Earnings Call Transcript - TRTX Q4 2024

Operator, Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to TPG Real Estate Finance Trust Fourth Quarter and Full Year 2024 Earnings Conference Call. Please note this conference is being recorded. It's now my pleasure to turn the call over to management. Thank you. You may begin.

Doug Bouquard, CEO

Good morning, and welcome to the TPG Real Estate Finance Trust Earnings Call for the Fourth Quarter and Full Year of 2024. We are joined today by Doug Bouquard, our Chief Executive Officer; and Bob Foley, our Chief Financial Officer. Doug and Bob will share some comments about the quarter and the year, and then we will open up the call for questions. Yesterday evening, we filed our 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 is being recorded and may include forward-looking statements that are uncertain and outside the company's control. Actual results may differ materially. For a discussion of risks that could affect results, please see the Risk Factors 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. For reconciliations, you should refer to the press release and the Form 10-K. At this time, I'll turn the call over to Doug. Thank you. Over the past quarter, strong economic growth and a resilient labor market continued to power the U.S. economy. Positive economic sentiment and the lingering concern over inflationary pressures appear to have caused the Fed to pause and potentially forgo additional rate cuts in 2025. We expect real estate investment activity to increase in 2025, driven by the deployment of dry powder into new acquisitions and the forcing mechanism of elevated short-term and long-term interest rates. These factors create an excellent dynamic for opportunistic debt investing, especially for well-positioned platforms like TRTX. Regardless of causal factors, we intend to continue to provide acquisition and tailored financings to recapitalize broken capital structures at reset valuations. We expect our increased 2024 loan investment volume to accelerate in 2025, driven by: one, an offensively oriented balance sheet with substantial liquidity and a flexible liability structure; and two, robust sourcing channels fed by TPG's fully integrated global real estate platform encompassing both credit and equity investing. By all metrics, 2024 was a successful year for TRTX. We accomplished precisely what we set out to do: number one, build a fortress balance sheet with substantial liquidity; number two, maintain a 100% performing balance sheet at year-end with stable credit risk ratings; number three, register consistent reductions in our CECL reserves throughout the year; and four, generate distributable earnings after realized losses that fully covered our $0.96 per share common dividend for 2024. And on a pre-realized loss basis, we generated $1.08 per share for the year, covering our dividend at 1.1 times. We are exceptionally well positioned to pull on the many levers that TRTX possesses to grow earnings, including: number one, deployment of excess liquidity into new investments; two, recycling equity currently supporting REO assets; three, accessing undrawn capacity from our existing lenders; and four, creating additional liquidity by taking advantage of the improving capital markets environment. Our strong operating results for the full year 2024 reflect the success of our strategy and confirm TRTX is advantageously positioned to continue its loan investment activity in 2025 and beyond. In the second half of 2024, we increased net earning assets by 3%, due to $446 million of new loan commitments comprised primarily of multifamily and industrial portfolio loans across the U.S., with an LTV of approximately 60% and a weighted-average spread of SOFR plus 3.25%. In the new year, our investment team has built a substantial investment pipeline that will fuel new origination activity in 2025. We currently have in excess of $300 million of live investment opportunities that we are in various stages of pursuit and diligence. We look forward to updating you on progress in subsequent quarters. With our shift to a more active new investment posture, we have not taken our eye off the strategy that created our comparative advantage: thoughtful, assertive, value-oriented risk and asset management. Our latest example is a recently completed accretive amendment to a loan secured by a Class A office building in New York City. Bob will share more granular details, but I will highlight three key facts that speak to our risk management approach. Over the past three years, the loan commitment amount has been reduced from $200 million down to $130 million. Our recent amendment attracted an infusion of $60 million of new institutional equity capital, and the newly amended lower-LTV loan is expected to generate an improved return on equity for our shareholders compared to the pre-amendment loan. Most importantly, this deal is illustrative of the expertise of TPG's asset management team when buttressed by our broader TPG real estate investing platform. This combined experience allows us to confidently navigate through complex transactions to maximize shareholder value. In summary, we intend to continue in 2025 to pull on our levers of accretive growth, all of which are immediately actionable to drive earnings and shareholder value. At our current share price, TRTX generates an 11% dividend yield, a compelling return in the context of several comparatively favorable fundamental metrics, including: number one, liquidity as a percentage of total assets; number two, low leverage; and number three, a 100% performing loan portfolio at year-end. From a risk and liquidity perspective, we are fortunate to remain both committed to our share repurchase plan and make new investments at the same time. We will continue to optimize capital allocation to the benefit of our shareholders. When you combine these factors with a $0.24 per quarter dividend, which is supported by our current run rate, with upside potential embedded in our deployable cash, untapped financing capacity, the near-term prospect of capital recycled from our REO portfolio and the sourcing and investing of TPG's integrated real estate debt and equity investment platform, we believe today's share price offers an attractive value proposition. With that, I will turn it over to Bob to provide a detailed summary of our financial results.

