TPG RE Finance Trust, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company is an externally managed commercial real estate lender and REIT, focused primarily on floating-rate first-mortgage loans secured by U.S. commercial properties.
Financial performance and position
Amounts below are in millions, except per-share data and ratios.
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Interest income | $70.1 | $88.3 | $151.8 | $164.9 |
| Interest expense | $25.9 | $46.4 | $64.3 | $85.8 |
| Net interest income | $44.2 | $41.8 | $87.5 | $79.1 |
| Net income (loss) | $42.9 | $32.0 | $(189.9) | $60.4 |
| Net income (loss) attributable to company | $40.7 | $32.0 | $(192.1) | $60.4 |
| Diluted earnings (loss) per common share | $0.52 | $0.43 | $(2.53) | $0.85 |
| Operating cash flow | Not presented quarterly | $70.7 | $53.0 |
- Portfolio: At quarter-end, 65 balance-sheet loans had $5.06 billion unpaid principal balance (UPB), $5.64 billion total commitments and $579.9 million of unfunded commitments. All loans were floating-rate and indexed to LIBOR; weighted-average credit spread was 3.4%, all-in yield 5.4%, LTV 65.8% and term to extended maturity 3.5 years.
- Credit quality: Weighted-average internal risk rating worsened to 3.1 from 2.9 at year-end 2019. The quarter-end allowance for credit losses was $53.6 million on funded loans, plus $5.1 million on unfunded commitments. A hotel-backed loan with $85.5 million amortized cost was individually assessed; foreclosure was considered probable after the borrower subsequently missed debt service.
- Balance sheet and leverage: Assets were $5.30 billion versus $5.89 billion at December 31, 2019; liabilities were $3.83 billion versus $4.39 billion. Cash and cash equivalents were $196.2 million. Total borrowings were $3.77 billion, down from $4.36 billion; debt-to-equity was 2.81x versus 2.84x.
- Liquidity: Management reported $333.6 million of available liquidity, including $196.2 million cash, $81.3 million of CLO cash available subject to eligible collateral, and $56.1 million of undrawn secured borrowing capacity, of which $46.2 million was immediately available. The filing cautions that lenders control whether some capacity is funded.
- Cash flows, six months: Operating activities provided $70.7 million; investing activities provided $461.2 million, principally reflecting loan repayments and CRE debt-security sales; financing activities used $415.1 million. Cash, cash equivalents and restricted cash increased $116.8 million to $196.4 million.
- Dividends: Common dividends declared were $0.20 per share for Q2, versus $0.43 a year earlier. The Q1 2020 common dividend of $0.43, whose payment had been deferred, was paid July 14; the Q2 common dividend was paid July 24. The 11% Series B preferred dividend for the quarter was $2.25 million and was paid June 30.
Material changes and unusual items
- Q2 GAAP net income was $42.9 million, up from $32.0 million a year earlier. Net interest income rose $2.4 million year over year as lower funding costs, including lower LIBOR, more than offset lower interest income. Q2 included a $24.3 million credit-loss benefit, largely from reversing reserves on a loan sold during the quarter.
- For the first half, the company reported a $189.9 million net loss, compared with $60.4 million net income in 2019. Results included $203.4 million of CRE debt-security impairments and sale losses and $52.8 million of credit-loss expense, including the realized $13.8 million loss on a loan sale.
- The company sold its entire CRE debt-securities portfolio during March and April 2020 after market volatility and margin calls. The sales generated $33.1 million net cash after repaying $581.7 million of related debt in April; the portfolio was zero at June 30.
- The company adopted CECL on January 1, 2020, recording a $19.6 million cumulative reduction to equity. The new allowance reflects expected credit losses and management’s judgment under unusually uncertain economic and valuation conditions.
- Six hotel loans with $457.7 million aggregate UPB were modified during Q2, including temporary interest deferrals and/or use of reserves. The company said the loans remained performing and were not classified as troubled debt restructurings. Four loans were more than 90 days past due at June 30 but remained on accrual; the filing says full past-due payments were received in July. A separate loan was placed on non-accrual after quarter-end.
- In May, the company issued $225 million of 11% Series B preferred stock and warrants to purchase up to 12 million common shares. It may issue another $100 million in two tranches before year-end. Preferred shares carry significant voting and redemption rights; the warrants have a $7.50 exercise price and expire in 2025.
Outlook, liquidity and risks
- Management stated that the substantial-doubt indicators about the company’s ability to continue as a going concern, present at March 31, no longer existed at June 30, following asset sales, preferred issuance, lender negotiations and maturity extensions. This assessment depends on the company’s ability to meet obligations and sustain operations; management warned that COVID-19’s effects remain uncertain.
- Management’s near-term focus is active credit management, generating and recycling liquidity, extending liabilities and limiting mark-to-market exposure. No formal earnings or portfolio guidance was provided.
- COVID-19 threatens borrower cash flows, property values, repayments, refinancing and access to capital. The portfolio is concentrated in office (47.3% of UPB), multifamily (23.3%) and hotels (14.0%); hotel, retail and certain regional exposures may be particularly vulnerable.
- Repurchase financing includes mark-to-market provisions and potential margin calls. The company paid $157.7 million to lenders in May to reduce debt and obtain temporary margin-call suspensions; further collateral demands or forced asset sales remain possible. It had breached certain covenants at March 31, later cured the defaults and obtained waivers; it reported covenant compliance at June 30 but warned future compliance is not assured.
- Debt and assets are predominantly floating-rate and LIBOR-indexed. LIBOR transition, extension of borrower loans, slower repayments, lower yields, valuation uncertainty, and REIT distribution requirements are additional risks. Management noted that the 2020 temporary tax rule permits qualifying REIT distributions with a minimum 10% cash component.
- Management reported effective disclosure controls as of June 30, 2020, and no material legal proceedings.
Important facts for investors to verify
- How hotel and other stressed borrowers perform, including the status, collateral value and recovery prospects of the individually assessed hotel loan and the post-quarter non-accrual loan.
- Whether the $58.7 million total funded and unfunded credit-loss allowances adequately reflect portfolio risks, and how sensitive those estimates are to economic and property-value assumptions.
- Actual immediately available liquidity, lender-approved borrowing capacity, expiration or renewal of margin-call suspensions, and compliance with financing covenants and debt maturities.
- The economics and potential dilution of the Series B preferred stock and warrants, including any additional issuance, redemption rights and voting protections.
- The sustainability of common dividends given the lower Q2 payout, deferred Q1 payment, preferred dividend burden and REIT distribution requirements.
- Subsequent developments on the proposed loan modification and assumption described in the filing, and the effect of the Citibank facility’s July 12, 2020 expiration.