TPG RE Finance Trust, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet figures are as of March 31, 2019, compared with December 31, 2018 unless otherwise stated. The company is an externally managed commercial real estate finance REIT focused primarily on floating-rate first mortgage loans.
Financial and portfolio highlights
| Metric | Q1 2019 / March 31, 2019 | Comparison |
|---|---|---|
| Interest income | $76.6 million | $59.4 million in Q1 2018 |
| Interest expense | $39.4 million | $26.0 million in Q1 2018 |
| Net interest income | $37.2 million | $33.4 million in Q1 2018 |
| Net income | $28.4 million | $25.1 million in Q1 2018 |
| Diluted EPS | $0.42 | $0.42 in Q1 2018; $0.43 in Q4 2018 |
| Core Earnings per diluted share | $0.43 | Unchanged from Q4 2018; non-GAAP measure |
| Common dividend declared | $0.43 per share | $0.42 in Q1 2018 |
| Total assets / stockholders’ equity | $5.12 billion / $1.44 billion | $4.53 billion / $1.33 billion at year-end |
| Cash and cash equivalents | $55.4 million | $39.7 million at year-end |
| Total indebtedness | $3.64 billion | $3.17 billion at year-end |
| Debt-to-equity ratio | 2.48x | 2.36x at year-end |
- Profitability and margins: Year-over-year net interest income rose 11.6% and net income rose 13.1%. Average core interest-earning asset yield was 6.6%, versus a 4.6% average financing cost. The filing attributes the increase in net interest income mainly to portfolio growth and higher average LIBOR, partly offset by lower loan credit spreads.
- Cash flow: Operating activities provided $26.0 million; investing activities used $590.1 million, principally for loan originations and securities purchases; financing activities provided $579.1 million. Cash, cash equivalents and restricted cash increased $15.1 million to $55.8 million.
- Liquidity: The company reported $160.5 million of cash and currently undrawn borrowing capacity in its liquidity-source table. Separately, it cited $105.1 million of capacity available without pledging additional collateral. Additional financing capacity depends on lenders accepting collateral. Available-for-sale CMBS and CRE CLO securities had $310.2 million face amount.
- Loan portfolio: 66 first-mortgage loans or interests had $4.73 billion unpaid principal balance, $5.37 billion total commitments and $640.7 million of unfunded commitments. All loans were floating rate; weighted-average credit spread was 3.9%, all-in yield 6.7%, LTV 64.2%, and term to extended maturity 3.8 years.
- Credit quality: Weighted-average internal risk rating remained 2.8. Loans rated 4 totaled $133.8 million, down from $205.1 million at year-end; none were rated 5. The company reported no loans on non-accrual, no impairments and no loan-loss allowance.
- Other investments: The company held 14 CMBS and CRE CLO securities at $308.3 million fair value, up from $74.4 million at year-end. The portfolio included $1.9 million of unrealized losses; the filing says underlying loans were performing and no other-than-temporary impairment was recognized.
Material changes versus comparable periods
- Compared with Q1 2018, interest income increased $17.2 million, while interest expense increased $13.4 million; net interest income increased $3.9 million. Management cited loan portfolio growth of approximately $1.1 billion and higher average LIBOR, offset partly by a decline in weighted-average loan credit spread from 4.52% to 3.89%.
- Net income increased $3.3 million year over year, but EPS remained $0.42 as the weighted-average share count increased. Compared with Q4 2018, GAAP EPS fell from $0.43 to $0.42, which management primarily attributed to the March issuance of 6 million common shares.
- Loans held for investment increased to $4.71 billion from $4.29 billion at year-end. Total debt increased, with repurchase-agreement and term-loan balances rising while CLO balances declined.
- On March 19, the company issued 6.0 million common shares at $19.80 per share, generating $118.8 million net proceeds. In April, underwriters exercised an option for 900,000 additional shares, generating approximately $17.4 million before transaction expenses.
Outlook, risks and unusual items
- The filing provides no formal earnings or dividend guidance. Management’s stated objective is to deliver risk-adjusted returns through distributions and capital appreciation; it intends to use equity proceeds to originate or acquire commercial mortgage loans.
- Management reported $613.7 million of first-mortgage loan commitments closed or in process and $98.9 million of CRE CLO purchases from April 1 through April 29, 2019. A loan with $57.3 million unpaid principal balance was repaid in that interval.
- Key risks include real estate and credit-market deterioration, borrower defaults, collateral-value declines, interest-rate and credit-spread movements, refinancing and capital-market access, and counterparty or funding risk. Rising rates are generally expected to increase net interest income, but could pressure borrowers’ property cash flows. A 25-basis-point increase was estimated to raise annual net interest income by $3.4 million; a 25-basis-point decrease was estimated to reduce it by $2.4 million.
- Funding obligations include $640.7 million of unfunded loan commitments. The filing lists $1.86 billion of debt principal obligations due in less than one year and notes reliance on loan repayments, extensions, refinancing, capital markets, structured financing or asset sales to meet obligations. Repurchase facilities are subject to collateral acceptance, extension conditions and margin-maintenance provisions.
- All stated financing covenants were met at quarter-end. CLO assets and liabilities are consolidated VIE balances; those assets are restricted to the relevant VIEs and associated creditor recourse is limited to those assets.
- No material legal proceedings or material changes to previously disclosed principal risk factors were reported. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
- The company is externally managed and pays base and incentive management fees; Q1 management and incentive fees totaled $6.5 million incurred. The filing also identifies potential conflicts with the Manager and related parties. Adoption of the expected-credit-loss accounting standard was anticipated to require reserves at loan origination or acquisition; the company was evaluating the impact.
Most important facts for investors to verify
- Whether portfolio growth can sustain net interest income as loan spreads, financing costs and LIBOR change.
- Borrower performance, collateral valuations and migration in risk ratings, particularly for the $133.8 million of risk-rating-4 loans.
- Availability and terms of borrowing capacity, near-term maturities, margin-call exposure and the company’s ability to fund $640.7 million of unfunded commitments.
- Dividend coverage and the effects of share issuance, leverage and management fees on per-share returns and book value.
- The extent to which reported liquidity depends on asset repayments, new equity or debt issuance, and lender approval of collateral.