Robert Foley, CFO

Thank you, Doug. Good morning, everyone, and thanks for joining us. Our strong operating results for the full year 2024 and this fourth quarter reflect the success of our strategy and provide a springboard for increasing loan investment activity in 2025 and beyond. In the fourth quarter, we increased net earning assets for the second consecutive quarter due to $242 million of new loan commitments. With strong liquidity of $320.8 million, leverage of only 2.14:1, a CECL reserve of 187 basis points that has continued to decline in response to the solid credit performance of our loan book and stabilizing real estate market conditions, a weighted-average risk rating of 3.0 that hasn't wavered in four quarters, distributable earnings for the year that fully covered our $0.96 annual dividend throughout 2024, and distributable earnings before realized losses that covered our annual dividend by 1.1 times, TRTX continues its march to increase earnings and shareholder value. TRTX's share price performance is the strongest among its peers since January 2023, with a cumulative return of 61% through last Friday. The levers that Doug detailed further support the compelling value TRTX offers at today's share price. Our operating results for the year and the quarter are amply reported in our earnings release, earnings supplemental, and Form 10-K, all of which were filed with the SEC after yesterday's market close and are available on the TRTX website. Regarding our loan portfolio, 100% of our loan portfolio is performing and current. We have only two 4-rated loans and no 5-rated loans. Our weighted-average risk rating is 3.0, consistent with the prior four quarters. For the year, we originated eight loans, totaling $562.3 million of commitments. For the fourth quarter, we originated two loans, totaling $242 million of commitments; we funded $4.7 million of deferred fundings on existing loans, and we collected full and partial loan repayments of $110.2 million. Earlier this month, we amended an existing office loan as part of the sale by the original institutional equity investor of its interest in the property to another sizable, highly experienced, global institutional real estate investor. The new investor injected $60 million of fresh equity capital into the joint venture. As part of the amendment, we received a $20 million principal repayment that reduced our loan amount to $130.5 million. We improved the seniority of our credit position because the recapitalization terminated a former ground lease on a portion of the building site, thus facilitating consolidation into a single fee interest: the leased land beneath one of the connected buildings. We enhanced property cash flow because our borrower leased the remaining 13% of the building's net rentable square footage to an existing tenant through early 2032. Consequently, our loan now has an in-place debt yield of 11.7%, a stabilized debt yield of 14.4%, leased occupancy of 100%, and a weighted-average remaining lease term greater than 8 years. We extended our loan for three years, through February 2028. We preserved our advantageous financing of this investment and, consequently, boosted our asset-level leveraged return on equity. Combined with previous principal repayments totaling $40 million, our asset management team has, over time, engineered a $70 million reduction in our loan commitment amount and improved our credit position in an already strong New York City office property. Regarding REO, we own eight REO properties, with an aggregate carrying value of $275.8 million, comprising 7.4% of our total assets. The four multifamily properties represent 56.5% of our REO holdings, and four office properties represent the remainder. The integrated TPG real estate platform continues to apply its experience, intellectual capital, platforms, and network resources to improve the operating performance of our REO, determine the best strategy to optimize shareholder returns, and execute each business plan efficiently and quickly. As previewed last quarter, we foreclosed during the fourth quarter on two multifamily loans: one in San Antonio and the other in Chicago. We immediately seized operational control and are now stabilizing and reenergizing