Q2 2024 TPG RE Finance Trust Inc Earnings Call

July 31, 2024

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to the TPG Real Estate Finance Trust's second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode.

Operator: TPG Real Estate Finance Trust Second Quarter 2024 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 the star zero on your telephone keypad. Please note this conference is being recorded. It is now my pleasure to turn the call over to the company. Thank you.

Speaker Change: 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. Please note this conference is being recorded. It is now my pleasure to turn the call over to the company. Thank you. You may begin.

Unknown Executive: Good morning, and welcome to the TPG Real Estate Finance Trust earnings call for the second quarter of 2024. We're joined today by Doug Bouquard, Chief Executive Officer, and Bob Foley, Chief Financial Officer.

Speaker Change: Good morning and welcome to the TPG Real Estate Finance Trust earnings call for the second quarter of 2024.

Speaker Change: We are joined today by Doug Bouquard, Chief Executive Officer, and Bob Foley, Chief Financial Officer.

Unknown Executive: Doug and Bob will share some comments about the quarter, and then we will open the call for questions. Yesterday evening, the company filed its Form 10-Q and issued a press release and earnings supplemental with a presentation of operating results, all of which are available on the company's website in the investor relations section. As a reminder, today's call is being recorded and may include forward-looking statements that are uncertain and outside of the company's control.

Unknown Executive: Actual results may differ materially. For a discussion of risks that could affect results, please see the risk factor section of the company's most recent Form 10-K. The company does not undertake any duty to update these statements, and today's call participants will refer to certain non-GAAP measures, and for reconciliation, you should refer to the press release and the Form 10-Q. At this time, it's my pleasure to turn the call over to Chief Executive Officer Doug Bouquard.

Speaker Change: As a reminder, today's call is being recorded and may include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially.

Speaker Change: For a discussion of risks that could affect results, please see the risk factor section of the company's most recent Form 10-K .

Speaker Change: At this time, my pleasure to turn the call over to Chief Executive Officer, Doug Bouquard.

Doug Bouquard: Over the past quarter, the U.S. economy and financial markets have continued to exhibit resiliency as the soft-landing narrative gains momentum. Recent CPI data suggests disinflation is underway, and more accommodative financial conditions may be just around the corner. Corporate credit spreads remain near the post-GFC types, and the securitized debt markets have actually been a bright spot year to date. CNBS issuance has already matched all of 2023's volume, driven primarily by heavy SASB offerings.

Doug Bouquard: Thank you very much.

Doug Bouquard: Over the past quarter, the U.S. economy and financial markets have continued to exhibit resiliency as the soft landing narrative gains momentum.

Speaker Change: Recent CPI data suggests disinflation is underway and more accommodative financial conditions may be just around the corner.

Doug Bouquard: [inaudible] Despite the positive tone across most asset classes, the combination of elevated geopolitical risk and uncertain elections reminds us of how quickly demand for risk assets can pivot as we head to the second half of. While we do see signs of recovery within the real estate sector broadly, it does continue to lag relative to the broader market rally. In the face of an uneven recovery in the real estate market, certain themes remain consistent. Acquisition activity remains modest relative to peak.

Speaker Change: in the first half of 2024.

Speaker Change: Despite the positive tone across most asset classes, the combination of elevated geopolitical risk and an uncertain election season reminds us of how quickly demand for risk assets can pivot as we head into the second half of 2024.

Speaker Change: While we do see signs of recovery within the real estate sector broadly, it does continue to lag relative to the broader market reality.

Speaker Change: In the face of an uneven recovery in the real estate market, certain themes remain consistent.

Doug Bouquard: Banks continue to pivot away from direct lending and towards providing one-on-one capital. And lastly, elevated front-end interest rates continue to put pressure on certain real estate capital structures. We're at a point in the cycle where dispersion and idiosyncratic outcomes will remain a constant in real estate investing. Asset, property type, market level, and capital markets intelligence are critical, and we're fortunate to have the depth and breadth of TPG's integrated global debt and equity platform at our disposal.

Speaker Change: Acquisition activity remains modest relative to peak. Banks continue to pivot away from direct lending and towards providing well-known loan capital.

Speaker Change: And lastly, elevated front-end interest rates continue to put pressure on certain real estate capital structures.

Speaker Change: We're at a point in the cycle where dispersion and idiosyncratic outcomes will remain a constant in real estate investing. Asset, property type, market level, and capital markets intelligence is critical, and we're fortunate to have the depth and breadth of TPG's integrated global debt and equity platform at our disposal.

Doug Bouquard: Over the past quarter, TRTX's investment approach has remained steadfast, maintaining ample levels of liquidity, proactively risk managing our balance sheet, and selectively identifying new investment outputs. Our results demonstrate the benefits of the strategy. Our portfolio is 100% current, we have no five-rated loans, and we have a growing investment. Furthermore, our risk ratings remained constant while we reduced our CECL reserves.

TRTX: Over the past quarter, TRTX's investment approach has remained steadfast, maintain ample levels of liquidity, proactively risk-manage our balance sheet, and selectively identify new investment opportunities.

Speaker Change: Our results demonstrate the benefits of the strategy. Our portfolio is 100% current, we have no 5-rated loans, and we have a growing investment pipeline.

