Q1 2022 TPG RE Finance Trust Inc Earnings Call
[music].
Greetings and welcome to TPG R E Finance Trust first quarter 2022 earnings conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow.
The formal presentation.
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As a reminder, this conference is being recorded.
I would now like to turn the conference over to your host Deborah Ginsberg, Vice President Secretary and General Counsel.
Thank you and what do you.
Good morning, and welcome to TPG Real estate Finance Trust's conference call for the first quarter of 2022.
Joined today by Doug <unk>, Chief Executive Officer, not Coleman, President and Bob Foley, Chief Financial Officer, and Peter Smith, Keith and death.
And 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.
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 Form 10-Q and 10-K.
We do not undertake any duty to update these statements and we will also refer to certain non-GAAP measures on this call and for a reconciliation you should refer to the press release our 10-Q.
I'll turn the call over to Matt Quinlan President of TPG Real estate Finance Trust.
Thank you Debra and thanks to everyone for joining this morning's call.
Before I turn to our results for the first quarter I want to introduce Doug from card formally joined US last week as the CEO of <unk> and as the TPG partner.
As most of you are aware prior to joining PPG. Doug spent his entire 18 year career at Goldman Sachs, where he most recently served as the managing director and head of U S commercial real estate debt and the global markets Division.
In that role he had oversight of the firm's commercial real estate debt origination activities, including securitized lending balance sheet lending and commercial real estate warehouse financing as well as commercial real estate securities issuance.
As I mentioned on our last earnings call, we've gotten to know them quite well over the last several months and I couldn't be more pleased to welcome him to TR T X and the TPG.
Doug. This appointment is an important step for <unk> in the firm and I look forward to partnering with him for many years to come with that let me pass it over to Doug for a few remarks.
Yeah.
Thank you Matt.
I'm incredibly excited to join the leadership team here at CRT accident TPG.
I'll start with human capital is amongst the most important asset with any organization and despite starting just a few days ago I've been incredibly impressed with the quality of our people both within <unk> and TPG broadly.
As financial market transition from the area of QE to Qt investing opportunity set for real estate credit markets will be compelling and our company is well positioned to take advantage of this investing landscape.
Lastly, I look forward to meeting many of you over the coming weeks I've settled into my new role and with that I'll turn it back to Matt to discuss the first quarter and the broader market environment.
Thanks, Doug turning now to the first quarter, let me begin with a few comments on the macro environment and its impact on <unk> over the quarter.
Needless to say 2022 has gotten off to a complicated start from the Russian invasion of Ukraine to inflation of 40 year highs to rising interest rates and the continuance of a global pandemic the environment is choppy.
We're seeing the effects of this confluence of factors in public equity markets with the NASDAQ down approximately 20% year to date and the S&P 500 also down double digits.
On the other hand, many real estate asset classes, particularly as reflected in private market valuations remain strong.
The family has proven thus far to be a very effective inflation hedge rental rates and industrial continue to grow and demand for lab space continues to be robust.
And while it's true that new office is winning in certain markets. It's also the case that the country's office recovery has been uneven at best.
The decrease four quarter NOI growth in office was the only negative reading across CRE property types.
As a final complicating overlay spreads widened significantly in the FASB and CLO markets, but have been slower to rise in the transitional lending space, Although we're starting to see some movement on that front.
So how about all of these factors affect TRT acts during the first quarter.
First as reflected in our Q1 originations repurchased this quarter as we do all others from the perspective of being good stewards of Investor capital.
The geopolitical and market uncertainties that I, just highlighted we invested selectively consistent with our strategic approach to geographies asset classes and sponsors that we think are best positioned to succeed as.
As a percentage of total commitment slightly more than half of our originations for the quarter were in multifamily and 48, 5% were in industrial.
Total new commitments for the quarter were $233 million, reflecting a cautious approach in light of the environment.
Our repayments in the first quarter were also slower than forecasted which resulted in modest net asset Chris.
As we've started to see the opportunity to earn more spread we picked up the pace a bit with five new loans closed or in the process of closing since quarter end, representing total commitments of just over $300 million.
This prudent approach has resulted in available liquidity of $384 $2 million, which positions <unk> well to take advantage of evolving market conditions and opportunities.