these properties to prepare them for sale. Both of our California office properties are currently on the market for sale. Only one of our REO properties is encumbered by mortgage debt. We expect REO sales will, over time, generate capital for reinvestment, and we have a track record of selling REO properties at or in excess of our carrying values. Our net equity in REO totals approximately $250 million. Assuming a 9.5% net ROE on loan investments, every $100 million of recycled REO equity equals $0.03 per share of distributable earnings per quarter. Refer to Footnote 4 of our financial statements for a snapshot of our REO portfolio. As usual, we've been quick to take advantage of improving capital market conditions. Our cost of liabilities for new loan investments continues to decline, and we expect to capture further savings in 2025. Our share of non-mark-to-market, non-recourse term financing held steady at 77% at year-end, confirming our long-standing emphasis on non-mark-to-market term funding of our investment portfolio. Our total leverage was virtually unchanged quarter-over-quarter, at 2.14:1. Paired with $4 billion of financing capacity, our liability structure will drive continued growth in earning assets as market dynamics continue to improve. Last week, we closed on a three-year extension and $85 million upsize, to $375 million, of an existing non-mark-to-market secured borrowing arrangement. All six of our current syndicate members renewed and upsized their commitments; plus, we added a seventh lender. Improving terms and conditions in the CRE CLO and note-on-note markets make this an opportune time for TRTX to refinance certain existing liabilities at a higher advance rate and lower cost of funds. We were in compliance with all financial covenants at December 31, 2024. Regarding liquidity, we have substantial immediate and near-term liquidity to support accelerating loan investments activity. At year-end, liquidity of $320.8 million included $190.2 million of cash in excess of our covenant requirements, plus an additional $128.1 million of undrawn capacity under our secured credit agreements. We also have $33.4 million of unencumbered loan assets, plus several unlevered REO properties. During the quarter, we funded $4.7 million of commitments under existing loans. At quarter-end, our deferred funding obligations under existing loan commitments totaled only $127.9 million, a mere 3.7% of our total loan commitments. We expect another strong year in 2025. We set the table last year and for the past few quarters have focused on executing our growth strategy. Our advantages include accelerating momentum due to two consecutive quarters of net growth in earning assets; we outrank our primary public peers in a variety of key financial measures. We have a 100% performing loan portfolio and a highly predictive CECL reserve that has steadily declined in dollar amount and basis points. We have stable loan risk ratings. We have a low share of REO and non-accrual loans; in fact, we've had no non-accrual loans for five consecutive quarters. A run-rate distributable earnings that covers our $0.24 per quarter dividend, with upside potential due to deployable cash, untapped financing capacity, the near-term prospect of capital recycled from our REO portfolio, and the sourcing and investment strength of TPG's integrated real estate credit and equity platform. Our ample liquidity and financing capacity means our new loan investment activity is not reliant on loan repayments. We expect our dividend yield will decline as the market fully recognizes our prior performance, solid credit quality, accelerating growth in earning assets, and the results generated by the growth levers discussed this morning. And with that, we'll open the floor to questions.

Operator, Operator

Our first question comes from Tom Catherwood, with BTIG.

William Catherwood, Analyst

Maybe, Bob, starting with you, on the two multifamily loans that you took into foreclosure, those were 4-risk rated last quarter. Can you talk us through kind of what the change was over the course of the quarter that took those from the 4 risk rating all the way to foreclosure? And then, how much needs to be done to bring those properties to stabilization?

