TPG RE Finance Trust, Inc. — Q1 2018 Form 10-Q
Business context and reporting period. The company is an externally managed commercial real estate finance REIT that originates and acquires primarily floating-rate commercial mortgage loans. This unaudited report covers the three months ended March 31, 2018; income and cash-flow comparisons are against Q1 2017, and balance-sheet comparisons are against December 31, 2017.
Financial performance and position
- Income: Interest income was $59.4 million, up from $47.9 million; interest expense was $26.0 million, up from $17.8 million. Net interest income rose 10.7% to $33.4 million. Net income was $25.1 million, versus $23.5 million; diluted EPS was $0.42, down from $0.48 as weighted-average shares increased to 60.4 million from 48.4 million.
- Expenses and returns: Other expenses rose to $8.4 million from $6.6 million, including a $2.1 million increase in management fees. Core Earnings, a non-GAAP measure, were $25.3 million, or $0.42 per share. The company declared a $0.42 per-share dividend, totaling $25.3 million. Book value per common share was $19.82, unchanged from year-end.
- Assets and portfolio: Total assets were $3.84 billion, up from $3.36 billion. Loans held for investment were $3.60 billion, versus $3.18 billion; CMBS fair value was $149.0 million, versus $85.9 million. The loan portfolio had a 4.5% weighted-average credit spread, 6.4% all-in yield, 3.7-year term to extended maturity, and 60.6% weighted-average LTV. No loans were on non-accrual or impaired, and no loan-loss allowance was recorded.
- Cash flow and liquidity: Operating cash flow was $23.5 million, investing cash flow was negative $480.9 million, and financing cash flow was positive $456.5 million. Cash, cash equivalents and restricted cash declined $1.0 million to $74.8 million; unrestricted cash was $74.4 million. Management reported $104.1 million of immediately available undrawn capacity under facilities and asset-specific financings, in addition to $74.4 million cash. Further facility capacity depended on lenders accepting additional collateral.
- Debt and leverage: Outstanding financing principal totaled $2.62 billion, up from $2.13 billion. Debt-to-equity increased to 2.14x from 1.71x; total leverage was 2.21x, versus 1.82x. The company reported $530.5 million in unfunded loan commitments. Financing is principally floating-rate and generally LIBOR-linked.
Material changes versus comparable periods
- Net income increased 7.0% year over year, while diluted EPS fell $0.06, principally reflecting the larger share count following the 2017 IPO and stock dividend.
- Portfolio growth and higher average LIBOR contributed to higher interest income and net interest income; increased borrowing balances and rates also raised interest expense.
- In February 2018, the company completed a new CLO backed by $932.4 million of mortgage assets. Proceeds repaid $670.3 million of repurchase borrowings and supported new originations and general corporate purposes. The company consolidates the CLO entities; their assets are restricted to their obligations and their liabilities are non-recourse to the company.
- The internal weighted-average loan risk rating moved to 2.7 from 2.6. One loan improved from rating 2 to 1; another moved from 2 to 3 following construction-milestone delays. No loans were rated 5.
Outlook, commentary, risks and unusual items
- The filing provides no quantitative earnings or dividend guidance. Management’s stated objective is to generate risk-adjusted returns through distributions and capital appreciation. It expects rising rates generally to increase net interest income, with the reported net floating-rate exposure of approximately $1.04 billion; the filing estimates a $2.6 million increase in annual net interest income for a 25-basis-point rate rise, before other effects.
- Key risks include borrower defaults and collateral-value deterioration, interest-rate and credit-spread movements, refinancing and funding availability, lender margin calls and collateral approval, concentration and property-market risk, and the company’s ability to meet debt service, dividend and unfunded-loan obligations. Floating-rate borrowers could face payment stress if rates rise. Some facilities are recourse to Holdco, including 100% recourse on CMBS facilities, and financing agreements contain financial covenants.
- After quarter-end, five first-mortgage loans totaling $450 million in commitments were originated or in closing through May 7. On May 4, guaranty amendments aligned covenants and increased the permitted debt-to-equity ceiling from 3.0x to 3.5x, while setting a 1.5x minimum interest-coverage ratio and liquidity requirements. A May 2 management-agreement amendment revised definitions used in management and incentive fee calculations.
- The $0.42-per-share dividend was paid April 25. The company repurchased 443,570 shares during Q1 for $8.4 million under its share-purchase plan. No material legal proceedings were reported, and management reported effective disclosure controls as of March 31.
- Core Earnings is non-GAAP and is not a substitute for GAAP income or operating cash flow. The company noted that the forthcoming expected-credit-loss standard may require reserves at loan origination or acquisition; adoption was expected for fiscal years beginning after December 15, 2019, and impact was still under evaluation.
Important facts for investors to verify
- Loan-level performance, especially the loan moved to rating 3, and the portfolio’s rising risk-rating average.
- Liquidity available after accounting for $530.5 million of unfunded commitments, covenant restrictions, collateral requirements and upcoming debt maturities.
- The sustainability of earnings and dividends as financing costs, LIBOR, management fees and share count change; compare GAAP results with Core Earnings.
- The CLO’s financing terms, retained interests, non-recourse structure and effect on leverage, alongside the post-quarter covenant amendments.
- Exposure to property-type and geographic concentrations, borrower extensions or prepayments, and potential borrower strain from higher rates.