U.S. Markets open in 7 hrs 50 mins

Edited Transcript of TRTX.N earnings conference call or presentation 30-Jul-19 12:30pm GMT

Q2 2019 TPG RE Finance Trust Inc Earnings Call

SAN FRANCISCO Sep 3, 2019 (Thomson StreetEvents) -- Edited Transcript of TPG RE Finance Trust Inc earnings conference call or presentation Tuesday, July 30, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Deborah Ginsberg

TPG RE Finance Trust, Inc. - VP, General Counsel & Secretary

* Greta Guggenheim

TPG RE Finance Trust, Inc. - CEO, President & Director

* Robert R. Foley

TPG RE Finance Trust, Inc. - Chief Financial & Risk Officer

================================================================================

Conference Call Participants

================================================================================

* Richard Barry Shane

JP Morgan Chase & Co, Research Division - Senior Equity Analyst

* Steven Cole Delaney

JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to the TPG RE Finance Trust's Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note, this conference is being recorded.

I would now like to turn the conference over to your host today, Deborah Ginsberg. Please proceed.

--------------------------------------------------------------------------------

Deborah Ginsberg, TPG RE Finance Trust, Inc. - VP, General Counsel & Secretary [2]

--------------------------------------------------------------------------------

Good morning, and welcome to TPG Real Estate Finance Trust's Second Quarter 2019 Conference Call. I'm joined today by Greta Guggenheim, Chief Executive Officer; and Bob Foley, Chief Financial and Risk Officer. Greta and Bob will share some comments about the quarter, and then we'll open up the call for questions.

Last night, we filed our Form 10-Q and issued a press release with a presentation of our operating results, all of which are available on our website in the Investor Relations section. I'd like to remind everyone that today's call may include forward-looking statements, which are uncertain and out of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect our results, please see the Risk Factors section of our most recently filed 10-K. We do not undertake any duty to update these statements, and we'll also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release and our 10-Q.

With that, it's my pleasure to turn the call over to Greta Guggenheim, Chief Executive Officer of TPG Real Estate Finance Trust.

--------------------------------------------------------------------------------

Greta Guggenheim, TPG RE Finance Trust, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Thank you, Deborah, and good morning, all, and thank you for joining our second quarter earnings call. We are now celebrating our 2-year anniversary as a public company and are pleased to report our increased earnings, robust originations and the continuance of attractive ROEs on our newly originated loans. We originated $1.5 billion in loans for the first half of the year, including $755 million in the second quarter. Total earning assets were $5.5 billion at quarter end, which generated net income of $32 million. Our weighted average spread of 364 basis points for Q2 combined with a 60% weighted average LTV indicates our continued focus on and ability to source exceptional credit assets with attractive yields. Our weighted average spread for the first half of the year of 380 basis points is very attractive relative to the market, and is a testament to the quality of our team. Currently, loans in the process of closing totaled $454 million, and we have a very strong pipeline for this point in the quarter.

We continue to focus on increasing earnings and the coverage of our dividend. CRE mortgage REITs have lumpy originations and repayments. So a key factor is cash management, which we continually seek to optimize. We are particularly pleased with our earnings this quarter, especially since we began the quarter with significant cash balances from our follow-on equity offering. The core of our origination strategy is on Class A plus properties with institutional sponsors in the top 10 markets. We augment these with relationship-driven opportunities in the top 25 markets. These are often off-market transactions where the bar or significant stakeholder wants to work with us and negotiates exclusively with us, which was the case for more than half of our 2Q loans. As an example, our second largest loan for the quarter had a spread of 408 basis points over LIBOR, with an in-place debt yield of 7.6%, a projected stabilized debt yield of 11.6%, and an as is LTV of 67%. We were given a first look on this asset due to our demonstrated reliability and long-term relationships with the key decision-makers.

Our success in attaining superior returns relative to risk is based on our exceptionally strong understanding of credit assets and markets, which gives counterparties confidence that we will close a loan without surprises. They know we understand the assets and markets when we close. This was also the case with our largest loan origination in the quarter, for which we received exclusivity in negotiating terms early on. I should point out this loan is our only construction loan and our first construction loan origination in 2.5 years. As we have said on prior calls, we do not focus on increasing our construction exposure, but we will certainly pursue construction loans with unusually compelling metrics, which is the case with this loan. We closely monitor our average loan sizes and bar exposure as a percent of equity as these are vital to managing risk. Our average loan size as a percentage of equity is 5.5%. We are steadfast on credit for both new investment and in monitoring our portfolio.