Robert Foley, CFO

Sure, Tom, thank you for your question. As we mentioned in the third quarter call, we were actively engaged with the borrower regarding these two loans. During that call, we indicated that these situations might require modifications or enforcement of our remedies. Ultimately, in the fourth quarter, we decided to enforce our remedies for both situations, aligning with our overall philosophy to maximize value for our shareholders. After determining that neither borrower would fulfill the modification terms we had set, which included a significant reduction in principal and replenishment of interest reserves, we moved quickly to take back all three properties: two in November and one in December. Looking ahead, for all the properties, we have deployed our asset transition and property management teams, which have been effective in previous situations. In San Antonio, we are focused on stabilizing and increasing occupancy, and we anticipate making some improvements to the properties. The Chicago property is currently well leased, with occupancy exceeding 90%, and we expect to sell that one fairly soon.

William Catherwood, Analyst

Okay. Appreciate that, Bob. And then, following up on another item you discussed, you talked about tapping your financing capacity as you continue to ramp originations. How do you expect leverage to scale through the year? And could we see you out in the market looking to do a new CLO as well?

Robert Foley, CFO

Good question. Regarding our financing scaling, we have been investing on a net growth basis over the past few quarters and have significant liquidity on our balance sheet. Our cash position is strong, as reflected in our balance sheet. We are currently in the process of deploying that liquidity first and then will use leverage. We have enough capacity with our existing credit facilities. I mentioned that we renewed and upsized a funding facility for three years. We actively participate in the note-on-note market, which has become more liquid and cost-effective for borrowers like us. Additionally, the CRE CLO market has seen increased activity over the last couple of quarters. We have been a leader in the CRE CLO market since its revival in early 2018, and while I'm not making a commitment, we might participate again as a new issuer in that market in 2025. Lastly, to address your question fully, our current leverage is 2.14:1. Historically, we have operated with leverage in the range of 3x to 3.3x. As we increase our deployment pace, you can expect to see our debt-to-equity ratio rise steadily.

William Catherwood, Analyst

Got it. Doug, in your prepared remarks, you mentioned the steeper yield curve as a forcing mechanism. Do you consider that as compelling borrowers to sell assets if they can't find relief? Is it pushing borrowers into shorter-term floating-rate paper? Or does it have a different impact on the CRE market? How do you interpret that statement you made?

Doug Bouquard, CEO

I mean, it's a little bit of all of the above. I would say that when we think about the interest rate market, look, I think, first, with the movement in forward SOFR, let's just say, kind of generally anchoring around 4%, that does put pressure on existing transactions that are out in the market where there might be a need for newly capitalized debt financing, and we are looking at those types of transactions where we can be opportunistic. But I would say, again, that with SOFR being elevated, the forcing mechanism is just that some borrowers may look to kind of fix their broken capital structures. And that's one. And then I would say, two, as it relates to interest rates as well, clearly, on the fixed-rate takeout side, as the 10-year Treasury has kind of hovered around 4.5%, I think that's also putting a little bit of pressure on the timing for certain kind of term-out financings within perhaps the conduit or agency market. So I think all of that, again, will help drive opportunity set. And then I think all that is founded in the fact that the interest rate market has also shifted so far from a pipeline perspective, in that the second half of 2024 is really characterized by elevated interest rate volatility and that there was a lot of uncertainty in terms of the path of SOFR, kind of where perhaps the 10-year would settle. For what it's worth, as we've turned the calendar into January and February, we have begun to see a reduction in interest rate volatility, which generally means that should be met with an increase in real estate activity. I think that when real estate owners have a little bit more clarity in terms of the path of rates, they tend to deploy capital with, I would say, a bit higher pace. So I think those are kind of some of the big macro trends that are affecting our business. And again, all signs point to a very active 2025 investment pipeline.

