TPG RE Finance Trust, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. The company is an externally managed commercial real estate finance REIT that originates and acquires primarily floating-rate commercial mortgage loans. This unaudited report covers the quarter and six months ended June 30, 2019; financial amounts below are in U.S. dollars unless noted.
Financial performance and position
| Metric | Q2 2019 / June 30, 2019 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $88.3 million | $64.7 million in Q2 2018 |
| Interest expense | $46.4 million | $30.2 million in Q2 2018 |
| Net interest income | $41.8 million | $34.5 million in Q2 2018 |
| Net income | $32.0 million; diluted EPS $0.43 | $26.4 million; diluted EPS $0.44 in Q2 2018 |
| Six-month net income / diluted EPS | $60.4 million / $0.85 | $51.6 million / $0.86 in H1 2018 |
| Cash from operations, six months | $53.0 million | $52.2 million in H1 2018 |
| Assets / stockholders’ equity | $5.825 billion / $1.465 billion | $4.527 billion / $1.327 billion at Dec. 31, 2018 |
| Cash and cash equivalents | $70.0 million | $39.7 million at Dec. 31, 2018 |
| Debt principal outstanding | $4.324 billion; reported debt-to-equity ratio 2.90x and total leverage ratio 2.99x | $3.174 billion; both ratios 2.36x at Dec. 31, 2018 |
Q2 GAAP net income increased 12.7% from Q1 2019, and Core Earnings were $32.7 million, or $0.44 per share, versus $28.9 million, or $0.43 per share, in Q1. Core Earnings is a non-GAAP measure. The company declared a $0.43-per-share Q2 dividend, paid July 25, 2019. Book value per common share was $19.76, up from $19.73 at March 31.
At quarter-end, the loan portfolio had $4.849 billion of unpaid principal, a 3.8% weighted-average credit spread, 6.5% all-in yield, 65.1% weighted-average LTV and 3.8-year term to extended maturity. All loans were floating rate. Available-for-sale CMBS and CRE CLO securities had $679.2 million fair value. The company reported $171.4 million of cash and identified borrowing capacity, including $70.0 million cash and $101.4 million of undrawn capacity against already pledged collateral; additional capacity depends on lenders approving further collateral.
Six-month cash flows were $53.0 million provided by operations, $1.268 billion used in investing and $1.245 billion provided by financing, leaving cash, cash equivalents and restricted cash up $29.8 million. Investing outflows chiefly reflected loan originations and securities purchases.
Material changes versus comparable periods
- Q2 net interest income rose $7.3 million year over year; H1 net interest income rose $11.2 million. Management attributed growth mainly to larger loan and securities portfolios and higher average LIBOR, partly offset by narrower loan credit spreads.
- Debt principal increased about $1.150 billion from year-end, alongside portfolio growth. The debt-to-equity ratio rose to 2.90x from 2.36x.
- Q2 diluted EPS was $0.43 versus $0.44 a year earlier, despite higher net income; the filing cites the effect of issuing 6.9 million common shares during the current year.
- Risk rating 4 loan carrying value increased to $336.4 million from $205.1 million at year-end; the weighted-average risk rating remained 2.8. No loans were on non-accrual, impaired or subject to a loan-loss allowance at June 30.
- Available-for-sale securities grew to $679.2 million from $74.4 million, primarily reflecting CRE CLO purchases. The portfolio recorded a $3.2 million H1 unrealized gain in other comprehensive income, versus a $1.6 million loss in H1 2018.
Outlook, risks and unusual items
- The filing provides no specific earnings or portfolio guidance. Management describes a strategy focused on floating-rate first mortgage lending and says rising rates generally benefit net interest income, subject to loan floors and other factors.
- Rate sensitivity analysis estimates that a parallel 25-basis-point increase would raise next-12-month net interest income by $2.8 million; a 25-basis-point decrease would reduce it by $1.5 million. These estimates exclude CMBS and CRE CLO investments and related liabilities.
- Key risks include borrower defaults and property-value declines, interest-rate and credit-spread movements, funding availability, collateral haircuts and margin calls, refinancing and maturity risk, lender and counterparty concentration, and REIT qualification. Loan financing arrangements include financial covenants and certain guarantees; the company reported compliance at quarter-end.
- Contractual obligations included $664.4 million of unfunded loan commitments and $4.324 billion of debt principal. The company expects to meet debt obligations through loan repayments, extensions, refinancing, capital raises, structured financing or asset sales. Some secured borrowings have recourse or “bad boy” carve-outs.
- Three CMBS/CRE CLO repurchase arrangements shown with July 2019 roll or maturity dates were reported as extended subsequent to quarter-end. From July 1 through July 29, the company reported three loans closed or in process totaling $454.3 million and full repayments of two loans with $249.1 million combined unpaid principal at June 30.
- Four loans moved into risk rating 4 during Q2; one move was associated with uncertainty following New York City rent-regulation changes. The company also disclosed that the expected-credit-loss accounting standard scheduled for 2020 adoption may require recording loan-loss reserves at origination or acquisition; the impact was still being evaluated.
- The company is externally managed by a TPG affiliate and pays base and incentive management fees. The filing highlights potential conflicts with TPG and its affiliates. No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether the increase in risk-rating-4 loans, including exposure affected by NYC rent regulation, changes collateral performance or credit losses.
- Whether available liquidity remains sufficient as debt maturities, unfunded commitments and dividends come due; distinguish cash and currently undrawn capacity from capacity requiring new collateral approval.
- How higher leverage, lender extensions, collateral haircuts, margin-call provisions and recourse guarantees affect refinancing and liquidity risk.
- Whether loan repayments and new originations sustain net interest income as credit spreads, funding costs and interest rates change.
- The effect of external-manager fees and conflicts, REIT compliance, and adoption of the expected-credit-loss standard on future earnings and distributions.