Speaker Change: Furthermore, our risk ratings remained constant while we reduced our CECL reserves.

Doug Bouquard: With the continued strong portfolio performance, a robust liquidity position, and an offensive posture, TRTX is well positioned to take advantage of the opportunities within the real estate credit market, particularly as we head into the new year. In terms of noteworthy activity this quarter, we received $186 million in repayments during the second quarter, over half of which were office loans repaid in full. On the new investment front, our pipeline continues to grow. We funded a $96 million multifamily loan two days after quarter end.

Speaker Change: In terms of noteworthy activity this quarter, we received $186 million of repayments during the second quarter, over half of which were office loans repaid in full.

Speaker Change: On the new investment front, our pipeline continues to grow. We funded a $96 million multifamily loan two days after quarter end.

Doug Bouquard: With the softening in CMBS spreads over the past few weeks, we do expect borrower demand for floating rate loans to pivot from CMBS to other lending channels, including TRTX and the broader non-bank lending market. With respect to our balance sheet, we continue to maintain robust liquidity with over $389 million of cash and undrawn credit capacity from our secured lenders. We finished the quarter with a 2-to-1 debt-to-equity ratio and are positioned to accretively grow the balance sheet as the opportunity set evolves.

Speaker Change: With the softening in CMBS spreads over the past few weeks, we do expect borrower demand for floating rate loans to pivot from CMBS to other lending channels, including TRTX and the broader non-bank lending market.

Speaker Change: With respect to our balance sheet, we continue to maintain robust liquidity with over $389 million of cash and undrawn credit capacity from our secured lenders.

Speaker Change: We finished the quarter with a 2-to-1 debt-to-equity ratio and are positioned to accretively grow the balance sheet as the opportunity set evolves.

Doug Bouquard: With the experience and resources of TPG's global real estate platform, we are uniquely positioned to maximize shareholder value on our existing balance sheet and identify attractive new investments. In summary, we're excited about TRT Expeditioning relative to competitors across the non-bank sector. As we evaluate new investments, we remain highly selective given the uneven nature of the real estate recovery. As banks withdraw from direct lending and the opportunity set grows for the non-bank lending community, a solid balance sheet, ample liquidity, and a best-in-class global real estate investment platform provide the foundation on which to drive shareholder value over the long term. With that, I will turn it over to Bob for a more detailed summary of our quarterly results.

Speaker Change: With the experience and resources of TPG's global real estate platform, we are uniquely positioned to maximize shareholder value on our existing balance sheet and identify attractive new investments.

Speaker Change: In summary, we're excited about TRT Expeditioning relative to competitors across the non-bank lending space.

Speaker Change: As we evaluate new investments, we remain highly selective given the uneven nature of the real estate recovery.

Speaker Change: As banks withdraw from direct lending and the opportunity set grows for the non-bank lending community, a solid balance sheet, ample liquidity, and a best-in-class global real estate investing platform provide the foundation on which to drive shareholder value over the long term.

Speaker Change: With that, I will turn it over to Bob for a more detailed summary of our quarterly results.

Robert R. Foley: Thank you, Doug. Good morning, everyone.

Robert R. Foley: Thank you, Doug. Good morning, everyone. Thanks for joining us. Our second quarter results reflect an increase in net interest margin, a loan portfolio that remains 100% current, and a decline in our CECL reserve of $4.5 million or 6.1%.

Robert R. Foley: Thanks for joining us. Our second quarter results reflect an increase in net interest margin and a loan portfolio that remains 100% current. And the decline in our CECL reserve of 4.5 million or 6.1%, reflecting 186.1 million of loan repayments along with solid operating performance of our loans. Gap net income attributable to common shareholders was $21 million as compared to $13.1 million in the preceding quarter. That increase was due almost entirely to a quarter over quarter reduction in credit loss expense of $8.9 million, driven by a $4.5 million reduction in our CECL reserve for the second quarter, compared to a $4.4 million increase in the first quarter of this year.

Robert R. Foley: Reflecting 186.1 million of loan repayments along with solid operating performance of our loan collateral.

Robert R. Foley: Gap net income attributable to common shareholders was 21 million as compared to 13.1 million in the preceding quarter.

Robert R. Foley: That increase was due almost entirely to a quarter-over-quarter reduction in credit loss expense of $8.9 million.

Robert R. Foley: driven by a four and a half million dollar reduction in our CECL reserve for the second quarter compared to a 4.4 million dollar increase in the first quarter of this year.

Robert R. Foley: That interest margin for our loan portfolio was $27.5 million versus $26.8 million in the prior quarter, or one penny per common share, due to reduced borrowings and further optimization of our liability structure. However, our weighted average credit spread on borrowings was virtually unchanged at 197 basis points.

Robert R. Foley: Our weighted average credit spread on borrowings was virtually unchanged at 197 basis points.

Robert R. Foley: Exterminable earnings were $22.3 million, or $0.28 per share. Coverage in the quarter for the quarter of our $0.24 dividend was 1.17 times and 1.21 times for the first six months of this year. Our CESA reserve declined by $4.5 million to $69.6 million from $74.1 million, or $0.06 per share. This decline was due primarily to solid collateral operating performance and a quarter over quarter net decline in UPP of $168 million. All of our loans were current.

