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spk01: Good morning and welcome to the TPGRE Finance Trust first quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please sign up a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one, on your telephone keypad. To withdraw your question, please press Start and Chew. Please note, this event is being recorded. I would now like to turn the conference over to Deborah Ginsburg, General Counsel, Vice President, and Secretary. Please go ahead.
spk00: Good morning, and welcome to TPG Real Estate Finance Trust's conference call for the first quarter of 2023. I'm joined today by Doug Bucard, Chief Executive Officer, and Bob Foley, Chief Financial Officer. Doug and Bob will share some comments throughout 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 and earnings supplemental 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 10Q and our 10K. We do not undertake any duty to update these statements. 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 turn the call over to Doug LeCarde, Chief Executive Officer of TPG Real Estate Branch Trust.
spk04: Thank you, Deborah. Good morning, and thank you for joining our call today. The broad real estate credit and equity markets continue to face headwinds driven by elevated interest rates, reduced available liquidity, and continued pressure on valuations. Over the past quarter, these trends were exacerbated by the current regional banking crisis, a greater sense of concern over commercial real estate broadly, and the secular pressures facing the office property market. Transaction activity continues to slow across all real estate sectors. and is reflected in our relatively modest investment and repayment activity during the past quarter. We continue to be front-footed in acknowledging these market trends and have positioned TRTX accordingly. We've maintained ample liquidity, we've been selective with new investments, and we have continued to proactively asset manage our current balance sheet. Over the past quarter, we originated two loans with total commitments of $124 million comprised one portfolio of industrial assets and one hotel asset with a blended LTV of 59%. Each of these loans was financed with match term, non-recourse, non-mark-to-market financings. On the repayment side, we had $228 million of repayments during the quarter, of which 50% of the loan repayments were office loans, bringing our total office exposure down to 27% at quarter end. Subsequent to quarter end, we had a $46 million office loan repay, bringing our total office exposure down to 26%, which reflects a 38% decrease in office exposure over the past five quarters. Despite our reduction in net income quarter over quarter, our CECL reserve and blended risk ratings remain approximately flat, and we continue to be steadfast in our proactive asset management approach. We work collaboratively with our borrowers in the most effective manner possible, avoiding the kick the can down the road approach while acknowledging that one size does not fit all when it comes to resolving individual assets. In short, the broad resources of TPG's global investment platform and our deep experience across both the real estate debt and equity business afford us a wide array of asset management tools that TRTX will employ to maximize shareholder value. From a liquidity perspective, we continue to be highly focused on striking the appropriate balance between deploying capital in the new investments on a highly selective basis and maintaining sufficient liquidity for need that they may arise. Our quarter end liquidity totaled $663 million and included $133 million of balance sheet cash and $457 million of CLL reinvestment cash. We intend to continue to maintain ample liquidity to navigate an increasingly volatile market environment. Lastly, our ability to deliver for our shareholders and execute on our business plan is rooted in two key advantages. One, the tremendous insights and perspectives gained through our $20 billion AUM TPG real estate platform, and two, a deeply experienced leadership team with an average of 25-plus years of experience in the real estate credit markets across numerous cycles. With that, I will turn it over to Bob for a review of our financial results.
spk05: Thank you, Doug. Good morning, everyone, and thanks for joining us. Adam L. Regarding operating results gap net income for the fourth quarter was 3.8 million or five cents per common share reflecting a decline of 28.8 million from the prior quarter. Adam L. The principal drivers of this change were a net change in quarter over quarter Cecil expense of 18.6 million largely because the prior quarter included a Cecil benefit rather than an expense. an 8.6 million decline in interest income due largely to an increase during the quarter of 359.7 million dollars in non-accrual loans. Distributable earnings was 13.4 million or 17 cents per common share down from 23.3 million and 30 cents per share quarter over quarter. Dividend coverage did decline from 1.25 times to 0.71 times although cumulative distributed learnings for the preceding four quarters covered our dividend at a ratio of 1.17 to one. Both value per share declined 17 cents quarter over quarter to $14.31 due to an increase in the CECL reserve that was roughly 11 cents per share and a common stock dividend that exceeded distributable earnings by approximately seven cents per share. Our CECL reserve increased by 7.8 million or 3.6% to $222.4 million Our CECL reserve rate measured against loan commitments increased to 420 basis points from 395 basis points. We remain entirely focused on creating value for shareholders through the judicious balancing of boosting book value, share price, and distributable earnings. Our decisions regarding liquidity, speedy resolution of challenged loan investments, liability management, and asset allocation follow directly from this overarching goal. Regarding liquidity, we have intentionally maintained high levels of liquidity, roughly 12% of total assets, to enable us to seize opportunities that we create or that arise in our loan investment and asset management businesses. The