Q2 2022 TPG RE Finance Trust Inc Earnings Call
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Greetings.
And welcome to TPG R E Finance Trust second 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.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad.
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.
Please go ahead ma'am.
Good morning, and welcome to TPG Real estate Finance Trust conference call for the second quarter of 2022.
I'm joined today by Delta card, Chief Executive Officer, Matt Colen, President and Bob Foley Chief Financial Officer.
Doug and Bob 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 and earnings supplement, though with the 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.
A discussion of some of the risks that could affect results. Please see the risk factors section of our 10-Q.
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.
With that it's my pleasure to turn the call over to <unk>, Chief Executive Officer of TPG Real estate Finance Trust. Thank.
Thank you Debra I appreciate it good morning, everyone and thank you for joining the call.
As I complete my first quarter as CEO I first just wanted to thank the <unk> team and TPG more broadly for welcoming me into the firm it's been a pleasure to collaborate with such a talented group of colleagues and access the depth and breadth of Tpg's global investing platform.
Furthermore, the connectivity among Tpg's integrated real estate group comprised of.
18 billion AVM across debt and equity strategies provides <unk> with a broad perspective across the entire real estate landscape.
First I'd like to discuss the market over the past quarter.
In an attempt to tame inflation central bank policies have begun to slow economic growth and uncertainty regarding the forward path of the economy has intensified.
Thats, a tightening liquidity have spread across nearly all asset classes and frankly real estate has been no exception.
Within the real estate lending market, we have seen a reduction in leverage a widening of credit spreads.
And have begun to observe business plans readjusting with more modest assumptions simply put we find ourselves in a more lender friendly investing environment and TRT actions begin to take advantage of this part of the cycle.
Earlier in the year, we intentionally slowed originations and bolstered our liquidity and as we head into the second half of the year. This decision has allowed us to do two things one deploy capital at more favorable terms and structure and to provide ample cushion in the event of further market deterioration and or negative credit outcomes in our loan portfolio.
While this quarter the risk rating shift was more muted than the prior quarter. We did materially increased our seasonal reserve to reflect deteriorating broader market trends and loan specific credit concerns, particularly within the office sector. This move is consistent with our transparent approach to report it.
For context, we have 12 loans totaling $1 $3 billion with extensions or maturity dates between now and year end as such I want to highlight that the expected range of potential outcomes may significantly vary as near term maturities approach, particularly during the second half of 2022.
As the credit markets evolve and potential credit issues and potential credit issue loans move toward resolution, we will continue to be steadfast in our risk management approach and laser focused on maximizing value for our shareholders.
Consistent with the conservatism of the prior quarter, we continue to be we continue to be.
Incredibly focused on our liquidity position and ended the quarter with more than $770 million of total liquidity that's broken out.
$339 million of available cash and $365 million of reinvestment capacity within our existing CRE CLO.
In addition, we have closed on new node on node and term funding facilities that provide term non mark to market financing for our lending and this allows us to diversify away from the CRE CLO market and complement our existing repurchase facilities.
Regarding our existing loan portfolio during the quarter, we received loan repayments of a total of $757 million, which is comprised primarily of 35% office, 23% multifamily 22% hotel.
The remaining amounts are split between life science and mixed use.
If you look at these metrics by individual quarter. It can skew the picture, especially where any repayment may slip by a week or two ticket into a subsequent quarter.
And as a function of the market uncertainty predicting repayment timing will continue to be a challenge for all lenders, including <unk>. However, we are pleased to have the ability to redeploy that capital into today's increasingly attractive lending environment.
To provide one highlight on the range of outcomes with respect to loan resolutions in todays market one of the loans repaid in Q2 was a $165 million four rated loan on a convention Center hotel.
I highlight this just to reinforce that risk range youre not necessarily a predictor of losses in.
In addition, since quarter end, we received $226 million of full loan repayments, both of which were office loans.
On the new origination side, we committed to $380 million of new loans at an average LTV of 65% and a weighted average spread of terms so for plus for 'twenty one.
Consistent with the investment approach sorry, consistent with the investment focus we've previously articulated 87% of the second quarter's loan originations where multifamily loans.
Furthermore, since the quarter ended.
During the month of July we increased our origination velocity meaningfully with another $386 million of loans closed.
And another $171 million of loans under executed term sheet.
And within that population post quarter end, 88% of those loans are also multifamily with comparable credit metrics to the prior quarter's originations.
