TPG RE Finance Trust, Inc. quarterly report, Q3 FY2017

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TPG RE Finance Trust, Inc. — Q3 2017 Form 10-Q

Reporting period: Three and nine months ended September 30, 2017. The company is a TPG-sponsored, externally managed commercial real estate finance REIT focused mainly on originating and acquiring commercial mortgage loans.

Financial results and position

  • Q3 revenue and earnings: Interest income was $46.7 million and interest expense was $19.2 million, producing net interest income of $27.6 million, up 17.5% from $23.5 million a year earlier. Net income was $20.8 million, up 19.2% from $17.4 million. Basic and diluted EPS was $0.35 versus $0.43.
  • Nine-month results: Interest income was $146.4 million, interest expense $56.6 million, and net interest income $89.8 million, compared with $112.6 million, $44.9 million, and $67.6 million, respectively, in 2016. Net income was $69.6 million versus $50.8 million; EPS was $1.34 versus $1.30.
  • Dividends and book value: Q3 dividend declared was $0.33 per share, versus $0.41 in Q3 2016. Book value per common share was $19.80, down from $20.20 at June 30, 2017. Q3 Core Earnings, a non-GAAP measure, equaled net income attributable to common stockholders: $20.8 million, or $0.35 per share.
  • Assets and portfolio: Total assets were $3.04 billion and stockholders’ equity was $1.21 billion at quarter-end. Loans held for investment were $2.82 billion; the loan portfolio had $2.85 billion of unpaid principal, $581.6 million of unfunded commitments, a 4.9% weighted-average credit spread, 6.4% all-in yield, 59.2% weighted-average LTV, and 3.5-year extended maturity. Five CMBS investments had a fair value of $86.2 million.
  • Debt and leverage: Outstanding borrowings were approximately $1.80 billion; debt-to-equity was 1.44x and total leverage was 1.55x. The private CLO was repaid and terminated in August. The company entered a $250 million Bank of America senior secured facility in September, expandable to $500 million with lender agreement; it was undrawn at quarter-end.
  • Liquidity and cash flow: Cash and cash equivalents were $64.8 million, down from $103.1 million at year-end 2016. Reported available liquidity sources totaled $346.2 million, including cash, $147.0 million of undrawn revolving-facility capacity and $134.4 million of asset-specific financing capacity. Further borrowing capacity depends on lenders accepting eligible collateral. Nine-month operating cash flow was $67.2 million; investing cash flow was negative $401.5 million and financing cash flow was positive $296.0 million.

Changes and significant events

  • The July IPO and partial overallotment generated approximately $212.3 million in net proceeds, which the company said it used to originate commercial mortgage loans. The company also issued a stock dividend, increasing shares outstanding; this helps explain why Q3 net income rose while EPS fell year over year.
  • Portfolio growth and higher average LIBOR increased interest income and net interest income. Higher borrowings and borrowing rates partly offset the increase. Nine-month net interest income rose $22.2 million year over year.
  • The CLO was unwound in August: the company sold two loan interests, transferred seven others from the CLO to a subsidiary, and retired the remaining $118.0 million note. The company recognized $0.9 million of additional unamortized issuance costs on retirement.
  • Q3 included $2.7 million of discount accretion associated with a CMBS sale and a $0.3 million gain on that sale; the CLO loan sales also generated a $0.2 million loss.
  • From quarter-end through November 6, the company originated three first mortgage loans with aggregate commitments of $294 million. It repurchased 0.2 million shares after quarter-end for $3.4 million.

Outlook, risks and contingencies

  • The filing provides no quantitative earnings or dividend guidance. Management expects public-company operating costs and management-related expenses to increase following the IPO.
  • Management says rising interest rates generally increase net income because the portfolio is predominantly floating rate. The filing estimates that an immediate 25-basis-point increase would raise 12-month net interest income by $1.9 million; a 25-basis-point decrease would reduce it by $1.2 million. These are sensitivities, not forecasts.
  • Key risks include commercial real estate and collateral deterioration, borrower defaults, changing interest rates and credit spreads, financing availability and cost, lender margin calls and collateral eligibility, refinancing and extension risk, and reliance on capital markets. Approximately 98.8% of loan principal was floating rate; net floating-rate exposure was $1.01 billion.
  • The company reported no impaired or non-accrual loans and no loan-loss allowance at quarter-end; its weighted-average internal risk rating was 2.6, unchanged from year-end. Four loans were downgraded from rating 3 to 4 during the first nine months, while two loans improved from rating 4.
  • Unfunded loan commitments were $581.6 million. The company reported no material legal proceedings, no material changes to previously disclosed principal risks, and effective disclosure controls as of September 30, 2017. REIT status and continued access to secured financing remain important dependencies.

Investor verification priorities

  1. Review the IPO-related share increase and stock dividend when comparing per-share results, book value, and dividend coverage.
  2. Assess whether available liquidity and eligible collateral can support $581.6 million of unfunded loan commitments, debt maturities, and dividends.
  3. Examine collateral performance, particularly the four loans rated 4, higher-LTV exposures, and geographic and property-type concentrations.
  4. Verify the effects of the new post-IPO management and incentive-fee arrangements, including the expected increase in public-company costs.
  5. Track floating-rate asset and liability repricing, borrowing costs, lender advance rates, and the availability and terms of facility extensions.