quarter ends liquidity totaled $662.2 million, including $132.5 million of cash, $457.2 million of CLO reinvestment cash, plus $43.8 million of undrawn capacity, under our secured credit agreements. $265.4 million of CLO reinvestment cash relates to FL4, whose reinvestment period closed in mid-March 2023. Pursuant to the terms of the indenture, we committed prior to the mid-March closure of that reinvestment window to contribute $265.4 million of existing performing loans to FL4 before the mid-May distribution date. These reinvestments will fully absorb this cash, reduce borrowings under our secured credit facilities by approximately $189.4 million, and generate $76 million of net cash proceeds for the REITs balance sheet. Excluding pro forma earnings from that potential reinvestment of the cash generated from this reinvestment transaction, this activity alone is estimated to generate approximately four pennies per quarter of net interest margin. Our third CLL remains open for reinvestment through February of next year. We had 192.3 million of reinvestable cash at March 31st in that CLL. This term, non-market-to-market, non-recourse financing, with a credit spread of 202 basis points, is valuable to us in supporting new loan investments, optimizing our current financing arrangements, and sustaining or boosting investment-level ROE. Unfunded commitments under existing loans declined by 72.2 million. or 17%, to $353.9 million, nearly 6.7 of our total loan commitments. Regarding credit, limited liquidity and higher interest rates combine to place increased pressure on the ability of borrowers to repay their loans at maturity via refinancing or sale. Our CECL reserve increased by $7.8 million, or 3.6%. This slight increase reflects our clear-eyed assessment of current and expected future conditions in the property and capital markets. And the TRTX was an early mover four quarters ago in identifying looming challenges and adjusting our risk ratings and our CISO reserve accordingly. Last week, we took ownership via deed in lieu of foreclosure of a 375,440 square foot, 73.5% leased office building in downtown Houston. The loan had an unpaid principal balance of $55 million. a five risk rating, and has an unleveraged cash on cash yield to our carrying value of 10%. We are pursuing strategies to optimize property value for shareholders using the expertise of TPG's $20 billion real estate platform and its portfolio companies to augment our asset management team and our very experienced senior management group. Non-accrual loans increased to 550.1 million across six loans, from 190.4 million across two loans, which reflects operating challenges faced by several of our borrowers in the office sector and the asset management strategies we have selected for certain of our loans to optimize shareholder value. This increase is a symptom, not a cause, of our earlier increase in CECL reserves and our downgrades in risk ratings. Higher non-accruals caused a reduction of 8.6 million of interest income quarter over quarter, Regarding two of our loans, we adopted cost recovery accounting during the quarter, which means that cash interest payments received each month have been and will be applied to reduce the loan balance rather than recognized as current income. Fully 64% of the non-accrual adjustment relates to a loan in Philadelphia secured by a 76% leased office building. We are simultaneously engaged in restructuring discussions with the borrower and the pursuit of our legal remedies, and we'll provide an update next quarter. Our financing of this loan is non-mark to market and includes the right at our option to convert our financing to a mortgage should we eventually acquire the property. This valuable optionality strengthens our ability to generate the best shareholder value from this loan. Our weighted average risk ratings remained unchanged quarter over quarter at 3.2, and the dispersion of ratings across our portfolio was largely unchanged. Regarding our loan portfolio, we originated two new loans involving $123.8 million of commitments, $111.2 million of initial fundings, and we utilized only $8 million of balance sheet cash to do so. For the quarter, we received total repayments of $227.8 million, of which $144.4 million were repayments in full. Nearly 50% of these repayments were office loans, including one four-rated office loan. Quarter over quarter, our office exposure declined 26.5% from 28.5% of our loan portfolio, due primarily to full and partial loan repayments of office loans totaling $113.4 million. And as Doug mentioned, after quarter end, a $45.9 million office loan repaid. Our emphasis on low-cost, non-mark-to-market, non-recourse term funding with maximum available duration remains unwavering. At quarter end, 74.1% of our secured financing was non-mark-to-market, virtually unchanged from the prior quarter, and consistent with our longstanding financing policy. During the quarter, we extended the maturity through May 2024 of a $500 million secured credit facility, and we're in the final throes of documentation of a three-year extension of another existing $200 million secured credit facility. We have three other credit facilities within our maturities in the second half of this year. which we intend to extend under existing contractual options to do so. Our leverage remains modest. Total debt to equity was 2.95 to 1 at quarter end, virtually unchanged from last quarter's 2.97 to 1. We remain in compliance with our financial covenants. And with that, we'd be happy to open the floor for questions. Operator?
spk01: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speaker equipment, please pick up your headset before pressing the star keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Stephen Laws with Raymond James. Please go ahead.
spk06: Hi, good morning. Hi, good morning, Doug and Bob. You know, first, can we start with the non-accruals? Do you think this number's peaked? You know, how do you think about any additional non-accruals, possibly on some loans you've identified early to watch versus, you know, resolution path of the six existing non-accruals? And I guess start with that.