In terms of our general focus.
I would say that we remain consistent in favoring multifamily and industrial credits in select markets with institutional borrowers we have high conviction that these sectors. Currently present, the most attractive risk adjusted returns for our shareholders. While also affording the most flexibility in terms of financing options based on our portfolio as of today multifamily is now.
Our largest property type exposure at 41% of our loan commitments.
Lastly.
With regard to interest rates I would like to highlight that <unk> portfolio is now positively exposed to increases in short term interest rates for context as of June 38, 2% increase in short term benchmark rates is expected to result in additional <unk> <unk> per share on a quarterly basis going forward.
While I've been in my new role for only three months I am very excited about what we've been able to accomplish in a short period of time.
Our mission is to prudently deploy our capital for the benefit of our shareholders boost earnings and position ourselves to increase the quarterly dividend when appropriate I believe we are well positioned to do so in summary lending conditions have materially improved in Trs <unk> favor, we've a strong pipeline of origination transactions.
We have over $707 million $770 million of liquidity and a debt to equity ratio that is well below our target and we have a stable financing base with ample capacity to support sustained growth with that I will turn it over to Bob to provide more detail on our results. Thank.
Thank you, Doug and good morning, everyone. Thanks for joining standard quarter over quarter comparisons of income and balance sheet line items and changes in portfolio construction of our loan portfolio and our liability structure are contained in our Form 10-Q, and our earnings supplemental please refer to them to augment what we discussed on this morning's call.
Or for detail on what we don't discuss this morning.
Three quick data points first book value per common share declined quarter over quarter by 38 per share to $16 three from $16 41.
Primarily because the increase in our seasonal reserve outpace some of our operating earnings in the $13 $3 million gain on sale that we realized on that land parcel on the Las Vegas strip.
Second diluted distributable earnings per share covered our dividend per share by a ratio of one one to one our year to date payout ratio is 80%.
Third our current quarterly dividend of <unk> 24 per common share produces an annualized yield of 6% to book value and nine 2% Yesterdays closing stock price.
Cover four topics. This morning components of earnings in particular, a bridge from GAAP net loss to common shareholders on the one hand to distributable earnings on the other.
The $42 $3 million net increase in our <unk> reserve.
Our capital strategy and our liquidity position.
We reported yesterday for the quarter ended June 30, our GAAP net loss to common shareholders of $8 $8 million and distributable earnings of positive $21 $5 million, Here's a quick bridge and some commentary.
Net interest margin was virtually unchanged down only one $5 million or 1% repayments totaled $757 million, although 28, 5% of those repayments occurred during the final week of June resulting in an immaterial impact on net interest margin for the quarter.
By quarter end, LIBOR and terms, so far exceeded our weighted average rate floor at the end of the quarter, which was 90 basis points currently both LIBOR and terms so for exceed the highest of our rate floors as of the mid August interest rate determination date for our loans TRT X will be 100% positively levered to rising short term rates.
<unk>.
Second we recorded a gain on sale of $13 3 million or <unk> 17 per share from the sale in April over the last 10 acres of land we owned on the strip.
As with our prior gain of $15 8 million recorded in the fourth quarter of 2021, we used capital loss carryforwards to shelter. This income and retained 100% of it is equity accordingly. This amount is excluded from distributable earnings.
Third we recorded a net increase in our <unk> reserve of $42 3 million to $93 $4 million or 180 basis points as compared to 91 basis points for the preceding quarter.
This reserve is unrealized noncash and does not reduce distributable earnings.
The increase was comprised of $34 6 million relating to the general seasonal reserve and $7 7 million related to an individually assessed office loan in Houston with a risk rating of five.
The reserve increase was driven by our macro view, which includes a weakening macroeconomic picture a substantial increase in short term interest rates since the beginning of the year high inflation signs of a possible recession.
A recent slowdown in investment sales transactions and indications that cap rates are on the rise.
And risk rating downgrades that reflect our growing concerned about operating performance and broader capital availability in the office sector.
Our deal professionals report to us daily about wider loan spreads reduced loan advanced rates and an imbalance between high demand for capital and reduced investor or lender willingness to provide it.
This is a double edged sword positive for those seeking to originate new office loans.
Potentially challenging for existing owners and lenders.
On the positive side of the Ledger, we received $267 $2 million of office loan repayments in the second quarter and we received a further $226 2 million since June 30.
