TPG RE Finance Trust, Inc.
Q4 2020 Earnings Call Transcript

Published: 25 Feb 2021

[Operator:]

Greetings and welcome to the TPG Real Estate Finance Trust, Fourth Quarter 2020 Earnings Conference Call. It is now my pleasure to introduce your host Deborah Ginsberg, Vice President and General Counsel. Thank you. You may begin.

[Deborah Ginsberg:]

Good morning, and welcome to TPG Real Estate Finance Trust's conference call for the fourth quarter of 2020. I'm joined today by Greta Guggenheim, Chief Executive Officer; Matt Coleman, President; Bob Foley, Chief Financial Officer and Peter Smith, Chief Investment Officer. Greta, Matt and Bob will share some comments about the quarter and the year. And then we'll open up the line for questions.

[Greta Guggenheim:]

Good morning, and welcome to our fourth quarter conference call. And if I suspect you may have read, I announced I will be retiring from my position as CEO and resigning from the board as of the end of this quarter. I've been thinking about my retirement for some time, actually since late 2019 after having helped build the company and with the intention of leaving it well positioned for future growth. This was delayed a bit, but with the strength of our balance sheet restored, our strong liquidity position, and with our experienced management and origination teams, I feel now is a good time to move on. The firm has asked and I have gladly accepted to stay on as an advisor to the business through this transition period. I want to thank TPG and the TRTX team for their commitment and support. I'm incredibly proud of what we've accomplished over these last five years and know the company is well positioned for continued success. With that, it's my pleasure to turn the call over to our President, Matt Coleman. Matt has assumed responsibility for the day-to-day management of the company. And TPG and the Board will jointly conduct a search for a new CEO. Matt and Bob, will now provide the earnings readout and share some comments about 2020 and the past quarter. Thank you.

[Matt Coleman:]

Thank you, Greta. On behalf of TPG and everyone at TPG, TRTX, I'm going to thank Greta for contributions to the company over the last five years. During her tenure at the firm, Greta led the successful IPO of TRTX, built a world-class team that's originated $9.1 billion of loans under her watch. And help establish the company as a leading real estate debt franchise. Greta, we all wish you well in retirement. And I thank you again for your many contributions to TRTX.

[Bob Foley:]

Thank you, Matt. Good morning, everyone. First I want to extend my warmest wishes to Greta upon her retirement from TRTX. Many of you know that for decades Greta and I were competitors and friends, before we became colleagues in early 2016. Her retirement marks the end of one chapter and the beginning of another. Greta, thank you for your leadership, competitive fire, integrity and wise-counsel, the accomplishments that TRTX and this team are the direct results of your forceful leadership, I will miss you as a boss, a partner and a friend. Thank you. Now onto the business at hands, we reported yesterday afternoon for the quarter ending December 31, GAAP net income for TRTX of $14.6 million, GAAP net income allocable to shareholders of $6.6 million or $0.09 per share and distributable earnings of $11.7 million or $.15 per diluted share. Book value declined to $16.50 per share, a decline of $0.28 for two reasons. First we declared on December 15 and paid on January 22, a special dividend of $0.18 per share attributable to the buildup of undistributed taxable income in earlier quarters of 2020 that exceeded our stated dividend rate of $0.20 per share. And two, we recorded credit loss expense of $16.3 million or $0.21 per share due to a specific reserve of 10 million on a defaulted retail loan in Metro Los Angeles and an incremental 6.3 million to our general CECL reserve due to the cautious stance we have on the economic reopening due to the slow rollout of the COVID-19 vaccine. Net interest margin declined by $7.8 million or $0.10 per share due to loan repayments, the full earning of $199.6 million received late in the third quarter and $365 million of loan repayments received very early in the fourth quarter. We collected 96.7% of interest due, which includes PIK interest of $0.9 million which is only 1.7% of total interest collections. Six of our 57 loans are subject to modification at year end, representing 548.4 million of UPB and 12.1% of our loan portfolio.

[Operator:]

Our first question comes from the line of Stephen Laws with Raymond James. Please proceed with your question.

[Stephen Laws:]

Hi, good morning. First, Greta congratulations on retirement, it's been a pleasure working with you and wish you well in the future. As I think about portfolio growth, Bob in modeling for the year, can you talk about, what if I look at the maturity schedule it's for next maturity is a lot this year, next year, but extended maturity is as a couple of years out. So can you talk about the repayment expectations as an offset to origination outlook and how we should think about leverage trending over the course of 2021?

