Earnings Call Transcript - TRTX Q4 2020

Operator, Operator

Greetings and welcome to the TPG Real Estate Finance Trust, Fourth Quarter 2020 Earnings Conference Call. It is now my pleasure to introduce your host Deborah Ginsberg, Vice President and General Counsel. Thank you. You may begin.

Deborah Ginsberg, Vice President and General Counsel

Good morning, and welcome to TPG Real Estate Finance Trust's conference call for the fourth quarter of 2020. I'm joined today by Greta Guggenheim, Chief Executive Officer; Matt Coleman, President; Bob Foley, Chief Financial Officer and Peter Smith, Chief Investment Officer. Greta, Matt, and Bob will share some comments about the quarter and the year. And then we'll open up the line for questions. Yesterday evening, we filed our Form 10-K and issued a press release with the 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 Factors section of our 10-K. 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 10-K. With that I will turn the call over to Greta Guggenheim, Chief Executive Officer of TPG Real Estate Finance Trust.

Greta Guggenheim, Chief Executive Officer

Good morning, and welcome to our fourth quarter conference call. As you may have read, I announced I will be retiring from my position as CEO and resigning from the board at the end of this quarter. I've been thinking about my retirement for some time, actually since late 2019 after having helped build the company and with the intention of leaving it well positioned for future growth. This was delayed a bit, but with the strength of our balance sheet restored, our strong liquidity position, and with our experienced management and origination teams, I feel now is a good time to move on. The firm has asked and I have gladly accepted to stay on as an advisor to the business through this transition period. I want to thank TPG and the TRTX team for their commitment and support. I'm incredibly proud of what we've accomplished over these last five years and know the company is well positioned for continued success. With that, it's my pleasure to turn the call over to our President, Matt Coleman. Matt has assumed responsibility for the day-to-day management of the company. TPG and the Board will jointly conduct a search for a new CEO. Matt and Bob will now provide the earnings readout and share some comments about 2020 and the past quarter. Thank you.

Matt Coleman, President

Thank you, Greta. On behalf of TPG and everyone at TPG, TRTX, I want to thank Greta for her contributions to the company over the last five years. During her tenure at the firm, Greta led the successful IPO of TRTX, built a world-class team that has originated $9.1 billion of loans under her watch and helped establish the company as a leading real estate debt franchise. Greta, we all wish you well in retirement. I personally couldn't be more proud to partner with this group of people. The professionals who work on behalf of the TRTX manager are immensely smart, talented, and dedicated. I'm excited about what we can achieve together in the quarters and years ahead. I'll recap 2020 and look ahead to the rest of 2021. 2020 was a tough year. There's no way around that. We ended the year with GAAP net loss attributable to common shareholders of $155.5 million or $2.03 per share and distributable earnings of negative $106.6 million or negative $1.39 per share. Prior to the onset of COVID-19, we originated five loans representing approximately $437 million of aggregate commitment. Although 2020 was a turbulent year, we took quick and decisive steps to stabilize the company. We completely exited $969.8 million of CRE security and terminated $722.7 million of associated debt. We raised capital as needed, including $225 million of Series B preferred stock from affiliates of Starwood Capital Group. We took steps to shore up the right side of our balance sheet, increasing our percentage of non-mark-to-market liabilities from 43.4% at March 31, 2020 to 63.5% as of December 31, 2020. We ended the year in a healthy liquidity position with a stable balance sheet. We also positioned ourselves to reenter the lending market, which is now our primary focus. As we reported last night, we increased our CECL reserve in Q4 2020 to 127 basis points of total loan commitments versus 109 basis points in Q3 2020. While we're optimistic about the rollout of vaccinations across the country, there remains considerable uncertainty with different COVID strains emerging and the pace of economic recovery unclear. Accordingly, we've maintained a conservative stance with respect to our reserves to allow us to focus our attention on the path forward. At the asset level, we continue to address challenges with respect to two specific loans, the land loan in Las Vegas, where we took title through a deed-in-lieu of foreclosure on December 31 and a $31.2 million loan on a retail property in Los Angeles, which defaulted in December. Interest collections in Q4 were 96.7%, including 1.7% of PIK interests with Las Vegas land and the Los Angeles retail loan being the only non-paying loans. Liquidity at year-end was $342.6 million comprised primarily of $319.7 million in cash and $22.8 million in available undrawn capacity. We recently signed a term sheet for a $50.2 million multifamily loan on an asset in Durham, North Carolina. Our market was exceedingly strong, and we're optimistic about transaction volume in 2021. Our focus is on quality assets and markets, and we will not compromise on these core principles. Our strategic plan for 2021 is at the intersection of active asset management of the loans in our portfolio, robust originations focused on compelling underlying credit, and optimizing our capital structure.

