Q4 2024 TPG RE Finance Trust Inc Earnings Call
Music
Speaker Change: Doug Foley, Doug Bouquard, Unknown Executive Doug Foley, Doug Bouquard, Unknown Executive Doug Foley, Doug Bouquard, Unknown Executive
Speaker Change: Okay.
Speaker Change: Good morning, ladies and gentlemen, thank you for standing by welcome to TPG Real estate Finance Trust fourth quarter and full year 2024 earnings conference call. If any much require operator assistance. Please press star zero on your telephone keypad question and answer session will follow the formal.
Speaker Change: Please note. This conference is being recorded it is now my pleasure to turn the call over to management.
Speaker Change: You may begin.
Speaker Change: Good morning, and welcome to the TPG Real estate Finance Trust earnings call for the fourth quarter and full year of 2024.
Speaker Change: We're joined today by Doug the card, our Chief Executive Officer, and Bob Foley, Our Chief Financial Officer.
Speaker Change: Doug and Bob will share some comments about the quarter and the year and then we will open up the call for questions yesterday evening, we filed our Form 10-K 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.
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 for.
Speaker Change: For a discussion of risks that could affect results. Please see the risk factors section of the company's Form 10-K.
Speaker Change: The company does not undertake any duty to update these statements in today's call participants will refer to certain non-GAAP measures and for reconciliations you should refer to the press release and the Form 10-K at this time I'll turn the call over to Doug.
Doug: Thank you over the past quarter strong economic growth and resilient labor market continued to power the U S economy.
Doug: Positive economic sentiment and the lingering concern over inflationary pressures appear to have caused the fed to pause and potentially forgo additional rate cuts in 2025 weeks.
Doug: We expect real estate investment activity to increase in 2025, driven by the deployment of dry powder and the new acquisitions, and a forcing mechanism of elevated short term and long term interest rates.
Doug: These factors create an excellent dynamic for opportunistic debt investing, especially for well positioned platforms like Dr. T X rig.
Doug: Regardless of causal factors, we intend to continue to provide acquisition and tailored financings to recapitalize broken capital structures at reset valuations.
Doug: We expect our increased 2024 loan investment volume to accelerate in 2025, driven by one and offensive oriented balance sheet with substantial liquidity and a flexible liability structure and too robust sourcing channels fed by Tpg's fully integrated global real estate platform encompassing both credit and equity.
Doug: Investing.
Doug: By all metrics 2024 was a successful year for TR T X, we accomplished precisely what we set out to do.
Doug: Number one build a fortress balance sheet with substantial liquidity.
Doug: Two maintaining a 100% performing balance sheet at year end with stable credit risk ratings.
Doug: Three register consistent reductions in our seats are reserved throughout the year and four generate distributable earnings after realized losses that fully covered our 96 cent per share common dividend for 2024 and on a pre realized loss basis, we generated $1 eight per share for the year.
Doug: Covering our dividend at one one times, we are exceptionally well positioned to pull on the many levers the TRT ex possesses to grow earnings including number one deployment of excess liquidity into new investments to recycling equity currently supporting Oreo assets.
Doug: Free accessing undrawn capacity from our existing lenders and for creating additional liquidity by taking advantage of the improving capital markets environment.
Doug: Our strong operating results for the full year 2024 reflect the success of our strategy and confirm TRT exited advantageously positioned to continue with loan investment activity in 2025 and beyond and.
Doug: In the second half of 2024, we increased net earning assets by 3% due to $446 million of new loan commitments comprised primarily of multifamily and industrial portfolio loans across the U S with an LTV of approximately 60% and a weighted average spread of silver plus $3 25.
Doug: In the new year, our investment team has built a substantial investment pipeline that will fuel new origination activity in 2025.
Doug: We currently have in excess of $300 million of live investment opportunities there.
Doug: We are in various stages of pursuit and diligence, we look forward to updating you on progress in subsequent quarters.
Doug: With our shift to a more active new investment posture, we have not taken our eye off the strategy that created our comparative advantage thoughtful assertive value oriented risk and asset management.
Doug: Our latest example is our recently completed accretive amendment to our loan secured by a class a office building in New York City.
Bob will share more granular details, but I will highlight three key facts that speak to our risk management approach.
Doug: Over the past three years, the loan commitment amount has been reduced from $200 million down to $130 million.
Doug: Our recent amendment attracted an infusion of $60 million of new institutional equity capital.
Doug: And the newly amended lower LTV loans is expected to generate an improved return on equity.
Doug: For our shareholders as compared to the pre amendment one.
Doug: Most importantly, this deal is illustrative of the expertise of Tpg's asset management team when buttressed by a broader TPG real estate investing platform. This combined experience allows us to confidently navigate through complex transactions to maximize shareholder value.
Doug: In summary, we intend to continue in 2025 to pull on our levers of accretive growth all of which are immediately actionable to drive earnings and shareholder value at our current share price TRT ex generates an 11% dividend yield.
Doug: Impelling return in the context of several comparatively favorable fundamental metrics, including number one liquidity as a percentage of total assets number two low leverage and number three a one one.