[Bob Foley:]

Yes. Thanks and good morning, Stephen. Let me take the repayment and leverage, and then I may ask Peter to make some comments with respect to originations. Historically, our repayments have ranged annually between $1.3 billion and about $2 billion, that dynamic has not really changed in COVID. There has not been as much extension as one might think for the year that just ended our repayments were in the range of $1 billion. And our expectations for the current year are roughly the same that clearly means that some of the loans that have current scheduled maturities in 2021 are likely to extend. And we're managing that very carefully. And that will just play out during the course of the year. So I think that's a pretty reasonable expectation. In terms of leverage assumptions, we have reduced our leverage as most of our competitors with respect to bank-oriented borrowings, but on the term side which in our instance is primarily the two CLOs that we have outstanding. Our advance rates, there are slightly above 80%, which as I said in my comments, we believe is prudent given the non-recourse non-mark-to-market nature of those financing. So I think you will expect to see leverage largely unchanged, if we're more active in the capital markets, it might creep up a little bit. I don't think you'll see us do that much more leverage on the bank financing side. That is a healthy market. The bank and insurance companies are anxious to add assets and we're receiving very strong quotes from them with respect to our origination pipeline, but I think you'll see those advanced rates range in the 75% against loan balance rather than 80% and I think you'll see the higher advance rates only in our term funding arrangements. Peter?

[Peter Smith:]

Sure. Thanks Bob. Actually the pipeline looks pretty good right now. We really maintained a lot of the relationships and contacts with the borrowers and brokers that we've historically done a lot of business with them in 2020. And so we kept the communication lines open, so when we started to really originate again, it was relatively seamless. And we've been reaching out to brokers that necessarily we don't have daily or weekly contact with some borrowers. So we feel pretty good. So overall the pipeline looks pretty decent. I'll be at – the strikes on for I think for us has gotten a little bit smaller. We're going to look to be more heavily in multifamily this year similar to a lot of people I think you're hearing that across the board. And we feel pretty good. We have a decent pipeline for the rest of the year.

[Bob Foley:]

So to put that in numerical context, Stephen and others, I think that in prior years we typically originated between $2 billion and $3 billion on a measured by commitment. We're currently a recycler of capital as is everyone in our space. And so we would expect the current year originations would probably be the low end of that range as opposed to high, but market conditions will largely determine how that plays out.

[Stephen Laws:]

Great. Thanks. Thanks Peter. Thanks Bob. As a follow-up, can you talk about the Series B preferred for a second? When are those – when can that be refinance that to a lower cost of capital? Is that a 22 of that? Or when can you reevaluate that?

[Bob Foley:]

Well, it’s for use to say, that's job one along with maintaining the credit discipline that Matt mentioned earlier. So retiring the Series B preferred stock is truly the most important corporate finance objectives that we have and our capital markets team has for 2021. The specific answer to your question is that, the year-over-year maintenance on the Series B, it's effectively the present value of the dividend stream. The dividend rate is 11% through the second anniversary date of the deal, which is May 28 of 2022. And after that premium is 105%, then it steps down to 102.5% for the third year. So we're looking very closely at that. Starwood has been a great partner of ours thus far, but it is expensive capital. And so the positive momentum and lower funding costs that we're seeing across the fixed income and hybrid debt equity spectrum is obviously very interesting to us and we're pretty focused on refunding the Series B as quickly as is practicable. So we'll be weighing the cost of new funds and the clear use of that capital with the .

[Stephen Laws:]

Great. Thanks for the comments this morning.

[Matt Coleman:]

You bet. Thank you, Stephen.

[Operator:]

Thank you. Our next question comes from the line of Charlie Arestia with JP Morgan. Please proceed with your question.

[Charlie Arestia:]

Hey good morning everybody. Thanks for taking the questions today. I actually have a follow-up on sort of a maturities question from earlier. Looking at that chart on Slide 4, I'm wondering if you have disclosed kind of what the asset type or property type mixes on those 21 maturities, if it's pretty representative of the existing portfolio or if there's any real weightings by property type there? And then just sort of at a high level, what milestones really have to be met for those extension options to be realized? And then lastly – realized this is a bunch of questions apologize, but do you expect any additional credit reserves on those near-term maturities?

