TPG RE Finance Trust, Inc. (NYSE:TRTX) Q4 2023 Earnings Call Transcript February 21, 2024
TPG RE Finance Trust, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to TPG Real Estate Finance Trust Earnings Call for the Fourth Quarter and Full Year of 2023. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, today’s call is being recorded. It is now my pleasure to turn the call over to the company. Thank you. You may begin.
Unidentified Company Representative: Good morning and welcome to TPG RE Finance Trust earning call for the fourth quarter and full year of 2023. We are joined today by Doug Bouquard, Chief Executive Officer; and Bob Foley, Chief Financial Officer. Doug and Bob will share some comments about the quarter and then we will open the floor for questions. Last evening, the company filed its Form 10-K and issued a press release and earnings supplemental with a presentation of operating results, all of which are available on the company’s website in the Investor Relations section. As a reminder, today’s call may include forward-looking statements which are uncertain and outside of the company’s control. Actual results may differ materially.
For a discussion of risks that could affect results, please see the Risk Factor section of the company’s Form 10-K. The company does not undertake any duty to update these statements, and today’s call participants will refer to certain non-GAAP measures, and for reconciliations you should refer the press release and the Form 10-K. At this time, I’ll turn the call over to Doug Bouquard, Chief Executive Officer.
Doug Bouquard: Good morning and thank you for joining the call. Over the past quarter, the market has rallied broadly, driven by a mix of robust economic growth, a tight labor market and the expectation that the worst is behind us in terms of both inflation and restrictive Fed policy. Not only is the S&P 500 up about 5% since the start of the year, it’s worth noting that since October 2022, the S&P has rallied a remarkable 40%. In credit markets, corporate credit spreads continue to tighten in sympathy with the equity markets. However, real estate credit spreads continue to underperform on a relative basis, driven by the same themes that have been affecting the real estate market for the last several quarters. Broad pressure on values, secular challenges to office, elevated borrowing costs and reduced liquidity.
Many traditional providers of real estate debt capital, particularly regional banks, remain defensively positioned. While there are multitude of dynamics at play within real estate capital markets, the pace of Fed rate cuts will be a key driver of credit performance, particularly among floating rate lenders. On the positive side, thus far in 2024, credit spreads in the CMBS and Series CLO markets have tightened with particularly strong demand from the bond buying community in favor property types such as multifamily and industrial. However, real estate as an asset class has lagged the broader market rally. I expect 2024 will be a year of increased transaction volumes and price discovery across the sector. In the fourth quarter, TRTX followed through decisively on the strategy that we have steadily articulated to the market.
Number one, maintain elevated levels of liquidity given the broader market pressure and uncertainty. Number two, resolve identified credit challenged loans with an eye towards maximizing shareholder value. And number three, position TRTX to take advantage of an attractive investment environment in 2024 and beyond. As I’ve mentioned in prior quarters, we continue to use every asset management tool at our disposal to maximize shareholder value, including those available to TRTX by virtue of being part of a broader real estate investment platform and a $222 billion multi-strategy asset management firm. Driven by the hard work and focus of our asset management team, we resolved during 2023, and especially in the fourth quarter, all of our identified credit challenge loans at levels in line with our CECL reserves.
Consequently, we ended the year with a loan portfolio that is 100% performing, contains no 5 rated loans nor non-performing loans, and achieved a 71% reduction in CECL reserves, all while maintaining liquidity of $480 million. Simply put, we were an early mover to identify and address challenges within the sector. Our fourth quarter results exemplify our commitment to getting ahead of and resolving underperforming credit exposures. Looking at our asset management progress through a more focused lens, we identified the challenges facing the office market and moved prudently to reduce our exposure by approximately 70% from $2.3 billion to $728 million since early 2022. A substantial portion of that risk reduction came in the form of full or partial repayments from our borrowers.
However, in certain cases where we deemed it to be the optimal path for shareholder value, we sold loans or took title to assets. These asset management decisions are rooted in the investment framework we apply to all of our investments. Given that TRTX is part of TPG’s fully integrated debt and equity investment platform, we are uniquely positioned to manage REO assets and maximize shareholder value. At quarter end, REO assets account for slightly less than 5% of TRTX’s total assets. Despite the banking industry’s emphasis to reduce direct lending on commercial real estate assets, we continue to benefit from strong demand from our financing counterparties to deepen their lending relationship with TRTX. To that end, we extended a $500 million secured credit facility with Goldman Sachs to 2028 and closed a new financing arrangement with HSBC.