One note on repayment speeds, our year to date repayments, if annualized are only slightly faster than our typical historical annual rate.
And if our current expectations hold full year repayments will be in line with our historical speeds.
Related to the earnings bridge, but worthy of note, we paid to our manager an incentive fee of $5 $2 million this quarter, because our trailing 12 months core earnings exceeded the ROE hurdle of 7%.
The $29 1 million of gains generated from Oreo sales were a major contributor to this increase.
And optimal capital strategy remains integral to our growth profitability and risk mitigation, we remain laser focused on our low cost of debt capital longer maturities limited exposure to mark to market risk.
Excuse me and financing techniques that support new loan investment activity and our existing loans at quarter end, our liabilities were 73, 7% non mark to market within our targeted range.
CRE CLO markets remain open and functioning in fact for the period ending July 31, New issue volume for 2022 was <unk> 25 billion slightly more than the $24 5 billion issued during the same period of 2021.
Nonetheless, we continue to diversify our non mark to market term funding sources.
Since March 31, we've established a new $200 million non mark to market node on node facility with a long standing financing relationship and $108 7 million of non mark to market financing with another institutional lender.
During the quarter just ended we extended the maturities of two credit facilities yesterday, we extended a third and we are in the final stages of extending a fourth.
The reinvestment period remains open for two of our three <unk>.
Providing highly accretive non mark to market financing for existing and new loan investments.
A weighted average advance rate and credit spread for those two CLO, which totaled $1 $9 billion or 83, 6% and 179 basis points respectively.
Finally regarding liquidity.
Quarter end, our total liquidity was $771 $7 million. Doug described earlier that we expect the remainder of 2022 to be a target rich market for experienced and investors via direct origination and loan purchases since it seems advanced rates decline and credit spreads increase week by week arm.
Third origination pace during the first seven months of 2022, and our stable capital base leave us favorably positioned to play offense and defense.
With that we'll open the floor to questions operator.
Okay.
Thank you very much Scott.
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Before passing the Sarkis.
One moment please poll for questions.
We have our first question from the line of Rick Shane with J P. Morgan. Please go ahead.
Thanks, guys for taking my question.
And we've asked this on several of your peers calls as well.
It definitely feels like there is an ongoing.
I will almost use the word rush towards.
Sunbelt multifamily.
I'm curious at some point how are you guys identify when that space, just becomes too crowded and no longer makes sense because from our perspective.
We see everybody going there and we've seen this story before and just wondering.
How this plays out.
Sure I mean, I'll say first.
The loans that we have recently funded generally speaking are not overly concentrated within the sunbelt first of all.
I would say secondly, we're starting to kind of two trends seep into our lending which is number one we're seeing just frankly, a broader array of multifamily across the country driven really more so by the fact that the conduit market is is slower as a function of where were fixed rate costs are and then secondly, the <unk>.
<unk> market is also a slower so I would say in the recent weeks and months, we've seen a sort of frankly, a broader lens into into national multifamily.
Got it okay.
This.
This ties into something we heard yesterday.
More.
Traditional residential.
Credit, but certain markets really starting to show.
Substantial inflation.
<unk> are seems to be uncorrelated.
To economic activity or some of the demographic shifts that we've seen are there markets that you are now.
Equally concerned about because you've seen so much runoff.
In terms of multifamily and wood.
Avoid them because of that.
Good morning, Rick It's Bob.
Thanks for your question.
Sure.
There are no markets that we would avoid solely because of it because of that but I think what's most instructive as to comment briefly on how do we think about multifamily more broadly in the context of the housing ecosystem and how we think about affordability of housing affordability is clearly a big issue in this country.
And one of the reasons that as a firm on our equity side and the debt side in <unk>. We're very active in multifamily is that that's the thesis we believe in.
Housing is expensive everywhere.
And rising rates are in our view driving more people to be renters than even before.
But it has always been the case for us in underwriting multifamily in particular that we look really carefully at affordability, we look at.
<unk> share of the wallet that a renter is spending.
Typically range between the low the high Twenty's and in some really tough markets like California. Its typically it can range as high as 45% or 50% of monthly household income. So we've always looked at that so when we're looking at a transaction now in a market that may have some of the concerning attributes that you described.
We're going to catch that upfront that's going to be one of the first things that our deal professionals look at.