For those of you familiar with New York City's successful crime reduction under police commissioner Bill Bratton and his broken window policy, our asset management follows his approach. Borrowers want to know we are on top of the loans when they need something from us, such as a loan draw, but it is also imperative they know we are actively monitoring their loan when business plans do not go as planned. We are on top of every detail of each loan, and this is evident to our borrowers. We're acutely aware of small misses. And if we believe the small misses will lead to bigger misses, we take action immediately. Given that we focus on experienced, well-capitalized borrowers, taking action generally requires a conversation only. We continue to utilize the TPG Real Estate equity group's investment experience to inform us in making go/no-go decisions. Their equity real estate knowledge based on seeing and evaluating most all significant real estate sale transactions in the U.S. is invaluable. This provides educated and informed data points on value and loan experience and loan basis. The [count amount] to this is our people, our teamwork and our experience. We are cognizant that in today's highly liquid environment, most loans can be refinanced.

We originate and structure our loans, assuming this unusual environment does not continue. I cannot overemphasize the importance of credit discipline today. The market is exceptionally choppy and there are many pressure points that could be a catalyst to a risk-off environment. For example, rapid political shifts that trigger regulatory change, such as the New, New York City multifamily rent regulations that were approved on June 4, which is a great segue to my next topic. Because I know you will ask, we have one $64 million loan commitment with a $45 million unpaid balance, representing 1% of our loan portfolio that is secured by a portfolio of rent-related multifamily properties in New York City, Brooklyn to be precise. This acquisition loan closed in November of last year, and the sponsor invested 40% cash equity for this acquisition. We believe this is a very substantial cushion to absorb even the high range of potential valuation declines being bantered about by the press.

Despite the equity cushion and some unique risk mitigants to our loans, we moved this asset from a 3 rating to a 4 rating, while we evaluate the borrower's revised business plans, incorporating the new rent regulation. While we are on this topic, we also moved 2 other loans totaling $160 million from a 3 rating to a 4 rating. Both loans are on multifamily assets and both are experiencing delays in executing their business plans. We believe these loans will repay in full and foresee no impairments to loan value. Our portfolio-wide risk rating at quarter end remained at 2.8. And immediately following quarter end, our largest 4-rated loan paid off in full.

Loan repayments for the first half of the year were $722 million, and we expect this number to increase in the second half. This is driven by the tremendous liquidity in the market and borrower's ability to refinance or sell assets. However, based on our year-to-date originations and our very strong pipeline, we expect our net earning assets will continue to grow throughout the year.

On our funding side, as you know, we raised $136 million of equity in the first half of the year. Throughout the remainder of the year, we will continue to augment leases and diversify our financing sources.

Bob will now comment further on our financial results.

--------------------------------------------------------------------------------

Robert R. Foley, TPG RE Finance Trust, Inc. - Chief Financial & Risk Officer [4]

--------------------------------------------------------------------------------

Thanks, Greta. For the second quarter, we generated core earnings of $32.7 million or $0.44 per diluted share, an increase of 13% compared to $28.9 million and $0.43 per diluted share for the preceding quarter. During the quarter, we declared a dividend of $0.43 per share, which was covered 1.02x by our core earnings. Earnings growth was driven primarily by an increase in net interest margin of $4.6 million quarter-over-quarter due to the earn in of our $714 million of first quarter originations and investment earnings from our short-term investment portfolio. Net loan growth of $116.2 million was due to the closing of 8 first mortgage loans, representing total commitments of $755 million, initial fundings of $507.8 million, deferred fundings on existing loans of $59.7 million and repayments of $451.3 million. For new loan originations, the average loan size was $94.4 million. Our weighted average credit spread was 364 basis points and the weighted average LTV was 60%. The weighted average spread of our loan portfolio at quarter end was 377 basis points as compared to 389 basis points at March 31, due primarily to loan repayments.

At quarter end, portfolio-wide loan level leverage increased to 77.3% from 74.1%. Our overall debt-to-equity ratio increased to 2.9x from 2.5x due to increased leverage on our loans and growth in our short-term investment portfolio. Book value per share grew quarter-over-quarter by $0.03, due primarily to unrealized gains in our short-term investment portfolio of $3.1 million.

Unlike earlier in the year, lower rates now seem likely for the foreseeable future. All but one of our loans carry a LIBOR floor. The portfolio-wide weighted LIBOR floor is 1.43%. The weighted average LIBOR floor for second quarter originations alone was 1.84% as compared to current LIBOR of approximately 2.25%.

On the right-hand side of the balance sheet, less than 13% of our liabilities are floored. We continue to enhance the durability of our balance sheet by targeting non-mark-to-market, match term liabilities to match the tenure of our loan investments and reduce our borrowing costs. At June 30, 41.8% of our liabilities were non-mark-to-market and matched term. Additionally, the bulk of our loan-related secured credit facilities do not permit capital markets based marks. We syndicated a $132 million nonconsolidated senior interest in a first mortgage loan originated during the quarter, which ensures match term funding for this investment.