Bob Foley, Chief Financial Officer

Thank you, Matt. Good morning, everyone. First, I want to extend my warmest wishes to Greta upon her retirement from TRTX. Greta's retirement marks the end of one chapter and the beginning of another. Thank you for your leadership, competitive fire, integrity, and wise counsel. Now onto the business at hand, we reported yesterday afternoon for the quarter ending December 31, GAAP net income for TRTX of $14.6 million, GAAP net income allocable to shareholders of $6.6 million or $0.09 per share and distributable earnings of $11.7 million or $0.15 per diluted share. Book value declined to $16.50 per share, a decline of $0.28 for two reasons. First, we declared on December 15 and paid on January 22, a special dividend of $0.18 per share attributable to the buildup of undistributed taxable income in earlier quarters of 2020 that exceeded our stated dividend rate of $0.20 per share. And two, we recorded credit loss expense of $16.3 million or $0.21 per share due to a specific reserve of $10 million on a defaulted retail loan in Metro Los Angeles and an incremental $6.3 million to our general CECL reserve due to the cautious stance we have on the economic reopening. We collected 96.7% of interest due, including PIK interest of $0.9 million, which is only 1.7% of total interest collections. Our cash on hand at quarter end was $319.7 million or 6.5% of our total assets. The gradual growth of commercial real estate investment activity and the remarkable return of liquidity to the equity and debt capital markets positions us well to realize earnings. Based on our review of SEC filings, we believe we ranked second among our publicly traded peers in terms of the least reliance on mark-to-market liabilities. We do agree with observers who believe hospitality performance will snap back once the economy reopens and leisure travel in particular resumes. We are focused on our proven ability to raise non-recourse long-term low-cost liabilities.

Stephen Laws, Analyst

Hi, good morning. First, Greta, congratulations on your retirement. It's been a pleasure working with you and wish you well in the future. As I think about portfolio growth, Bob, in modeling for the year, can you talk about the repayment expectations as an offset to origination outlook and how we should think about leverage trending over the course of 2021?

Bob Foley, Chief Financial Officer

Yes. Thanks and good morning, Stephen. Let me take the repayment and leverage, and then I may ask Peter to make some comments with respect to originations. Historically, our repayments have ranged annually between $1.3 billion and about $2 billion. That dynamic has not really changed in COVID. There has not been as much extension as one might think. Our repayments for the year that just ended were in the range of $1 billion. In terms of leverage assumptions, we have reduced our leverage as most of our competitors have done with respect to bank-oriented borrowings. We believe our advance rates are slightly above 80%, which we think is prudent. So I think you will expect to see leverage largely unchanged. If we are more active in the capital markets, it might go up a little bit.

Peter Smith, Chief Investment Officer

Sure. Thanks Bob. Actually, the pipeline looks pretty good right now. We maintained a lot of the relationships and contacts with the borrowers and brokers that we've historically done a lot of business with, and so we feel pretty good about the current deals in the multifamily sector. We’ve seen high-quality loans and are optimistic about those opportunities.

Charlie Arestia, Analyst

Hey good morning everybody. Thanks for taking the questions today. I have a follow-up on the maturities question from earlier. Looking at that chart on Slide 4, I'm wondering if you have disclosed what the asset type or property type mixes on those maturities, if it's pretty representative of the existing portfolio or if there's any real weightings by property type there?

Matt Coleman, President

Sure. The repayment behavior thus far has been heavily weighted on multifamily, which should not be a surprise given the strength of the multifamily financing market. We expect that trend to continue during 2021. We think that pace will continue. Much of the repayment activity that we forecast in 2021 is multifamily related. Our loan documents typically involve extension tests that include a minimum debt yield requirement and/or a minimum LTV requirement, sometimes both. We do expect that there will be some extensions during 2021. Our reserve at quarter end reflects a prudent estimate of expected losses across our portfolio, and we are comfortable with it right now.

Tim Hayes, Analyst

Hey, good morning guys. Thanks for taking my questions. Just on the pipeline again, can you just want to get a little bit more color on the pipeline, how many opportunities you're evaluating right now, what type of assets they largely consist of? And then you mentioned just the impact of competition potentially on spreads and so what do all coupons look like on loans in the pipeline versus the portfolio average?

Bob Foley, Chief Financial Officer

Good morning to Tim. The number that I referenced in my earlier comments was $3.5 billion currently under evaluation. The vast majority of the actionable and interesting opportunities right now are in the multifamily space. We feel we probably have three more deals we're going to be signing up in the next week or so in that sector. We think pricing is currently more favorable on multifamily deals, with spreads being tighter than we were seeing pre-COVID.

Matt Coleman, President

To conclude, I'm excited about our progress and our path forward and looking forward to getting to know those of you who I have not already met. We thank you again for your interest in TRTX and we'll speak to you next quarter. Thank you.

Operator, Operator

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.