Operator, Operator

And our next question comes from Stephen Laws, with Raymond James.

Stephen Laws, Analyst

Two questions, I guess. First, Doug, can you give us an update on your life sciences exposure? I know things in that property type really seem to be asset by asset. So I would love to get a little bit of color on your exposures there and how those loans are performing.

Doug Bouquard, CEO

Absolutely. So we began the quarter with four life sciences deals on our books. We actually had one of the four pay off. So we're actually now down to three life sciences transactions. When you think about our current exposure, I think that one of the things that are really important to highlight is that, first of all, none of our assets are in shell condition, in that they're all built out, and it's really just kind of a function of identifying tenants for those spaces. Secondly, from a borrower perspective, we've really kind of centered on the highest-quality borrowers, experienced borrowers in the market and those that we think are going to have a particular edge in terms of that lease-up. And then I'd say, lastly, if you zoom out for a moment and kind of think about TPG's expertise within life sciences, it really is kind of first class, both in terms of having real estate equity and debt exposure within life sciences and then also just the broader TPG healthcare investing platform, which can provide some insights into some of the trends around the demand for life sciences space. And I'd say, lastly, Stephen, as we have some insights in terms of our real estate equity business, we actually have seen a slight uptick in terms of leasing and touring activity over the last 90 to 120 days. So while we fully acknowledge that I'd say business plans are going certainly slower than they were one to two years ago, we've been investing in this asset class for many years, and we are starting to see a little bit of pickup in terms of activity.

Stephen Laws, Analyst

Great. Appreciate those comments, Doug. Bob, a couple of questions related to REO. I think REO revenue was flat. I think that makes sense given your comments. Expenses, I believe I read in the K, were up $1.2 million related to the new assets. Can you talk about how you expect those line items to move forward? I think the Chicago, you mentioned 90% leased, but probably came in late in the quarter. So maybe add some real estate income there. But then expenses, we need a full quarter impact from the partial impact from Q4. Is that fair? Or are there other factors I'm not considering?

Robert Foley, CFO

Thanks for your question, Stephen. I think there's a sort of macro and then some property-specific answers. I would say, generally speaking, most of our current REO properties are cash flow positive. The increase in real estate owned expenses that you cite was a one-timer and related entirely to the San Antonio property that we converted in early November. And with respect to Chicago and other multifamily properties, in particular, that we own, the two Chicago properties that we own are both 90-plus percent leased. They're very cash flow positive. Expenses are stable. So we would expect those to move toward sale reasonably quickly. And I would add, although you didn't ask, we don't really envision much in the way of capital expenditure across the portfolio as a whole.

Stephen Laws, Analyst

Great. And I'll ask this difficult question. How do you define 'reasonably quickly'? I think you mentioned in your prepared remarks, I think, the two California assets may be being marketed for sale. You mentioned Chicago is leased up, so something that could move quickly. When you think about the eight properties in the REO bucket, is there a way to estimate how many may move in the first half or in 2025? Or other side of it, how many are kind of longer-term execution paths?

Robert Foley, CFO

Sure. Let me revisit this. Our primary goal regarding REO is to maximize shareholder value, which means we continuously assess whether to buy or hold and take action based on that analysis. Currently, we have two properties on the market and anticipate they will be resolved by the end of the second quarter. We have received an offer on one property and expect to receive bids on the other in early March. We also have a second set of properties that will be ready for market soon after. Generally, by the end of 2025, I expect our existing REO portfolio to be reduced by about half, just to give you an idea of the timeline.

Operator, Operator

Our next question comes from Steve Delaney, with JMP Securities.