We utilized the reinvestment feature of our second CLO to recycle $69.5 million from loan repayments received during the quarter. Year-to-date through June 30, we've recycled $101.3 million, and we expect to continue to recycle capital in this term funding vehicle through the end of its reinvestment period in November 2020.

During the second quarter, TPG's strong network of relationships with major banks enabled us to extend 2 of our secured revolving repurchase agreements for terms of 1 and 3 years and further reduce our financing costs. Similar results will continue through the year as the initial maturities of other credit facilities draw near, and all are part of our overall strategy to optimize the term structure of our liabilities to support the direct origination of high-quality first mortgage loans to generate appropriate ROEs.

The debt capital markets remain our focus as we continue to extend the tenure of our liabilities, further reduce our exposure to mark-to-market risk and provide for near-term capital growth -- near-term growth in our capital base.

And with that, Greta and I will be happy to entertain your questions. Thank you very much. Operator?

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Steve Delaney with JMP Securities.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [2]

--------------------------------------------------------------------------------

Your CLO investments have been increasing. And when we saw the March follow-on offering, we certainly expected you would find a short-term place for that. But I'm wondering now that the balance is up to $600 million, if we may continue to see this being a significant asset class on your balance sheet? And if you could -- Bob, if you could comment on sort of what the range of levered returns are on the CLOs versus the loan book?

--------------------------------------------------------------------------------

Greta Guggenheim, TPG RE Finance Trust, Inc. - CEO, President & Director [3]

--------------------------------------------------------------------------------

Sure. I'll start, Steve, and then hand it over to Bob. And yes, we did purchase over $300 million of CLOs in the second quarter and 85% -- 81%, excuse me, are single A or better, and approximately 40% are AAA. So the purpose of these really was for cash management because of the liquidity position that we had. And I don't expect to see these to materially increase. And if you do see them increase, it will be the same -- it would be the same characteristics of the ones we've already purchased. We're not looking to acquire these in lieu of loans. It's really just to augment cash management.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [4]

--------------------------------------------------------------------------------

Understood. Yes, that's helpful. And the general range of returns, leverage returns there compared to the loans?

--------------------------------------------------------------------------------

Robert R. Foley, TPG RE Finance Trust, Inc. - Chief Financial & Risk Officer [5]

--------------------------------------------------------------------------------

Sure. They're a little lower. I mean they range, on average, it's about 8.5% on a levered ROE basis. Some are higher, some are slightly lower. And we view that as appropriate given the liquidity of these positions, the significant subordination, as Greta said, we're generally single A or better. And the bulk of it is AAA, and the equity that we have deployed in this short-term investment portfolio can and will be redeployed as Greta and Peter and the team see additional appropriate loan origination opportunities.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [6]

--------------------------------------------------------------------------------

Great. Yes, that's helpful. And while it's lower that roughly -- the 8.5% roughly matches your dividend yield on your book value. So obviously you've got expenses...

--------------------------------------------------------------------------------

Robert R. Foley, TPG RE Finance Trust, Inc. - Chief Financial & Risk Officer [7]

--------------------------------------------------------------------------------

And to be clear -- just to be clear, those ROEs are net ROEs of expenses. So that ROE is calculated on the same basis that we calculate [here] the ROE. Yes.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [8]

--------------------------------------------------------------------------------

Okay, that's good to know. Okay. And then switching over, your information you've provided on floors is a little more specific than appreciated relative to what we've been seeing. I think we'll be hearing more about that with the direction in rates. But you're -- when I'm thinking about the 1.84% weighted average floor, 1-month LIBOR for the second quarter was probably sort of in the 2.40%-ish range, maybe slightly below. Is it coincidence that, that 1.84% is roughly 50 basis points below where actual 1-month LIBOR -- would that be a reasonable expectation for us in terms of the floors on new originations going forward?

--------------------------------------------------------------------------------

Greta Guggenheim, TPG RE Finance Trust, Inc. - CEO, President & Director [9]

--------------------------------------------------------------------------------

No, that -- it's just how the average worked out. We try to get a floor at the money when we close every loan, so at that current LIBOR. And as time passes, borrowers are getting more savvy to this and focusing on it a bit more. And because we have highly sophisticated institutional borrowers, it is a battle to get high floors. But we have succeeded in giving them at the money occasionally and some at 2%, but some are much lower. So that just happens to be the average.

--------------------------------------------------------------------------------

Steven Cole Delaney, JMP Securities LLC, Research Division - MD, Director of Specialty Finance Research and Senior Research Analyst [10]

--------------------------------------------------------------------------------

It sounds like all -- just all part of the negotiation and how badly you want the loan, et cetera, et cetera?

--------------------------------------------------------------------------------

Greta Guggenheim, TPG RE Finance Trust, Inc. - CEO, President & Director [11]

--------------------------------------------------------------------------------

Exactly. We're negotiating a loan right now that we believe will get signed up soon, and the borrowers come back and ask for X and we're going to go back and say, "Okay, put the floor back to LIBOR, and you can have it." So we'll see how that goes.