spk04: Yeah, sure. And so on the On that specific question, I think what's important to highlight, first of all, is our last two quarters, we have seen four rated loans pay off at par. So our general comment on this is that fours do not necessarily become fives. We actually had, again, it was Marriott, Burbank, and then also Colton Corporate Center that were fours over the last two quarters that did pay off at par. But in terms of our force, generally speaking, it really kind of ties back into our general strategy, which we've been pretty consistent about over the last few quarters, which is we are focused on maximizing shareholder value, and we acknowledge that there is pressure within the real estate market. However, if we end up with loans that are on non-accrual, as we have, If we're heading towards maximizing shareholder value, we still feel comfortable. And I would say lastly, it's really important to highlight that our quarter-over-quarter risk ratings and also CECL reserves remained relatively unchanged quarter-over-quarter. But no change to how we're approaching it from a risk management perspective. And I think to Bob's point, just to put a really fine point on this, About 64% of that non-accrual is related to one office loan in Philadelphia, and I think it's worth highlighting on that loan that we are currently in discussions with the borrower about a potential modification, and we are actively trading proposals. In the interim, we've begun to enforce our remedies, and we've applied $5 million of cash flow to reduce our basis in that loan.
spk06: Great. Appreciate those comments, Doug. A second question for me, if you don't mind, Bob. Appreciate the color on the CLO reinvestment opportunities. Still seems like outside of the action that will take place during Q2 with regards to, I think, FL4. Can you talk about the other $200 million of capacity you know, if you reinvested that, what type of pickup would we see in that interest income? And then I guess along the CLO front, you know, any thoughts on FL3, which is amortizing down, and could that be collapsed with those loans being put into, I think it's FL5?
spk05: Sure, great. Well, let's take those in order. With respect to FL5, as I mentioned, we do have reinvestment cash available there. Doug described earlier that occasionally, well, Most frequently, when we've recently originated loans, we've funded them directly into one of our two CLOs, now only one CLO that has reinvestment capacity. We can also shift loans from other forms of financing, whether it's repo or note-on-note or anode or what have you, into the CLOs. And we do have a reinvestment plan for that cash as well. I chose in my remarks to focus on FL4 because the quantum of cash was higher and the timeframe was nearer. But the mechanics work the same. And in terms of the, you know, marginal benefit of reinvesting that cash, it's a function of, you know, frankly, having the interest income from the assets contributed and then avoiding the interest cost that was used to fund those assets prior to their contribution to the CLO, since we're paying the interest costs on the CLOs every month, you know, whether we use it or not, so to speak. So that's the math there. With respect to FL3, you know, we monitor that very closely. That deal's been in Hyper-AM since the reinvestment window closed at the end of 2021. we're obviously focused on our potential alternative sources of financing. Although the advance rate is lower and the cost of funds is higher, that is a vintage, you know, that's a 2019 deal. And even with the deleveraging, the, you know, the cost of funds is actually not bad. Yep.
spk04: One, one, one final point on that, which is, I believe I mentioned in the prior quarters that we, we, remain very comfortable with liquidity as a function of the fact that we have, you know, demand in really a variety of different financing sources. And that's, you know, a mix of A-notes, our series COO capacity, our secured credit facilities, and then other potential private financing that we can arrange. So, you know, from a back leverage and financing perspective, you know, we have a variety of levers. And frankly, over the last Three quarters, we've used each of those, but really in the past quarter, really in the past two quarters, we've predominantly employed the CRE CLOs.
spk03: Great. Appreciate the comments this morning. Thank you.
spk08: Thank you. Thanks, Stephen.
spk01: Next question comes from Steve Delaney with GMP Securities. Please go ahead.
spk07: Thanks. Good morning, Doug and Bob. Listen, a little surprising given the overall report to see the stock open down so weak, about 10%. Thankfully, it's come back a little. The only thing that I see in the report, and I guess specifically in the press release, was the subsequent event about the Houston foreclosure. So I'm just curious if you could tell us, and I know it's subsequent, so it's not in your first quarter data specifically, but can you comment on when you transferred that from a loan to REO in April, I guess, what the carrying value of that office as real estate owned, what that carrying value would be, and do you expect any loss or charge-offs in the second quarter results related to that subsequent event? Thanks.
spk05: Sure. Thanks for the question, Steve. The short answer to that is we'll report on that at the end of the second quarter. We acquired the property last Friday and have been in preparation to do so for some time. And so we have not yet established what the value as REO will be. The accounting rules for REO are a little bit different than they are for loans. But as you suggest, the math will be You know, the UPB, the CECL Reserve will be reversed, and then we will establish a new value that needs to be corroborated by, you know, appraisals and market comps and so on, and that will be our carrying value going forward for the duration of our ownership.