Steven Delaney, Analyst

Congrats on a strong close to what was certainly a challenging year for the broad CRE market. From your comments, it sounds like you have a far more constructive view of 2025. I'm hearing that's not only from your own internal view of the economy, but also a lot of feedback from real estate equity investors in the marketplace. So cutting right to the portfolio, which was $3.4 billion, it certainly sounds like you have the opportunity to grow, and you have the relatively low leverage of 2.1x. Is it realistic to think, and I'll just go straight to some specific numbers, and you can talk me off the mountain, just year-end 2025, if we model a portfolio of somewhere between $4.5 billion and $5 billion even, how realistic, in your mind, would that level of portfolio growth be for 2025?

Robert Foley, CFO

Steve, thanks for your question. As you know and as everybody on the call knows, we've never been in the practice of providing guidance. Having said that, let me offer a little illumination on how we're thinking about the year. Doug was very clear that we think the year has set up very nicely for increased investment activity, and he's described the factors driving that. From our standpoint, we've got significant liquidity on the balance sheet today that's available to us for new investment, frankly, without leverage, without recycling REO capital, without anything else. So in rough terms, if we were to deploy, say, $200 million of that at 3:1 or 4:1, that's $800 million to $1 billion of new loan investment activity off the bat. In our peak years, the company has typically done around $2 billion, a little more than $2 billion, of investment activity. On the repayment side, Doug made clear in his remarks that higher rates and this more steeply sloped yield curve would suggest that, on balance, existing loans are probably more likely to lengthen a little bit than prepay. Obviously, every loan is a little bit different. But we've had strong steady repayments throughout the year, including the life science deal that Doug mentioned earlier. So I would expect that new investment activity would comfortably outpace loan repayment activity for the year. And so we would expect pretty significant growth in net earning assets, but I'm not in a position nor are we in the practice of providing a specific number.

Steven Delaney, Analyst

Understood. That's very helpful color, and Chris and I will work that out. But I've heard more positive than negative in terms of the opportunity that you're facing to invest capital in 2025 vis-a-vis the past year. Just curious a little bit; my little quick follow-up. Of the two new loans of $242 million, I mean, on the surface, it looks a bit chunky. But then again, it's pretty clear you guys are not in the small-balance CRE lending market, which we would normally put at $25 million or $50 million. And is that just reflecting sort of TPG from an institutional standpoint, your borrower mix? Would you consider yourself more upper-middle market? I don't know really how CRE lenders, other than the small-balance segment, which is so obvious, how you really kind of peg yourself in between the very mega borrowers and the small borrowers. But it seems like to me, what you're saying, a loan of $100 million to $150 million on an individual loan to one borrower, I'm hearing that that's not any kind of a heavy lift for TRTX. Is that a fair statement?

Doug Bouquard, CEO

Yes. And happy to kind of speak to sort of how we think about loan sizing. I would first highlight that the two loans that we did in Q4, both of those do have some inherent diversity within the loans, in that they are portfolios. So as we do kind of lean perhaps above the $100 million size, we will also orient ourselves towards portfolio where we get the benefit of diversity. And that's statement one. I would say, secondly, these deals as well, we also are very focused on repeat borrowers. So we're seeing a lot of that both in the deals that we closed in the second half of 2024, and a lot of what we're seeing in our pipeline is repeat borrower-heavy. When you think about sort of average loan size, to kind of go back to the data, again, in approximate terms, average typically loan size is closer to kind of the $75 million range. So I think that, Steven, while we're somewhat uniquely positioned, is that we do have range. I mean, we can go down to $25 million to $50 million if we do see opportunities there, which we have done over the past year, but also, if we do see a deal that's $150 million or more, we can pursue that as well. So to put a fine point on it, I would say that we're really trafficking really across both the middle market and upper-middle market. And I think as we look at more and more institutional borrowers, institutional real estate is where we tend to sometimes have some somewhat larger loan sizes.

Operator, Operator

And our next question comes from Don Fandetti, with Wells Fargo.

Donald Fandetti, Analyst

Bob, can you talk a little bit about the moving pieces in the allowance? It looks like there was around $4.6 million of provision. And then, were reserves sufficient to cover the conversion to the loan to REO this quarter?

