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spk00: RE Finance Trust first quarter 2022 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow a formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Deborah Ginsberg, Vice President, Secretary, and General Counsel. Thank you, and over to you.
spk02: Good morning, and welcome to TPG Real Estate Finance Trust's conference call for the first quarter of 2022. I'm joined today by Doug Picard, Chief Executive Officer, Matt Coleman, President, Bob Foley, Chief Financial Officer, and Peter Smith, Chief Investment Officer. Matt and Bob will share some comments about the quarter, and then we'll open up the call 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 discussion of some of the risks that could affect results, please see the risk factor section of our form 10Q and 10K. 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 and our 10Q. With that, I'll turn the call over to Matt Coleman, President of TPG Real Estate Finance Trust.
spk04: Thank you, Debra, and thanks to everyone for joining this morning's call. Before I turn to our results for the first quarter, I want to introduce Doug Bucard, who formally joined us last week as the CEO of TRTX and as a TPG partner. As most of you are aware, prior to joining TPG, Doug spent his entire 18-year career at Goldman Sachs, where he most recently served as a managing director and head of U.S. commercial real estate debt in the global markets division. In that role, he had oversight of the firm's commercial real estate debt origination activities, including securitized lending, balance sheet lending, and commercial real estate warehouse financing, as well as commercial real estate securities issuance. As I mentioned on our last earnings call, we've gotten to know Doug quite well over the last several months, and I couldn't be more pleased to welcome him to TRTX and to TPG. Doug's appointment is an important step for TRTX and the firm, and I look forward to partnering with him for many years to come. With that, let me pass it over to Doug for a few remarks.
spk07: Thank you, Matt. I am incredibly excited to join the leadership team here at TRTX and TPG. I'll first start with, look, human capital is amongst the most important assets of any organization. And despite starting just a few days ago, I've been incredibly impressed with the quality of our people, both within TRTX and TPG broadly. As financial markets transition from the era of QE to QT, the investing opportunity set for real estate credit markets will be compelling. and our company is well positioned to take advantage of this investing landscape. Lastly, I look forward to meeting many of you over the coming weeks as I settle into my new role. And with that, I will turn it back to Matt to discuss the first quarter and the broader market environment.
spk04: Thanks, Doug. Turning now to the first quarter, let me begin with a few comments on the macro environment and its impact on TRTX over the quarter. Needless to say, 2022 has gotten off to a complicated start. From the Russian invasion of Ukraine to inflation at 40-year highs to rising interest rates and the continuance of a global pandemic, the environment is choppy. We're seeing the effects of this confluence of factors in public equity markets, with the NASDAQ down approximately 20% year-to-date and the S&P 500 also down double digits. On the other hand, many real estate asset classes, particularly as reflected in private market valuations, remain strong. Multifamily has proven thus far to be a very effective inflation hedge. Rental rates and industrial continue to grow, and demand for lab space continues to be robust. And while it's true that new office is winning in certain markets, it's also the case that the country's office recovery has been uneven at best. According to NACRE, four-quarter NOI growth in office is the only negative reading across CRE property types. As a final complicating overlay, spreads widened significantly in the SASB and CLO markets, but have been slower to rise in the transitional lending space, although we're starting to see some movement on that front. So how did all of these factors affect TRTX during the first quarter? First, as reflected in our Q1 originations, we approached this quarter, as we do all others, from the perspective of being good stewards of investor capital. In light of the geopolitical and market uncertainties that I just highlighted, We invested selectively, consistent with our strategic approach to geographies, asset classes, and sponsors that we think are best positioned to succeed. As a percentage of total commitments, slightly more than half of our originations for the quarter were in multifamily, and 48.5% were in industrial. Total new commitments for the quarter were $233 million, reflecting a cautious approach in light of the environment. Our repayments in the first quarter were also slower than forecasted, which resulted in modest net asset growth. As we've started to see the opportunity to earn more spread, we've picked up the pace a bit with five new loans closed or in the process of closing since quarter end, representing total commitments of just over $300 million. This prudent approach has resulted in available liquidity of $384.2 million, which positions TRTX well to take advantage of evolving market conditions and opportunities. With respect to the portfolio, interest collections for the quarter were again in excess of 99%, reflecting strong performance and resilience, with our Southern California retail property remaining our only non-payer. In addition, we closed on the sale of the