TPG RE Finance Trust, Inc. annual report, FY2020

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TPG RE Finance Trust, Inc. — 2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020. The filing also reports fourth-quarter results. TPG RE Finance Trust (NYSE: TRTX) is an externally managed commercial real estate lender and REIT, primarily originating floating-rate first mortgages on transitional U.S. properties.

Financial performance and position

  • 2020 earnings: GAAP net loss was $136.8 million; net loss attributable to common stockholders was $155.5 million, or $2.03 per diluted share. In 2019, net income attributable to common stockholders was $125.6 million, or $1.73 per diluted share.
  • Fourth quarter: GAAP net income was $14.6 million; net income attributable to common stockholders was $6.6 million, or $0.09 per diluted share. Distributable Earnings, a non-GAAP measure, were $11.7 million, or $0.15 per diluted share.
  • Interest income and margin: 2020 interest income was $283.7 million and interest expense $107.2 million, producing net interest income of $176.4 million, up $11.5 million from 2019. Average core asset yield declined to 5.5% from 6.5%, while average financing cost declined to 2.7% from 4.4%. The filing does not present a single overall net interest margin figure.
  • Major loss items: The company recorded $203.4 million of losses on sales of CRE debt securities and $69.8 million of credit loss expense, including CECL provision and realized loan losses.
  • Cash flow: Cash from operations was $132.1 million, investing activities provided $964.6 million, and financing activities used $856.7 million. Cash and cash equivalents ended the year at $319.7 million, versus $79.2 million a year earlier.
  • Debt and leverage: Total indebtedness was $3.41 billion, down from $4.36 billion at year-end 2019. Debt-to-equity was 2.44x, versus 2.84x; total leverage was 2.54x, versus 2.93x. The company reported $342.6 million of available liquidity, including $319.7 million cash and $22.8 million of undrawn capacity not requiring additional collateral.
  • Portfolio and equity: The portfolio comprised 57 balance-sheet loans with $4.52 billion unpaid principal, $4.94 billion total commitments and $423.5 million unfunded commitments. Weighted average loan spread was 3.2%, all-in yield 5.3%, LTV 65.9%, and extended term 3.1 years. Book value per common share fell to $16.50 from $19.78.
  • Credit quality: Allowance for credit losses totaled $62.8 million, including the reserve for unfunded commitments; the balance-sheet allowance against loans was $59.9 million. One $31.1 million retail loan was placed on non-accrual. Weighted average internal risk rating deteriorated to 3.1 from 2.9.

Material changes versus 2019

  • COVID-19 market dislocation led the company to sell all CRE debt securities during March and April 2020. The $969.8 million face-value portfolio generated $766.4 million gross proceeds and a $203.4 million loss; no CRE debt securities remained at year-end.
  • Loan commitments decreased from $5.63 billion to $4.94 billion, and loan UPB from $5.00 billion to $4.52 billion. New originations slowed substantially: six loans totaling $526.3 million in commitments in 2020, compared with 32 loans and approximately $2.9 billion in commitments in 2019.
  • Common dividends declined to $1.21 per share from $1.72. The first-quarter 2020 dividend payment was deferred until July, and the regular common dividend was reduced; the company later declared a $0.18-per-share special dividend tied to previously undistributed estimated REIT taxable income.
  • The company raised $225 million in Series B preferred equity carrying an 11% dividend rate and issued warrants for up to 12 million common shares at a $7.50 exercise price. The preferred dividend is a material fixed cash cost; the warrants may dilute common holders.
  • Debt declined and liquidity increased, but the financing mix changed: secured credit facilities for loans were $1.52 billion and CLO debt $1.83 billion at year-end. The company made $157.7 million of voluntary lender deleveraging payments and extended several facilities.
  • Adoption of CECL on January 1, 2020 resulted in a $19.6 million cumulative reduction to retained earnings. The allowance and credit-loss estimate incorporate forward-looking economic assumptions.

Outlook, risks and unusual items

  • Management said portfolio repayments, improved liquidity, extended financing maturities and a new facility with reduced mark-to-market exposure positioned the company to resume originating first-mortgage transitional loans. No quantified earnings, origination or dividend guidance was provided.
  • COVID-19 effects remained uncertain. Borrowers sought payment deferrals and other modifications; 17 modifications were executed during 2020, and six were still outstanding at year-end with $548.4 million UPB. The company warned that defaults, delinquencies, property-value declines and reduced refinancing activity could increase.
  • Office loans represented 53.0% of loan UPB and hotel loans 16.2%. Hospitality and retail faced direct pandemic pressures, while sustained remote work could affect office demand. New York City was the largest MSA exposure by commitment, at approximately $1.02 billion.
  • Liquidity and refinancing risks include margin calls, lender discretion over collateral and borrowing capacity, covenant breaches, and maturity or index mismatches. At March 31, 2020 the company breached certain debt-to-equity covenants; it cured the breach through debt repayment and received lender waivers. It reported covenant compliance at year-end.
  • All loans and $3.4 billion of debt were floating-rate and LIBOR-linked. The company had approximately $1.17 billion net floating-rate exposure and a 1.66% weighted-average loan LIBOR floor. The LIBOR transition could create financial, operational and documentation risks.
  • A $112.0 million mortgage loan matured in default; a negotiated deed-in-lieu converted it into two 27-acre Las Vegas Strip land parcels valued at $99.2 million. The company also borrowed $50.0 million secured by the property.
  • Other principal risks include real estate concentration and valuation uncertainty, CECL estimate sensitivity, leverage and collateral requirements, dependence on the external manager and potential TPG conflicts, REIT qualification, and maintaining Investment Company Act exclusions. The company reported no material legal proceedings and no off-balance-sheet arrangements.
  • The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; the filing identifies the allowance for credit losses as a critical audit matter.

Important facts for investors to verify

  • Review the allowance composition, loan-level risk ratings and the $31.1 million non-accrual retail exposure; distinguish the $59.9 million loan allowance from the $62.8 million total including unfunded commitments.
  • Assess the liquidity available after covenant restrictions, collateral requirements and the $423.5 million of unfunded loan commitments, and confirm facility maturities and extension conditions.
  • Evaluate the assumptions supporting the $99.2 million Las Vegas property valuation and the repayment, extension or refinancing prospects for higher-risk hotel and office loans.
  • Quantify the continuing cost and redemption terms of the 11% Series B preferred stock, and potential dilution from warrants exercisable for up to 12 million shares.
  • Track common dividend coverage and sustainability against GAAP results, taxable income, Distributable Earnings and required preferred dividends; these measures are not interchangeable.
  • Monitor LIBOR replacement provisions, covenant headroom and whether management’s stated return to new originations translates into deployed capital and improved earnings.