[Matt Coleman:]

Sure. Well, let's take those questions Charlie in the order in which you asked them. First, the repayment behavior thus far as you've seen and what we've reported has been heavily weighted on multifamily, which should not be a surprise given the strength of the multifamily financing market and the presence of the GSEs in particular and we expect that trend to continue during 2021. Our multifamily portfolio was paid down from roughly 23% of the total book to about 15% or 16%. We think that pace will continue, so much of the repayment activity that we forecast and that you see in 2021 is multifamily related not all, but much. And a quick way to get at that is you can download the loans, the mortgage loan schedule in Excel and sort by property type and maturity date. Your next question is which loans that have a scheduled maturity in 2021, do we expect will extend, and what tests do borrowers need to achieve in order to exercise those extensions? Our loan documents typically involve extension tests that include a minimum debt yield requirement and/or a minimum LTV requirement, sometimes both. And so we're able to predict with some accuracy and by staying in tight contact with our borrowers. We're able to see where we think borrowers will be able to achieve those hurdles and where they won't, if they can't and we feel comfortable with our asset coverage and the business plan, then an extension modification might be in where it's difficult to predict exactly on which loans and when. And if we can't, then the borrower is going to need to raise capitals either conventionally through the mortgage market or mortgage perhaps plus Mez in order to pay us back. But we do expect that there will be some extensions during 2021. And so for all of you, if you look at Page 4 in the schedule at the bottom, reality is likely to be somewhere between the blue bars and the gray bars. And then finally, your third question Charlie was with respect to loan loss reserves and further reserves. And the answer is we do our very best job every quarter through our portfolio reviews and the CECL loan loss reserve process to, be prudent to apply the accounting pronouncements and to come up with our best estimates of what the expected losses across our portfolio will be over the life of the loans in that portfolio. And so our reserve at quarter end reflects that. There are some times events and we've experienced them and so about others in the industry that are pretty sudden that crop-up. And the loan that was humming along all of a sudden isn't but we're comfortable with our level of reserves right now and are probably conservative at least based on what we've seen from our competitors reporting.

[Charlie Arestia:]

Okay. I appreciate all the color on that. Thank you.

[Bob Foley:]

You bet, thank you Charlie. Do you try to get one more in?

[Charlie Arestia:]

Thank you. I got one more in.

[Bob Foley:]

Okay. Whoever's next in the queue will graciously yield their time to you. Go ahead.

[Charlie Arestia:]

On the Las Vegas land loan. I know, I understand it's really early in the process, but we'd love to get your thoughts on longer-term plans for the asset, if it's a potential sales candidate or if development is maybe on the table as well?

[Bob Foley:]

Well let me take a crack at that. And Peter and Matt may have some follow-on. That's an asset that it's two parcels on the strip, 27 acres, a big loan exposure in a high-earning loan. We've been very attentive to that loan from the beginning since it was land. Both are developable sites, we are not developers. I think our business plan right now heavily trends toward sale to the right party or parties at attractive pricing. It is a little bit early in the process, but we've already done a significant amount of work to help us define a path toward monetization. Matt or Peter?

[Matt Coleman:]

No. We learn into the long-term holders of this. I think it is too early to lay out a timeline, but we're actively working with people in the local market.

[Bob Foley:]

Yes. Charlie, the last thing I point to is, if you look in the loan footnote under cap, we're obligated to describe how we estimate the value of loans and have a specific reserve identified against them. So if you go back and look at the 3Q foot note, you'll see both a range of discount rates and a sort of an estimated range of hold period for that asset and while there are no assurances that that will play out exactly the way that we've modeled it, our expectation as Matt said is that this will be a relatively short-term hold, but in a controlled way. We've financed it. We're well-capitalized we know that market pretty well. And so we'll be looking to maximize our value as we should be for shareholders.

[Charlie Arestia:]

Thanks very much guys. That's it for me. I appreciate it.

[Operator:]

Our next question comes from the line of Tim Hayes with BTIG. Please proceed with your question.

[Tim Hayes:]

Hey, good morning guys. Thanks for taking my questions. And Greta, best of luck to you on your next steps. Just on the pipeline again, I think you might've sized it earlier in the call, but I missed it. Can you – I just want to get a little bit more color on the pipeline, how many opportunities you're evaluating right now, what type of assets they largely consist of? And then, you mentioned just the impact of competition potentially on spreads and so what do all coupons look like on loans in the pipeline versus the portfolio average? Thanks.