Doug: 3rd% performing loan portfolio at year end.
Doug: From a risk and liquidity perspective, we are fortunate to be able to remain both committed to our share repurchase plan and make new investments at the same time, we will continue to optimize capital allocation to the benefit of our shareholders.
Doug: When you combine these factors with a 24 <unk> per quarter dividend, which is supported by our current run rate with upside potential embedded in our deployable cash untapped financing capacity the near term prospect of capital recycled from our Oreo portfolio.
Doug: And the sourcing and investing of Tpg's integrated real estate debt and equity investment platform. We believe today's share price offers an attractive value proposition.
Doug: With that I will turn it over to Bob to provide a detailed summary of our financial results.
Bob: Thank you, Doug and good morning, everyone and thanks for joining us.
Bob: Our strong operating results for the full year 2024, and its fourth quarter reflect the success of our strategy.
Bob: And provide a springboard for increasing loan investment activity in 2025 and beyond.
Bob: In the fourth quarter, we increased net earning assets for the second consecutive quarter due to 242 million of new loan commitments.
Bob: With strong liquidity of $320 8 million leverage of only 2.14 to one it's useful reserve of 187 basis points that has continued to decline in response to the solid credit performance of our loan book and stabilizing real estate market conditions, a weighted average risk rating of 3.0 that hasn't wavered.
Four quarters.
Bob: Distributable earnings for the year that fully covered our ninety-six Santa annual dividend throughout 2024, and distributable earnings before realized losses that covered our annual dividend by one point and one times TR T X continues its march to increase earnings and shareholder value.
Bob: T. R. T X is share price performance is the strongest among its peers since January 2023, with a cumulative return of 61% through last Friday.
Bob: The levers that Doug detailed further support the compelling value to you our T X offers at today's share price.
Bob: Our operating results for the year in the quarter are amply reported in our earnings release earnings supplemental and Form 10-K, all of which were filed with the SEC After yesterday's market close and are available on the TR T X website.
Bob: Regarding our loan portfolio, 100% of our loan portfolio is performing in current we have only two four rated loans and no five rated loans our weighted average risk rating is three point out consistent with the prior four quarters.
Bob: For the year, we originated eight loans totaling $562 3 million of commitments.
Bob: For the fourth quarter, we originated two loans totaling $242 million of commitments, we funded $4 7 million of deferred fundings on existing loans and we collected Golan partial loan repayments of 110.2 million.
Bob: Earlier this month, we amended an existing office loan as part of the sale by the original institutional equity investor of its interest in the property to another sizeable highly experienced global institutional real estate investor.
Bob: The new Investor injected 60 million of fresh equity capital into the joint venture.
Bob: As part of the Amendment, we received a 20 million dollar of principal repayment that reduced our loan amount to $135 million.
Bob: Improve the seniority of our credit position because of the recapitalization terminated a former ground lease on a portion of the building site, that's facilitating consolidation into a single fee interest the lease land beneath why are the connected buildings.
Bob: We enhanced property cash flow because our borrower leased the remaining 13% of the buildings net rentable square footage to an existing tenant through early 'twenty 32 Conn.
Bob: Consequently, our loan now has an in place debt yield of 11, 7%.
Bob: Stabilized debt yield of 14.4% leased occupancy of 100% and a weighted average remaining lease term of greater than eight years.
Bob: We extended our loan for three years through February 2028, we preserved our advantageous financing of this investment and consequently boosted our asset level leverage return on equity.
Bob: Combined with previous principal repayments totaling $40 million.
Bob: As a management team is overtime engineered a 70 million dollar reduction in our loan commitment amount and improved our credit position in an already strong New York City office property.
Bob: Regarding our Yo we own eight Oreo properties with an aggregate carrying value of $275 8 million comprising seven 4% of our total assets.
Bob: For multifamily properties represent 56.5% of our our REO holdings and four office properties represent the remainder.
Bob: The integrated TPG real estate platform continues to apply its experience intellectual capital platforms and network resources to improve operating performance of our Oreo determine the best strategy to optimize shareholder returns and execute each business plan efficiently and quickly.
Bob: As previewed last quarter, we foreclosed during the fourth quarter on two multifamily loans, one in San Antonio and the other in Chicago, We immediately she used operational control and are now stabilizing and Reenergizing. These properties to ripen them for sale.
Bob: Both of our California office properties are currently in the market for sale.
Bob: Only one of our Oreo properties is encumbered by mortgage debt.
Bob: We expect Oreo sales will over time generate capital for reinvestment and we have a track record of selling Oreo properties at or in excess of our carrying values.
Bob: Our net equity in Oreo totals approximately $250 million.
Bob: Assuming a nine 5% net ROE on loan investments every $100 million of recycled the Oreo equity equals three cents per share of distributable earnings per quarter.
Bob: Refer to footnote four of our financial statements for a snapshot of our Oreo portfolio.
Bob: As usual, we've been quick to take advantage of improving capital market conditions, our cost of liabilities for new loan investments continues to decline and we expect to capture further savings in 2025.
Bob: Our share of non Mark to market nonrecourse term financing held steady at 77% at year end.