Robert R. Foley: Distributive earnings were 22.3 million or 28 cents per share. Coverage in the quarter for the quarter of our 24 cent dividend was 1.17 times and 1.21 times for the first six months of this year.

Robert R. Foley: Our CESA reserve declined by $4.5 million to $69.6 million from $74.1 million, or six cents per share.

Robert R. Foley: This decline was due primarily to solid collateral operating performance and a quarter-over-quarter net decline in UPP of $168 million.

Robert R. Foley: We have no fibrated loans nor specifically identified loans, and thus, we have no specific seasonal loan loss reserve. Our CESA reserve was 208 basis points versus 210 basis points last quarter. We incurred no realized losses during the quarter.

Robert R. Foley: All of our loans were current. We had no fibrated loans nor specifically identified loans, thus we had no specific CECL loan loss reserve. Our CECL reserve was 208 basis points versus 210 basis points last quarter. We incurred no realized losses in the quarter.

Robert R. Foley: Book value declined $0.41 per share to $11.40 from $11.81, reflecting the impact of, first, distributed earnings per share exceeding our dividend by $0.04, second, a $0.06 per share reduction in our CESA reserve, and third, a $0.39 per share decline due to the delivery on May 8 of 2.6 million common shares of TRTX relating to a warrant exercise. No warrants remain outstanding.

Robert R. Foley: Book value declined 41 cents per share to $11.40 from $11.81.

Robert R. Foley: Reflecting the impact of first

Robert R. Foley: Distributable earnings per share exceeding our dividend by $0.04. Second, the $0.06 per share reduction in our CESA reserve

Robert R. Foley: And third, a $0.39 per share decline due to the delivery on May 8.

Robert R. Foley: of 2.6 million common shares of TRTX relating to a warrant exercise. No warrants remain outstanding.

Robert R. Foley: Regarding our loan investment portfolio, multifamily now represents 52.5% of our loan portfolio, and office has declined 73% over the past 10 quarters to 18.4%.

Robert R. Foley: regarding our loan investment portfolio.

Robert R. Foley: Multifamily now represents 52.5% of our loan portfolio. Office has declined 73% over the past 10 quarters to 18.4%.

Robert R. Foley: Life Science is 12.1%, Hotel is 10.4%, and no other property type comprises more than 3.4% of our budget. Office loan UPV declined by $95.8 million, representing 51.5% of total loan repayments received during the second quarter. That was due primarily to the par repayment in full of two office loans, one in Atlanta and the other in the mid-peninsula sub-market of the Bay Area. At quarter end, total office UPV was $587.5 million across six of our 48 loan investors.

Speaker Change: Life Science is 12.1%, Hotel is 10.4%, and no other property type comprises more than 3.4% of our book.

Speaker Change: Office loan UPV declined by $95.8 million, representing 51.5% of total loan repayments received during the second quarter.

Speaker Change: That was due primarily to the PAR repayment in full of two office loans, one in Atlanta and the other in the Mid-Continentalist sub-market of the Bay Area.

Speaker Change: At quarter end, total office UPV was $587.5 million across six of our 48 loan investments.

Robert R. Foley: We had no new loan originations during the quarter, but we did close on July 3rd at $96 million, the first mortgage loan on a two-property portfolio of leased multifamily, whose closing slid from the last week of June to the first week of July. Our sizable pipeline is populated with quality transactions that fit our strike zone. Regarding REO, we have five REO properties comprising 5.2% of our total assets. One multifamily property and four office properties with a total carrying value of $190.4 million.

Speaker Change: We had no new loan originations during the quarter, but we did close on July 3rd at $96 million, first mortgage loan on a two-property portfolio of leased multifamily.

Speaker Change: whose closing slid from the last week of June to the first week of July . Our sizable pipeline is populated with quality transactions that fit our strike zone.

Speaker Change: Regarding REO, we have five REO properties comprising 5.2% of our total assets.

Speaker Change: One multifamily property and four office properties with a total carrying value of $190.4 million.

Robert R. Foley: Using the depth and breadth of TPG Real Estate's platform, we continue to drive operating performance and finalize near-term disposition strategies for properties that would otherwise require significant capital investment and longer hold periods. This portfolio currently contributes $0.04 per share to our distributable earnings. Please refer to footnote four of our financial statements for a snapshot of our REO. Regarding credit, our weighted average risk rating was unchanged at 3.0. All of our loans were current. Refer to page 53 of our 410Q for more detail.

Speaker Change: Using the depth and breadth of TPG Real Estate's platform, we continue to drive operating performance and finalize near-term disposition strategies for properties that would otherwise require significant capital investment and longer hold periods.

Speaker Change: This portfolio currently contributes $0.04 per share to our distributable earnings.

Speaker Change: Please refer to footnote 4 of our financial statements for a snapshot of our REO portfolio.

Speaker Change: Regarding credit, our weighted average risk rating was unchanged at 3.0. All of our loans were current. Refer to page 53 over 410Q for more detail.

Robert R. Foley: Regarding liabilities and capital base, the share of non-mark-to-market, non-recourse term financing increased at quarter end to 78.7% from 77.1% at March 31st. However, total leverage declined to two to one from 2.2 to one at March 31st. We have 4.1 billion of total financing capacity across 11 different arrangements. In June, we opted to terminate rather than renew a $500 million secured credit facility with Morgan Stanley due to non-use. We repaid $1.8 million of our borrowings upon termination.

