TPG RE Finance Trust, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. The company is an externally managed commercial real estate finance REIT focused primarily on floating-rate mortgage loans.
Financial performance and portfolio
| Metric | Q3 2021 / September 30, 2021 | Comparable period / prior date |
|---|---|---|
| Interest income | $60.0 million | $69.9 million in Q3 2020 |
| Net interest income | $39.0 million | $48.4 million in Q3 2020 |
| Net income | $29.3 million; diluted EPS $0.32 | $38.4 million; diluted EPS $0.39 in Q3 2020 |
| Net income attributable to common stockholders | $26.0 million | $30.8 million in Q3 2020 |
| Distributable Earnings (non-GAAP) | $27.0 million; $0.33 per diluted share | $21.9 million; $0.27 per diluted share in Q2 2021 |
| Nine-month net income (loss) | $93.7 million; diluted EPS $0.36 | Loss of $151.4 million; diluted EPS loss of $2.13 in 2020 |
| Nine-month net interest income | $116.8 million | $135.9 million in 2020 |
| Operating cash flow, nine months | $97.0 million | $102.1 million in 2020 |
| Total assets / stockholders’ equity | $5.20 billion / $1.45 billion | $4.91 billion / $1.27 billion at December 31, 2020 |
| Common dividend | $0.24 per share for Q3 | $0.20 in Q3 2020; $0.20 in Q2 2021 |
- Loan portfolio: $5.24 billion total commitments and $4.76 billion unpaid principal balance across 65 loans held for investment; a further $86.6 million loan was classified as held for sale. Loans were 100% floating rate. Weighted-average credit spread was 3.3%, all-in yield 4.9%, loan-to-value 66.3%, and risk rating 3.1.
- Credit quality: The funded-loan allowance was $50.1 million; including the $4.9 million reserve for unfunded commitments, total credit-loss reserves were approximately $55.0 million. The funded-loan allowance declined $9.9 million during the first nine months. One $31.2 million retail loan was on non-accrual, with a $10.0 million specific reserve.
- Debt and liquidity: Outstanding borrowings were approximately $3.73 billion, comprising $2.76 billion of CLO notes, $919.9 million of secured credit facilities, and a $50.0 million mortgage loan. Debt-to-equity was 2.40x and total leverage was 2.49x. Reported available liquidity was $323.6 million, including $269.3 million cash, $47.4 million secured-facility undrawn capacity, and $6.9 million of CLO cash. Management reported $254.3 million of cash available for investment after the $15.0 million minimum liquidity covenant reserve and other restrictions.
- Other exposure: Office loans made up 50.2% of portfolio UPB. Unfunded loan commitments totaled $486.7 million. The company also held $99.2 million of Las Vegas land acquired through a deed-in-lieu of foreclosure, financed by a $50.0 million non-recourse mortgage.
Material changes and unusual items
- Q3 net interest income fell year over year, primarily because repayments and sales reduced the average earning-asset base and portfolio all-in yield and LIBOR floors declined. For the first nine months, interest income decreased to $180.0 million from $221.7 million, partly offset by lower interest expense.
- The year-over-year nine-month earnings comparison was substantially affected by 2020 CRE debt-security losses: $203.4 million of impairment and sale losses. The company held no CRE debt securities at September 30, 2021.
- In June, the company issued $201.3 million of Series C preferred stock, with a 6.25% dividend rate, and redeemed all Series B preferred stock for approximately $247.5 million, including a $22.5 million make-whole payment. A further $22.5 million write-off of unamortized discount and transaction costs affected earnings attributable to common stockholders, but was treated as an equity distribution rather than an operating expense. Series C dividends are cumulative and the shares are redeemable at the company’s option beginning in 2026.
- The company closed a $1.25 billion CLO in March 2021. Non-mark-to-market financing represented 77.8% of total loan portfolio borrowings at quarter-end. The company reported compliance with financial covenants.
- Q3 activity included seven loan originations totaling $482.9 million and $460.4 million of repayments. Four borrowers received five modifications; the modified loans were performing at quarter-end and none qualified as troubled debt restructurings. One hotel loan classified as held for sale was sold at par, before transaction costs, on October 4.
Outlook, risks, and contingencies
- The filing provides no numerical earnings or portfolio guidance. Management said lending and capital-markets activity resumed in 2021 alongside economic recovery, while noting that recovery remains uncertain.
- Key risks include COVID-19 impacts on borrowers, tenants, property values, and financing markets; concentrated property-type exposure; borrower defaults; and possible margin calls or reduced financing availability. Secured facilities generally include credit-based mark-to-market provisions and are 25% recourse to Holdco.
- LIBOR transition presents potential basis, operational, and funding risks. As of quarter-end, the company’s loans generally referenced LIBOR, while FL3 CLO liabilities had transitioned to SOFR; management said the resulting basis difference was expected to be mitigated and the transition was not expected to materially affect FL3. The filing cautions that broader transition effects remain uncertain.
- Management cited improving property performance and macroeconomic conditions when explaining the lower credit reserve, but emphasized uncertainty around the durability and timing of recovery. No material legal proceedings or off-balance-sheet arrangements were reported.
- Subsequent to quarter-end, the company closed or was in the process of closing eight loans with $539.2 million of commitments, and received repayments on three loans with $257.1 million UPB through November 2, 2021.
Important facts for investors to verify
- Whether portfolio yields and net interest income stabilize as new originations replace repayments and older loans.
- Credit performance, risk-rating migration, non-accruals, modifications, and the adequacy of funded and unfunded CECL reserves.
- Actual availability of liquidity and secured-facility capacity, including collateral eligibility, extension conditions, covenant headroom, and margin-call exposure.
- LIBOR-to-SOFR transition terms and any resulting asset-liability basis mismatch or cost changes.
- Coverage and sustainability of the $0.24 common dividend relative to GAAP earnings, taxable income, and non-GAAP Distributable Earnings.