Bob: Confirming our longstanding emphasis on non mark to market term funding of our investment portfolio.
Bob: Our total leverage was virtually unchanged quarter over quarter at 2.14 to one.
Bob: Paired with 4 billion of financing capacity, our liability structure will drive continued growth in earning assets as market dynamics continue to improve.
Bob: Last week, we closed on a three year extension and 85 million dollar upsized to $375 million of an existing non mark to market secured borrowing arrangement.
Bob: All six of our current syndicate members renewed an upsize their commitments plus we added a seventh lender.
Bob: Improving terms and conditions in the CRE CLO and note on note markets make this an opportune time for T. R. T extra refinance certain existing liabilities at a higher advance rate and lower cost of funds.
Bob: We were in compliance with all financial covenants at December 31, 2024.
Bob: Regarding liquidity, we have substantial immediate and near term liquidity to support accelerating loan investment activity.
Bob: Year end liquidity of $328 million included $192 million of cash in excess of our covenant requirements.
Bob: That's an additional $128 1 million of Undrawn capacity under our secured credit agreements. We also have $33 4 million of unencumbered loan assets plus several unlevered Oreo properties.
During the quarter, we funded $4 7 million of commitments under existing loans at quarter end, our deferred funding obligations under existing loan commitments totaled only 127 9 million a mere three 7% of our total loan commitments.
Bob: We expect another strong year in 2025, we set the table last year and for the past few quarters are focused on executing our growth strategy.
Bob: Our advantages include accelerating momentum due to two consecutive quarters of net growth in earning assets.
Bob: We out rank our primary public peers in a variety of key financial measures, we have a 100% performing loan portfolio and a highly predictive Cecil reserve that has steadily declined in dollar amount and basis points. We have stable loan risk ratings, we have a low share of Oreo and non accrual loans in fact, we've had none.
Bob: Non accrual loans for five consecutive quarters.
Bob: Our run rate distributable earnings that covers our 24 cent per quarter dividend with upside potential due to deployable cash untapped financing capacity the near term prospect of capital recycled from our Oreo portfolio and the sourcing and investment strength of Tpg's integrated real estate credit and equity platform or <unk>.
Bob: Ample liquidity and financing capacity means our new loan investment activity is not reliant on loan repayments.
Bob: We expect our dividend yield will decline as the market fully recognizes our prior performance solid credit quality accelerating growth in earning assets and the results generated by the growth levers discuss this morning.
Bob: And with that we'll open the floor to questions operator.
Bob: Yeah.
Bob: Okay.
Speaker Change: Thank you we will now be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad confirmation tone will indicate your line is in the question queue. You May press star two to remove yourself from the queue for participants using speaker equipment. It may be necessary to pick up the handset before pressing the star keys, one moment, while we poll for questions.
Bob: Yeah.
Tom Casert: And our first question comes from Tom Casert food with BT Edgy. Please proceed with your question.
Tom Casert: Thanks, and good morning, everybody maybe.
Tom Casert: Starting with you on the two multifamily loans that you took in effort to foreclosure or those were for risk rated last quarter can you talk us through kind of what the change was over the course of the quarter that took those from.
Tom Casert: Before risk rating you know all the way through foreclosure and then how much needs to be done to bring those properties to stabilization.
Tom Casert: Sure Good morning, Tom Thanks for the question.
Tom Casert: As we discussed on our third quarter call, you know and pretty heavily previewed.
Tom Casert: These were two loans, where we have been pretty engaged with the borrower.
Tom Casert: And on the third quarter call you, everyone I think we'll recall that.
Tom Casert: We said these things might be modified and resolved or we might enforce remedies.
Tom Casert: Both situations, we did choose to enforce our remedies in the fourth quarter.
Tom Casert: That's consistent with our overarching Oreo philosophy, which is to Max value for our shareholders.
Tom Casert: And after.
Tom Casert: Reaching a point with both borrowers where it may it became clear to us that either borrowers going to.
Tom Casert: Meet the terms that we had set forth for modification was consistent with our principles, which are meaningful reduction in principal outstanding.
Tom Casert: Replenishment of interest reserves and so on are we and we went immediately towards the enforcement path and took back all three properties in two.
Tom Casert: Tune in November and one in December.
Tom Casert:
Tom Casert: In terms of the path forward from here the two properties in San Antonio with respect to all the properties. We immediately put our swap transition and property management teams in place we've used them on other properties that we've taken back in the past and San Antonio are we're working to stabilize and rebuild occupancy and we expect.
Tom Casert: To do some work on the properties to achieve that property in Chicago as well leased it's in excess of 90% leased and we would expect that we would do.
Tom Casert: Really quickly to sell out.
Speaker Change: Got it appreciate that Bob and then following up on on another item you discussed you talked about tap.
Tom Casert: Tapping.
Tom Casert: Your financing capacity as you continue to ramp our originations how do you expect leverage to scale through the year and could we see you out in the market looking to do a new C. C L O as well.
Tom Casert: Yeah.
Tom Casert: A good question first with respect to overall.
Tom Casert: Scaling of financing I would say that as we continue to and.
