TPG RE Finance Trust, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; the filing also reports fourth-quarter results. The company is an externally managed commercial real estate finance REIT that primarily originates and acquires floating-rate first mortgage loans secured by U.S. commercial properties.
Financial performance and portfolio
| Metric | 2018 | 2017 |
|---|---|---|
| Interest income | $265.6 million | $198.9 million |
| Interest expense | $126.0 million | $78.3 million |
| Net interest income | $139.6 million | $120.6 million |
| Net income attributable to the company | $106.9 million | $94.3 million |
| Basic and diluted EPS | $1.70 | $1.74 |
| Dividends declared per share | $1.71 | $1.56 |
| Cash flow from operating activities | $107.7 million | $91.2 million |
- Fourth-quarter 2018 net income was $28.6 million, or $0.43 per share; the quarterly dividend was also $0.43 per share.
- Core Earnings, a non-GAAP measure, were $107.4 million, or $1.70 per share, compared with $94.4 million, or $1.74 per share, in 2017. Management cautions that Core Earnings are not GAAP net income or cash flow.
- At year-end, the loan portfolio comprised 60 loans with $4.31 billion unpaid principal, $4.95 billion total commitments and $634.2 million of unfunded commitments. Weighted-average credit spread was 3.9%, all-in yield 6.6%, LTV 64.5%, and extended term 3.9 years.
- Four fixed-rate CMBS investments had $76.4 million face amount and a 4.0% weighted-average yield to expected maturity. The securities were government agency- or GSE-guaranteed.
- Total assets were $4.53 billion, total liabilities $3.20 billion, and stockholders’ equity $1.33 billion. Outstanding borrowings were $3.17 billion; reported debt-to-equity was 2.36x, up from 1.71x in 2017.
- Year-end cash and cash equivalents were $39.7 million. The company reported $236.5 million of undrawn capacity against already approved collateral and a further $2.6 billion of potential financing capacity that requires lenders to approve and accept pledged collateral.
Changes versus 2017
- Net interest income rose $18.9 million and net income rose $12.6 million, primarily reflecting portfolio growth and higher average LIBOR; higher borrowing balances and financing costs partly offset the gains.
- Interest-bearing assets’ average yield declined from 6.9% to 6.6%, while average financing cost rose from 4.3% to 4.6%. Loan portfolio unpaid principal increased from $3.20 billion to $4.31 billion.
- EPS fell from $1.74 to $1.70 despite higher net income, while the weighted-average share count increased to 63.0 million from 54.2 million. Book value per share eased to $19.76 from $19.82.
- Debt increased from $2.13 billion to $3.17 billion. The company completed two CLOs totaling about $1.9 billion, adding non-recourse, matched-term financing; CLOs represented 52.1% of loan-portfolio borrowings at year-end.
- Portfolio mix shifted: office loans rose to 36.8% of loan UPB from 21.1%; condominium exposure declined to 3.3% from 16.1%. The weighted-average internal risk rating worsened to 2.8 from 2.6.
Outlook, risks and notable items
- Management stated expected leverage would generally be 3.0–3.5x debt to equity, subject to covenants and market conditions; this is an expectation, not earnings guidance. No numerical earnings or dividend guidance was provided.
- All loans were floating-rate and LIBOR-indexed. Net floating-rate exposure was approximately $1.17 billion; the filing estimates a 25-basis-point LIBOR increase would increase annual net interest income by $2.9 million, while a 25-basis-point decrease would reduce it by $2.7 million. Interest-rate floors affect sensitivity, and the company had not employed interest-rate derivatives to hedge its loan portfolio.
- Management reported no loans on non-accrual, no loan impairments or portfolio losses, and no material legal proceedings. Nonetheless, the average risk rating worsened and six loans carried a rating of 4; no loans were rated 5.
- Principal risks include commercial property and borrower credit deterioration, transitional-loan execution, leverage and refinancing, margin calls, lender and counterparty dependence, property concentration, illiquid assets, and the planned cessation of LIBOR after 2021. The company had $4.3 billion of LIBOR-linked loans and about $3.1 billion of LIBOR-linked debt.
- Unfunded loan commitments totaled $634.2 million. Scheduled debt principal included $1.64 billion due within one year, according to the contractual-obligations table; management cited repayments, extensions, refinancing, securitizations, capital markets and asset sales as potential repayment sources.
- Operating cash flow was $107.7 million, investing cash flow was a $1.19 billion outflow, and financing cash flow was a $1.05 billion inflow. Declared dividends of $109.1 million exceeded operating cash flow; cash flows are not equivalent to taxable income or funds available for distribution.
- The company expects adoption of the CECL expected-credit-loss standard for fiscal years beginning after December 15, 2019; it anticipated earlier recognition of loan-loss allowances but had not quantified the impact.
- In August 2018, the company issued 7 million shares for $138.7 million gross proceeds. It declared $1.71 per share in 2018 dividends and repurchased 23,577 shares in the fourth quarter. Subsequent to year-end through February 25, 2019, it reported 10 new or pending loan originations totaling $629.5 million and five full repayments totaling $246.2 million UPB.
Most important facts for investors to verify
- Whether the rise in portfolio risk rating and larger office concentration are accompanied by weaker collateral performance, borrower payment issues or future loss provisions.
- Liquidity and refinancing capacity against near-term contractual maturities, unfunded loan commitments and potential margin calls; distinguish committed undrawn capacity from capacity requiring new collateral approval.
- How higher funding costs, interest-rate floors and LIBOR replacement affect the asset-liability spread and earnings sensitivity.
- The sustainability and funding of dividends, given declared 2018 distributions slightly exceeded GAAP EPS and operating cash flow.
- The economics and recourse implications of CLO financing, guarantees, management fees and potential conflicts with the external manager and TPG-affiliated funds.