TPG RE Finance Trust: The Dividend Yield Is Fat At 15% For A Reason (NYSE:TRTX)

Some commercial real estate lenders are currently in a state of flux as previously safe and stable property asset classes like offices and urban hotels get disrupted by the now entrenched post-pandemic working-from-home trend. Hence, TPG RE Finance Trust, Inc. (NYSE:TRTX) has experienced a significant level of earnings volatility despite a broadly diversified portfolio of loans to a range of property types including multifamily properties, industrial facilities, offices, and hotels. The lender last declared a quarterly cash dividend of $0.24 per share, unchanged sequentially for a 15% annualized forward dividend yield. The yield sits far above its comparable mortgage REIT peers with TRTX also currently trading at a 46% discount to its recent third-quarter book value of $12.04 per share.

A fat double-digit yield for 54 cents on the dollar is seemingly a compelling buy but TRTX has seen quite significant book value deterioration and has a history of dividend cuts. The closing of this discount represents a source of potential upside for common shareholders, but forms the core reason why the dividend yield is at its current level. TRTX trading at book value would mean a dividend yield of 8%, around 700 basis points lower than the current yield. Critically, the continued dip in book value represents a fundamental barrier to building a position in the commons with book value dipping from $14.28 per share a year ago in the third quarter of 2022 and $16.15 per share in the third quarter of 2021.

Book Value And Current Expected Credit Losses

TRTX’s loan portfolio was valued at $4.2 billion at the end of the third quarter with the unpaid principal balance component of this at $3.97 billion. The portfolio had 59 loans with an average loan size of $71.6 million, a 9.28% weighted average all-in yield, and was 100% invested in floating-rate loans. The portfolio has been declining on the back of repayments in excess of new originations with TRTX seeing repayments and sales of $578.6 million during the third quarter versus $37.2 million in originations.

TRTX’s allowance for credit losses was $236.6 million at the end of the third quarter, a sequential dip of $41.7 million. On a per share basis, CECL reserve was $3.04 per share, down from $3.58 per share in the second quarter. It was also 5.6% of TRTX’s total loan portfolio, a decline of around 12 basis points sequentially.

The mREIT realized a GAAP net loss of $64.6 million, around $0.83 per share on the back of quite a substantial credit loss expense of $75.8 million during the third quarter. The loss was driven by the sale of two loans at substantial discounts to their unpaid principal balance. There was an office loan sold for $79 million with an unpaid principal balance of $152.4 million that drove a loss on sale of roughly $74.4 million. TRTX also sold a mixed-use loan for $95 million, generating a loss on sale of $35 million against an unpaid principal balance of $129.2 million.

Dividend Outlook And The Preferreds

Third quarter distributable earnings was a loss of $103.7 million, around $1.33 per share but would have been $13.7 million or $0.18 per share without realized credit losses. The more positive figure was down 7 cents from $0.25 per share in the second quarter. It means the mREIT is only able to cover its $0.24 per share dividend by 75%, a roughly 133% payout ratio. This is problematic as whilst TRTX ended the third quarter with $302.3 million in cash and equivalents, these funds are earmarked for investment with $15.6 million of this required to satisfy liquidity covenants under the mREIT’s secured financing agreement. The Series C preferreds, TPG RE Finance Trust, Inc. 6.25% RED PFD C (NYSE:TRTX.PR.C) offer an alternative and safer option and are currently trading at a 41% discount to their $25 per share par value and with a roughly 10.7% yield on cost.

Further, whilst the mREIT is making progress in derisking its loan portfolio’s previously high office exposure, this reduction has come at a high cost of losses with office loan repayments of $1.1 billion being responsible for just 72% of the total reduction since the start of 2021 and the remainder being driven by loan resolutions. TRTX is in a state of extreme flux with an uncertain outlook for a declining loan portfolio now set against a dividend that’s not covered by distributable earnings. The mREIT has cut its dividend before during the pandemic when the previous $0.43 per share distribution was cut by 54%. There could be another cut coming with the commons making a tough purchase against the continued NAV decline and the poor outlook for the dividend.