TPG RE Finance Trust, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021. TPG RE Finance Trust is an externally managed commercial real estate finance REIT focused primarily on floating-rate mortgage loans. Financial amounts below are in U.S. dollars; “million” and “billion” are abbreviated as m and bn.
Financial performance and key metrics
| Metric | Q1 2021 | Comparable period / reference |
|---|---|---|
| Interest income | $58.1m | $81.7m in Q1 2020 |
| Interest expense | $20.3m | $38.5m in Q1 2020 |
| Net interest income | $37.9m | $43.3m in Q1 2020 |
| Net income (loss) | $32.0m; diluted EPS $0.30 | Net loss of $232.8m; diluted loss per share $3.05 in Q1 2020 |
| Distributable Earnings, non-GAAP | $21.7m; diluted $0.27 per share | $11.7m; diluted $0.15 per share in Q4 2020 |
| Operating cash flow | $26.3m | $37.5m in Q1 2020 |
| Common dividend declared | $0.20 per share | $0.43 per share in Q1 2020 |
Net interest income declined 12.6% year over year, primarily as the interest-earning asset base contracted after the sale of the CRE debt securities portfolio and average LIBOR fell. Lower interest expense partly offset the decline. Q1 2020 results included $203.5m of securities impairment expense and $63.3m of credit-loss expense; Q1 2021 had no securities impairment and recorded a $4.0m credit-loss benefit. Management reported GAAP net income rose $17.4m and Distributable Earnings rose $10.0m versus Q4 2020.
Balance sheet, portfolio, debt and liquidity
- Total assets were $5.27bn at March 31, 2021, up from $4.91bn at year-end. Stockholders’ equity was $1.28bn; Series B preferred stock of $201.0m is classified as temporary equity.
- Loans held for investment were $4.58bn before a $56.6m credit-loss allowance, or $4.52bn net. The portfolio had $5.0bn of total commitments, $4.59bn of unpaid principal and $401.7m of unfunded commitments. All loans were floating-rate and LIBOR-indexed; weighted-average credit spread was 3.2%, all-in yield 5.2%, LTV 65.9%, and extended maturity 2.9 years.
- Office loans represented 52.8% of loan UPB, hotels 15.9%, and multifamily 17.9%. The weighted-average internal risk rating remained 3.1. One $31.2m retail loan was on non-accrual, with a $10.0m collateral-based reserve.
- Total financing principal was approximately $3.78bn: $2.87bn of CLO notes, $860.9m under secured credit facilities and $50.0m mortgage debt. Borrowings increased from $3.41bn at year-end, principally following the March closing of the $1.25bn TRTX 2021-FL4 CLO. Debt-to-equity was 2.72x, versus 2.44x at year-end; total leverage was 2.83x, versus 2.54x.
- Management reported available liquidity of $632.8m: $301.6m cash, $310.1m of CLO proceeds held at trustees (primarily the FL4 ramp-up account), and $21.2m of secured-facility undrawn capacity. Trustee funds are available for eligible collateral purchases, and facility capacity depends on lender approval of collateral. $10.8m of cash was held to satisfy a liquidity covenant.
- Cash and restricted cash decreased $17.2m during the quarter. Investing activities used $62.3m; financing activities provided $18.8m. The $26.3m of operating cash flow was below Q1 2020’s $37.5m.
Material changes and management commentary
- The FL4 CLO issued $1.25bn of securities, financed loan collateral and placed approximately $308.9m in a ramp-up account. The transaction also distributed $104.8m of cash to the Company for investment or corporate use. Management said 83.6% of loan financing was non-mark-to-market and non-recourse at quarter-end.
- The allowance for credit losses fell $4.0m to $58.8m, which management attributed mainly to improving macroeconomic expectations and better operating results at some COVID-affected properties. The portfolio still included $803.6m of loans rated 4 and $31.2m rated 5.
- Five loans were modified in Q1; 11 modified loans remained outstanding, with $943.5m UPB. All were performing at quarter-end, and the quarter’s modifications did not qualify as troubled debt restructurings. Borrowers made principal reductions and added reserves in connection with modifications.
- The Company held $99.2m of Las Vegas land acquired through a deed-in-lieu of foreclosure. It also had $50.0m of non-recourse mortgage debt secured by the property. The property’s valuation uses significant unobservable inputs.
- Subsequent to quarter-end, the Company closed a $47.0m commitment loan and contributed a $37.5m loan to FL4. It was also in the process of closing seven loans with $588.7m total commitments; most were expected to be financed through FL4.
Outlook, risks and contingencies
The filing provides no specific earnings or dividend guidance. Management said improved credit performance, liquidity and financing structure had positioned the Company to resume originating transitional first-mortgage loans in Q1 2021. Future results remain uncertain, particularly due to COVID-19’s effects on borrowers, property cash flows and commercial real estate values.
- Credit and valuation risks include property and borrower deterioration, defaults, slower repayments and uncertainty in collateral values and CECL estimates. Unfunded loan commitments were $401.7m.
- Secured facilities have mark-to-market provisions and are generally 25% recourse to Holdco. Margin calls, reduced lender capacity or difficulty refinancing maturities could pressure liquidity. The Company reported covenant compliance at March 31, 2021 but gave no assurance of future compliance.
- All loans and floating-rate borrowings were LIBOR-linked. The filing discusses the announced end of relevant U.S. dollar LIBOR settings after June 30, 2023 and warns that replacement rates, operational changes or asset-liability mismatches could increase costs or affect results.
- Common-share dividends were reduced to $0.20 per share from $0.43 in Q1 2020; the 11% Series B preferred dividend is an additional cash obligation. Distributable Earnings is a non-GAAP measure and is not equivalent to operating cash flow or funds available for distributions.
- The Company reported no material legal proceedings and no off-balance-sheet arrangements. Disclosure controls were assessed as effective; no material internal-control changes were reported for the quarter.
Important facts for investors to verify
- Review the performance, collateral valuations and reserve adequacy for the non-accrual retail loan and the Las Vegas REO.
- Assess modified-loan performance, unfunded commitments and the potential for further payment deferrals or defaults.
- Confirm how the FL4 ramp-up funds are deployed and whether expected loan closings and financing occur on the stated terms.
- Check actual availability of lender capacity, covenant headroom, facility maturities and exposure to margin calls.
- Evaluate the LIBOR-to-replacement-rate transition, including whether asset and liability indices remain appropriately matched.
- Compare cash generation and preferred-dividend obligations with common dividends; Distributable Earnings is non-GAAP and should not be treated as cash flow.