TPG RE Finance Trust, Inc. — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. The company is an externally managed commercial real estate finance REIT focused mainly on floating-rate first mortgage loans, with a smaller CMBS portfolio. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and condition
- Q2 earnings: Interest income was $64.7 million and interest expense was $30.2 million, producing net interest income of $34.5 million, up $2.4 million year over year. Net income attributable to common stockholders was $26.4 million, up 4.4% from $25.3 million. Diluted EPS was $0.44, versus $0.52.
- First-half earnings: Interest income of $124.1 million less interest expense of $56.2 million yielded net interest income of $67.9 million, up $5.7 million year over year. Net income attributable to common stockholders was $51.5 million, versus $48.8 million; diluted EPS was $0.86, versus $1.00.
- Expenses and margins: Q2 other expenses totaled $8.6 million, including $4.8 million of management fees and $1.1 million of incentive management fees. First-half other expenses were $17.0 million. The filing does not provide a conventional operating-margin figure.
- Cash flow: First-half operating cash flow was $52.2 million; investing cash flow was negative $796.1 million, mainly reflecting loan originations and CMBS purchases; financing cash flow was positive $711.5 million, mainly from CLO and secured financing proceeds. Cash, cash equivalents and restricted cash declined $32.4 million to $43.3 million; unrestricted cash was $42.5 million at quarter-end.
- Balance sheet and liquidity: Total assets were $4.12 billion, total liabilities $2.93 billion and stockholders’ equity $1.19 billion. The company reported $2.90 billion of outstanding borrowings on a principal basis and debt-to-equity of 2.40x, up from 1.71x at year-end. Its liquidity table showed $147.8 million from cash and undrawn financing capacity; $482.8 million of unfunded loan commitments are an additional funding need.
- Portfolio: Loan carrying value was $3.81 billion across 61 balance-sheet loans; weighted-average credit spread was 4.3%, all-in yield 6.5%, term to extended maturity 3.8 years and LTV 61.8%. Floating-rate loans were 99.9% of loan UPB. CMBS fair value was $218.1 million.
- Dividends and book value: Q2 dividend was $0.43 per share, declared and paid after quarter-end; management cited an 8.7% annualized yield on $19.80 book value per share. Book value was down $0.02 from March 31. First-half dividends declared were $0.85 per share.
Material changes versus comparable periods
- Loan carrying value grew from $3.18 billion at December 31, 2017 to $3.81 billion at June 30, 2018. During the first half, the company originated 14 loans with approximately $1.2 billion in total commitments and funded $150.8 million of existing loan commitments.
- Higher loan balances and higher LIBOR increased interest income, but higher borrowings and borrowing costs also increased interest expense. Net interest income and net income rose, while EPS declined year over year; weighted-average shares were approximately 60.2 million in Q2 2018 versus 48.7 million in Q2 2017.
- In February, the company closed TRTX 2018-FL1, a CLO with approximately $932.4 million of stated financing and an 80% advance rate. It consolidated the CLO; its assets are restricted to CLO obligations and its liabilities are non-recourse to the company. The transaction increased leverage and provided matched-term, non-recourse financing.
- The weighted-average loan risk rating worsened to 2.8 from 2.6 at year-end. Loans rated 4 totaled $220.2 million, versus $175.9 million; there were no loans rated 5.
- CMBS unrealized losses were $1.6 million in the first half, compared with unrealized gains of $1.3 million in the prior-year period. These were recorded in other comprehensive income; no other-than-temporary impairment was recognized.
Outlook, risks and unusual items
- The filing gives no quantified earnings or portfolio guidance. Management’s strategy is to originate or acquire primarily floating-rate loans secured by transitional commercial properties and to fund growth through repayments, secured borrowing, CLOs and potential capital-market access.
- Management said substantially all floating-rate assets and related liabilities are indexed to LIBOR. Net floating-rate exposure was approximately $962.3 million; the filing estimates a 25-basis-point increase would raise annual net interest income by $2.4 million, while a 25-basis-point decrease would reduce it by $2.3 million, assuming the stated balances and other assumptions.
- Key risks include real estate and borrower deterioration, higher rates affecting borrower debt service, credit-spread and property-value changes, refinancing and facility renewal risk, lender margin calls, concentration and counterparty exposure, and the company’s ability to fund loan commitments and dividends. Most repurchase financing is subject to collateral approval and covenant requirements; certain facilities carry recourse guarantees.
- Management reported compliance with financing covenants and no material legal proceedings. No loans were on non-accrual or impaired, and no loan-loss allowance was recorded. Two loans were downgraded during Q2 due to near-term maturity and weaker collateral performance, or slower-than-expected leasing.
- Subsequent to quarter-end, the company entered a $160 million Citi revolving facility, reported six new loan originations or pending closings totaling $569.1 million, sold 17 CMBS for $133.3 million with a $0.1 million loss, and sold a non-core loan participation with a $0.4 million loss. It also paid the $25.9 million Q2 dividend.
- The company is externally managed by a TPG affiliate. The management agreement provides base and incentive fees; management fees increased year over year alongside the larger equity base. REIT status and the ability to maintain its Investment Company Act exemption remain important conditions.
Important facts for investors to verify
- Reconcile the reported $147.8 million of available liquidity with facility-level borrowing availability and the separate $218.1 million CMBS portfolio; availability depends on collateral eligibility and lender approval.
- Review the debt maturity schedule and refinancing needs, especially the substantial borrowings scheduled within one year, alongside the $482.8 million of unfunded commitments.
- Confirm the senior secured credit facility’s maturity: the filing’s facility table lists September 29, 2020, while narrative text refers to a current extended maturity in September 2022.
- Track risk-rating migration, particularly the $220.2 million rated 4 and the two Q2 downgrades, and assess whether the absence of impairment reserves remains appropriate.
- Assess leverage growth from the CLO and other borrowings, rate sensitivity and funding-cost changes, including potential effects on dividend coverage and per-share earnings.
- Review the post-quarter loan closings and CMBS sales, and assess related realized losses, liquidity use and subsequent portfolio composition.