With respect to the portfolio interest collections for the quarter were again in excess of 99%, reflecting strong performance and resilience with our southern California retail property remaining our only non payer.
In addition, we closed on the sale of the North parcel of our Las Vegas land position for a purchase price of $75 million versus an allocated carrying value of $60 6 million.
Together with the previous sale of the South parcel those sales generated a total gain of $16 $3 million versus our original loan basis of $112 million.
This resolution demonstrates the strength of our loan structures and asset management capabilities, while we generally expect our assets to perform is underwritten.
We often structure loans with interim milestones to keep business plans on track in most cases, we can work with borrowers to adjust when things don't go as planned but in limited circumstances, such as this we're well equipped to act when necessary to preserve value.
Through an efficient resolution with our underlying borrower and proactive asset management, we're able to identify the optimal buyers for each individual parcel and transact quickly.
As I've mentioned on prior calls we were encouraged by the strength of the Vegas market and that thesis proved out.
Turning to the broader portfolio, we downgraded the risk ratings of eight office loans this quarter reflect reflecting the uneven office recovery discussed earlier together with widening cap rates and delayed business plans across the office sector.
Despite the downgrades, which we view as prudent under the circumstances all of our office loans continued to perform.
As I mentioned active asset management is a key pillar of our organization and these downgrades reflect our increased attention to these loans as we work through slowing business plans.
While none of us can be clearer about the pace of interest rate increases where inflation is headed and the outcome of certain geopolitical events I have full confidence that T. O T is well positioned for what lies ahead.
Under Doug's leadership with the intellectual capital that comes from being part of TPG and with the substantial liquidity that we have available to deploy into the most interesting and strategic transitional lending opportunities TRT.
<unk> is well positioned to continue growing earnings and delivering attractive shareholder returns.
With that I'll hand, it over to Bob to cover our Q1 results in greater detail.
Thank you, Matt and good morning, everyone. It's my turn to welcome Doug to the team I've known Doug for many years and all of US here are thrilled at the firm and the board of directors selected him Doug chose to join the TRT X team and they're working together.
Yesterday, we reported earnings for the quarter ended March 31.
GAAP net income of $23 8 million versus $44 9 million in the prior quarter.
Net income attributable to common stockholders of $20 4 million or <unk> 25 per diluted share a decrease of 51% versus the prior quarter.
Distributable earnings of $26 6 million or <unk> 33 per diluted share versus $18 5 million or 23 per diluted share in the fourth quarter.
For all three of those earnings measures the quarter over quarter difference was due primarily to the absence in the first quarter of the $15 8 million gain from our fourth quarter, our REO sale and a write off of a portion of a defaulted retail loan.
And an increase in the first quarter of $4 9 million in the seasonal reserve.
Distributable earnings from our basic transitional lending business were virtually unchanged quarter over quarter $26 6 million in the first quarter of this year versus $26 7 million in the prior quarter. Once again distributable earnings comfortably covered our quarterly dividend dividend <unk> 24 cents per common share.
Net interest margin increased slightly despite a one time expense of approximately $1 1 million of deferred financing costs related to loans previously financed on several of our secured credit facilities that were contributed in February 2022, and two <unk> 2022 F. L. Five our latest CRE CLO.
<unk> of net interest margin included a quarter over quarter increase in our weighted average loan coupon to $4 five 9% from 449%.
A decline in the weighted average rate floor in our loan portfolio to 105 from 110 basis points due to loan repayments and the earn in of loans originated in the preceding quarter net.
Net interest margin did benefit from the steep rise in rates during the final third of the first quarter.
Book value per common share increased quarter over quarter by <unk> <unk> per share to $16 41 from $16 37 <unk>.
Due primarily to net income exceeding dividends paid.
Current quarterly dividend of <unk> 24 per common share produces annualized yields of five 9% to book value and eight 8% at yesterday's closing stock price for.
For the quarter, our <unk> reserves increased by $4 $9 million due to our adoption.
Gives me of a more conservative macroeconomic forecast for modeling our expected losses.