--------------------------------------------------------------------------------

Robert R. Foley, TPG RE Finance Trust, Inc. - Chief Financial & Risk Officer [12]

--------------------------------------------------------------------------------

Yes. Just to give you and others on the call a sense, this quarter, the weighted average LIBOR on our new originations with respect to floors was 1.84%. Last quarter, it was 2.19%. So to Greta's point, a lot of this is simple hand-to-hand combat, so to speak, or at least fierce negotiation, spirited negotiation with our borrowers.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Rick Shane with JPMorgan.

--------------------------------------------------------------------------------

Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [14]

--------------------------------------------------------------------------------

Steve really sort of built in on the floor stuff that we want to talk about. The only other question I'd like to explore is, given relative size, you guys have been very active in the CLO market in terms of issuance. I am curious how that strategy will be affected by the shift in policy from the Fed.

--------------------------------------------------------------------------------

Greta Guggenheim, TPG RE Finance Trust, Inc. - CEO, President & Director [15]

--------------------------------------------------------------------------------

The shift in what, I'm sorry?

--------------------------------------------------------------------------------

Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [16]

--------------------------------------------------------------------------------

Policy from the Fed.

--------------------------------------------------------------------------------

Robert R. Foley, TPG RE Finance Trust, Inc. - Chief Financial & Risk Officer [17]

--------------------------------------------------------------------------------

Oh, well, tomorrow will be here soon enough. Now that's a good question. I guess I think your question is directed primarily by our behavior as an issuer of CLOs rather than an investor, correct?

--------------------------------------------------------------------------------

Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [18]

--------------------------------------------------------------------------------

Yes, that's exactly it. Basically, what I'm trying to understand is, does that form of financing become more or less or equally attractive in an environment where the Fed is more dovish?

--------------------------------------------------------------------------------

Robert R. Foley, TPG RE Finance Trust, Inc. - Chief Financial & Risk Officer [19]

--------------------------------------------------------------------------------

Well, honestly, in our business, let's talk first about our balance sheet and then demand for loans from our borrowers. In fact, let's talk about demand for loans from our borrowers first because that's more important. As we've discussed before, most of our borrowers borrow in the floating rate markets for reasons that are somewhat independent of the general level of rates. It's really a function of their business plan and what they intend to do with the property. So we don't view demand for floating rate transitional loans as being largely dependent on the general level of rates or LIBOR in particular or its replacement rate in several years. So we expect that demand for loans will continue in pretty strong fashion because the economy and the markets feel pretty good.

With respect to repayments, lower rates at the margin make it easier for a given amount of cash flow for borrowers to repay loans. And as Greta said earlier, we would expect to see more repayments in the second half of the year than we did in the first. In terms of accessing the CLO market as a source of nonrecourse, non-mark-to-market term financing, we continue to see pretty strong -- well, very strong, frankly, investor interest. We get a lot of inbound inquiry from investors about when our next deal will be. There've been a couple of deals in the market over the last month that have done quite well. And that demonstrates that floating rate fixed income investors are in the market in a big way. And frankly, if you think that rates are going down, which everyone seems to believe then being floating and being in a position to be able to adjust is something that a lot of fixed income investors are interested in doing.

--------------------------------------------------------------------------------

Greta Guggenheim, TPG RE Finance Trust, Inc. - CEO, President & Director [20]

--------------------------------------------------------------------------------

And, Rick, if your question is in part based on the fact that the AAA and other investors of CLOs are not wanting to -- are looking at where rates are going in the short term and the long term, which would steer their decision to want to invest in short-duration floating rate investments, I think it may help them on the margin in that it's clear they're not going to be missing any great investment opportunities at higher rates in the very near term. So it may -- it could spur demand and make the spread tightening on the sell side more attractive.

--------------------------------------------------------------------------------

Richard Barry Shane, JP Morgan Chase & Co, Research Division - Senior Equity Analyst [21]

--------------------------------------------------------------------------------

Got it, that's exactly the type of insight I was looking for. I asked the question not necessarily knowing what the answer is going to be, but that's what we want to try to understand that dynamic in terms of how you guys think about it and also how the CLO buyers think about it as well.

--------------------------------------------------------------------------------

Operator [22]

--------------------------------------------------------------------------------

There are no further questions in queue at this time. I would like to turn the call back over to Greta Guggenheim for closing comments.

--------------------------------------------------------------------------------

Greta Guggenheim, TPG RE Finance Trust, Inc. - CEO, President & Director [23]

--------------------------------------------------------------------------------

Well, thank you all for joining us on our call today. We're very excited about how we're starting the next quarter with a very high level of earning assets and with a very strong pipeline, and we look forward to speaking to you next quarter.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time, and have a great day.