Tom Casert: And Vas, which we've been doing that on a macro basis. The past couple of quarters, we've got substantial liquidity already in place on the balance sheet. We have significant cash as you can see by inspecting our balance sheet I would expect that we would and are in the process actually of deploying that.
Tom Casert: First.
Tom Casert: And then we'll back lever, we have ample capacity to do that with.
Tom Casert: With existing credit facilities I mentioned in the table funding facility that we renewed for three years and Upsized were very active borrower in the note on note market, which as I mentioned in my prepared remarks continues to become more liquid and cheaper.
Speaker Change: Point of borrowers like tier Tx.
Speaker Change: And last with respect to the CRE CLO market that market has become.
Speaker Change: Recently active over the last.
Speaker Change: Couple of call it two and a half to three quarters tier JAKKS has been a leader in the CRE CLO market.
Speaker Change: Revived in early 2018.
Speaker Change: And so I wouldn't be surprised although I'm not meeting here and now.
Speaker Change: We would be purchased and again as a new issuer in that market at some point in 2025.
Speaker Change: I appreciate it just one last thing.
Speaker Change: And I didn't answer your question. So our current Leverages 2.14 to one.
Speaker Change: We have historically operated the business and the sort of three to 3.3 times leverage.
Speaker Change: We continue to increase the pace of our deployment I think youll see that debt to equity ratio marched up steadily.
Speaker Change: Okay.
Speaker Change: Got it thank you Bob and last one for me Doug in your prepared remarks.
Speaker Change: You noted the steeper yield curve as a forcing mechanism is that do you think of that as kind of forcing borrowers too.
Speaker Change: Sell assets, if if they if they can't find relief is it forcing borrowers into shorter term floating rate paper or is it forcing something else in the CRE market. How do you. How do you kind of think of that statement that you made.
Speaker Change: Yes, I mean, it is a little bit of all of the above I would say that you know when we think about the interest rate market look I think first with with the with the moving forward. So for let's just say kind of generally anchoring around 4% that does put you.
Speaker Change: Pressure on.
Speaker Change: Existing transactions that are out in the market, where there might be a need for.
A newly capitalized debt financing and we are looking at those types of transactions, where we can be opportunistic, but I would say again that with silver being elevated a forcing mechanism is just that.
Speaker Change: Some some borrowers may look to you know kind of a.
Speaker Change: Fix their broken capital structures, and that's one and then I would say too as it relates to interest rates as well.
Speaker Change: Clearly.
Speaker Change: On the fixed rate take outside as the 10 year Treasury has kind of hovered around four 5%.
Speaker Change: I think that's also putting a little bit of pressure on the timing for certain.
Speaker Change: The term out financings within perhaps the condo in the agency market.
Speaker Change: So I think all of that again, well what will help drive opportunity set and and I think all of that is is.
Speaker Change: <unk>.
Speaker Change: Founded in the fact that the interest rate market has also shifted so far from a pipeline perspective and that the second half of 2024 is really characterized by elevated interest rate volatility and that there's a lot of uncertainty in terms of the path of so for now kind of where perhaps the tenure would settle.
Speaker Change: For what it's worth as we've turned the calendar into January and February we have begun to see a reduction in interest rate volatility, which generally means that should be met with an increase in real estate activity I think that when real estate owners have a little bit more clarity in terms of the path of rates.
Speaker Change: They tend to deploy capital with what I would say a bit a bit higher pace. So I think those are kind of some of the big macro trends that are affecting our business and again all signs point to a very active 2025.
Speaker Change: And pipeline.
Speaker Change: Got it I appreciate all the thoughts thanks, everyone.
Speaker Change: Thank you.
Speaker Change: Yeah.
Speaker Change: Thank you and our next question comes from Stephen Laws with Raymond James. Please proceed with your question.
Stephen Laws: Hi, good morning.
Speaker Change: Two questions I guess.
Speaker Change: Good morning, Doug can you give us an update on your life Sciences exposure, you know I know things in that property type really seem to be asset by asset. So we'd love to get a little bit of color on your exposures, there and how those loans are performing.
Speaker Change: Absolutely. So we we began the quarter with with for life Sciences.
Speaker Change: Deals are not on our books, we actually had one of the four pay off.
Speaker Change: And so we're actually now down to three life Sciences transactions.
Speaker Change: When you think about our current exposure I think that one of the things that are really important to highlight is that first of all.
Speaker Change: None of our assets are in shell condition and that they're all built out and it's really just kind of a function of identifying tenants.
Speaker Change: For those spaces, secondly from a borrower perspective.
Speaker Change: Really kind of centered on the highest quality borrowers experienced borrowers in the market and those that we think are going to have a particular edge in terms of that lease up.
Speaker Change: And then I think lastly, if you zoom out for a moment and kind of think about tpg's expertise within life Sciences. It really is kind of a first class both in terms of having real estate equity and debt exposure within life Sciences, and then also just the broader TPG.
Speaker Change: Health care investing platform, which can provide some insights into some of the trends around the demand for life Sciences space.
Speaker Change: And I'd say you know.