Heightened concerns about the office sector nationally spurred by a slower than expected return to office and some business planned slowdowns experienced by some of our office loans more on this topic shortly our seasonal reserve rate measured as a percentage of total commitments was 91 basis points compared to 85 basis points for the preceding.
Quarter.
The right side of our balance sheet is integral to our growth profitability and risk mitigation. Our work in the first quarter start to extend duration maintain a high proportion of non mark to market liabilities and preserve low cost financing at quarter end, our liabilities was 72, 5% non mark to market within our usual range of 7%.
80%.
Consequently, we continue to streamline our portfolio of secured credit facilities by downsizing too, but retaining according accordion options on both terminating one with zero usage and extending the maturity of several others over half our liabilities have maturity dates beyond the typical maturity of our loans.
During the quarter, we closed F. L. Five a $1 1 billion dollar manage CRE CLO with a two year reinvestment period, an advance rate of 84, 4% and a weighted average interest rate of issuance of compounded sofa, plus 202 basis points.
We redeemed debt fell to cause reinvestment period ended in the fourth quarter.
Of 2019 and be alone repayments at amortized to an advanced rate of 74, 5% versus nearly 80% in issuance. This redemption was funded with proceeds from F. L five plus existing secured credit facilities and.
And we closed a new $250 million recourse revolving secured credit facility.
On new and existing loans for up to 180 days at a running cost of terms, so for plus 200 basis points.
Finally through yesterday, we had extended the maturity of three secured credit agreements.
On April 4th we closed on the sale of the second of two land parcels on the Las Vegas strip that we acquired via deed in lieu of foreclosure in December of 2020.
We sold the 10 acre parcel for $75 million or $7 $5 million per acre.
Realized a gain for book and tax purposes of $13 3 million and well utilized $13 $3 million of our $187 6 million of capital loss carryforwards to retain all of that gain thus boosting our book value by approximately <unk> 17 per share.
The economic recap for the entire 27 acres that secured our initial loan.
Hold period of 15 months in aggregate sales price of $130 million.
A net gain of $29 1 million measured against our written down carrying value of $99 2 million and a net gain of $16 3 million measured against our original loan amount of $112 million.
Regarding portfolio construction and credit our.
Portfolio reflects our primary investment themes, which are affordable multifamily life Sciences and industrial <unk>.
Every year, our multifamily exposure grew by 79, 5% to 37% of our portfolio life Sciences grew by over 200% to eight 8% of our portfolio and office declined by 24, 3% to 39, 6% of our portfolio.
Quarter end, our loan portfolio weighted average as is LTV ratio was 67, 2% compared to 67, 1% for the prior quarter.
As discussed on prior calls our LTV has remained consistent since 2018.
Ask ratings increased slightly quarter over quarter to three one from three point O D.
You almost entirely to our decision to downgrade the risk ratings of seven office loans to four from three and one office loan from two to three.
As a precautionary step is consistent with our prior practice in the second quarter of 2019, we immediately downgraded a loan secured by a rent stabilized apartment complex in New York City on the state tightened its rent stabilization statute and in the first quarter of 2020, you'll recall, we downgraded all of our loans secured by operating hotels.
Lodging sector hunkered down to weather the Covid storm.
All of our office loans are performing.
But we are mindful of the headwinds facing the offering office sector nationally caused by slowdowns and business plan execution, the slower than expected to return to office by American workers. The capital investment that may be needed to address COVID-19 carbon zero and other ESG related regulations and the impact of rising rates on the ability of office owners to sell.
Or refinance their properties, our asset management team actively monitors general conditions in the office markets in each of our office loans to encourage their timely repayment.
Regarding interest rates higher rates are good for floating rate lenders like TRT ex short term rates rose materially during the first quarter and continued their surged through April .
Yesterday term sofa was approximately 81 basis points and one month LIBOR was 80 basis points, we're moving steadily towards positive interest rate sensitivity demonstrated by the decline of our weighted average rate floor during the quarter to 105 basis points a.
At quarter end the share of our loan portfolio with rate floors of less than 100 basis points was 42, 5% and the share with rate floors of at least 200 basis points was 18, 9%.
The race among rising rates your origination of new loans with new rate floors.
And the repayment of existing loans with high rate floors will determine the timing and magnitude of improving net interest margin.