Robert Foley, CFO

Don, thanks for the question. So I'll speak in numbers rounded to the nearest million. At the end of last quarter, our CECL reserve was about $69 million. As previewed, we converted the two loans we've been discussing into REO. That occasioned a relief of the CECL reserve of $10 million, which was within about $250,000 to $300,000 of the reserve that we had previously been carrying with respect to those two loans. So the answer to your question is, yes, it was fully reserved for. And those results are actually consistent with our historical CECL results, where our realized losses have been around 3%, within 3% of what our CECL reserves were at the end of the quarter preceding the period in which the realized loss was taken. And then there was about $5 million of expense, as you said, during the quarter, which was really driven by the macro factor impact on our general reserve. We have no specific reserves, and we've had no specific reserves for a while. It's all general. And so inflation, steeper yield curve, higher rates, a lot of these factors as they course through the loss given default model that we and many of our competitors use to develop our CECL reserve, that's what gave rise to that approximately $5 million boost. So $69 million minus $10 million gets you to $59 million, plus $5 million gets you to $64 million. That's 187 basis points, which is actually 15, almost 20, basis points lower than the preceding quarter-end and just reinforces the steady decline in that reserve rate expressed in basis points that we've engineered over the last number of quarters.

Donald Fandetti, Analyst

What is your perspective on provisions moving forward? There seem to be some improving aspects in commercial real estate. How do you view moving from 3-rated to 4-rated? Do you feel stable in that area? Additionally, what are your general thoughts on provision expenses looking ahead?

Robert Foley, CFO

Let me disaggregate your question into two parts. The first is sort of where do we see CECL reserve going on a forward-looking basis. I would expect, given where we are in the cycle and the 100% performing nature of our current book, that the CECL rate expressed in basis points would not increase. And theoretically, over time, that rate should converge with sort of the long-term loss rate for us as a company or our peers as a company. As you know, CECL has been in effect for only five years. So all of us are still building our own sample set or universe of actual loans and losses. And in the interim, we're using these large data sets that we contract with other companies to get. So I would expect that the rate would kind of be flat or decline, but it's probably not going to go up. In dollar terms, as we continue to grow our book, which we have been doing, we expect and you should expect that the dollar amount of the CECL reserve will increase, because it has to, given how the CECL pronouncement is applied. Every loan is going to attract some amount of general reserve as soon as it's booked. So I hope that answers that question. The second part of the question was, I think, really about migration. We have only two 4-rated loans. That's less than, or it's about 3% of our current loan book. Otherwise, our risk rating average has been 3.0 for a number of quarters. So we don't anticipate much migration. Historically, most of the 4-rated loans that we've had have either reperformed and become 3s or they've been resolved through payoffs. Obviously, some have migrated in the other direction, but that's not the majority. It's the minority.

Operator, Operator

And our final question comes from Rick Shane, with JPMorgan.

Richard Shane, Analyst

I have a few questions, and much of the information has already been addressed. Last quarter, you clearly outlined the potential path for the 4-rated loans, specifically mentioning two becoming REO. With two 4-rated loans still remaining, do you plan to pursue REO solutions aggressively, or do you foresee different options for those?

Robert Foley, CFO

Rick, thanks for your question. Before commenting specifically on those two loans, allow me to restate again, our view about loan asset management and REO management as well is our job is to maximize shareholder value. So we're going to make the decision based on the facts and circumstances of each loan as they develop and as the situation presents itself. So we've got two 4-rated loans currently. I don't think it's really a matter of us being more or less aggressive. We've been very clear to the investor market and we're very clear to the borrower market that we'll be commercially reasonable on loan modifications and extensions. But 'commercially reasonable,' to us, means that a borrower is going to reduce its loan principal, it's going to replenish an interest reserve, it's going to buy the interest cap that it's obligated to buy under the loan agreement, and so on. And if people do that, then we'll be commercial. And if they won't, our view is that shareholder value is best delivered by us owning it and doing whatever needs to be done and then monetizing the property at the right time. With respect to the two properties, I think one is an office property in Honolulu, and the borrower looks like they're going to sell that property and repay us. And the other is a mixed-use property in Southern California. We continue to engage in discussions with the borrower about a potential modification that, if it occurred, would need to conform with the framework that I just described.

