TPG RE Finance Trust, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. The company is an externally managed commercial real estate finance REIT, primarily originating and acquiring floating-rate mortgage loans secured by U.S. commercial properties. The quarter was significantly affected by COVID-19 market disruption.
Financial performance and condition
- Revenue and net interest income: Interest income was $81.7 million, versus $76.6 million in Q1 2019; interest expense was $38.5 million, versus $39.4 million. Net interest income rose 16.3% to $43.3 million from $37.2 million.
- Profit: GAAP net loss was $232.8 million, or $3.05 per diluted share, compared with net income of $28.4 million, or $0.42 per share, in Q1 2019. The loss primarily reflected $203.5 million of securities impairments and $63.3 million of credit loss expense. Non-GAAP Core Earnings were a loss of $168.3 million, or $2.20 per share.
- Portfolio and credit: Loans held for investment, net, were $5.02 billion at quarter-end. The portfolio had $5.11 billion of unpaid principal, $650.9 million of unfunded commitments, a 3.4% weighted-average credit spread, a 5.4% all-in yield and 65.7% weighted-average LTV. The allowance for loan losses was $75.7 million; including $7.3 million for unfunded commitments, total reserves were $83.0 million.
- Cash flow: Operating activities provided $37.5 million; investing activities used $183.1 million; financing activities provided $170.5 million. Cash, cash equivalents and restricted cash ended at $104.5 million.
- Debt and liquidity: Outstanding borrowings were approximately $4.55 billion before deferred financing costs. Stockholders’ equity was $1.23 billion, and book value was $16.06 per common share, down from $19.78 at December 31, 2019. Reported available liquidity was $167.9 million, including $103.6 million cash, of which $45.2 million was available for investment or general corporate purposes, and $64.0 million of conditional undrawn borrowing capacity. Debt-to-equity was 3.61x, versus 2.84x at year-end.
- Dividend: The company declared $0.43 per share for Q1, but deferred payment until July 14, 2020; the board had not decided whether payment would be all cash or a mix of cash and stock.
Material changes versus comparable periods
- Net interest income increased from Q1 2019, supported by portfolio growth, LIBOR floors and lower financing costs. This was more than offset by securities losses and higher credit-loss provisions, shifting the company from profit to a substantial net loss.
- After adopting CECL on January 1, the company recorded a $19.6 million opening reserve adjustment and a further $63.3 million credit loss expense during the quarter. Management attributed the increase mainly to a sharply worsened economic outlook and COVID-19 risks.
- Portfolio risk ratings deteriorated: weighted-average risk rating rose to 3.1 from 2.9 at year-end. Nine hotel loans were downgraded to rating 4; one loan was downgraded to rating 5. Hotels represented 14.1% of loan UPB; offices represented 46.1%.
- The company sold CRE debt securities at losses and recorded an impairment on securities it intended to sell. Subsequent to quarter-end, it sold the remaining portfolio described in the filing; sales through April 29 generated $33.1 million of net cash proceeds after repayment of related financing, with $167.3 million of losses matching the quarter-end impairment.
- Common shares increased during the quarter, including 0.6 million shares sold through the at-the-market program for $12.9 million gross proceeds. All Class A common shares converted to common shares.
Outlook, risks and unusual items
- Going concern and funding: Management projected insufficient liquidity to repay $432.2 million of maturing debt and meet obligations through one year after issuance of the financial statements, raising substantial doubt about the company’s ability to continue as a going concern. Management concluded lender extensions were probable and expected to extend maturities to May 2022 or later. This conclusion depends on those extensions being obtained.
- COVID-19 and credit: Management anticipated reduced loan repayments, weaker collateral values, higher delinquencies and defaults, borrower requests for payment relief, reduced originations and continuing market volatility. It cautioned that valuation estimates are unusually uncertain because observable market inputs are limited.
- Margin calls and financing: Daily mark-to-market securities financing triggered $170.9 million of margin calls during March; $89.8 million was met before quarter-end and the remaining $19.0 million was satisfied in April. Short-term securities financing, lender discretion over collateral and advance rates, and potential future margin calls create liquidity risk.
- Covenants and maturities: The company was out of compliance with certain debt-to-equity covenants at March 31; it cured the issue on April 2 through debt repayment and later received lender waivers. A financial-statement delivery covenant issue was also cured and waived. The Morgan Stanley facility was extended to May 4, 2021. The filing warns that future covenant compliance and refinancing are not assured.
- Borrower event: A borrower on a loan with $81.4 million unpaid principal notified the company of its intent to negotiate a deed in lieu of foreclosure. The loan was current through April 1 and had an interest reserve through June; the eventual impact was not reliably estimable.
- Other items: Unfunded loan commitments totaled $650.9 million. The company reported no material legal proceedings. It gave no quantified earnings or dividend guidance.
Investor verification priorities
- Track lender-extension progress, upcoming maturities and actual unrestricted liquidity against the disclosed $432.2 million funding need.
- Verify whether deferred dividends are paid, in what form, and how distributions align with REIT requirements and cash needs.
- Monitor hotel and other borrower performance, payment modifications, delinquencies, non-accrual loans, the deed-in-lieu negotiation and any further credit-reserve changes.
- Assess future collateral marks, margin calls, repo renewals, advance rates and covenant compliance, including any new waivers or defaults.
- Reconcile realized securities-sale results and remaining portfolio exposure with the $203.5 million Q1 securities charge and subsequent sale disclosures.