We have no material financing maturities until 2026, which provides us an attractive runway to deploy fresh capital into the real estate credit market. Looking ahead, uncertainty continues to permeate the broader real estate market. For TRTX, due to the substantial progress made over the past year in reshaping our loan portfolio, our strong liquidity and low leverage, we are confident in our ability to navigate the current environment. From an exposure perspective, our loan portfolio is 49% multifamily, which we believe is a sector with positive long-term tailwinds, despite the near term pressures of new supply and elevated short-term borrowing costs. Our multifamily book is 100% performing. Furthermore, 100% of our multifamily borrowers who are required to replace their interest rate caps in 2023 did so by either renewing, replacing a cap or funding an interest reserve, which is a positive signal towards borrower commitment, the strength of our collateral and the overall credit quality of our balance sheet.
While slower than expected interest rate cuts may put pressure on the sector and our borrowers, we continue to favor the housing sector and believe this will be an area for attractive new investment in the coming quarters. Against this improvement backdrop, our current share price represents approximately 50% of book value, so there remains a clear disconnect from the company’s fundamentals, including the significant progress made in 2023 and our 100% performing loan portfolio. In simple terms, with $480 million of available liquidity, a conservative leverage ratio of 2.5 to 1, a balance sheet with 100% performing loans and the deep investing experience of TPG’s global real estate platform, we believe that our shares offer compelling value at today’s price.
We acknowledge the real estate sector remains under pressure and that credit performance may be heavily dependent on the pace of future interest rate cuts. However, we are pleased with how we are positioned to navigate 2024 and beyond. With that, I will turn it over to Bob for a more detailed summary of this quarter’s performance.
Bob Foley: Thank you, Doug. Good morning, everyone and thanks for joining us. Our results for the fourth quarter and full year illustrate our success in executing our 2023 operating, which was to efficiently resolve or identify credit challenge loans, primarily office, at the best values available in the market, sustain high levels of liquidity, maintain or reduce our already low leverage levels and position TRTX at year end to play offense, defense or both in 2024. Regarding our operating results, GAAP net income attributable to common shareholders was $2.6 million for the fourth quarter as compared to a loss of $64.6 million for the third quarter. Net interest margin for our loan portfolio was $21.3 million versus $19.5 million in the prior quarter, an increase of $1.8 million or $0.02 per common share, due largely to repayment of borrowings associated with non-performing loans resolved during the fourth quarter.
Distributable earnings before realized credit losses was $24.4 million or $0.31 per common share as compared to $13.7 million or $0.18 per common share in the prior quarter. Distributable earnings before realized credit losses averaged $0.23 per quarter for the full year 2023, which we view as a solid foundation from which to build in 2024. Distributable earnings declined quarter-over-quarter to a loss of $159.7 million versus a loss of $103.7 million in the prior quarter due entirely to realized losses incurred from the resolution of all of our non-performing and 5 rated loans during the fourth quarter. The realized losses recognized in the fourth quarter were nearly identical to the CECL reserves associated with the resolved loans. Our CECL reserve decreased quarter-over-quarter by $166.8 million or 70.5% to $69.8 million from $236.6 million as of September 30th, 2023.
Our CECL reserve rate declined to 190 basis points from 560 basis points. This decline reflects $466 million of loan resolutions during the fourth quarter involving identified credit challenge loans, including the elimination of all 5 rated loans and non-performing loans. We have no specific reserves for loan losses at year end. Book value per share is $11.86, a decline of $0.18 per share from $12.04 in the third quarter. Some important data points. We reduced non-performing loans to zero from the peak of $558.9 million at March 31st, 2023. Our $3.7 billion loan portfolio was at year end 100% performing, 100% floating rate and 100% first mortgage. Resolved $466 million of identified credit challenge loans in the fourth quarter and $951 million during the entire year.
For the quarter, the loan resolutions included, one office loan sold, three office loans converted to REO, one multifamily loan sold and one multifamily loan converted to REO. Excluded from these amounts, our $70 million of regular way loan repayments in full on one hotel loan and partial repayments of $30.2 million across three loans. To accomplish our goal, we incurred realized losses during the full quarter of $184.1 million and for the year of $334.7 million. These losses were within 3% for the quarter and 9.5% for the full year of the aggregate CECL reserves related to those resolved loans. The small quarterly decline in book value in the face of $184.1 million of realized losses reflects that our CECL reserve had already largely captured the eventual losses realized upon resolution.