As rates rise so does the economic incentive for borrowers to repay these high coupon loans.
Just on a current forecast we expect our net interest margin will expand.
Toward the end of this year or very early next year, we will have better visibility by the third quarter of this year when a substantial portion of this year's loan repayments are expected to occur.
Our smooth transition to sofa from LIBOR continues.
And 61% of our liabilities and 4% of our assets were sofa based.
Our liabilities will continue to transition during 2022 at a pace largely of our own choosing the share of our assets pegged. The sofa will grow as we originate more silver based loans and if we elect to change the benchmark rate of our existing loans to sofa from LIBOR, the timing of which we also control.
All of our 2022 loan originations or so per based and we don't expect the transition will have a material impact on our operating results.
Finally, with regard to liquidity leverage and growth, we have substantial investment cast capacity for growth and ample liquidity for offense and defense if required.
Quarter end, we held available cash of 334, $335 4 million available undrawn borrowing capacity of $32 $3 million in Unpledged loan investments in real estate at $74 3 million our debt to equity ratio was two and a half to one.
Our target remains $3 75 to one and with that we'll open the floor to questions operator.
Okay.
Thank you.
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Ladies and gentlemen.
We will wait for a minute before we begin with our question and answer session.
Thank you. The first question comes from the line of Rick Shane with JP Morgan. Please go ahead.
Hey, guys good morning, and thanks for taking the questions.
Given the environment can you just talk a little bit about the structural protections that you build into your loans.
Related to both higher interest rates, but also too.
Execution risks related to supply chain delays.
Prolonged construction and.
Material inflation.
Sure Peter do you want to take that.
Yeah, I'll jump in on that one.
No.
Yeah. When we were about we look at obviously, we're aware that there's been a lot of issues with respect to people getting.
You know getting supplies and actually land labor and whatnot.
For the most part if you look at sort of our moderate and less multifamily.
Work force housing deals that we've got on loans that we've closed.
We're seeing a little bit of a slowdown and you really on deliveries.
Mostly appliances and whatnot.
And that really sort of moderates the pace of renovations, but what's interesting is a lot of these moderations and.
And the slowdown in these renovating these units where you renovate the units and then popped around a couple of hundred dollars per month.
Seeing the rent gains youre getting a lot of rent gains not doing those renovations. So we're we're really haven't been terribly impacted by.
By those really supply chain issues for the most part maybe slow down a little bit on the margin, but nothing sort of material from our end on that.
The only thing I would add Rick is that.
We haven't we haven't done straight construction loans post and during Covid.
And I think generally we've been lending on lighter transitional renovation plans as opposed to heavier.
Yeah, and also borrower's bars have been very very quick to sort of reposition for instance, we're looking at signing up.
It's relatively straightforward against 70, I think 75% LTC law on a light renovation.
The borrower is already redirecting the onslaught of their assets in the market. He's directing a truckload of appliances from some of the assets he owns and in New Jersey.
He was able to secure them and moving them down and putting them in a warehouse down in Texas, where he will end up using those overtime and then with respect to you know rate increases I think it was the other part of your question.
We actually do require rate caps, they've gotten a lot more expensive over the last.
Two months.
But generally almost everyone I believe every one of our lunch is a rate cap or a certain amount certain borrowers have chosen lower rate caps.
And actually have profited quite well on it but generally we're looking at having bought requiring borrowers right catching that two five to three per cent strike price.
And having them buy that for one to three year terms.
And I was that was the second part of my question the rate caps or the rate caps on your original term or are they on a fully extended basis.
It's generally a combination.
Most part it's we're getting for two years and then I think the average life of our law and its 27 months or something like that it could be off that number but generally they would be they are buying for the most part in 24 months, so they'll buy a two year rate cap.
And that cost is really tripled over the last.
30 days or so 45 days.
I think I agree. Thank you last question yeah.
Sure sure sorry, I was going to say welcome Doug Nice to meet you.
Thank you radio as well Rick.
Okay.
Thank you.
The next question comes from the line of Eric Hagen with <unk>.
<unk>. Please go ahead.
Hey, Thanks, good morning, and nice to meet you Doug.