Speaker Change: Regarding liabilities and capital base, the share of non-mark-to-market, non-recourse term financing increased at quarter end to 78.7%.

Speaker Change: From 77.1% at March 31st. Total leverage declined to 2 to 1 from 2.2 to 1 at March 31st. We have $4.1 billion of total financing capacity across 11 different arrangements.

Speaker Change: In June , we opted to terminate rather than renew a $500 million secured credit facility with Morgan Stanley due to non-use. We repaid $1.8 million of borrowings upon termination.

Robert R. Foley: Liquidity and pricing in the market continue to improve for financing provided via non-direct lending from large and mid-sized banks. Combined with unchanged to slightly wider loan spreads on new loan investments, our ROEs are stable and expected to improve. We completed in April the reinvestment of the final $51 million of cash in our FL5 CLO. The reinvestment windows are now closed for all three of our CLOs, although we remain able to substitute and exchange loans under certain circumstances.

Speaker Change: Liquidity and pricing in the market continue to improve for financing provided via non-direct lending from large and mid-sized banks.

Speaker Change: Combined with unchanged to slightly wider loan spreads on new loan investments, our ROEs are stable to improving.

Speaker Change: We completed in April the reinvestment of the final $51 million of cash in our FL5 CLO. The reinvestment windows are now closed for all three of our CLOs, although we remain able to substitute and exchange loans under certain circumstances.

Robert R. Foley: We continue to monitor the CRE CLO market as a tool to further optimize our cost-efficient, highly non-mark-to-market liability structure, either refinancing existing CLOs, financing loan investments that are currently unencumbered, or to finance new loan investments. Presently, the note-on-note market continues to hold greater appeal to us due to more favorable structure and money terms. We were in compliance with all of our financial covenants at June 30th, 2024. We repurchased no shares during the second quarter under our share repurchase program, largely because our share price appreciated by 11.9% during the quarter. GRTX's share price appreciation was 41.2% for the first six months of this year.

Speaker Change: We continue to monitor the CRE CLO market as a tool to further optimize our cost-efficient, highly non-mark-to-market liability structure, either refinancing existing CLOs, financing loan investments that are currently unencumbered, or to finance new loan investments.

Speaker Change: Presently, the note-on-note market continues to hold greater appeal to us due to more favorable structure and money terms.

Speaker Change: We were in compliance with all of our financial covenants at June 30, 2024. We repurchased no shares during the second quarter under our share repurchase program, largely because our share price appreciated by 11.9% during the quarter.

GRTX: GRTX's share price appreciation was 41.2% for the first six months of this year.

Robert R. Foley: We maintain an appropriate amount of immediate and near-term liquidity at 10.5% of our total assets. Cash in near-term liquidity was $389.4 million on June 30, compared to $370.7 million at March 31st, comprised of $244.2 million of cash in excess of our covenant requirements and $127.7 million of undrawn capacity under our secured credit agreement. During the quarter, we funded $18.1 million of commitments under existing loans. At quarter end, our deferred funding obligations under existing loan agreements total only $139.6 million, nearly 4.2% of our total loan commitments and less than half of our current liquidity. In summary, the second quarter was characterized by strong operating performance, solid credit, further optimization of our liability structure, and significant liquidity to support opportunistic capital allocations. And with that, we'll open the floor to questions. Operator?

Speaker Change: We maintain an appropriate amount of intermediate of immediate and near-term liquidity at 10.5% of our total asset base.

Speaker Change: Cash in near-term liquidity was $389.4 million on June 30th, compared to $370.7 million on March 31st.

Speaker Change: comprised of $244.2 million of cash in excess of our permanent requirements and $127.7 million of undrawn capacity under our secured credit agreements.

Speaker Change: At quarter end, our deferred funding obligations under existing loan agreements total only $139.6 million, nearly 4.2% of our total loan commitments, and less than half of our current liquidity.

Speaker Change: And with that, we'll open the floor to questions. Operator?

Operator: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press Star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. If at any time you wish to remove your question from the queue, please press Star 2. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the Star key.

Operator: One moment, please, while we poll for questions. Our first question is from Tom Catherwood with BTIG. Please proceed with your question.

Tom Catherwood: Thank you so much. Doug, maybe going back to something that you had mentioned in the opening, just the thought of widerning CMBS spreads and driving more demand for your floating rate products, is this kind of helping populate your post 2Q pipeline, and can you provide some more color around that?

Speaker Change: Driving more demand for your floating rate products. Is this kind of helping populate your post 2Q pipeline? Can you provide some more color around that?

Doug Bouquard: Yeah, you know, sure. Happy to do it.

Doug Bouquard: And, you know, sort of bear in mind that, you know, we as a platform are also a borrower in the CNBS market. So we do share some Robert Foley, Derek Hewett, Christopher Muller, Unknown Executive, Sarah Barcomb, Deborah Ginsberg about, you know, about the month of June. And in the month of June, what we began to see was, you know, spreads widen, I think, really as a function of too much supply in the market.

Robert R. Foley: Unknown Executive, Robert Foley

Speaker Change: about, you know, about, about the month of, the month of June.