Speaker Change: Lastly, Stephen as we have some insights in terms of our real estate equity business, we actually have seen.
Speaker Change: A slight uptick in terms of leasing and touring activity over the last 90 to 120 days. So why we fully acknowledge that I'd say business plans are going certainly slower than they were one or two years ago.
Speaker Change: We've been investing in this asset class for many years and we are starting to see a little bit of pick up in terms of activity.
Speaker Change: Great appreciate those comments Doug.
Bob: Bob a couple of them.
Speaker Change: Questions related to Oreo.
Speaker Change: Excuse me.
Speaker Change: I think you know.
Speaker Change: Are your revenue was flat I think that makes sense given your comments expenses I believe I read in the K we're up.
Speaker Change: $1 2 million related to the new assets.
Speaker Change: Can you talk about how you expect those line items to move forward I think the Chicago, you mentioned, 90% lease, but probably came in late in the quarter. So it may be add some some real estate income there, but then expenses, we need a full quarter impact from from the partial impact from Q4 is that is that fair or are there other factors I'm not.
Speaker Change: Considering.
Speaker Change: Oh. Thanks for your question, Stephen I think there's a sort of macro and some property specific answers I would say generally speaking most of our current Oreo properties are.
Speaker Change: Cash flow positive.
Speaker Change: The increase in real estate owned expenses that you cite was a one timer.
Speaker Change: And related entirely to the San Antonio property.
Speaker Change: We converted in early November.
Speaker Change:
Speaker Change: And with respect to Chicago.
Speaker Change: Multifamily properties in particular that we own.
Speaker Change: The two Chicago properties that we own are both 90 plus percent leased.
Speaker Change: Theyre very cash flow positive expenses are stable.
Speaker Change: So we would expect those to tour.
Speaker Change: Sale reasonably quickly and I would add although you didn't ask we don't really envision much in the way of capital expenditure expenditure excuse me.
Speaker Change: Across the portfolio as a whole.
Speaker Change: Right and then I'll ask difficult questions. So how do you define a reasonably quickly I think you.
Speaker Change: You mentioned in your prepared remarks, you know I think the two California assets being marketed for sale.
Speaker Change: You mentioned Chicago is leased up so something that could move quickly.
Speaker Change: When you think about the eight properties in Oreo bucket.
Speaker Change: You know a stairway to to.
Speaker Change: Estimate how many may move in the first half or in 2025 or <unk>.
Speaker Change: The other side of it how many are kind of longer term.
Speaker Change: Execution paths.
Speaker Change: Sure well let me.
Speaker Change: I will answer very specifically.
Again.
Speaker Change: Our our job one with respect to Oreo is to maximize shareholder value.
Speaker Change: And for us that means constantly evaluating the buy versus hold decision.
Speaker Change: And then executing accordingly.
Speaker Change: We did that and we have two properties in the market right now.
Speaker Change: And we would expect those to you now.
Speaker Change: Resolve themselves in this at or near the end of the second quarter we.
Speaker Change: We have offers on one and we expect offers on the other.
Speaker Change: Sure.
Speaker Change:
Speaker Change: We then have a second tranche.
Tranche of properties that we have.
Speaker Change: We have seasoned and.
Speaker Change: And we would expect to bring those to market. Shortly thereafter, I would say in general terms you know by the end of 2025, I would expect that our existing Oreo portfolio would be reduced by about half.
Speaker Change: Just to give you a general sense of timing.
That's great color. Thanks, Bob appreciate the Telmex this morning.
Speaker Change: Thank you our.
Speaker Change: Next question comes from Steve Delaney with JMP Securities. Please proceed with your question.
Steve DeLaney: Thanks, Good morning, everyone and congrats on a strong close to what was certainly a challenging year for the broad CRE market.
Speaker Change: From your comments it sounds like you have a far more constructive.
Speaker Change: View of 2025, I'm hearing that not only from your own internal in view of the economy, but also a lot of feedback from our real estate equity investors in the marketplace. So cutting right to the portfolio, which was 3.4 billion. It certainly sounds like you.
The opportunity to grow and you have relatively low leverage of two one times.
Speaker Change: Is it realistic to think and I'll just go straight to some specific numbers and you can talk me off the mountain, but just.
Speaker Change: Year end 2025.
Hal: If we model a portfolio of somewhere between $4 5 billion and $5 billion even Hal.
Speaker Change: How realistic in your mind, what would that level of portfolio growth for 2025. Thank you.
Speaker Change: Good morning, Steve and thanks for your question.
Speaker Change: As you know and as everybody on the call knows.
Speaker Change: <unk> never been in the practice of providing guidance.
Speaker Change: Having said that.
Speaker Change: Let me offer a law.
Speaker Change:
Speaker Change: Illumination on how we're thinking about the year, Doug was very clear that we think that the year has set up very nicely for increased investment activity.
Speaker Change: Describe the factors driving that.
Speaker Change: From our standpoint, we've got significant.
Speaker Change: <unk>.
Speaker Change: Liquidity on the balance sheet today.
Speaker Change: It's available to us for new investment frankly without leverage without recycling capital without anything else. So.