spk07: Okay. And was this loan number 39 in your disclosures?
spk08: No.
spk07: I guess Chris sent me this. I guess it was from DetainQ or from your DAC.
spk05: Yeah, it's on the mortgage schedule. We'll come back during this call to confirm or deny that.
spk03: All right.
spk05: Thanks. You and Chris were correct in your Sherlock Holmesian work. Okay.
spk07: Thank you. Just one quick follow-up, if I may. Interesting to see the hotel lending in first quarter. Can you comment just very generally on on the REO profile of those new loan opportunities, how you would compare it sort of to your historical overall expected ROE on, on the portfolio. And does TPG have specific expertise experience on the private equity side in the hospitality industry? Thanks very much.
spk04: Yeah, absolutely. You know, first just to speak a little bit about the TPG broader platform where, uh, We have about $20 billion of assets under management across both debt and equity. So the short answer is that we do have tremendous experience from both the debt and equity lens within hotels. The loan specifically is an asset in Miami. So it's a market that we are very excited about. And frankly, it was a transaction that needed to close in a relatively tight timeframe. And we were able to move quickly as a function of the, you know, depth and breadth of our team, but also our financing in place that we had on our balance sheet to be able to provide capital with some real certainty to that borrower. Just, you know, some other metrics on it, you know, for a high level is, you know, the asset itself, you know, from a leverage perspective has an as-is LTV of approximately 58%. The interest rate on it was SOFR plus 510. And then in terms of an expected ROE, it's approximately 12%. So I think when we look at today's market, the ability to originate a new loan at SOFR plus 510 at a 58% LTV is a really attractive allocation of capital. Great.
spk07: I would agree. Congratulations on that, and thanks for the comments.
spk03: Thank you.
spk01: Next question comes from Rick Shane with JP Morgan. Please go ahead.
spk02: Hey guys, thanks for taking my questions this morning. And I don't think it's going to be a surprise given the questions I've been asking throughout earnings for your peers. You're using $75 million a year in cash currently to pay the dividend. Two questions. One, given... the taxable income over the last 18 months, what is the minimum dividend distribution you would need to make? Do you have any NOLs that you can use to reduce the payout? And does it make sense, given particularly where the stock's trading now, to reallocate return of capital or balance it a little bit between dividend and repurchase?
spk04: Got it. Yeah, happy to provide some context there. So I think from a dividend coverage perspective, I know that Bob mentioned it, but it's worth re-highlighting, which is that over the last year, we did have a 1.17 times coverage. And then the last quarter, we had a 1.25 coverage of the dividend. And I think it kind of goes, if you zoom out just a moment, about the fact that from a quarter-over-quarter perspective, you know, we're roughly unchanged on both CECL and on our risk ratings. And we think that, you know, frankly, this near-term volatility in terms of DE is really more a function of our extreme focus on maximizing shareholder value. And I think that's what the most important trend is, one. And then, two, you know, I'll pause there and then perhaps, Bob, if you want to add
spk05: Yeah, just Rick, in response to your quasi-technical question, like all REITs, we need to distribute really not less than 90% of our taxable income. Once you get below that, you begin to subject yourselves to some excise taxes, which are really inefficient. So as we made clear, we were undistributed last year. So from a taxable income standpoint, we do have some spill forward into this year, which we'll evaluate. You get a year to figure out how to apply all of that. So, you know, distributed learnings is going to move about a little bit over the next several quarters. We've made this clear in our calls the last several quarters as we speedily resolve these loans, in part to reduce the sub-earning assets that Stephen was asking about earlier. So that's our plan, or that's the technical answer in that regard. The second part of your question had to do with net operating losses. We do have capital loss carry forwards in the neighborhood of 170 million. We have utilized some of those to effectively shelter gains, capital gains, on property transactions that we've had where gains were realized. That's not available under the tax code to shelter ordinary income that lenders like us earn. So I hope that directly answers your question.
spk02: It does. And then the second part of that is, and in theory, distributing distributions in the form of a repurchase or distributions in terms of a form of dividend is shareholders should be, if the stock's trading at par, relatively indifferent. But given where the stock's trading, it starts to become more compelling to repurchase shares. Is there flexibility? Is there interest in doing that?
spk04: Well, I think as we've thought about just kind of acknowledging the cycle that we're in, what's happening in the market, we have really put liquidity at the top of our list. I think that having that marginal capital on our balance sheet to address any needs as they may arise is really paramount for us.
spk08: Thank you, guys. Thanks, Rick. Thank you.
spk01: This concludes our question and answer session. I would like to turn the conference back over to Doug, Chief Executive Officer, for any closing remarks.
spk04: I just want to thank everyone for joining this morning and look forward to keeping you updated on our progress. Thank you.
spk01: The conference has now concluded. Thank you for attending to this presentation. You may now disconnect.
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