north parcel of our Las Vegas land position, for a purchase price of $75 million versus an allocated carrying value of $60.6 million. Together with the previous sale of the south parcel, those sales generated a total gain of $16.3 million versus our original loan basis of $112 million. This resolution demonstrates the strength of our loan structures and asset management capabilities. While we generally expect our assets to perform as underwritten, we often structure loans with interim milestones to keep business plans on track. In most cases, we can work with borrowers to adjust when things don't go as planned, but in limited circumstances such as this, we're well equipped to act when necessary to preserve value. Through an efficient resolution with our underlying borrower and proactive asset management, we're able to identify the optimal buyers for each individual parcel and transact quickly. As I've mentioned on prior calls, we were encouraged by the strength of the Vegas market, and that thesis proved out. Turning to the broader portfolio, we downgraded the risk ratings of eight office loans this quarter, reflecting the uneven office recovery discussed earlier, together with widening cap rates and delayed business plans across the office sector. Despite the downgrades, which we view as prudent under the circumstances, all of our office loans continue to perform. As I mentioned, active asset management is a key pillar of our organization, and these downgrades reflect our increased attention to these loans as we work through slowing business plans. While none of us can be clairvoyant about the pace of interest rate increases, where inflation is headed, and the outcome of certain geopolitical events, I have full confidence that TRT is well positioned for what lies ahead. Under Doug's leadership, with the intellectual capital that comes from being part of TPG, and with the substantial liquidity that we have available to deploy into the most interesting and strategic transitional lending opportunities, TRTX is well positioned to continue growing earnings and delivering attractive shareholder returns. With that, I'll hand it over to Bob to cover our Q1 results in greater detail.
spk08: Thank you, Matt. Good morning, everyone. It's now my turn to welcome Doug to the team. I've known Doug for many years, and all of us here are thrilled that the firm and the board of directors selected him, that Doug chose to join the TRTX team, and that we're working together. Yesterday we reported earnings for the quarter ended March 31st as follows. Gap net income of 23.8 million versus 44.9 million in the prior quarter. Net income attributable to common stockholders of 20.4 million or 25 cents per diluted share. A decrease of 51% versus the prior quarter. Distributable earnings of 26.6 million or 33 cents per diluted share. versus $18.5 million, or $0.23 per diluted share, in the fourth quarter. For all three of those earnings measures, the quarter-over-quarter difference was due primarily to the absence in the first quarter of the $15.8 million gain from our fourth quarter REO sale and a write-off of a portion of a defaulted retail loan, and an increase in the first quarter of $4.9 million in the CECL reserve. Distributable earnings from our basic transitional lending business were virtually unchanged quarter over quarter, $26.6 million in the first quarter of this year versus $26.7 million in the prior quarter. Once again, distributable earnings comfortably covered our quarterly dividend of $0.24 per common share. Net interest margin increased slightly despite a one-time expense of approximately $1.1 million of deferred financing costs. related to loans previously financed on several of our secured credit facilities that were contributed in February 2022 into TRTX 2022 FL5, our latest CRE CLO. Drivers of net interest margin included a quarter-over-quarter increase in our weighted average loan coupon to 4.59% from 4.49%, a decline in the weighted average rate floor in our loan portfolio to 105% from 110 basis points due to loan repayments and the earning of loans originated in the preceding quarter. Then interest margin did benefit from the steep rise in rates during the final third of the first quarter. Both value per common share increased quarter over quarter by 4 cents per share to $16.41 from $16.37 due primarily to net income exceeding dividends paid. Our current quarterly dividend of 24 cents per common share produces annualized yields of 5.9% to book value and 8.8% to yesterday's closing stock price. For the quarter, our CISO reserve increased by $4.9 million due to our adoption of a more conservative macroeconomic forecast for modeling our expected losses, heightened concerns about the office sector nationally spurred by a slower-than-expected return to office, and some business plan slowdowns experienced by some of our office loans. More on this topic shortly. Our CECL reserve rate, measured as a percentage of total commitments, was 91 basis points compared to 85 basis points for the preceding quarter. The right side of our balance sheet is integral to our growth, profitability, and risk mitigation. Our work in the first quarter sought to extend duration, maintain a high proportion of non-market market liabilities, and preserve low-cost financing. At quarter end, our liabilities were 72.5% non-marked market, within our usual range of 70% to 80%. Consequently, we continued to streamline our portfolio of secured credit facilities by downsizing two, but retaining accordion options on both, terminating one with zero usage, and extending the maturity of several others. Over