TPG RE Finance Trust, Inc. — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing was signed February 18, 2020. TPG RE Finance Trust (NYSE: TRTX) is an externally managed commercial real estate finance REIT focused primarily on originating and acquiring floating-rate commercial mortgage loans.
Financial performance and key metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Interest income | $339.8 million | $265.6 million |
| Interest expense | $174.8 million | $126.0 million |
| Net interest income | $165.0 million | $139.6 million |
| Net income | $126.3 million | $106.9 million |
| Net income attributable to TRTX | $126.3 million | $106.9 million |
| GAAP diluted earnings per share | $1.73 | $1.70 |
| Core Earnings per share (non-GAAP) | $1.76 | $1.70 |
| Dividends declared per share | $1.72 | $1.71 |
Fourth-quarter 2019 net income attributable to TRTX was $32.9 million, or $0.44 per share; Core Earnings were $0.45 per share and the declared dividend was $0.43 per share. Core Earnings is a non-GAAP measure and should not be treated as cash flow or a measure of liquidity.
- Balance sheet at year-end: Assets of $5.89 billion, liabilities of $4.39 billion, and stockholders’ equity of $1.50 billion. Book value was $19.78 per common share, versus $19.76 a year earlier.
- Cash flow: Operating cash flow was $121.7 million; investing activities used $1.31 billion; financing activities provided $1.23 billion. Cash, cash equivalents and restricted cash increased $38.9 million to $79.7 million.
- Debt and leverage: Total indebtedness was $4.36 billion, up from $3.17 billion. Debt-to-equity was 2.84x, compared with 2.36x; total leverage was 2.93x, compared with 2.36x. The company reported compliance with its financing covenants at year-end.
- Liquidity: The liquidity table lists $359.8 million, comprising cash and cash equivalents, undrawn capacity and CLO reinvestment cash, subject to collateral eligibility. Management also reported $465.4 million of “available liquidity,” a broader figure that includes potential proceeds from selling CRE debt securities; $105.7 million of that amount reflects estimated proceeds net of financing, assuming securities are sold at par.
- Portfolio: 65 balance-sheet loans had $5.63 billion of commitments, $5.00 billion of unpaid principal and $630.6 million of unfunded commitments. Weighted-average credit spread was 3.48%, all-in yield 5.71%, LTV 65.4%, and extended maturity 3.8 years. CRE debt securities had a $786.3 million face amount and a 3.68% weighted-average yield to expected maturity.
Changes versus the prior year
- Net interest income rose $25.4 million, primarily as average interest-earning assets expanded by about $1.4 billion; higher borrowing costs partly offset the growth.
- Net income increased $19.4 million, or 18.1%; Core Earnings increased $20.8 million, or 19.4%. Diluted EPS rose from $1.70 to $1.73, while the dividend increased from $1.71 to $1.72 per share.
- Loans held for investment grew from $4.29 billion to $4.98 billion in carrying value. CRE debt securities expanded from four investments with $76.4 million face value to 38 investments with $786.3 million face value.
- Debt increased by approximately $1.18 billion. The loan portfolio’s risk rating moved modestly higher, from a weighted average 2.8 to 2.9; no loans were rated 5, impaired, or on non-accrual at year-end.
- TRTX issued common stock in an underwritten offering and through its at-the-market program, raising net proceeds of $136.5 million and $37.5 million, respectively.
Management commentary, outlook, risks and unusual items
- Management describes a strategy of matching asset and liability indices and maturities where practical. All loans were floating-rate and LIBOR-linked at year-end; net floating-rate exposure was approximately $1.33 billion. A 25-basis-point rate increase was estimated to increase 12-month net interest income by $3.3 million, while a 25-basis-point decrease was estimated to increase it by $10.5 million, largely reflecting loan floors and the absence of floors on most floating-rate liabilities. These are sensitivities, not forecasts.
- The company closed the $1.2 billion TRTX 2019-FL3 CLO and exercised a call option to redeem TRTX 2018-FL1 securities for $509.5 million, refinancing the underlying collateral and generating $32.2 million of net cash proceeds. The new CLO increased matched-term, non-mark-to-market financing.
- Management identified the expected transition away from LIBOR after 2021 as a risk. At year-end, approximately $5.0 billion of loans and $3.7 billion of floating-rate debt were LIBOR-linked. The company was evaluating transition provisions and alternative rates; the ultimate financial effect was not yet determinable.
- CECL became effective for the company on January 1, 2020. Management expected an initial allowance of approximately $18.5 million, or $0.24 per share, charged to retained earnings; the estimated impact on available-for-sale securities was not expected to be material. The estimate is subject to change as economic and credit conditions evolve.
- Key risks include real estate collateral performance and valuation, transitional-loan execution, office-property concentration (49.9% of loan UPB), leverage and refinancing or margin-call exposure, liquidity and capital-market access, competition, LIBOR transition, REIT and Investment Company Act compliance, and conflicts arising from the external manager’s TPG affiliations. Unfunded loan commitments of $630.6 million are additional funding obligations.
- No numeric earnings or dividend guidance was provided. Subsequent to year-end through February 18, 2020, the company closed or was arranging eight first-mortgage loans totaling $857.7 million of commitments and acquired or committed to acquire $169.0 million of CRE debt securities. It paid the $0.43-per-share fourth-quarter dividend in January. All Class A shares were converted into common shares by January 24, 2020.
- No material legal proceedings were reported. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Most important facts for investors to verify
- Reconcile the two disclosed liquidity figures—$359.8 million and $465.4 million—and confirm what is immediately available versus dependent on collateral eligibility or asset sales.
- Assess the expected $18.5 million CECL opening reserve and subsequent allowance changes against loan performance, underwriting assumptions and collateral valuations.
- Review debt maturities, extensions, lender terms, collateral haircuts and covenant headroom, particularly given higher leverage and significant unfunded commitments.
- Monitor office concentration, the rise in the portfolio’s average risk rating, and performance of transitional and construction exposures; the filing reports no 2019 loan impairments or non-accruals.
- Track LIBOR replacement terms for both assets and liabilities, including the risk of index or timing mismatches.
- Evaluate dividend coverage and sustainability using taxable income, GAAP earnings, cash flows and financing needs; the dividend is set at the board’s discretion.
- Consider potential conflicts of interest, fee incentives and investment allocations associated with the external manager and TPG affiliates.