TPG RE Finance Trust, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter ended September 30, 2019; comparisons include Q3 and nine months ended September 30, 2018. The company is an externally managed commercial real estate finance REIT focused mainly on floating-rate mortgage loans secured by U.S. commercial properties.
Financial performance and position
| Metric | Q3 / September 30, 2019 | Comparable period / prior year |
|---|---|---|
| Interest income | $92.4 million | Q3 2018: $69.9 million |
| Interest expense | $47.9 million | Q3 2018: $34.3 million |
| Net interest income | $44.5 million | Q3 2018: $35.6 million |
| Net income attributable to TPG RE Finance Trust | $33.0 million; $0.44 per diluted share | Q3 2018: $26.8 million; $0.42 per share |
| Nine-month net interest income | $123.6 million | 2018: $103.5 million |
| Nine-month net income attributable to the company | $93.4 million; $1.29 per diluted share | 2018: $78.4 million; $1.27 per share |
| Cash and cash equivalents | $99.3 million | December 31, 2018: $39.7 million |
| Total assets / stockholders’ equity | $5.86 billion / $1.47 billion | December 31, 2018: $4.53 billion / $1.33 billion |
| Outstanding borrowings | $4.36 billion principal | December 31, 2018: $3.17 billion |
- Q3 GAAP net income increased 23% year over year; nine-month net income increased 19%. Management attributed higher net interest income chiefly to portfolio growth, partly offset by lower loan credit spreads and increased funding costs.
- Q3 Core Earnings, a non-GAAP measure, were $33.4 million, or $0.45 per share, compared with $32.7 million, or $0.44 per share, in Q2 2019. Q3 GAAP diluted EPS was $0.44 versus $0.43 in Q2.
- Q3 dividend declared was $0.43 per share, unchanged year over year; $1.29 per share was declared for the first nine months of 2019. The Q3 dividend, totaling $32.0 million, was paid October 25, 2019. Book value was $19.78 per common share, versus $19.76 at June 30, 2019.
- Operating cash flow was $87.9 million for the first nine months. Investing activities used $1.26 billion and financing activities provided $1.23 billion; cash, cash equivalents and restricted cash increased $59.0 million.
- Management reported $217.5 million of available liquidity, including cash and currently drawable financing capacity; undrawn capacity under existing facilities was approximately $118.1 million. Borrowing availability depends on eligible collateral and lender approval.
Portfolio, financing and changes
- At quarter-end, the loan portfolio had $5.70 billion of commitments, $5.04 billion of unpaid principal and $661.4 million of unfunded commitments. All loans were floating rate; weighted-average credit spread was 3.7%, all-in yield 6.0%, LTV 65.9%, and term to extended maturity 3.8 years.
- The weighted-average loan risk rating moved to 2.9 from 2.8 at year-end 2018. Loans rated 4 totaled $267.3 million, up from $205.1 million; no loans were rated 5. The company reported no non-accrual loans, impairments or loan-loss allowance.
- Office loans represented 43.0% of loan UPB; the East region represented 45.5%. These concentrations, together with transitional-property exposure, are relevant to portfolio credit risk.
- Available-for-sale CMBS and CRE CLO securities totaled $631.8 million at fair value, compared with $74.4 million at year-end 2018. The company purchased 27 CRE CLO investments during the first nine months. Two securities were in an unrealized loss position, but underlying loans were performing and no other-than-temporary impairment was recorded.
- Total debt-to-equity was 2.91x and total leverage was 3.00x, versus 2.36x for both measures at year-end 2018. Nearly all loan assets and related borrowings were floating rate; net floating-rate exposure was $1.21 billion. A 25-basis-point rate increase was estimated to raise next-12-month net interest income by $3.0 million; a 25-basis-point decrease was estimated to raise it by $4.4 million, reflecting loan floors.
- In August, the company redeemed its FL1 CLO securities for $509.5 million and refinanced related collateral with repurchase borrowings. It also opened a $750 million Barclays repurchase facility. After quarter-end, it closed a third CLO, FL3, with $1.23 billion of notes issued, and reported five new or pending loan closings totaling $475.8 million and repayments of seven loans totaling $369.4 million through October 28.
Outlook, risks and other disclosures
- The filing provides no specific earnings or dividend guidance. Management’s stated objective is to generate risk-adjusted returns through distributions and capital appreciation; future results remain subject to forward-looking-statement risks.
- Key risks include borrower defaults and property-value deterioration, interest-rate and credit-spread changes, refinancing and lender collateral requirements, liquidity and capital-market access, loan prepayments or extensions, and LIBOR transition. Management said it was evaluating the transition from LIBOR, then expected to cease after 2021.
- The company had $661.4 million of unfunded loan commitments, subject to borrower milestones. Debt agreements contain liquidity, net-worth, leverage and interest-coverage covenants; the company reported compliance at quarter-end. Certain facilities include recourse guarantees and margin-maintenance provisions.
- Expected-credit-loss standard CECL was planned for adoption in Q1 2020. The filing does not provide a clear estimate of the adoption impact.
- No material legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether loan risk-rating deterioration, property-type and geographic concentration, and transitional-property performance have changed since September 30.
- Actual usable liquidity, collateral eligibility, lender approvals, facility extensions and exposure to margin calls or covenant limits.
- Credit quality and realized performance of the expanded CRE CLO portfolio, including fair-value changes and any credit losses.
- The effect of CECL adoption, LIBOR transition, and rate changes on credit-loss allowances, funding costs and net interest income.
- Dividend coverage by recurring earnings and cash generation, considering leverage, unfunded commitments and manager fees.