half our liabilities have maturity dates beyond the typical maturity of our loans. During the quarter, we closed FL5, a $1.1 billion managed CRE CLO with a two-year reinvestment period, an advance rate of 84.4%, and a weighted average interest rate at issuance of compounded SOFR plus 202 basis points. We redeemed FL2, whose reinvestment period ended in the fourth quarter of 2019, and via loan repayments it amortized to an advance rate of 74.5% versus nearly 80% at issuance. This redemption was funded with proceeds from FL5 plus existing secured credit facilities. And we closed a new $250 million recourse revolving secured credit facility to fund new and existing loans for up to 180 days at a running cost of term SOFR plus 200 basis points. And finally, through yesterday, we'd extended the maturity of three secured credit agreements. On April 4th, we closed on the sale of the second of two land parcels on the Las Vegas Strip, that we acquired via deed in lieu of foreclosure in December of 2020. We sold the 10-acre parcel for $75 million, or $7.5 million per acre, realized a gain for book and tax purposes of $13.3 million, and we'll utilize $13.3 million of our $187.6 million of capital loss carry-forwards to retain all of that gain, thus boosting our book value by approximately 17 cents per share. The economic recap for the entire 27 acres that secured our initial loan, a whole period of 15 months, an aggregate sales price of $130 million, a net gain of 29.1 million measured against our written down carrying value of 99.2 million, and a net gain of 16.3 million measured against our original loan amount of 112 million. Regarding portfolio construction and credit, Our portfolio reflects our primary investment themes, which are affordable multifamily, life sciences, and industrial. Year over year, our multifamily exposure grew by 79.5% to 30.7% of our portfolio. Life sciences grew by over 200% to 8.8% of our portfolio. And office declined by 24.3% to 39.6% of our portfolio. At quarter end, our loan portfolio weighted average as is LTV ratio was 67.2% compared to 67.1% for the prior quarter. As discussed on prior calls, our LTV has remained consistent since 2018. Risk ratings increased slightly quarter over quarter to 3.1 from 3.0 due almost entirely to our decision to downgrade the risk ratings of seven office loans to four from three and one office loan from two to three. This precautionary step is consistent with our prior practice. In the second quarter of 2019, we immediately downgraded a loan secured by a rent-stabilized apartment complex in New York City when the state tightened its rent stabilization statute. And in the first quarter of 2020, you'll recall we downgraded all of our loans secured by operating hotels as the lodging sector hunkered down to weather the COVID storm. All of our office loans are performing. but we are mindful of the headwinds facing the office sector nationally, caused by slowdowns in business plan execution, the slower than expected to return the office by American workers, the capital investment that may be needed to address COVID, carbon zero, and other ESG-related regulations, and the impact of rising rates on the ability of office owners to sell or refinance their properties. Our asset management team actively monitors general conditions in the office markets and each of our office loans, to encourage their timely repayment. Regarding interest rates, higher rates are good for floating rate lenders like TRTX. Short-term rates rose materially during the first quarter and continued their surge through April. Yesterday term SOFR was approximately 81 basis points and one month LIBOR was 80 basis points. We're moving steadily toward positive interest rate sensitivity demonstrated by the decline of our weighted average rate floor during the quarter to 105 basis points. At quarter end, the share of our loan portfolio with rate floors less than 100 basis points was 42.5%, and the share with rate floors of at least 200 basis points was 18.9%. The race among rising rates, the origination of new loans with new rate floors, and the repayment of existing loans with high rate floors will determine the timing and magnitude of improving net interest margin. As rates rise, so does the economic incentive for borrowers to repay these high-coupon loans. Based on our current forecast, we expect our net interest margin will expand toward the end of this year or very early next year. We'll have better visibility by the third quarter of this year when a substantial portion of this year's loan repayments are expected to occur. Our smooth transition to SOFR from LIBOR continues. The quarter ends 61% of our liabilities and 4% of our assets were SOFR-based. Our liabilities will continue to transition during 2022 at a pace largely of our own choosing. The share of our assets pegged to SOFR will grow as we originate more SOFR-based loans and as we elect to change the benchmark rate of our existing loans to SOFR from LIBOR, the timing of which we also control. All of our 2022 loan originations are SOFR-based, and we don't expect the transition will have a material impact on our operating results. Finally, with regard to liquidity, leverage, and growth, we have substantial investment capacity for growth and ample liquidity for offense and defense if required. At quarter end, we held available cash of $335.4 million, available undrawn borrowing capacity of $32.3 million, and unpledged loan investments in real estate of $74.3 million. Our debt-to-equity ratio was 2.5 to 1. Our target remains 3.75 to 1. And with that, we'll open the floor to questions. Operator?
