Business context and reporting period
TPG RE Finance Trust, Inc. (NYSE: TRTX) filed this Form 10-K for the fiscal year ended December 31, 2021. The externally managed commercial real estate lender, which operates as a REIT, primarily originates floating-rate mortgage loans secured by transitional commercial properties in U.S. markets. It had no commercial real estate debt securities at year-end.
Financial and operating highlights
| Metric | 2021 | 2020 |
|---|---|---|
| Interest income | $240.2 million | $283.7 million |
| Interest expense | $85.1 million | $107.2 million |
| Net interest income | $155.1 million | $176.4 million |
| Net income (loss) | $138.6 million | $(136.8) million |
| Net income (loss) attributable to common stockholders | $70.7 million; $0.87 diluted EPS | $(155.5) million; $(2.03) diluted EPS |
| Distributable Earnings, non-GAAP | $89.0 million; $1.09 diluted per share | $(106.6) million; $(1.39) diluted per share |
| Common dividends declared per share | $0.95 | $1.21 |
| Cash flow from operations | $132.2 million | $132.1 million |
Distributable Earnings is a non-GAAP measure and is not equivalent to GAAP net income or operating cash flow. The company says it excludes certain items, including certain credit-loss provisions, and should not be treated as a measure of liquidity or cash available for distributions.
- Fourth quarter: Net income attributable to common stockholders was $41.4 million, or $0.51 per diluted share. Distributable Earnings were $18.5 million, or $0.23 per diluted share. Results included a $15.8 million gain on a partial sale of the Las Vegas REO property and an $8.2 million partial write-off of a non-performing retail loan.
- Loan portfolio: At year-end, 69 balance-sheet loans had $5.4 billion of commitments and $4.9 billion of unpaid principal. All were floating rate; weighted-average credit spread was 3.4%, all-in yield 4.8%, LTV 67.1%, and term to extended maturity 2.8 years. Unfunded commitments were $487.8 million.
- Credit quality: The allowance for credit losses, including unfunded commitments, was $46.2 million, down from $62.8 million at year-end 2020. One $23.0 million retail loan was on non-accrual. The weighted-average internal risk rating improved to 3.0 from 3.1.
- Debt and leverage: Consolidated borrowings were $3.72 billion, comprising $2.56 billion of CLO liabilities and $1.17 billion under secured credit facilities. Including a $132.0 million non-consolidated senior interest, reported total indebtedness was $3.85 billion. Debt-to-equity was 2.36x and total leverage 2.45x, versus 2.44x and 2.54x, respectively, a year earlier.
- Funding and liquidity: Available liquidity was $321.2 million: $260.6 million cash, $60.3 million of undrawn secured-credit capacity, and $0.2 million held at a CLO trustee. Of cash, $245.6 million was available for investment after covenant-restricted cash. Cash, cash equivalents and restricted cash decreased $58.6 million during the year.
- Book value: Book value per common share was $16.37 at year-end, compared with $16.50 a year earlier.
Material changes versus the prior comparable period
- Net interest income fell $21.4 million, primarily as average interest-earning assets declined and portfolio all-in yield decreased to 4.8% from 5.3%. Average financing cost also declined, to 2.3% from 2.7%.
- GAAP net income improved from a large loss in 2020, when the company recorded $203.4 million of securities impairments, to income in 2021. The 2021 comparison also benefited from a $15.8 million REO sale gain and a $6.3 million credit-loss benefit, versus a $69.8 million credit-loss expense in 2020.
- The loan portfolio expanded to 69 balance-sheet loans and $5.4 billion of commitments from 57 loans and $4.9 billion at year-end 2020. Office remained the largest property exposure, but its share of commitments declined from 52.8% to 41.9%; multifamily increased from 16.3% to 29.5%.
- The company issued $201.3 million of Series C preferred stock, receiving $194.4 million net, and redeemed all Series B preferred shares for approximately $247.5 million. The redemption included a $22.5 million make-whole payment and a $22.5 million accelerated write-off of discount and related costs, both of which reduced income attributable to common stockholders.
- The company closed the $1.25 billion TRTX 2021-FL4 CLO. Non-mark-to-market, non-recourse financing rose to 70.4% of total borrowings from 63.5% at year-end 2020.
Outlook, management commentary, risks and unusual items
- The filing provides no formal earnings or dividend guidance. Management reported resumed loan origination activity during 2021 and expected the Federal Reserve to raise benchmark rates multiple times in 2022. Higher rates may increase asset income, but also financing costs and borrower debt service; the net effect is uncertain.
- LIBOR cessation after June 30, 2023 requires transition of relevant assets and liabilities. The company reported some index mismatch in one CLO and noted possible basis, operational and financing-cost risks during transition.
- Credit, collateral valuation, refinancing, extension and liquidity risks remain material. Office and multifamily represented 41.9% and 29.5% of loan commitments, respectively. Transitional loans depend on property improvement, leasing and refinancing; secured facilities may require additional collateral or repayment after specified collateral-value or performance changes.
- COVID-19 effects remain uncertain, particularly for borrowers, property operations and commercial real estate values. The company also identifies concentration, interest-rate, funding, counterparty, REIT qualification, Investment Company Act compliance, external-manager conflicts and key-personnel risks.
- The company reported compliance with its financing covenants at year-end and no material legal proceedings. Management and the auditor concluded internal control over financial reporting was effective; the financial statements received an unqualified audit opinion. The auditor identified the $46.2 million credit-loss allowance as a critical audit matter because of the judgment involved in its estimation.
- Subsequent to year-end, the company reported nine new or pending loan closings totaling $543.8 million in commitments; a $1.075 billion TRTX 2022-FL5 CLO; redemption of TRTX 2018-FL2; an extension and resizing of its Wells Fargo facility; and a new $250 million revolving credit facility.
Most important facts for investors to verify
- Whether loan-level credit performance, the non-accrual retail loan and the $46.2 million total credit-loss allowance support management’s estimates.
- How the 2022 CLO and credit-facility transactions changed net leverage, funding costs, collateral encumbrance and near-term maturities.
- Whether distributions are supported by recurring earnings and cash generation, given 2021’s $0.95 common dividend, $1.09 per-share Distributable Earnings and $0.87 diluted GAAP EPS.
- The valuation and eventual proceeds from the remaining Las Vegas REO land, carried at $60.6 million, and the effect of the 2021 partial-sale gain on reported results.
- Potential dilution from warrants to purchase up to 12 million common shares at $7.50 per share, outstanding through May 2025; none had been exercised by year-end.