Speaker Change: So in rough terms.
Speaker Change: You know if we were to deploy say $200 million of that.
Speaker Change: Three or four to one that's 800 to a $1 billion of new loan investment activity.
Off the back.
Speaker Change: In our peak years of companies typically done around $2 billion, a little more than $2 billion of investment activity.
Speaker Change: On the repayment side.
Speaker Change: Doug made clear in his remarks that.
Speaker Change: Higher rates in this more steeply sloped yield curve excuse me would suggest that on balance existing loans are probably more likely.
Speaker Change: A little bit in prepay, obviously every loans a little bit different.
Speaker Change: But we've had strong steady repayments throughout the year, including the Lifesize deal that Doug mentioned earlier, so I would expect that the new investment activity would comfortably outpace.
Speaker Change: Loan repayment activity for the year.
Speaker Change: And so we would expect.
Speaker Change: Pretty significant growth in.
Speaker Change: In that earning assets, but I'm not in a position nor are we in the practice of providing a specific number.
Speaker Change: No understood.
Speaker Change: That's very helpful color and we will Kristina.
Speaker Change: Chris and I will work that out, but I've heard more part more positive than negative in terms of.
The opportunity that you are facing to invest capital in 2025 vis vis the.
Speaker Change: The past year.
Speaker Change: Just curious a little bit, but my little quick follow up you covered so much in these first few questions of the two new loans of $242 million.
Speaker Change: On the surface it looks a bit chunky.
Speaker Change: But then again.
Speaker Change: It's pretty clear you guys are not in the small balance CRE lending market, which we would normally put it at 25 or 50.
Speaker Change: And is that just reflecting sort of TPG from an institutional standpoint, your borrower mix.
Speaker Change: Would you consider yourself more upper middle market I don't know really how CRE lenders other than the small balanced segment, which is so obvious how you really.
Speaker Change: Kind of Peg yourself again between the very Mega borrowers and the small borrowers, but it seems like to me. What you are saying alone about 100 to 150 million on an individual loan to one borrower.
Speaker Change: Hearing that that's not that's not any kind of a heavy lift for TR T X is that.
Speaker Change: Is that a fair statement.
Speaker Change: Yeah, and happy to kind of speak to sort of how we think about loan sizing I would first highlight that the two loans that we did in Q4.
Speaker Change: Both of those do have some inherent diversity within the loans and that they are portfolio. So as we do kind of lean perhaps you know above the $100 million size. We will also orient ourselves towards portfolio, where we have the benefit of diversity.
Speaker Change: One.
Speaker Change: Scott.
Speaker Change: Secondly.
Speaker Change: These deals as well. We also are very focused on repeat borrowers. So we're seeing a lot of that both of them in the deals that we closed in the.
Speaker Change: The second half of 2024, and a lot of what we're seeing in our pipeline as repeat borrower heavy.
Speaker Change: When you think about sort of average loan size to kind of go back to the data.
Stephen Laws: We've again in approximate terms average typically loan sizes closer to kind of $75 million range. So I think that Steven while where we are.
Speaker Change:
Speaker Change: Somewhat uniquely positioned is that we do have range I mean, we can go down to.
Speaker Change: $25 million to $50 million, if we do see opportunities there, which we have done over the past over the past year, but also if we do see a deal thats $150 million or more.
Speaker Change: We see that as well so that put a fine point on it I would say that we're really trafficking really across both the middle market and upper middle market.
Speaker Change: And I think as we look at more and more institutional borrowers and institutional real estate is where we tend to sometimes have some.
Speaker Change: Somewhat larger loan sizes.
Speaker Change: That's helpful Nice kind of a nice wide bandwidth. Therefore, you. So thank you.
Speaker Change: Comment.
Speaker Change: Thank you I appreciate it.
Speaker Change: Yeah.
Speaker Change: Thank you.
Speaker Change: Next question comes from Don <unk> with Wells Fargo. Please proceed with your question.
Speaker Change: Bob can you talk a little bit about the moving pieces in the allowance.
Speaker Change: It looks like there was around $4 6 million of provision and then.
Speaker Change: Where reserves sufficient to cover the conversion to the Oreo loan Oreo this quarter.
Speaker Change: Sure.
Don: Don Thanks for the questions. So.
Speaker Change: I'll speak in.
Speaker Change: Numbers rounded to the nearest million.
Speaker Change: At the end of last quarter, our seasonal reserve was about $69 million.
Speaker Change: As previewed we converted the two loans we've been discussing in Rio.
Speaker Change: That occasion, a relief of the Sis the reserve of $10 million, which was within about.
Speaker Change: 250 to $300000 of the reserve that we had previously been carrying with respect to those two lines on the answer to your question is yes. It was fully reserved for.
Speaker Change: And those results are actually consistent with our historical seasonal results, where our realized losses have been.
Speaker Change: Around 3% within 3% of what our seasonal reserves were at the end of the quarter preceding the periods in which the realized loss was cancun.
Speaker Change: And then there was about five.
Speaker Change: $5 million of <unk>.
