TPG RE Finance Trust, Inc.

Greetings. Welcome to the TPG Refinance Trust second quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Deborah Ginsburg. You may begin.

Thank you. Good morning. and welcome to TPG Real Estate Finance Trust's second quarter 2020 conference call. I'm joined today by Greta Guggenheim, Chief Executive Officer, and Bob Foley, Chief Financial Officer. Greta and Bob will share some comments about the quarter and then we'll open up the line for questions. Yesterday evening, 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 outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the risk factor section of our most recent 10-K and 10-Q reports. We do not undertake any duty to update these statements, and we will also refer to certain non-GAAP measures on this call. And for reconciliations, you should refer to the press release in our Form 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.

Thank you, Debra. Good morning and welcome to our second quarter earnings call. While the equity and debt capital markets indicate we are in a recovery, we expect to continue to see significant volatility. The time it will take for us to meaningfully recover is unknown. With U.S. air travel at a relative standstill and office attendance very low, Real estate NOI continues to have downward pressure. Although we believe the trough is behind us, we operate in an environment where there is no clarity regarding near-term economic conditions. Additionally, there are numerous factors that will continue to affect the slope of the recovery period, virus spread, vaccine, the election, relations with China, to name just a few. In this environment, we are defensively focused. In particular, we are taking the following steps to best position our company. First, we have added to our senior management. I am delighted to announce that Matt Coleman joined us this week as president of the REIT. Matt's experience with TPG's real estate equity investing business, prior workout experience during the Great Recession, and his legal and operational background brings valuable experience and perspective to our business. Matt is very familiar with TRT. as he has been continuously involved with us starting with our inception in 2015 through the IPO in 2017 and to the present. We look forward to partnering with him. Second, we are focused on liquidity. A key driver of liquidity is the timing of loan repayments. During the first half of the year, repayments were $321 million. Repayments in the last two years prior to March generally occurred significantly earlier than we had anticipated or wanted, driven in large part by the then-continued spread tightening and borrowers' ability to increase proceeds in a refinance. This phenomenon has stopped. Borrowers are not rushing to repay despite low LIBOR and Treasury rates as they expect NOI will improve as COVID gets under control and the economy rebounds. Despite this, we are aware of several potential repayments in cases where borrowers are in the process of refinancing our loan or selling the underlying properties. Our primary use of cash is to fund future draws for CapEx, tenant improvement and leasing commissions, and interest reserves on our existing book. We have only $15 million of construction loan future fundings under our one construction loan. and the remainder of our deferred fundings total $420 million through December 2021. As a reminder, we received financing from our lenders to finance up to approximately 65% of these future funding draws. During the quarter, we decided to pay down our whole loan credit facilities by approximately $158 million or 8%. This reduced our advance rate on loans pledged to our bank lenders from 76% to 68%. Our objective was to reduce risk in the portfolio given the uncertainty of the timing of an economic recovery. Also, we continue to evaluate parcels of individual loans or interest in loans where we believe it makes sense. Third, we are zeroed in on asset management. Our senior and junior origination teams have joined with our asset managers to form a single team to manage our assets. Asset highlights include. 63 of our 65 loans are current on interest payments. This represents 97% of interest payments. We are in the process of completing a loan modification that will bring this number of current loans to 64% in the near term. The one loan that will remain as not current is a loan on a portfolio of limited service hotels, and although the operations are certainly feeling the impact of COVID and shutdowns, It is in large part because of a dispute between the two owners that they have not come to the table with additional equity to effectuate a modification. The properties themselves are Marriott and Hilton branded limited service hotels and six of the seven have been tipped in the last year. Current occupancy is in the 40% range, which is approximately breakeven NOI. The properties are in drive-to locations and are not dependent on corporate group convention business. This acquisition loan was originated in 2019 with significant new equity invested. In the second quarter, we modified six loans with a $458 million unpaid principal balance. These modifications resulted in an accrual of $551,000 of interest in the second quarter. Other than the one hotel loan I referenced previously, Our hotel sponsors have contributed substantial equity to support their properties. Most of the properties can support their operating costs from property cash flow. Office property rent collections are averaging about 90% in our diversified office portfolio. Multifamily rent collections by our bars have also been strong and average over 90%. 86% of the properties securing our multifamily properties generally are in non-urban locations and or are low-rise properties. Collections are strong, but we've seen a distinction between borrowers who have embraced virtual tours and other non-contact leasing strategies and those who have not. We executed a non-binding term sheet to provide acquisition financing for an office building in Brooklyn. This financing will repay an existing TRT loan, which was the subject of the deed and lieu request we disclosed last quarter. The acquirer of this asset and prospective borrower under a new loan is an existing borrower of TRT with whom we have a long, successful track record. This is a very experienced office property owner-operator in New York City as well as other markets. The new loan requires significant equity contributions from the borrower, including cash at closing and future guaranteed cash contributions. Our core earnings for the quarter is $17.5 million, or 23 cents a share. which reflects an $0.18 per share or $13.8 million loss on the sale of our $99.3 million loan on a Class A multifamily property in downtown Houston. The primary purpose of this 50% loan-to-cost loan was to provide lease-up financing and additional improvements. Since origination, the property stabilized to a 94% occupancy. However, due to significant concessions in the market, Retail Space Vacancy, and this property's higher than underwritten OPEX relative to newly constructed properties, and in our view, the low prospects for meaningful NOI growth, we decided to sell the loan. While COVID and the resulting economic impacts, including lower oil prices, have not helped the property, our decision to sell the loan was not motivated by COVID. This loan has been the subject of continued focus, and we were able to negotiate a price which we felt maximized and the rest of us. Bolstering earnings is our 167 basis point LIBOR floor on loans, which is 150 basis points in the money. Our asset WAC is 5.06% versus our liabilities WAC of approximately 1.86%. To conclude, we are committed to maximizing the performance of our loan book and continue to focus on maintaining and increasing liquidity in these uncertain times. I will now turn the call over to Bob.