TPG RE Finance Trust, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The company is an externally managed commercial real estate finance REIT focused primarily on floating-rate commercial mortgage loans, principally first mortgages. Unless otherwise stated, financial amounts are in U.S. dollars.
Financial performance and position
- Income: Interest income was $91.7 million and interest expense was $70.0 million, producing net interest income of $21.7 million. Net income was $7.4 million; net income attributable to common stockholders was $3.8 million, or $0.05 per diluted share.
- Credit losses: The quarter’s credit-loss expense was $7.8 million. The allowance for loan losses was $201.5 million; including the $20.9 million reserve for unfunded commitments, total credit-loss reserves were $222.4 million.
- Cash flow: Operating activities provided $23.5 million and investing activities provided $61.6 million; financing activities used $177.2 million. Cash, cash equivalents and restricted cash ended the quarter at $162.2 million.
- Portfolio: The 69-loan portfolio had $5.3 billion of commitments and $4.9 billion of unpaid principal. All loans were floating-rate; weighted-average all-in yield was 8.5%, weighted-average credit spread was 3.5%, and weighted-average LTV was 67.1%.
- Debt and equity: Outstanding borrowings were $4.0 billion, against $1.3 billion of stockholders’ equity. Debt-to-equity was 2.95x, net of cash as defined by the company. The company reported compliance with its financing covenants at quarter-end.
- Liquidity: Management reported $662.6 million of available liquidity, comprising cash, undrawn financing capacity and CLO proceeds available for eligible collateral. This includes $457.2 million held in CLO structures, subject to their investment restrictions; $132.5 million of on-balance-sheet cash was available for investment after required covenant cash.
- Dividends and book value: The common dividend was $0.24 per share and the Series C preferred dividend was $0.3906 per share. Book value was $14.31 per common share, down from $14.48 at year-end 2022.
Changes versus prior periods
- Compared with Q1 2022, net interest income fell from $38.5 million to $21.7 million, and net income attributable to common stockholders declined from $20.4 million to $3.8 million. Interest income rose by $30.7 million, but interest expense rose by $47.5 million. Management attributed weaker net interest income primarily to more loans placed on non-accrual, including cost-recovery loans.
- Six loans with $550.1 million of amortized cost were on non-accrual at March 31, versus two loans totaling $190.4 million at December 31, 2022. Three of the six were 90 or more days past due; the filing reports $495.0 million in loans in that aging category.
- The allowance for loan losses increased to $201.5 million from $197.3 million at year-end; total reserves including unfunded commitments increased to $222.4 million from $214.6 million. Management cited recession assumptions, office-market deterioration and broader capital-market uncertainty, partly offset by improved collateral fundamentals for individually assessed loans.
- Compared with Q4 2022, net interest income declined by $13.4 million and common-stockholder income fell from $32.6 million to $3.8 million. Distributable Earnings, a non-GAAP measure, were $13.4 million, or $0.17 per diluted share, versus $23.3 million, or $0.30 per share, in Q4. The common dividend remained $0.24 per share.
- Loan commitments declined from $5.43 billion at year-end to $5.29 billion. The company originated two loans with $123.8 million of commitments and received $227.8 million of total loan repayments during the quarter.
Outlook, risks and notable items
- Management said it moderated originations and increased liquidity amid rising rates, inflation, banking-sector stress, market volatility and recession concerns. No numerical earnings or portfolio guidance was provided.
- Office exposure was 26.2% of portfolio unpaid principal, and its weighted-average internal risk rating was 3.7. Management highlighted reduced office demand and slower return-to-office as risks. Four loans were rated 5, with $243.3 million of amortized cost.
- Financing and liquidity risks include margin calls, lender discretion over collateral and refinancing, and near-term maturities. The company obtained a one-year Morgan Stanley facility extension effective May 4, 2023; Bank of America was extended only to May 30, 2023, and a longer extension was not assured. Scheduled 2023 principal maturities totaled approximately $906 million.
- All loans were floating-rate, but $3.8 billion of commitments remained indexed to LIBOR at quarter-end. The company expected substantially all assets and liabilities to transition to SOFR by June 30, 2023 and warned of related financial, operational and legal risks.
- After quarter-end, the company received repayment of an office loan with $44.3 million unpaid principal and acquired 100% ownership of a Houston office property through a negotiated deed-in-lieu of foreclosure. The related loan had been rated 5 at March 31.
- The filing reported no material litigation, no material change to previously disclosed risk factors, and effective disclosure controls. Management cautioned that economic and property-market conditions could materially affect credit reserves, financing availability and results.
Important facts for investors to verify
- Whether non-accrual loans, delinquencies and office collateral performance worsen, and how recoveries compare with the $222.4 million total reserve.
- Whether the company secures longer-term extensions or replacement financing for near-term maturities, particularly the Bank of America facility, and whether any margin calls arise.
- Whether reported liquidity is available for general corporate use, given restrictions on CLO-held funds and the company’s unfunded loan commitments of $353.9 million.
- Progress and completion of the LIBOR-to-SOFR transition, including whether asset and liability benchmark mismatches affect earnings.
- The financial and operational impact of the Houston office foreclosure and whether Distributable Earnings can support the common dividend; Q1 Distributable Earnings per share were below the $0.24 dividend.