TPG RE Finance Trust, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. The company originates and acquires commercial real estate debt, primarily floating-rate first mortgage loans, and operates as a REIT. Financial amounts below are in U.S. dollars; balance-sheet and cash-flow figures are generally in millions.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Interest income | $51.7m | $38.4m | $99.7m | $72.1m |
| Interest expense | $19.6m | $15.1m | $37.4m | $28.0m |
| Net interest income | $32.1m | $23.3m | $62.2m | $44.1m |
| Net income | $25.3m | $17.1m | $48.8m | $33.4m |
| EPS, basic and diluted | $0.64 | $0.52 | $1.24 | $1.08 |
| Dividend declared per share | $0.51 | $0.53 | $1.05 | $0.53 |
- Q2 total other expenses were $7.0m, including $2.8m management fees and $1.8m incentive management fees. Income taxes were immaterial.
- At June 30, total assets were $2.59bn, total liabilities $1.58bn, and stockholders’ equity $1.00bn. Cash and cash equivalents were $200.7m; restricted cash was $1.1m.
- Debt principal outstanding was $1.55bn: $1.15bn under repurchase agreements, $238.4m of notes payable, and $167.3m of CLO debt. Reported debt-to-equity and total leverage ratios were 1.35x and 1.48x, respectively, versus 1.62x and 1.67x at year-end 2016.
- Six-month operating cash flow was $52.6m; investing cash flow was $188.9m, primarily reflecting loan repayments; financing cash flow was negative $144.0m. Cash increased $97.5m to $200.7m.
- Loan carrying value was $2.19bn, down from $2.45bn at year-end. The portfolio had 47 first-mortgage loans and four mezzanine loans, with a 5.0% weighted-average credit spread, 6.4% all-in yield, 3.2-year extended term, and 60.2% weighted-average LTV. Approximately 97.8% of loan commitments were floating rate.
- Unfunded loan commitments were $510.3m. Management reported $179.2m of undrawn capacity across secured revolving facilities, CLO financing and asset-specific financings, but draws depended on collateral and facility terms. A separate $107.0m subscription facility was also shown in period-end liquidity disclosures; it was terminated in connection with the IPO.
Changes versus comparable periods
- Q2 net interest income rose $8.8m year over year and net income rose $8.2m. For the first half, net interest income increased $18.1m and net income increased $15.4m.
- Management attributed higher interest income mainly to portfolio growth and loan discount amortization, exit fees and minimum-multiple payments associated with repayments. Higher borrowings and LIBOR rates increased interest expense and partly offset the gains.
- Portfolio repayments and sales exceeded new funded originations in the first half: reported net fundings were negative $259.6m. The loan portfolio’s weighted-average risk rating remained 2.6; loans rated 4 declined from four at year-end to none at June 30, following improved collateral performance and repayments.
- No loans were on non-accrual or impaired, and no loan-loss allowance or asset-specific loan loss reserve was recorded. The company reported no other-than-temporary CMBS losses.
Outlook, risks and unusual items
- No numerical earnings or dividend guidance was provided. Management said it expected operating expenses to increase after becoming a public company, including reporting, investor-relations, compliance and related costs. The post-IPO management agreement increased the base fee rate and changed incentive-fee terms.
- On July 25, 2017, after quarter-end, the company completed an IPO of 11m shares at $20 per share, generating approximately $200m net proceeds for investment. It later sold another 650,000 shares for approximately $12.2m net proceeds. A July stock dividend also increased shares outstanding.
- After quarter-end, the company repaid the approximately $118m outstanding CLO Class A Note using proceeds from loan-interest transfers and about $3m of company cash; it planned to terminate the CLO. JPMorgan’s repurchase facility was upsized by $103.5m in connection with the restructuring. Morgan Stanley’s facility was also upsized after quarter-end.
- Four first-mortgage loans originated after June 30 had $447.6m total commitments, $368.7m initially funded, a 4.2% weighted-average spread over LIBOR, 5.6-year extended term and 59.6% weighted-average LTV.
- Key risks include borrower defaults and collateral-value declines, property-market and geographic concentration, interest-rate and spread movements, prepayment or extension risk, reliance on secured financing and lender collateral decisions, and access to capital. Management disclosed margin-maintenance provisions and financial covenants in financing agreements; it reported covenant compliance at June 30. No material litigation or material changes to previously disclosed risk factors were reported.
- The company reported effective disclosure controls as of June 30 and no material change in internal control over financial reporting during the quarter. It cautioned that its forward-looking statements are subject to risks and are not guarantees of future performance.
Important facts for investors to verify
- How the post-IPO share issuance, stock dividend and new management-fee arrangements affect per-share earnings, book value and distributions.
- Whether the $510.3m of unfunded loan commitments can be funded as expected, and the amount of usable financing capacity after the subscription facility’s termination.
- Progress and accounting effects of the CLO repayment and termination, including the migration of collateral and borrowings to repurchase facilities.
- Loan performance, collateral valuations and concentrations: condominium and hotel loans represented 27.0% and 21.9% of commitments, respectively; the East and South represented 36.3% and 32.5%.
- Interest-rate exposure and funding conditions: the filing estimated that an immediate 25-basis-point increase would raise next-12-month net interest income by $1.4m, while a 25-basis-point decrease would reduce it by $1.0m, subject to stated assumptions and loan-rate floors.
- The filing states that more than 90% of REIT taxable income generally must be distributed to maintain REIT status; taxable income may differ from GAAP net income and Core Earnings.