Richard Shane, Analyst

Got it. Okay. For my second question, you recently renewed your facility, putting you in a strong position in that market. Additionally, as you've noted, you are very experienced CLO issuers. We've observed that the market has reopened, with over $5 billion issued year-to-date. I'm interested in hearing your thoughts on the terms of your renewed facility in relation to the current CLO market. Can you provide some context regarding available leverage and spreads? What are the advantages and disadvantages between the two markets right now?

Robert Foley, CFO

We are fortunate to be part of TPG, which allows us to stay connected to the capital markets. Within our real estate credit platform and specifically at TRTX, we actively utilize these markets. The bank facility you mentioned is well developed and is on the path to recovery. It's important to differentiate this market from the repo market, where we are moderately active but typically only use 20% to 25% of our borrowings at most. The syndicated bank loan market is quite active and receptive to companies like ours that have strong credit ratings and a solid track record. In our recent deal, we were pleased to receive strong interest in our pricing and structure, and we have the flexibility to manage the facility effectively, which is crucial for optimizing our company's liability structure. Over the past few years, we've seen significant investor interest in the note-on-note market, which we've actively participated in as reflected in our previous discussions and filings. Advance rates have remained healthy in the 75% to 80% range, with spreads tightening. Regarding the CRE CLO market, there has been substantial new issuance, and it is expected to remain robust for the rest of the year. We have noticed improved structuring, especially with longer reinvestment periods for managed transactions. Spreads have been consistently tightening, and there is growing demand for transactions involving various property types beyond just multifamily, including both seasoned collateral and newly originated collateral. This presents an interesting opportunity for us, supported by our strong brand and reputation. We continuously monitor these markets to optimize our strategies for our shareholders.

Richard Shane, Analyst

Got it. I have one last question that ties back to a conversation we had nearly five years ago. You mentioned loan growth and the initial CECL reserves. At that time, the industry faced challenges because you were using data from a decade that had very few defaults. Now, we are in a phase with a significant amount of defaulted inventory. I'm interested in how you think the models will adjust for recency bias. Will the initial CECL general reserve rates be higher because of this? Additionally, how do you manage that time frame?

Robert Foley, CFO

Sure. That’s a great question. I recall that conversation. You’re right that the data sets we have today differ from those in early 2020 due to a significant correction in commercial real estate, which has led to a considerable decline in values. However, all this loss data is being accurately and timely captured by various providers and compilers. The intention behind these models, and how management decides to implement them, is to adjust for what you referred to as recency bias if needed. Clearly, the loss rates for the years leading up to 2020 were quite low. However, if you look back to the loss rates starting from 1998, you’ll see that they've also experienced a couple of cycles. Now, we have the advantage of the last five years' loss data, which will guide how we and others apply those rates to CECL estimates each quarter. I’m confident in our ability to manage this. It's important to note that these estimates are forward-looking; they focus on anticipated future losses. Therefore, they need to consider not just past loss experiences but also macroeconomic data, including rates, GDP growth, LTV, cost per square foot, consumer behavior, the Property Price Index, and other prospective factors rather than historical ones.

Operator, Operator

Thank you. And with that, there are no further questions at this time. I would like to turn the floor back to management for closing remarks.

Doug Bouquard, CEO

I just wanted to thank everyone for joining us this morning on our call, and we look forward to updating all of you on the continued progress here at TRTX. Have a great day. Thank you very much.

Operator, Operator

Thank you. That does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.