Speaker Change: <unk> as you said during the quarter, which was really driven by.
Speaker Change: The macro factor impact on our General reserve, we have no specific reserves had no specific reserves for awhile, It's all general.
Speaker Change: And so you know inflation steeper yield curve yield curve higher rates.
Speaker Change: A lot of these factors as a course through.
Speaker Change: The loss given default model that we and many of our competitors used to develop our seasonal reserve that's what gave rise to that.
Speaker Change: Approximately $8 million.
Speaker Change: So 69 minus 10 gets you to 59, plus five gets you to 64.
Speaker Change: That's 187 basis points, which is actually.
Speaker Change: 15, almost 20 basis points lower than the preceding quarter end and just reinforces the steady decline in that reserve rate expressed in basis points that we've engineered over the last.
Speaker Change: Number of quarters.
Speaker Change: So do you think you know what's your sense on provision going forward because you could argue that.
Speaker Change: There are some improving.
Speaker Change: Areas of commercial real estate.
And I guess, we're never thought.
Speaker Change: Yeah, what are your what's your thought process in terms of like three to four rated do you feel like you are pretty stable there.
Speaker Change: And just kind of generally thinking about provision expense going forward.
Speaker Change: Well, let me let me disaggregate your question into two parts. The first is sort of where do we see C sold reserve going on a forward looking basis.
Speaker Change: Oh.
Speaker Change: I would expect given where we are in the cycle in the 100% performing nature of our current book.
Speaker Change: The seasonal rate expressed in basis points, what would not increase.
Speaker Change: And theoretically over time that rates should converge with sort of the long term loss rate.
Speaker Change: For us as a company or our peers as a company as you know seasonal has been in effect for only five years. So all of US are still building our own sample centered universe of actual loans and losses in the interim we're using these large datasets that we contract with other companies to get.
Speaker Change: So I would expect that the rate would be.
Speaker Change: The flat or decline, but it's probably it's probably not going to go up.
Speaker Change: In dollar terms as we continue to grow our book, which we have been doing.
Speaker Change: We expect and you should expect that the dollar amount of the <unk> reserve will increase because it has two given how the Cecil.
Speaker Change: Pronouncement is apply every loan is going to attract some amount of general reserve as soon as it's booked.
Speaker Change: So I hope that answers that question. The second part of the question was.
Speaker Change: I think really about migration.
Speaker Change: We have only two four rated loans that's less than before it's about 3% of our current loan book.
Speaker Change:
Speaker Change: Otherwise our risk rating average has been 3.0 for a number of quarters. So we don't anticipate.
Speaker Change: Migration historically most of the four rated loans that we've had of either re performed and become threes or are they have been resolved through payoffs. Obviously some have migrated in the other direction, but that's not the majority of the minority.
Speaker Change: Okay. Thanks for all the detail.
Speaker Change: You bet.
Speaker Change: Thank you and our final question comes from Rick Shane with J P. Morgan. Please proceed with your question.
Rick Shane: Hey, guys. Thanks for taking my questions. This morning, I've got a few actually and a lot's been covered.
Rick Shane: Just curious last quarter, you were very very clear.
Rick Shane: About the potential path of the fours to the force becoming Oreo.
Rick Shane: You've got two remaining.
Rick Shane: <unk>.
Rick Shane: Are you going is your intent to be as aggressive potentially in terms of Oreo solutions or do you see different pads on those.
Rick Shane: Good morning, Rick and thanks, Thanks for your question.
Rick Shane: Before commenting specifically on those two loans allow me to restate again, our view about loan asset management, and Oreo management as well as you know our job is to Max shareholder value. So we're going to make the decision.
Rick Shane: In.
Rick Shane: At <unk>.
Rick Shane: Based on the facts and circumstances of each loan.
Rick Shane: As they develop and as the situation presents itself. So we've got two four rated loans.
Rick Shane: Currently I don't think its really a matter of us being more or less aggressive we've been very clear to the investor market and we're very pleased with the borrower market.
Rick Shane: It will be a commercially reasonable on loan modifications and extensions, but commercially reasonable to us means that you know our borrowers going to reduce its loan principal it's going to replenish an interest reserve. It is going to buy the interest cap that is obligated to buy under the loan agreement and so on.
Rick Shane: And if people do that then.
Rick Shane: We will be commercial and if they want.
Rick Shane: You as that shareholder value is best delivered by us.
Rick Shane: Owning it and doing whatever it needs to be done and then monetizing the property at the right time.
Rick Shane: With respect to the two properties I think once an office property in Honolulu, and the borrower looks like theyre going to sell that property and repay us and the other is a mixed use property in southern California.
Rick Shane: We continue to.
Rick Shane: Engaged in discussions with them about.
Rick Shane: The potential modification that occurred would need.
Rick Shane: Need to conform with the framework that I just described.
Speaker Change: Got it okay. Thank you.
Speaker Change: Second question you guys have been.
Rick Shane: <unk>.
Rick Shane: You recently renewed your facilities. So you were close to that market is anybody youre also.
Rick Shane: As you pointed out very experienced CLO issuers, we've seen the market.