spk00: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, It may be necessary to pick up your handset before pressing the star keys. Ladies and gentlemen, we will wait for a minute before we begin with the question and answer session. Thank you. The first question comes from the line of Rick Shane with J.B. Morgan. Please go ahead.
spk06: Good morning. Thanks for taking the question. Given the environment, can you just talk a little bit about the structural protections that you build into your loans related to both higher interest rates, but also to execution risk related to supply chain delays, prolonged construction, and material inflation?
spk03: Sure. Peter, do you want to take that? Yeah, I can, I'll jump in on that.
spk05: So when, yeah, when we're about, we, we, we look at, obviously we're aware that there's been a lot of issues with respect to people getting, um, you know, getting supplies and actually in labor and whatnot. Um, for, for the most part, if you look at sort of our, our, you know, moderate lift multifamily, uh, workforce housing deals that we've done and loans that we've, that we've closed, um, We're seeing a little bit of a slowdown and really on deliveries of mostly appliances and whatnot. And, you know, that really sort of moderates the pace of renovations. But what's interesting is a lot of these moderations and the slowdown in these renovating these units where you renovate the units and then pop the rents back up $100 per month. We're seeing the rent gains. You're getting a lot of rent gains not doing those renovations. So we really haven't been terribly impacted by those really supply chain issues for the most part, maybe slowed down a little bit on the margin, but nothing sort of material from our end on that.
spk04: The other thing that I would add, Rick, is that we haven't done straight construction loans post and during COVID-19. And I think generally we've been lending on lighter transitional renovation plans as opposed to heavier.
spk05: Yeah, and also bars. Bars have been very quick to sort of reposition. For instance, we're looking at signing up a relatively straightforward 70, I think it's 75% LTC loan on a light renovation plan. And the borrower is already redirecting. He owns four other assets in the market. He's directing a truckload of appliances from some of the assets he owns in New Jersey. So he's able to secure them and moving them down and putting them in a warehouse down in Texas where he will end up using those over time. And then with respect to rate increases, I think it was the other part of your question. We actually do require rate caps. They've gotten a lot more expensive over the last, you know, two months. But generally, almost everyone, I believe every one of our loans has a rate cap of a certain amount. Certain borrowers have chosen lower rate caps and actually have, you know, profited quite well on it. But generally, we're looking at having about requiring borrowers rate caps in the 2.5 to 3% strike price. And having them buy that for one to three-year terms.
spk06: And that was the second part of my question. The rate caps, are the rate caps on the original term, or are they on a fully extended basis?
spk05: It's generally a combination. For the most part, it's, you know, we're getting for two years, and then, you know, I think the average life of our loan is 27 months or something like that. It could be off. Bob knows that number. But generally, they're buying for the most part in 24 months. So they'll buy a two-year rate cap. And that cost has really tripled over the last, you know, 30 days or so, 45 days. Okay, great.
spk03: Thank you.
spk05: Yeah.
spk03: Sure. Oh, sorry. Welcome, Doug. Nice to meet you. Pleasure meeting you as well, Rick.