When they screen a transaction and that's clearly going to influence our view about how much runway remains for rent growth. We're always looking at household formation and job growth in those other things that are fundamental drivers of demand for housing whether it's for sale or for rent.
So we understand and appreciate your point, we observe it in some markets, but we Wouldnt cross necessarily cross any market off the list until we've had a chance to do our normal transaction screening, which includes the points I just mentioned.
Got it that makes sense and Doug I apologize if I cut you off.
I have to remember to listen.
So I'm not sure if I did because I think I think I started talking over you.
I do appreciate guys the transparency on the reserve policy, it's very helpful and certainly conservative in light of.
What we're seeing out there.
Thank you.
So we take the next question.
Yes. Please.
Thank you we have next question from the line of Steve Delaney with JMP Securities. Please go ahead.
Good morning, everyone and I appreciate you taking my questions.
You reported some third quarter activity and some credit resolutions and I just wanted to get some clarity to.
To make sure.
Two things I think one of these was a nonaccrual loan.
Our retail property and one was a five rated loan and Bob Am I correct that both of these resolutions are are going to close here in the third quarter.
Okay.
Good morning, Steve Thanks for your question.
Let me address your question in reverse order with regard to the non accrual loan you are correct. We reported that earlier in July our borrower sold the.
The retail property, securing our loan which was in southern California.
And under an agreement we had with them we accepted a 100% of the net proceeds from that transaction in full satisfaction of our loan.
And that amount worked out to be around $18 $6 million.
We reserved against that so were actually slightly over reserve versus that final resolution amount.
And that difference will flow through in the third quarter, along with the transaction in total so that was previously our only five rated loan. It has been a known it was on non accrual since the end of 2020. The property has been sold the loan has been extinguished and repay.
So third quarter will have this $4 4 million or 5% impact.
It will although it will be slightly offset.
By the fact that it's slightly over reserve by a little more than 1 million. So you talked for GAAP Youll get a reversal I guess on a small a small one yes, okay, great Thats correct. Okay.
I am sorry, please continue.
I was so what it sounds like as we sit here today.
Got you no longer have any five rated loans or any nonaccrual loans and if that's not correct. Please. Please please let me know.
Where everything stands.
Perfect. So with respect to the other loan you raise which was is.
It's the first bullet point in the subsequent events.
A new five rated loan Houston office building that loan is performing.
We extended it for a short period right. After June 30, which is why it warranted subsequent event disclosure that loan is performing.
And the borrower is in the process of marketing that property for sale.
And you can see that we have specifically identified that loan and recorded a seasonal reserve.
Separately.
On that loan.
That reserve amount as disclosed in the footnotes, it's approximately $11 million and we disclose how we valued the property in order to determine our reserve amount and we would expect that that loan would be resolved and repaid I think before the end of the year and perhaps before the end of the third quarter.
Okay.
What I had and I appreciate the comments Bob.
Absolutely Thanks, Steve.
Next question. Thank you.
Thank you. So we have next question from the line of Eric Hagen with BTG. Please go ahead.
Hey, guys. This is Ethan <unk> on for Eric. This morning, just wondering is there a minimum level of liquidity and look to keep on the balance sheet going forward.
Good morning, Ethan. Thanks for your question. The answer is yes that amount varies depending upon.
A number of factors, we have a model that we use to manage to manage our liquidity generally and to manage that minimum liquidity amount. The factors are that are included in that or what our covenants require and we disclose each quarter what minimum cash is required under the.
Financial covenants of our various financing agreements and all of those covenants are harmonized so that they have the same.
Minimum cash requirement.
Another important consideration is.
Operating expenses forward dividend.
<unk> of that sort.
Another important factor is our expected investment activity.
Forecasted deferred fundings under existing loans and.
Another important risk mitigating factor would be a careful assessment of our borrowings that are subject to.
Credit only marks on repo or mortgage warehouse.
And so we have this a shorthand, but sort of a value at risk approach to that.
We allocate capital in the event that we elect to remove alone from a CLO.
For for credit purposes.
And so when you do all of that daily and weekly, which we do it generates a range of numbers and I would say on average that number ranges between about 125 and $160 million.
Okay.
Great. Thank you that's Super helpful. And then my next question would just be you.
See any signs.
Yellow market might be stabilizing a bit anytime sooner.
Fair enough.
Sure Thats a great question I would say first of all I'd say that.