Doug Bouquard: So there was definitely a period of time during Q2 where, you know, more of the floating rate market share was basically taken by the CMBS market. And we do expect that, given the recent widening, that that could drive, you know, more and more activity within our pipeline. And we are beginning to see that,

Speaker Change: So, there was definitely a period of time during Q2 where more of the floating rate market share was basically taken by the CMBS market, and we do expect that given the recent widening, that that could drive more and more activity within our pipeline.

Doug Bouquard: And then, two, I would say, you know, CMBS does have its limitations in terms of the types of assets it can't finance. You know, we are fundamentally looking at, you know, primarily bridge and transitional assets. So we sort of have the benefit of both certain assets that perhaps would have gone to CMBS, you know; we can now look at financing them. And then I would say, secondly, as there is some amount of recovery within the real estate market, borrowers are beginning now to think through value-add business plans, which do require floating rate financing that really can only be financed outside the market. So, in short, we definitely do this to be a driver of activity.

Speaker Change: You know, some amount of recovery within the real estate market. We're seeing borrowers begin now to think through value-add business plans, which do require floating-rate financing that really can only be financed outside the CMS.

Speaker Change: So in short, we definitely do this to be a driver of activity going into the second half of the year.

Doug Bouquard: That's a very helpful color. And then as that relates to the pipeline specifically, I know the multifamily closing pushed from June into July, but can you put some numbers around how the pipeline today compares to where it was at the beginning of either 2Q or the start of the year? Is there a sense of how much that has grown in scale?

Speaker Change: That's a very helpful color and then as that relates to the pipeline specifically, I know the multifamily closing pushed from June into July , but can you put some, you know, maybe numbers around how the pipeline today compares to where it was at the beginning of either 2Q or the start of the year? Is there a sense of how much, you know, that has grown in scale?

Doug Bouquard: Yeah, I mean, look, I think from a pipeline perspective, we were, we're seeing a tremendous amount of deals right now across really a variety of different properties. From a measurement perspective, we at any time may have up to, you know, 60 to 70 deals within our pipeline, and I would say recently there's been an increase, but again, it's been largely driven by the fact that you're seeing CMBS pulling back, and we are basically able to kind of fill in for where that gap is.

Speaker Change: Yeah, I mean, look, I think from a pipeline perspective, you know, we're seeing a tremendous amount of deals right now across really a variety of different property types.

Speaker Change: From a measurement perspective, we at any time may have up to 60 to 70 deals within our pipeline.

Speaker Change: And I would say recently, there's been an increase, but again, it's been largely driven by the fact that you're seeing CMBS pulling back.

Doug Bouquard: So, I would say that there's been a substantial increase, and, you know, really, at the lows, which I would say was probably Q4 of last year, you know, I would say anecdotally we're probably seeing nearly about a 50% increase in terms of some of the activity based on how we, you know, how we track the pipeline.

Speaker Change: We are basically able to kind of, you know, fill in for where that, you know, where that gap is. So I would say that there's, there's been a substantial increase and really at the lows, which I would say was probably

Speaker Change: Q4 of last year, I would say anecdotally, we're probably seeing nearly about a 50% increase in terms of some of the activity based on how we track the pipeline.

Tom Catherwood: Really helpful. That's it for me. Thanks, everyone.

Operator: As a reminder, to ask a question, please press star 1. Our next question is from Stephen Laws with Raymond James.

Speaker Change: Thank you. As a reminder, to ask a question, please press star 1. Our next question is from Stephen Laws with Raymond James.

Stephen Albert Laws: Morning, Doug. Following up on the origination question, can you maybe talk about, you know, how your appetite for new investments balances against your expected repayments in the second half of the year and kind of, you know, is the portfolio size, you know, going to increase over the back half, stay the same, or do you expect some additional runoff here in 3Q?

Speaker Change: Is the portfolio size going to increase over the back half, stay the same, or do you expect some additional runoff here in 3Q?

Doug Bouquard: I'll share a few things about how we're thinking about investing and quickly as it relates to our repayment pace, you know, first and foremost, what really drives all of our new investment activity is, you know, being highly selective. I mentioned in my comments that sort of phrase that they're being, You know, uneven real estate recovery, you know, really kind of littered with many idiosyncratic outcomes. And really, that's how we're looking across the landscape is acknowledging that it's not just going to sort of all bounce back with a correlation of one across property types. It's, frankly, very idiosyncratic.

Speaker Change: I'll share a few things really about how we're thinking about

Speaker Change: Investing and quickly as it relates to our repayment pace, you know, first and foremost, what really drives all of our new investment activity is, you know, being highly selective. I mentioned in my comments the sort of phrase that they're being this

Doug Bouquard: So at the top of the list is that we remain selective, and then I would say, too, as it relates to property types specifically, I think you'll still see somewhat of a housing bias coming from us, really across the multifamily space, where we do see both a good amount of opportunity and dislocation, which for us as a lender is very attractive. And then I think your final comment about, you know, repayments is a great question.

Speaker Change: All bounce back with a correlation of one across property types. It's frankly very beautifully crafted.

Doug Bouquard: I think that there are obviously both some micro and macro factors that will weigh on the pace of our repayment. I would say on the on the micro side, again, it's naturally, you know, of course, very loan by loan, you know, for example, we had, you know, we had to, you know, pretty substantially sized office loans pay off this past quarter, which, you know, we did expect it to pay off, but the exact timing can at times be hard to maybe nail down to the sort of, you know, week, Thank you so much, everyone, for joining us today on Capital Markets for a Grievant Day.