Maybe a couple for me in the multifamily portfolio can you share expectations for rental rate increases that sponsors expect to pass along the renters and how you expect cap rates to maybe evolve.
As the fed raises rates and then in the office portfolio, where are you guys noted some business plans might be changing or adjusting can.
Can you talk about how that changes the pace of funding.
Commitments going forward. Thanks.
Sure.
I'll start with some color on the on the multifamily question I mean, we've seen.
Real rental rate run.
In many markets already and that's been great for many of the business plans that we've that we've underwritten.
And for our borrowers success for our our Covid and post Covid vintage loans.
At this point when we're evaluating a multifamily business plan, particularly one that involves light win rate right light renovations were mark to market.
Rental increases we're looking at a variety of factors as you know we.
We undertake a rigorous market analysis, where we're looking at demographics. We're looking at educational trends. We're looking at affordability, we're looking at rent versus own analysis, and it's very hard to generalize just because <unk> seen such a wide variety of Av.
Differences across the country, but in general as you know.
The rental rate increases have been have been strong and broad based they're obviously markets in Florida, where we have seen.
40% increases in rents over a 12 month period.
That's not anything close to what we are underwriting are what our borrowers are required to underwrite to make these business plans work.
But in general we're continuing to see a strong strong rental rate increases.
Affordability is of course, a significant factor.
Why don't why don't I turn it over to Bob to talk about.
The <unk>.
Capital deployment as it relates to the slowing business plans in the office portfolio.
Sure Eric Good question with respect to unfunded commitments.
Which at quarter end stood around $440 million or so.
Interestingly, an increasing share of our unfunded commitments relate to our lending initiative and life sciences sector in which we have been active since 2015 2016.
Those transactions typically involve.
Fairly substantial conversions of existing properties, we've got it theme there that we'd be happy to discuss separately, but we're generally as Matt said earlier not doing ground up construction. So the factors that drive the pace at which dollars are infused into our life Sciences transaction.
Are decidedly well they are the same but.
The dynamics of the market are very different in life sciences than they are in office generally speaking in our office portfolio on the unfunded commitment.
Commitment dollars relate to what we call good news money, which are.
Ti expenditures and leasing commissions those are typically shared between us and our borrow in proportion to our advance rate against the loan as a whole which is typically in the 65% to 70% range. So.
So those dollars are typically funded.
Only when a qualifying lease that is a lease that meets our minimum leasing guidelines and has been consented to buy us aside.
The pace of those fundings during Covid has slowed which is to be expected and.
As different markets begin to rebound at different paces, we expect we may see.
Some additional increases in the future.
But right now it has been pretty slow and we commented earlier on.
Our liquidity position, which is quite strong.
And we typically when we do make a deferred funding.
We typically finance a portion of that with one of our lenders so that we'd be funding the equity component of our portion of the total draw our lender would fund the other portion and then our borrowed funds.
25% to 30%.
Hope that answers your question.
That's very helpful color. Thank you guys very much one follow up on the multifamily portfolio is it fair to think that most of the loans can get a takeout with an agency loan for permanent financing.
How does it qualify.
Or do you want to take that.
Yeah, Yeah, we and all of our deals we run a refinance analysis.
And we actually assume a couple of different ones really current market conditions with respect to ratings with the with respect to the agencies.
You know the Fannie Freddie and whatnot. So we look at it a couple of way and then we also usually look at.
Really another way of kind of the.
Condor. It so usually you have two or three refinance analysis I would I would generally say, yes, but not every every one of them. It depends on what we're using going forward with respect to D SCR and that projected interest rates.
But for the most part.
Yes.
Thank you guys very much I appreciate it.
Yeah.
Thank you.
Ladies and gentlemen, we have reached the end of question and answer session.
And I would like to turn the call back to Matt to Goldman President.
For closing remarks, thank you.
Thank you as you've heard this morning, we're proud of the patience and Prudence that characterize Q1 for <unk>, we look forward to navigating the ensuing quarters from a position of strength with substantial dry powder to take advantage of evolving markets. We look forward to speaking with you again on next quarter's call. Thank you.
Thank you.
Today's conference you may disconnect your lines at this time, thank you for your participation.
Okay.