The series CLO market has remained open, albeit at slightly lower advances and frankly wider spreads.
I would say right now generally speaking, we see CRE CLO advances somewhere in the very high <unk> and then sort of like total cost of funds roughly in the 300 area. That's obviously moving.
Day to day, I think part of part of what we've been monitoring very closely is looking at how CRE CLO spreads.
Look relative to the investment grade market and the broader <unk> market and we're starting to see that and it's actually it's kind of been corroborated by a few research reports on the street about the fact that CRE CLO spreads appear cheap relative to those other markets.
And then also if you look at just even moves in the IGN Dx lately with.
The fed had I'd say a.
Slightly slightly more dovish tone, with I think which I think really within fixed income markets meant that maybe there is a path forward to that.
On top of the credit curve within within IAG, particularly starting to tighten and so if you go back six months and you really look at the fact that.
It was really I think frankly, the IGT market, which frankly led a lot of this wider and frankly it took the CRE CLO market, perhaps a couple of weeks or months to get there we are starting to see it.
Some argument around a little bit of a green shoot as the IGD excess that's frankly come in pretty meaningfully in the last two or three weeks in that.
That should over time bring in the cost of liabilities within the CRE CLO market, but but that being said, we do have other <unk>.
<unk> channels that we do pursue Bob Bob and I, both mentioned that we have added both.
The term funding term funding facilities <unk> nodes.
To our quiver in terms of where we can borrow on our loans. So again right now it feels like despite the CRE CLO market being more expensive. It is it is open and we are very focused on sort of watching when that will come to a point, where we will be more active borrower there.
Great. Thanks, so much.
All I got thanks, guys. Thank.
Thank you Ethan.
Thank you <unk>.
Our next question from the line of Don <unk> with Wells Fargo. Please go ahead.
Hi, can you talk a little bit about what youre seeing on commercial real estate valuations and the different property sectors and also.
What are transactional borrowers sort of thinking today or it seems like it would be difficult to sort of put a new business plan together, just keeping them certainty around the cost of funds.
Sure I mean look obviously that's it.
Broad, one and I'll try and kind of targeted and I would say look I think given the fact that as I mentioned, what we closed in Q3 and then also what's what we have since closed.
In the first few weeks of sorry.
Alright.
In Q2 and also what we're closing in Q3, thus far it's been predominantly multi so I'll spend more of my time kind of talking about multifamily, which is we've seen a couple of things one is.
We are starting to see frankly, private market valuations and where and where these these.
Assets are being acquired at lower price points.
We really saw it in public equities that that move started to really happen frankly in later April and early May and really now in June July we're starting to see transactions reflect that move in public markets. So that's really one and then two I think.
What we're starting to see also in terms of monitoring both our sponsor underwriting assumptions that also.
The lending markets underwriting assumptions as we are seeing people underwrite on the debt side, just higher higher debt yields simply put probably to the tune of an extra 100 basis points and I would say.
In terms of how people are kind of modeling exit cap rates again, it's very.
Deal specific and markets, but I would say generally speaking people are underwriting cap rates anywhere from 50 to 100 wider versus what they were doing in Q1.
Got it and then Bob are you should we assume that Youll continue to build reserves in the near term I mean, obviously.
But is that kind of the bias here.
Well.
Think that under the seasonal pronouncement at each quarter end our reserve should reflect.
Management's well supported view of what our losses would be on the entire portfolio over the life of those loans and as you know we use a loss given default model to help us do that so our view today is that that that reserve reflects what we what we saw.
See today.
As we move forward, our fourth quarter over quarter those amounts could change that could decline that could increase it is going to be a function of.
The macroeconomic environment, the underlying collateral performance of our loans.
And to some extent the composition of our loan portfolio, which is.
Is changing.
Fairly quickly in response to our continued focus as Doug described.
Affordable multifamily and the fact that loans in other property types like office and hotel are repaying and not largely being replaced by loans in those same property categories.
But I would say the bias right now.
Clearly in other industries, including the banking business is toward higher reserve levels.
We're our reserve level at this quarter and is based on our forward look as of today only.
Thank you.
Thank you ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back over to Jeff <unk>.
Closing comments over to you.
Sure.
Thank you again I just wanted to thank everyone for joining the call. This morning, and look forward to reporting back next quarter.
Thank you.
Thank you ladies and gentlemen. This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
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Yes.
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