TPG RE Finance Trust, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020. The company is an externally managed commercial real estate finance REIT focused primarily on floating-rate mortgage loans secured by U.S. commercial properties.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Interest income | $69.9 million | $92.4 million | $221.7 million | $257.2 million |
| Interest expense | $21.5 million | $47.9 million | $85.8 million | $133.7 million |
| Net interest income | $48.4 million | $44.5 million | $135.9 million | $123.6 million |
| Net income (loss) | $38.4 million | $33.0 million | $(151.4) million | $93.4 million |
| Diluted earnings (loss) per common share | $0.39 | $0.44 | $(2.13) | $1.29 |
| Common dividends declared per share | $0.20 | $0.43 | $0.83 | $1.29 |
- At September 30, the loan portfolio comprised 63 balance-sheet loans, with $5.45 billion of commitments and $4.94 billion unpaid principal. All loans were floating-rate; weighted-average credit spread was 3.3%, all-in yield 5.3%, LTV 65.8%, and extended term 3.3 years.
- Cash and cash equivalents were $225.6 million; total assets $5.15 billion; total liabilities $3.67 billion; and permanent stockholders’ equity $1.29 billion. The balance sheet also reported $198.2 million of Series B preferred stock as temporary equity.
- Outstanding financing principal was approximately $3.64 billion: $1.73 billion secured credit facilities, $1.83 billion CLO notes, and $77.0 million asset-specific financing. Debt-to-equity ratio was 2.66x and total leverage ratio 2.76x.
- For the nine months, operating cash flow was $102.1 million, investing cash flow was $637.8 million, and financing cash flow was $(594.1) million. Cash, cash equivalents and restricted cash increased $145.9 million to $225.6 million.
- Management reported available liquidity of $286.2 million: $203.9 million of cash available for investment or general corporate use, $23.2 million of CLO cash available for eligible investments, and $37.4 million of undrawn facility capacity, of which $30.9 million was immediately available. Facility availability remains subject to lender discretion and collateral requirements.
- Book value per common share was $16.78 at quarter-end, up from $16.55 at June 30, 2020.
Material changes versus comparable periods
- Q3 net interest income rose year over year despite lower interest income, as interest expense fell substantially with lower LIBOR and reduced financing costs. For the first nine months, net interest income increased 10% year over year.
- The nine-month net loss was driven chiefly by $203.4 million of losses and impairment on the sale of the company’s CRE debt securities portfolio, plus $53.5 million of credit loss expense, including a $13.8 million realized loan-sale loss. The securities portfolio was fully sold by April 2020; none remained at September 30.
- The company adopted CECL on January 1, 2020. The adoption reduced opening equity by $19.6 million; the September 30 allowance was $56.7 million on loans and $2.7 million on unfunded commitments.
- Loan credit quality weakened: the weighted-average risk rating rose to 3.1 from 2.9 at December 31, 2019. Loans rated 4 totaled $836.4 million and a $112.0 million loan was rated 5 at quarter-end.
- Common dividends were reduced to $0.20 per share in each of Q2 and Q3, compared with $0.43 per share in Q3 2019. The company issued $225 million of 11% Series B preferred stock and warrants in May 2020; up to another $100 million could be issued under the agreement subject to its terms.
- Secured credit agreement balances declined from year-end, and the company exited CRE-securities financing. It also made $157.7 million of voluntary deleveraging payments in May in exchange for temporary margin-call protections.
Outlook, risks and unusual items
- No formal earnings or dividend guidance is provided. Management said it is prioritizing active credit management, liquidity generation and recycling, extending financing maturities, reducing mark-to-market exposure, and controlling overhead.
- Management emphasized uncertainty from COVID-19, including effects on borrowers, tenants, property cash flows and values, refinancing and repayment activity, capital-market liquidity, and the company’s ability to raise financing. Hotel and retail exposures, as well as office-market changes, are particular concerns. Office loans represented 47.9% of loan UPB and hotel loans 14.7% at quarter-end.
- Fourteen loans had been modified during the first nine months; outstanding modified loans totaled $775.3 million UPB at September 30. The company said the modified loans were performing and none were on non-accrual at quarter-end. It cautioned that further delinquencies or defaults may occur.
- Subsequent event: a $112.0 million first mortgage loan on undeveloped land defaulted at maturity on October 9, 2020 after failing to meet extension conditions. It was placed on non-accrual, downgraded to risk rating 5, and had a $12.8 million specific reserve recorded at September 30. The company was considering remedies, including foreclosure or a deed-in-lieu.
- Subsequent event: on October 30, 2020, the company closed a $249.5 million, three-year secured facility at LIBOR plus 4.50%, with no mark-to-market margin calls for two years. It used proceeds to refinance borrowings and retire all mark-to-market borrowings related to hotel loans.
- After quarter-end, four first mortgage loans with $309.4 million aggregate UPB were repaid in full; net cash proceeds were $41.5 million after associated debt repayment, and $115.7 million was received by a CLO for reinvestment.
- Financing covenants were met at September 30, but management warned COVID-19 could make future compliance more difficult. The company disclosed prior first-quarter covenant non-compliance, which it said was cured, with lender waivers obtained.
- The company is exposed to LIBOR transition risk; all loans were LIBOR-indexed, and it was evaluating the transition to alternative reference rates. Fair-value estimates are also subject to heightened uncertainty because observable market data and transaction activity were limited.
- Management reported effective disclosure controls and no material legal proceedings or off-balance-sheet arrangements.
Most important facts for investors to verify
- Performance and recoverability of the $112.0 million maturity-defaulted land loan, including whether the $12.8 million reserve remains adequate and what recovery actions are pursued.
- Credit migration, delinquencies, future non-accruals and losses across the portfolio, particularly hotel, office and retail collateral and modified loans.
- Liquidity available in practice, including lender-controlled or conditional facility capacity, unfunded commitments of $514.0 million, and any renewed margin calls or collateral requirements.
- Whether loan repayments, refinancing conditions and collateral values support the reported credit-loss allowance and fair values amid ongoing COVID-19 uncertainty.
- Ability to meet debt maturities and covenants, and the impact of the 11% Series B preferred dividend, potential additional preferred issuance, warrants and common-stock dilution.
- Sustainability of the $0.20 quarterly common dividend and any future changes, including the company’s REIT distribution needs and available cash.