spk00: Thank you. The next question comes from the line of Eric Hagan. with BTIG. Please go ahead.
spk01: Hey, thanks. Good morning and nice to meet you, Doug. Maybe a couple from me. In the multifamily portfolio, can you share expectations for rental rate increases that sponsors expect to pass along to renters and how you expect cap rates to maybe evolve as the Fed raises rates? And then in the office portfolio where you guys noted some business plans might be changing or adjusting, Can you talk about how that changes the pace of funding commitments going forward? Thanks.
spk04: Sure. Why don't I just start with some color on the multifamily question. We've seen real rental rate run in many markets already, and that's been great for many of the business plans that we've underwritten. and for our borrowers' success for our COVID and post-COVID vintage loans. You know, at this point, when we're evaluating a multifamily business plan, particularly one that involves light renovations or mark-to-market rental increases, we're looking at a variety of factors, as you know. we undertake a rigorous market analysis where we're looking at demographics, we're looking at educational trends, we're looking at affordability, we're looking at rent versus own analysis. It's very hard to generalize just because you've seen such a wide variety of differences across the country. But in general, as you know, the rental rate increases have been strong and broad-based. There are obviously markets in Florida where we've seen you know, 40% increases in rents over a 12-month period. That's not anything close to what we're underwriting or what our borrowers are required to underwrite to make these business plans work. But in general, we're continuing to see strong rental rate increases. Affordability is, of course, a significant factor. Why don't I turn it over to Bob to talk about the capital deployment as it relates to slowing business plans in the office portfolio?
spk08: Sure. Eric, a good question with respect to unfunded commitments, which at quarter end stood around $440 million or so. Interestingly, an increasing share of our unfunded commitments relate to our lending initiative in life sciences, a sector in which we've been active since 2015, 2016. Those transactions typically involve fairly substantial conversions of existing properties. We've got a theme there that we'd be happy to discuss separately. But we're generally, as Matt said earlier, not doing roundup construction. So the factors that drive the pace at which dollars are infused into a life sciences transaction are decidedly, well, they are the same, but the dynamics of the market are very different in life sciences than they are in office. Generally speaking, in our office portfolio, the unfunded commitment dollars relate to what we call good news money, which are TI expenditures and leasing commissions. Those are typically shared between us and our borrow in proportion to our advance rate against the loan as a whole, which is typically in the 65% to 70% range. So those dollars are typically funded only when a qualifying lease, that is a lease that meets our minimum leasing guidelines and has been consented to by us, is signed. The pace of those fundings during COVID has slowed, which is to be expected. And as different markets begin to rebound at different paces, we expect we may see some additional increases in the future. but right now it has been pretty slow, and we commented earlier on our liquidity position, which is quite strong, and we typically, when we do make a deferred funding, we typically finance a portion of that with one of our lenders so that we'd be funding the equity component of our portion of the total draw. Our lender would fund the other portion, and then our borrower would fund the last 25% to 30%. I hope that answers your question.
spk01: That's very helpful, Keller. Thank you guys very much. One follow-up on the multifamily portfolio. Is it fair to think that most of the loans can get a takeout with an agency loan for permanent financing? How does it qualify?
spk05: Peter, do you want to take that? Yeah. In all of our deals, we run a refinance analysis, and we assume a couple of different ones in really current market conditions with respect to the agencies. um you know the uh fannie freddie um and whatnot so we look at it a couple way and then we also usually look at um really another way of you know conduit so usually you have two or three refinance analysis um i would gen i would generally say yes but not every every one of them it depends on what we're using going forward with respect to dscr and and then projected interest rates but to the for the most part pretty yes
spk03: Thank you guys very much. I appreciate you. Thank you.
spk00: Ladies and gentlemen, we have reached the end of question and answer session, and I would like to turn the call back to Matt Coleman, President, for closing remarks. Thank you.
spk04: Thank you. As you heard this morning, we're proud of the patience and prudence that characterized Q1 for TRT-X. We look forward to navigating the ensuing quarters from a position of strength with substantial dry powder to take advantage of evolving markets. We look forward to speaking with you again on next quarter's call. Thank you.
spk00: Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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