[Bob Foley:]

Good morning to Tim, I'll let Peter provide color. The number that I referenced in my earlier comments was $3.5 billion currently under evaluation. But let me turn it over to Peter to give some color on asset classes and pricing that we're seeing in the market

[Peter Smith:]

Sure, the $3.5 billion really is a snapshot that we have right now. And that generally remains pretty consistent throughout. I think the vast majority of stuff that we find sort of actionable and interesting, right now is in the multifamily space. We have a pretty good reaching to that market. And so that's where we're spending the vast majority of our time. And we feel we probably have three more deals that we're going to be signing up in the next week or so on the multifamily side, so that's really where we're going to probably be focused over the next 12 months or so. We think that's the best area where we can actually have good impact and also a good risk reward scenario. With respect to coupons and really interest rates and things like that, I think we should really talk about coupons here versus spread primarily. And there's been just such an unprecedented slide in LIBOR, so LIBOR is at 14 basis points, 15 basis points or something like that right now. So we're really talking all in coupons these days. And just to give a little context on that, pre-COVID the sort of the all-in coupon that we were generally in the strikes on was about 4.25 to 4.5. And right now on the multifamily side of the world, it's really 3.50 to 3.75 sometimes a little bit tighter. So that's quite a bit, that's quite a bit inside. So we're spending time there, to LIBOR our floors used to be 1.50 to 1.75, now we're really running with a LIBOR of 4.25. The good thing about that is, we're not holding that grip, but as rates on the start end of the scale increase, we'll be picking up a little more yield on that. So we feel pretty good we're priced accordingly, I also not to be overlooked as our liabilities have gone down in rate quite a bit.

[Tim Hayes:]

Right. And that's really helpful. And that was going to be kind of Part B of that question is, you talked about just the capital markets side of things, but on your on your repo lines, have you seen funding costs come down there and just as banks are – will be heard, chomping at the bit to do business and have to compete with some attractive capital markets conditions?

[Bob Foley:]

We have, I would say that advanced rates have returned to pre-COVID levels which means for a well-sponsored transactions in the right property types, multifamily, industrial, I'd say stronger office business plans. You can finance up to 80% and that's consistent with the pre-COVID environment. Spreads are a little wider, depending again on sponsorship and everything else. Spreads are sort of 175-ish to low-200 from multifamily you can probably do a little better. From our perspective and my perspective, the really interesting thing about this market is that financing markets have inverted and structured finance is now materially less costly than borrowing from banks or life insurance companies on a credit facility basis. I’ve mentioned earlier that spread – that favorable spread in favor of CRE CLOs is probably between 35 basis points and 45 basis points, fully loaded, including transaction costs. And so that's a pretty important inversion. And when that we and others are very focused on and I think you're likely to see quite a bit of issuance volume in that market this year. The financing markets are strong across the board. The banks are very active. They have a strike zone that mirrors ours, cost of funds are a little higher, advanced rates are roughly consistent that would be our summary report card now. They have a lot of capital to put to work.

[Tim Hayes:]

Right. Thanks for that. And then just one more quick one if I can. Just on liquidity, in your cash position, just curious it seems like you're playing a little bit more often these days than you were a few months ago. So has your view on minimum cash level changed at all? And if you can just give us an idea of how much you'd feel comfortable deploying at this time?

[Bob Foley:]

Sure. We do have a very strong cash position. We expect that to go down Peter and the origination's team are doing a great job of sourcing the kinds of business we want to do. There are also some opportunities in our liability portfolio to prune some – selectively, some of our higher costs borrowings independent of what we might do in the structured finance markets. Typically in our industry folks have held cash, that's roughly 2% to 3% of their total assets, that our history supports that as well. So that would be a reasonable target for us. There are some variables that influence that, the more revolving capacity you have on your credit facilities whether they're secured or unsecured the lower cash balances, one can hold. And so as we continue to optimize our capital structure, I think you'll see our cash levels diminish even further, but they'll still be healthy. And they always happen, one wants to be prepared for the unexpected.

[Tim Hayes:]

Fair enough. Thanks for the color, Bob.

[Bob Foley:]

You bet. Michelle, back to the queue.

[Operator:]

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to Mr. Coleman for any closing remarks.

[Matt Coleman:]

Thank you. To conclude, I'm excited about our progress and our path forward, and looking forward getting to know those of you if not already met. We thank you again for your interest in TRTX and we'll speak to you in next quarter. Thank you.

[Operator:]

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.