Speaker Change: We had two pretty substantially sized office loans pay off this past quarter, which we did expect it to pay off, but the exact timing can at times be hard to maybe nail down to the sort of week or month.

Speaker Change: or even day. But generally speaking, from a repayment perspective, we are starting to see a little bit more of a pickup. And I would expect that between now and year end, multifamily could see perhaps

Doug Bouquard: But generally speaking, from a repayment perspective, we are starting to see a little bit more of a pickup. And I would expect that between now and year end, multifamily could see perhaps a bit of repayment activity, as you are seeing capital markets loosen up, particularly within multifamily. You know, if we do sort of encounter easing financial conditions and the front end of the curve does, you know, does go lower, I think that will definitely, you know, potentially open up some amount of refinancing within, you know, within our balance sheet.

Speaker Change: A bit of repayment activity as you are seeing capital markets loosen up, particularly within multifamily. And I'd say finally, on the sort of macro point, which we're obviously very, you know, very focused on and in many ways, this will be a much bigger driver is

Speaker Change: If we do sort of encounter easing financial conditions and the front end of the curve does go lower, I think that will definitely potentially open up some amount of refinancings within the

Doug Bouquard: Part of that is driven by, you know, borrowers, perhaps once again able to get, you know, what they would view as attractive financing to continue on their business plan, and they may want to pay our financing off. So, again, it's a mix of really micro and macro, but we do acknowledge that the one overlaying factor as we think about new investments, which is pretty unique, is, you know, we've been talking about the sort of pullback of bank lenders for many quarters.

Speaker Change: Within our balance sheet, part of that driven by, you know, borrowers, you know, perhaps once again able to get, you know, what they would view as attractive financing to continue on their business plan, and they may want to pay our financing.

Speaker Change: So again, it's a mix of really micro and macro, but we do acknowledge that the one overlaying

Speaker Change: The other factor as we think about new investments, which is pretty unique, is we've been talking about the sort of pullback.

Doug Bouquard: But we may encounter the first time in sort of recent history where there is a pullback in bank lending, but the demand from the borrowing community will be for transitional assets. And I think a lot of what we've seen so far has been a little bit more oriented toward stabilized assets. So I think we're really set up very well for this technical of potentially front-end rates going lower, banks pulling back, and then I think TRTX being well-positioned from a liquidity perspective to take advantage of that potential gap.

Speaker Change: We've been talking about the potential of bank lenders for many quarters, but we may encounter the first time in recent history where there is a pullback in bank lending, but the demand from the borrowing community will be in transitional assets.

Robert R. Foley: Unknown Executive, Robert Foley

Speaker Change: Thanks pulling back and I think TRTX being well positioned from a liquidity perspective and be able to take advantage of that, of the potential gap.

Stephen Albert Laws: Appreciate the comments on that, Doug. And a follow-up question: I want to kind of touch on the four-rated loans. You know, are there any second-half events or milestones that would be instrumental as you look at those four loans on whether they move back to three or potentially have final problems? And then, specifically, any update on the San Antonio loan? I think there was a news article that maybe mentioned it was moving to a foreclosure sale. So, curious if there's an update there.

Speaker Change: Appreciate the comments on that, Doug.

Speaker Change: Follow-up question, I want to kind of touch on the four rated models.

Speaker Change: Are there any second-half events or milestones that would be instrumental as you look at those four loans and whether they move back to three or potentially have internal problems?

Speaker Change: You know, specifically, any update on the San Antonio loan? I think there was a news article maybe that mentioned it was moving to a foreclosure sale, so curious if there's an update there.

Robert R. Foley: Thanks for your question, Stephen. First, the macro, and then we can talk specifically about it. San Antonio. On the macro front, you know, four, four-rated loans are clearly behind their business plan, but their eventual resolution can take a number of paths. As we've discussed on previous calls, historically, a large proportion of 4-rigged loans actually resolve without... With respect to the specific four-rated loans right now, you know, we're all over each of them, and, you know, basically, we're working with borrowers to ensure that they're prepared to commit the capital that's needed to, frankly, bridge those loans to an eventual sale or refinancing. You know, there's Some are probably closer to the boundary of a three, and some are probably, you know, below the mean as well.

Speaker Change: Thanks for your question, Stephen. First the macro and then we can talk specifically about it.

Speaker Change: On the macro front, four rated loans are clearly behind their business plan, but their eventual resolution can take a number of paths.

Speaker Change: As we've discussed on previous calls, historically, a large proportion of 4-rigged loans actually resolve without incident.

Speaker Change: With respect to the specific four-rated loans right now, you know, we're all over each of them and, you know, basically we're working with borrowers to ensure that they're prepared to commit the capital that's needed to

Speaker Change: Frankly, bridge those loans to an eventual sale or refinancing.

Speaker Change: There's dispersion within that population. Some are probably.

Speaker Change: Closer to the boundary of a three and.

Speaker Change: And some are probably, you know, below the mean as well. I think the post-Labor Day season will be pretty important as we get closer to the election in terms of how some of these things play out.

