
You said in the Western United States.
Yes.
Yeah, San Diego has been a very good life sciences market for US we do like across other asset classes, we do like I think many of the demographic and secular trends that we see.
In the mountain West, Arizona, I think many of the migratory patterns that have been well characterized coming out of Covid. So we see the mountain west as a as an attractive investing area and.
And we like the demographics, there and then for obvious reasons.
There are a number of west coast markets, including <unk>, including San Francisco, and San Diego, where we found good life Sciences activity.
Great.
Thank you so much and I know Tim is looking forward to catching up with you all later.
We look forward to it thank you.
Thank you. Our next question comes from the line of Rick Shane with J P. Morgan. Please proceed with your question.
Hey, guys. Thanks for taking my question, one housekeeping thing and then one more.
Longer term conceptual question.
Terms of the.
Hotel loan that was sold.
Post quarter, you said it was sold at par with transaction costs.
I did you recover transaction costs or is there a modest loss associated with the transaction costs. Just so we can get that correct within our models.
Rick Thanks for your question this morning.
We sold the loan at par, we incurred modest legal and brokerage fees of slightly less than $500000 in connection with that transaction.
Okay perfect. Thanks, Thanks, Bob.
Second question is probably more important.
In some ways, we're looking at 'twenty, two as a transitional year for the industry.
And that's really a function of floors rolling off.
Creating some pressure on and I'll think about this on an ROI perspective to begin with creating an ROA pressure, but then ultimately.
A rebound in base rates hopefully are presumably as we move through the year. If you take the forward curve how.
How are you guys thinking about that and then given your relatively low leverage do you think there is an opportunity to offset that are away compression.
On the ROE side through a little bit of additional financial leverage.
Sure.
Let's we'll answer in reverse order with respect to the use of leverage I think we've been consistent and clear about.
Our strategy, which is we are under levered and through Covid that was intentional.
But we're currently levered about two four to one if you look at.
Some information we put out over the summer it's available for those of you listening in our most recent corporate presentation, which is on our website.
We run the company at three and a half to one leverage or thereabouts, we have a the ability to originate substantially more loans than we currently carry to the tune of $1 $2 1 billion four somewhere in that range.
Andy we do intend to use a little more leverage I think.
So the answer to your question is yes, you should expect to see more leverage and I think youll see that during 2022 as we continue to originate loans in conformance with the strategy that Matt described.
With respect to part of your question, which is basically NIM compression as the short end of the curve rises.
And the potential pressure that that could put on.
Our legacy loans that have very high floors are our weighted average floor across the whole book at this quarter and was 133% that's down about 30 basis points from the prior quarter and all of that is obviously due to repayments of quote unquote legacy loans and putting on new loans with floors between 10 and 25.
Basis points.
So we are cognizant some of it is just a function of.
Due repayments.
Occur faster than the rise in LIBOR.
LIBOR.
And there are a lot of commercial reasons, why borrowers would probably want to do that.
And then there are also other tools available to us and others to.
Immunized or at least in part immunize us from the impact of rising rates like hedging.
Okay.
Thank you very much.
Yep.
Thank you, ladies and gentlemen, as a reminder, if you'd like to join the question queue. Please press star one on your telephone keypad. Our next question comes from the line of Don <unk> with Wells Fargo. Please proceed with your question.
Hi.
Read a report recently that said commercial real estate transactions are up 20% from 2019 levels. I was just curious if you you know kind of as you look towards 'twenty two given the potential change in rate environment. If you expect that to remain robust and then also if you could comment on what youre seeing in terms of.
New York Office, how you're feeling about that market.
Yeah, I'll start Dan and other should other should chime in.
We're certainly seeing I think feeling the uptick in transaction volume, which is not surprising I think given the given the availability of capital generally.
Rates that have continued to be very low even if there are changes on the horizon. We can debate how near term that is.
And obviously the continued impact of substantial.
Government stimulus to offset the COVID-19 pandemic and we've seen that in.
I highlighted that or at least alluded to that in my earlier comments for instance, with the with the repayment of the Houston mixed use loan that I talked about earlier.
We're certainly seeing that.
I think as it as it impacts both our repayments, which returned to what we think of as a more normalized run rate level this quarter.
Paired to the first two quarters of the year.
And we're also seeing that in the strength of our pipeline and transactions that are available for us to evaluate to finance. So we certainly affirm that.
We evaluate the current conditions.
As we look ahead I think it's a little hard to know exactly obviously, what's going to happen with rates, there, presumably not going to get lower.
There are obviously inflation fears.
And you know real estate in many instances can be very effective inflation hedge so on the one hand that that could be a bit of a further a further tailwind.
Obviously, there could be.
There could be industry wide.
Impacts with with higher rates.
That affect our pricing and other factors although.
In the scheme of things I was looking at a rate chart. The other day. If you look at if you look at rates from kind of $19 80 to the present were by any measure still.
Still going to have historically low rates.
Even if there were to be to be modest increases next year I think we're also seeing.
Totally normal spreads between cap rates and interest rates.
And so that could also be another factor that moves next year, but I think in general.
We remain bullish on the on the real estate and real estate capital markets outlook as we look ahead to 'twenty two.
Yes, and I'll just I'll jump in there also this since Peter Smith.
Don.
I think I think what you are saying is like yes, we are seeing a lot more transaction volume and 20% feels about right it might even be a little bit higher.
I think part of that stem from there's just there's been a lot of borrowing because he hasnt to continue to push cap rates lower.
Which means for us.
Anders and stewards of capital what we need to do we spend a lot more time covering a lot more deals into the garbage can a lot faster just primarily because a lot of this transactional volume is because people are not paying.
Low three caps are tighter in certain markets certain growth market. So we really need to be intelligent vigilant.
And throat and throwing them quickly into the garbage and move on to something that makes it a little more sense from a basis. When you look at the dollars per door dollars per square foot, we really like that.
And then that picture a little bit on the coupons, yes, we're still seeing.
We're seeing a lot of actionable deals in the coupons in the low threes to upper 3% range and as you can see where we're tracking with our suite product appears to be right Greg in the middle there.
So we feel pretty good about that and with respect to new.
New York City office, we see a lot of.
New York City office deals and we haven't really acted or haven't gotten louisiana to cause any of them.
But on the portfolio that we have in our book.
I think collectively as a group we are surprised that.
Leasing how well.
Leasing is going and some of the buildings.
And how that's going and didn't really expect that but there is still there are a lot of leases getting signed in New York City right now.
People think.
Thank you.
Thank you ladies and gentlemen, this concludes our question and answer session I'll turn the floor back to Mr. Coleman for any final comments.
Thank you Melissa as you've heard this morning, we've again delivered strong quarterly results.
Well positioned for further growth in assets and earnings as we enter Q4, we look forward to speaking with you again early in the new year. Thank you.
Thank you. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.