TPG RE Finance Trust, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. TPG RE Finance Trust is an externally managed commercial real estate finance company and REIT focused primarily on floating-rate commercial mortgage loans.
Financial performance and position
- Q3 results: Net loss was $61.2 million; loss attributable to common stockholders was $64.6 million, or $0.83 per diluted share. Net interest income was $19.5 million. Interest income of $90.0 million was offset by $70.5 million of interest expense.
- Nine-month results: Net loss was $123.0 million and loss attributable to common stockholders was $133.5 million, or $1.72 per diluted share. Net interest income was $67.4 million.
- Credit losses: Credit loss expense was $75.8 million in Q3 and $172.7 million for the first nine months. The quarter-end loan allowance was $213.3 million; including the $23.4 million reserve for unfunded commitments, total reserves were $236.6 million.
- Portfolio: 59 loans with $4.22 billion in commitments and $3.97 billion unpaid principal; all were floating-rate. Weighted average all-in yield was 9.3%, credit spread 3.7%, and LTV 67.2%. Multifamily represented 47.5% and office 24.0% of loan principal.
- Balance sheet and leverage: Total assets were $4.46 billion and stockholders’ equity $1.14 billion. Outstanding financing principal totaled $3.26 billion; debt-to-equity and total leverage ratios were each 2.60x. Cash and cash equivalents were $302.3 million.
- Liquidity: Management reported $570.6 million of available liquidity, including $237.5 million held in CLOs for eligible collateral and $286.7 million of cash available for investment after required covenant cash.
- Cash flows, nine months: Operating activities provided $56.9 million; investing activities provided $982.5 million; financing activities used $991.4 million. Cash, cash equivalents and restricted cash increased $48.0 million.
- Dividends: Common dividend remained $0.24 per share for Q3; $0.72 per share was declared for the first nine months. Series C preferred dividends were $0.3906 per share for Q3.
Changes versus comparable periods
- Compared with Q3 2022, Q3 2023 net interest income fell to $19.5 million from $30.4 million, while common-stockholder loss narrowed to $64.6 million from $117.9 million. Q3 credit loss expense was $75.8 million versus $136.7 million.
- For the first nine months, net interest income declined to $67.4 million from $107.0 million, and common-stockholder loss widened to $133.5 million from $106.3 million. Higher interest expense and loans placed on non-accrual weighed on results. The prior-year period included a $13.3 million gain on sale of real estate.
- Portfolio principal fell from $5.00 billion at year-end 2022 to $3.97 billion; loan count declined from 70 to 59. The allowance for loan losses rose from $197.3 million to $213.3 million, while the combined loan and unfunded-commitment reserve rose from $214.6 million to $236.6 million.
- Book value per common share declined from $14.48 at December 31, 2022 to $12.04 at September 30, 2023, primarily reflecting credit loss expense.
Outlook, risks and unusual items
- Management said it curtailed originations and prioritized liquidity amid higher rates, market volatility, banking-sector stress, declining property values and recession concerns. It originated three loans totaling $167.4 million in commitments during the first nine months.
- Credit remains a key risk: five loans totaling $380.0 million were individually assessed for CECL; four loans with $318.1 million amortized cost were on non-accrual and accounted for using cost recovery. Risk ratings 4 and 5 together represented $637.7 million of amortized cost. Management cited continuing office-sector and local-market deterioration.
- During Q3, the company sold two loans for $174.0 million against $281.6 million unpaid principal, recognizing $109.3 million of losses including transaction costs. It also foreclosed on a Los Angeles multifamily property; the company held two REO properties at quarter-end, with $112.0 million net real estate carrying value. Q3 REO operations recorded a $1.1 million loss.
- Lenders waived the interest-coverage covenant threshold to 1.30x for Q3 and Q4 2023 from 1.40x. Without another waiver, it returns to 1.40x in Q1 2024. The company reported covenant compliance at quarter-end.
- Management provided no earnings or portfolio guidance. It cautioned that refinancing and extension activity, financing availability, collateral values and future credit-loss estimates are sensitive to market conditions. Secured financing may expose the company to collateral-based margin calls; its revolving facility is fully recourse to Holdco.
- Subsequent event: On October 24, 2023, the company sold a defaulted Arlington, Virginia office loan with $86.7 million unpaid principal and a risk rating of 5.
Key facts for investors to verify
- How the four non-accrual loans, five individually assessed loans and Arlington loan sale affect future recoveries, realized losses and the CECL reserve.
- Whether office-property performance and commercial real estate valuations lead to further downgrades, foreclosures or reserve increases.
- Whether the company maintains interest-coverage compliance after the temporary covenant waiver expires, and whether financing maturities or margin requirements pressure liquidity.
- How much of the reported $570.6 million liquidity is deployable after CLO restrictions, covenant requirements and unfunded loan commitments.
- Whether net interest income and cash generation support the common dividend amid declining portfolio balances and elevated financing costs.