Robert R. Foley: I think the post-Labor Day season will be pretty important as we get closer to the election in terms of how some of these things play out. With respect to San Antonio, there were several published reports that... We filed a notice of foreclosure sale on a two property multifamily portfolio in San Antonio that is not meeting its original business plan. San Antonio is a solid, affordable multifamily market. Having a, you know, Texas is a state in which it's relatively straightforward and quick to foreclose, and it's a good cudgel to use when negotiating with the borrower over terms of a modification.

Speaker Change: We had filed a notice of foreclosure sale on a two-property multifamily portfolio in San Antonio that is not meeting its original business plan. San Antonio is a solid, affordable multifamily market.

Speaker Change: Transcribed by https://otter.ai

Speaker Change: Having a, you know, Texas is a state in which it's relatively straightforward and quick to foreclose and it's a good cudgel to use when negotiating with the borrower over

Robert R. Foley: That's the current state of play. We told you about the sale that was originally posted in July because the borrower took certain steps and actually infused more capital into the transaction, and that's the story that will continue to play out probably over the next couple of months.

Robert R. Foley: in terms of a modification. That's the current state of play. We

Speaker Change: told the sale that was originally posted in July because the borrower took certain steps and actually infused more capital into the transaction. And that's the story that will continue to play out probably over the next couple of months.

Stephen Albert Laws: Appreciate the color there, Bob. And then, one last follow-up. On the REO assets, I know it contributed 4 cents of distributable earnings, this core REQ-2. Can you talk about maybe which one of those, you know, what are the one or two that are potentially the bigger drags on earnings that, if you kind of got that capital freed up to be recycled, could be the biggest lift to earnings? You know, similar loans. I'm sure there's a dispersion of performance across those five assets. Yeah, we

Speaker Change: Appreciate the color there, Bob, and then one last follow-up. On the REO assets, I know contributed four cents of distributable earnings to this core REQ2.

Speaker Change: You know, can you talk about maybe which one of those, you know, what are the one or two that are potentially the bigger drags on earnings that if you kind of got that capital freed up to be recycled could be the biggest lift to earnings, you know, similar loans. I'm sure there's a dispersion of performance across those five assets.

Robert R. Foley: Yeah, we own five properties. As you and others on the call know, we own one multifamily property that is a contributor to NOI. We've increased occupancy under our ownership in that property from the high 70s to the low 90s. So we're pretty pleased with the operational changes that we've been able to affect at the property level, and the market seems to be responding to that. So that, an office property in Houston and an office property here in New York are all contributors.

Speaker Change: Yeah, we own five properties is

Speaker Change: You and others on the call know we own one multifamily property that is a contributor to NOI. We've increased under our ownership.

Speaker Change: Occupancy in that property from the high 70s to the low 90s so we're pretty pleased with

Speaker Change: The Operational Changes that we've been able to affect at the property level and the market seems to be responding to that. So that, an office property in Houston and an office property here in New York are all contributors.

Robert R. Foley: The other two properties, both of which are in California, are effectively breaking even right now. Those are the ones that we're pretty focused on in terms of evaluating alternative business plans. Whether additional capital will be required and whether the rebuy analysis suggests that the best thing for shareholders is for us to invest. [inaudible] And as we've stated before, I think a lot of that will become much clearer between now and. I appreciate the comments this morning.

Speaker Change: The other two properties, both of which are in California, are effectively break-even right now. Those are the ones that we're pretty focused on in terms of evaluating alternative business plans.

Speaker Change: whether additional capital will be required and whether the rebuy analysis suggests that the best thing for shareholders is for us to invest or to sell.

Speaker Change: And as we've stated before, I think a lot of that will become much clearer between now and Thanksgiving.

Stephen Albert Laws: Fantastic. Appreciate the comments this morning. Yep.

Speaker Change: Fantastic. Appreciate the comments this morning.

Speaker Change: Yep.

Operator: As a reminder, if you'd like to ask a question, please press star one. Our next question is from Steve Delaney with Citizen JMP.

Speaker Change: As a reminder, if you'd like to ask a question, please press star 1. Our next question is from Steve DeLaney with Citizen JMP.

Steven Cole DeLaney: Good morning, Doug and Bob. Congratulations on a very clean quarter. I expect we won't see many quite this clean over the next couple of weeks.

Steven Cole DeLaney: Good morning, Doug and Bob. Congratulations on a very clean quarter. I expect we won't see many.

Steven Cole DeLaney: Nice job. I wanted to ask about the CESA reserve coming down, you know, four to $5 million. Was that simply due to payoffs in the quarter that caused the CESA reserve to drop?

Steven Cole DeLaney: I wanted to ask about the CESA reserve. It came down $4-$5 million. Was that simply due to payoffs in the quarter that caused the CESA reserve to drop?

Robert R. Foley: Well, I would say that there were three factors. One, as you point out, is You know, we did have a reduction in Total Loan UPB, which is subject to the CECL estimate process. I'd say the second factor is macroeconomic.

Speaker Change: Well, I would say that there were three factors. One, as you point out, is

Speaker Change: You know, we did have a reduction in total loan UPB, which is subject to the CECL estimate process.

Speaker Change: I'd say the second factor is the macroeconomic.

