TPG RE Finance Trust, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. TPG RE Finance Trust is an externally managed commercial real estate finance REIT, focused mainly on floating-rate commercial mortgage loans. Financial amounts below are in U.S. dollars; “Q2” comparisons are to Q2 2020 unless otherwise noted.
Financial performance and portfolio
- Q2 results: Interest income was $61.9 million and interest expense $22.0 million, producing net interest income of $39.9 million, down from $44.2 million. GAAP net income was $32.4 million, versus $42.9 million. After preferred dividends and Series B redemption-related charges, loss attributable to common stockholders was $21.0 million, or $0.27 per share, compared with income of $40.1 million, or $0.52 per share.
- Six-month results: Net interest income was $77.8 million, versus $87.5 million. Net income was $64.3 million, compared with a net loss of $189.9 million in 2020; the prior-year period included $203.4 million of CRE debt securities impairment and sale losses. Income attributable to common stockholders was $3.2 million, or $0.04 per share, versus a $193.0 million loss, or $2.53 per share.
- Cash flow: Operating activities provided $61.1 million in the first half, versus $70.7 million. Investing activities used $363.6 million, principally reflecting $631.4 million of loan originations and $73.1 million of advances, partly offset by $282.6 million of principal repayments. Financing activities provided $223.4 million. Cash, cash equivalents and restricted cash totaled $240.6 million at period-end.
- Portfolio: At June 30, loans totaled $4.834 billion unpaid principal balance, across 62 balance-sheet loans, with $5.318 billion of commitments and $488.9 million of unfunded commitments. All loans were floating-rate; weighted-average credit spread was 3.2%, all-in yield 5.0%, term to extended maturity 2.9 years, and LTV 66.7%. The allowance for loan credit losses was $51.9 million, down from $59.9 million at year-end.
- Credit: The weighted-average internal risk rating remained 3.1. One $31.2 million retail loan was on non-accrual, with a $10.0 million specific reserve. Twelve modified loans, with $1.033 billion of unpaid principal, were performing; none of the modifications were classified as troubled debt restructurings. Scheduled interest collections, including PIK, were 99.3% in Q2.
- Balance sheet and debt: Total assets were $5.203 billion and stockholders’ equity $1.437 billion. Outstanding principal borrowings were $3.749 billion, comprising $2.836 billion of CLO financing, $863.2 million of secured credit facilities and a $50.0 million mortgage loan. Debt-to-equity was 2.44x and total leverage 2.53x. Approximately 81.9% of loan portfolio borrowings were non-mark-to-market.
- Liquidity: Management reported available liquidity of approximately $393.0 million, comprising cash, CLO trustee funds and undrawn secured-credit capacity. Of the $239.7 million cash balance, $15.0 million was held to meet a liquidity covenant; management identified $224.7 million as available for investment. A further $69.7 million UPB of unencumbered loans was eligible to pledge, subject to lender approval.
Material changes and unusual items
- Net interest income declined year over year as repayments and loan sales reduced the average interest-earning asset base; management also cited lower portfolio spreads and LIBOR floors. Q2 credit-loss benefit was $1.9 million, compared with a $10.5 million benefit in Q2 2020. Management attributed lower reserves to improved economic expectations, collateral performance and CRE market activity, while cautioning that recovery remained uncertain.
- In March, the company closed the $1.25 billion TRTX 2021-FL4 CLO and fully invested its $308.9 million ramp-up account during Q2. CLO carrying value rose to $2.821 billion from $1.826 billion at year-end, while secured credit agreements declined to $858.6 million from $1.514 billion.
- The company issued 8.05 million Series C preferred shares, raising $194.4 million net, and redeemed all Series B preferred shares for approximately $247.5 million. The redemption included a $22.5 million make-whole payment and accelerated/write-off charges; together these redemption-related items reduced Q2 income attributable to common stockholders by approximately $45.0 million. Series C has a 6.25% cumulative dividend and is redeemable by the company on or after June 14, 2026.
- The common dividend was $0.20 per share for Q2, unchanged from Q2 2020; first-half dividends were $0.40 per share versus $0.63. Distributable Earnings, a non-GAAP measure, were $21.9 million, or $0.27 per diluted share, for Q2. Book value per common share was $16.03, down from $16.61 at March 31, primarily reflecting the preferred-stock redemption.
Outlook, risks and contingencies
- The filing gives no quantitative earnings or dividend guidance. Management described resuming transitional-loan originations in Q1 2021 as credit performance, repayments, liquidity and financing arrangements improved. Subsequent to quarter-end, five loans totaling $372.5 million of commitments had closed or were in process; two loans with $212.8 million of UPB were repaid by August 2. The company also extended its Goldman Sachs facility maturity in August 2021.
- COVID-19, new variants, uneven vaccination and economic recovery remain risks to borrowers, property cash flows, collateral values and financing markets. Office exposure was 49.9% of loan UPB; hotel and retail assets also face sector-specific risks. Management emphasized the uncertainty of credit-loss and fair-value estimates given limited observable market data.
- All loans were LIBOR-indexed at June 30. LIBOR cessation is expected after June 30, 2023; the company is working on transition processes. FL3 liabilities transitioned to SOFR in June while related assets remained LIBOR-indexed, creating a basis difference management expects to mitigate. The filing’s modeled 12-month sensitivity showed a 25-basis-point rate increase reducing net interest income by $8.4 million, while a 25-basis-point decrease increased it by $3.2 million, reflecting loan floors and floating-rate funding.
- Secured facilities include collateral-specific margin-call provisions, and one also permits spread-based margin calls. Refinancing, extension, covenant compliance and access to capital remain important liquidity risks. The company reported compliance with financial covenants at quarter-end. It reported no material legal proceedings and no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether loan growth and repayments support net interest income as the portfolio’s average yield and spreads evolve.
- Performance and collateral values of the non-accrual retail loan, modified loans and loans rated 4 or 5; monitor reserve adequacy and future delinquencies.
- Available liquidity after covenant cash requirements, unfunded commitments and dividends, and the actual availability of lender capacity and CLO reinvestment.
- Net common-stockholder economics after Series C dividends, the Series B redemption costs and any warrant dilution; compare GAAP results with non-GAAP Distributable Earnings.
- LIBOR-to-SOFR conversion terms, asset-liability index alignment, and exposure to margin calls, facility maturities and refinancing conditions.