Rick Shane: Reopened there've been over $5 billion issued year to date.
Rick Shane: When you look at the terms that you just received on your on your renewed facility and you look at what is happening in the CLO market can you compare give us some context in terms of.
Rick Shane: Available leverage spreads what are the puts and takes versus the two.
Markets right now.
Rick Shane: Sure.
Rick Shane: Well look we're fortunate that we're part of the TPG. So we have constant feelers out into the capital markets in here within the real estate credit platform and <unk> in particular, where active users of the capital markets.
Rick Shane: With respect to the bank facility.
Rick Shane: You referenced that.
Rick Shane: That market is.
Rick Shane: Pretty well developed and I would say recovering I'm going to distinguish the market. We just tapped from the the repo market repo market.
Rick Shane: Moderately active and we don't use a lot of repo, it's typically 20% to 25% of our backs.
Rick Shane: Max.
Rick Shane: But in the syndicated bank loan market, it's pretty active it is receptive to companies like ours that have strong credit profiles.
Rick Shane: And a good track record I would say specifically on that deal we found strong receptivity to our pricing.
Rick Shane: The structure.
Rick Shane: We're able to move things on and off of that facility. We don't really have restrictions on what we can put on it which is really really valuable to us as we optimize the liability structure of the company.
Rick Shane: We have seen over the last couple of years very strong investor interest in the note on note market and you've seen in our you've heard in our previous discussions and seen in our filings that we've been really active in that market advance rates have held steady strong in the mid to high I call, 75% to 80% range and spreads have come in.
Rick Shane: Finally, with respect to the CR CRE CLO market, we have seen a lot of new issuance.
Rick Shane: And the industry observers expect that to remain strong for the remainder of the year, we've seen improved structure in particular longer reinvestment periods for managed transactions.
Rick Shane: <unk> seen spreads coming in steadily.
Rick Shane: And we've also seen investor demand for transactions that have.
Rick Shane: Property types other than multifamily only and then in Q season collateral as well as newly originated collateral. So we see that as really interesting market, where we have a strong brand and reputation and so.
Rick Shane: So we monitor all of these markets and we try to optimize that's our job on behalf of shareholders.
Rick Shane: Got it and then if I could one last question and this goes back to <unk>.
Rick Shane: A discussion that actually the two of US had almost five years ago to the day.
Rick Shane: You talked about.
Rick Shane: Loan growth and implementation of our initiatives.
Rick Shane: Initial seasonal reserves.
Rick Shane: Five years ago, the industry was somewhat encumbered by the fact that you were using data were.
Rick Shane: There was for the past decade, very little default.
Rick Shane: Inventory.
Rick Shane: Now, we're entering a period where.
There is a high degree of defaulted inventory I'm curious when you think about the model how they adjust for that sort of recency bias.
Rick Shane: We see initial Cecil General reserve rates be higher because of this and how do you sort of manage that sort of barbell timeframe.
Rick Shane: Sure. Good question I do remember that conversation.
Rick Shane: And you're right but.
Rick Shane: These datasets are different today than they were in early 2020, because we've been through a fairly.
Rick Shane: Commercial real estate correction, where values have declined in some instances materially.
Rick Shane: But all of that loss data is timely and accurately captured by the various providers and compilers of the data.
Rick Shane:
Rick Shane: And look the idea in these models and frankly in the and managements judgment of how to buy them as too.
Rick Shane: Necessary adjust for what you termed recency bias.
Rick Shane: But clearly you know loss rates for the couple of years, leading into 2020 were quite low.
Rick Shane: But if you had looked at those loss rates extending back to 1998, which is when the data set actually begins.
Rick Shane: <unk>.
Rick Shane: They had been through a couple of cycles as well and now we have I hate to say this but the benefit of the last five years at least in terms of lost data.
Rick Shane: And so that will inform how we and others.
Rick Shane: Apply those loss rates to their seasonal estimates each quarter, but.
Rick Shane: But I feel confident of our ability to do that.
Rick Shane: But I do believe that again. These are forward looking the pronouncement is focused on forward. It's you know a current estimate of expected losses in the future.
Rick Shane: And so it needs to take into account not only.
Rick Shane: Past loss experience, but also the macroeconomic data rates GDP grows.
Rick Shane: LTV basis per square foot, the consumer property price index and a lot of other factors that are prospective.
Rick Shane: Not.
Historical.
Rick Shane: Got it okay. Thank you very much.
Rick Shane: It's going to be interesting to see how that develops over time, particularly as the industry.
Rick Shane: <unk> starting to grow loans again, thanks, guys.
Rick Shane: Thanks, Rick.
Rick Shane: Thank you.
Speaker Change: And with that there are no further questions at this time I would like to turn the floor back to management for closing remarks.
Speaker Change: Yes, just wanted to thank everyone for joining us this morning on our call and we look forward to updating all of you on the continued progress here at <unk> have a great day. Thank you very much.
Speaker Change: Thank you that does conclude today's teleconference. Thank you for your participation you may disconnect your lines at this time.
Speaker Change: Goodbye.
Speaker Change: [music].
Speaker Change: Yeah.