Steven Cole DeLaney: assumptions that drive the Monte Carlo model that develops the estimates for our general reserve, and all of our reserve right now falls into the general category. And I would say that those assumptions were, on average, a little bit better than last quarter. Especially with respect to rates and a slowdown in the pace of property depreciation and property value depreciation. And then I think the third thing, and probably the most important of the three factors, is, you know, the operating performance of most of our collateral has been pretty solid.

Speaker Change: Assumptions that drive the Monte Carlo model that

Steven Cole DeLaney: develops the estimates for our general reserve and all of our reserve right now falls into the general category.

Steven Cole DeLaney: And I would say that those assumptions were, on average, a little bit better than last quarter.

Steven Cole DeLaney: Especially with respect to rates and

Steven Cole DeLaney: A slowdown in the pace of

Steven Cole DeLaney: Property Depreciation, Property Value Depreciation.

Steven Cole DeLaney: And then I think the third thing and probably the most important of the three factors is, you know, the operating performance of most of our collateral has been pretty solid. And so that's reflected largely in the debt service coverage ratio, which is an important variable in, in my view.

Steven Cole DeLaney: And so that's reflected largely in the debt service coverage ratio, which is an important variable in the predictive model itself. So those are the three, And it's the portfolio that starts to rebuild. Obviously, you've got your big multifamily loan in July.

Steven Cole DeLaney: and the Predictive Model itself. So those are the three factors.

Speaker Change: Got it. And as the portfolio starts to rebuild, obviously you've got your big multifamily loan in July .

Steven Cole DeLaney: If we're projecting some net portfolio growth, given your low leverage, it would seem to me that that's reasonable and an improving market opportunity. How should we think about building the general reserve? I mean, you're at 200 basis points roughly right now, but will it take 200, or can we build it maybe to 150? Any thoughts just of the range, if we were trying to model out over the next year? Or how much general CECL build would you suggest we put into our models? Thank you. Thanks for your question.

Speaker Change: Did we, you know, if we're projecting some net portfolio growth, given your low leverage, it would seem to me that that's reasonable and an improving market opportunity.

Speaker Change: Unknown Speaker Okay.

Speaker Change: How should we think about building the general reserve? I mean, you're at 200 basis points roughly right now, but will it take 200 or can we build it maybe 150? Any thoughts just of the range, if we were trying to model out over the next year or two, how much general CECL build would you suggest we put into our models? Thank you.

Robert R. Foley: Well, first, I'll offer an editorial comment, which is that I try to avoid the use of the word build with respect to CSO reserves because that's exactly what the FASB was seeking to avoid when it established this new pronouncement back in early 2020. Uh, I think that perhaps a helpful construct would be, The purpose of CECL is to develop a forecast of expected losses over the life of the loan. You know, we are now investing in a very good credit market as a lender where we have, you know, much lower entry points per square foot, per unit, per key than we did several years ago.

Speaker Change: Thanks for your question. Well first I'll offer an editorial comment which is that I try to avoid the use of the word build with respect to CECL reserves because that's exactly what the FASB was seeking to avoid when it established this new pronouncement back in early 2020.

Speaker Change: I think that...

Speaker Change: Perhaps a helpful construct would be the purpose of CECL is to develop a forecast of expected losses over the life of the loan.

Speaker Change: We are now investing in a very good credit market as a lender, where we have much lower entry points per square foot, per unit, per key, than we did several years ago.

Robert R. Foley: And so – and those are all important inputs into the predictive model that we use. So the rate that you see with respect to our current portfolio largely reflects loans that were originated, you know, at the old end, in 2018 or 19, but most of them were originated in 21 through 23. You know, we've moved into a new era where, arguably, the risk profile is higher in place debt yield, lower LTV, lower absolute dollar basis per unit of real estate, all else being equal, macroeconomic assumptions, and so forth.

Steven Cole DeLaney: And so, and those are all important inputs into...

Robert R. Foley: The predictive model that we use. So the rate that you see with respect to our current portfolio largely reflects loans that were originated, you know, between at the old end 2018 or 19, but most of them were originated in

Steven Cole DeLaney: 21 through 23, we've moved into a new era where...

Steven Cole DeLaney: Arguably, the risk profile is...

Steven Cole DeLaney: Higher in-place debt yield, lower LTV, lower absolute dollar basis per unit of real estate, all else being equal, macroeconomic assumptions and so forth, that's going to produce a lower rate. So what I would suggest is perhaps you want to go back and look at

Robert R. Foley: That's going to produce a lower rate. So what I would suggest is perhaps you want to go back and look at loan losses or what people's estimates were prior to COVID and draw some inspiration from that.

Robert R. Foley: You know, loan losses or what people's estimates were prior to COVID and draw some inspiration from that.

Steven Cole DeLaney: Thank you. It's a very helpful caller. Appreciate the comments. Thank you.

Speaker Change: Thank you. It's very helpful, Culler. Appreciate the comments. Thank you.

Doug Bouquard: Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mr. Bouquard for a closing remarks.

Doug Bouquard: Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Bouquard for closing remarks.

Doug Bouquard: I just wanted to thank everyone for joining our call today, and we look forward to updating you on the progress. Have a great day. Thank you.

Doug Bouquard: I just wanted to thank everyone for joining our call today, and we look forward to updating you on any progress. Have a great day. Thank you.

Operator: This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.

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