In reading our balance sheet of these identified credit challenge loans, we also shared $280.6 million of borrowings used to fund those non-earning assets and $6.1 million of related quarterly interest expense or approximately $0.08 per share per quarter. Multifamily loans now represent 49.2% of our loan portfolio. Office has declined 68% over the past eight quarters to 19.9%, life sciences is 11%, hotel is 10.6% and no other property type comprises more than 3.1% of our portfolio. Unfunded commitments totaled $183.3 million, only 5% of our total loan commitments. We further de-levered to 2.5 to 1, which is defensive, but gives us ample room for growth when warranted. We have $4.9 billion of total financing capacity across 13 different arrangements.
During the fourth quarter, we added a non-mark-to-market note-on-note financing arrangement with a new counterparty, and shortly after year end, we extended our existing $500 million secured credit facility with Goldman Sachs for two additional years through 2026 and tacked on a two-year term out provision through 2028. Our only scheduled debt maturity in 2024 is $1.8 million under a credit facility we expect to extend. Regarding REO. One of our strategies to resolve credit challenge loans and recycle capital is to convert certain loan investments to REO, which gives TRTX sole control over the properties and their destinies. During the fourth quarter, we converted to REO four loans, three office properties and one multifamily property. Our holdings at year end comprised five properties, four office and one multifamily, with a total carrying value of $199.8 million, a blended current annualized yield of 6%, an average basis per square foot per office of $121 and per apartment unit of $274,000.
Refer to footnote four of our financial statements for a snapshot of our REO portfolio at year end. We’re using the broad resources of TPG Real Estate’s $18 billion real estate platform and TPG, including platform companies owned by our equity funds, senior advisors and partners, and counterparties to optimize REO returns, giving due consideration to investment alternatives, cash on cash returns, capital requirements and holding period. TRTX is experienced owning effectively managing and harvesting REO. Prior to the fourth quarter of 2023, we’d taken title to four properties, one land, two office and one multifamily. We sold the land within 14 months of acquisition for a gain of $29.1 million. We sold one of the office properties in the fourth quarter of 2022 for a net loss of roughly $200,000, which translated into a recovery against our pre-foreclosure EPV of roughly 95%.
We financed return in the second office building, which we own today and operate, and which generates a 9% yield on equity, and we sold in November, just three months after acquisition, the multifamily property for all cash, no seller financing and generating a $7 million gain compared to our REO carrying value, with total proceeds roughly equal to our pre-foreclosure loan balance. The gain is reflected in our results of operations for the fourth quarter. Regarding credit, risk ratings improved to 3.0 from 3.2, due almost entirely to loan resolutions during the fourth quarter. Refer to Pages 73 and 74 of our Form 10-K for a detailed recap of risk rating changes during the quarter. Regarding our liabilities and our capital base. Non-mark-to-market liabilities remain an essential ingredient in our financing strategy.
At quarter end, non-mark-to-market liabilities represented 73.5% of our liability base as compared to 68.9% at September 30th. Leverage declined further to 2.5 from 2.6 to 1 at September 30th and 2.8 to 1 at June 30th. We were in compliance with all financial covenants at December 31st, 2023. At quarter end, we had $247.2 million of reinvestment capacity available in FL5 to refinance existing loans financed elsewhere on our balance sheet or to support new loan acquisitions or originations. We have since utilized $71.2 million of this capacity and intend to fully utilize the remaining $176 million before the outside reinvestment date of mid-April. We estimate total incremental quarterly interest income of approximately $0.07 per share. Regarding liquidity.
We maintain high levels of immediate and near term liquidity, roughly 11.4% of total assets to support our asset resolution and loan investment strategies. Cash and near term liquidity remained substantial at quarter end at $480 million, comprised of $206.4 million of cash, $247.2 million of CLO reinvestment cash and $26.4 million of undrawn capacity under our secured credit agreements. Our third CLO remains open for reinvestment through mid-April of this year. And during the quarter, we funded $34.6 million of commitments under existing loans. And with that, we’ll open the floor to questions. Operator?
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