Earnings Call Transcript - TRTX Q2 2025

Operator, Operator

Good morning, everyone, and thank you for being here. Welcome to the TPG Real Estate Finance Trust Second Quarter 2025 Earnings Conference Call. This call is being recorded. I will now hand it over to management. Thank you. You may begin.

Brad D. Cohen, Managing Partner

Good morning, and welcome to the TPG RE Finance Trust Earnings Call for the second quarter of 2025. Today's speakers are Doug Bouquard, Chief Executive Officer; and Bob Foley, Chief Financial Officer. Doug and Bob will provide commentary regarding the company, its performance and the general economy, and we'll answer questions from call participants. Yesterday afternoon, we filed our Form 10-Q, issued a press release and shared an earnings supplemental, all of which are available on the company's website in the Investor Relations section. This morning's call is being recorded. Information regarding the replay of this call is available in our earnings release and on the TRTX website. Recordings are the property of TRTX and any unauthorized broadcast or reproduction in any form is strictly prohibited. This morning's call will include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially. For a comprehensive discussion of risks that could affect results, please see the Risk Factors section of the company's latest Form 10-K. The company does not undertake any duty to update our forward-looking statements or projections unless required by law. We will refer during today's call to certain non-GAAP financial measures, which are reconciled to GAAP amounts in our earnings release and our earnings supplemental, both of which are available in the Investor Relations section of our website. Now I'll turn the call over to Doug.

Doug Bouquard, CEO

Before we discuss our results for the quarter, we wanted to share that our hearts are heavy in the wake of Monday's senseless attack at 345 Park Avenue. We are grieving with our friends and neighbors at Blackstone and the NYPD, and our thoughts are with the teams at KPMG, the NFL, and all those impacted by this tragedy. Many of us at TPG had the utmost privilege of working alongside Wesley LePatner at Blackstone throughout her career. She'll be remembered for her exceptional talent, her kindness, and most importantly, as a loving wife and mother of two children. Our industry has lost a leader, and we have lost a friend. We are grateful for the swift response and dedication of local law enforcement, first responders, and security personnel. At this profoundly difficult moment, we are mourning with those who have lost loved ones and colleagues, and we stand in solidarity with all those affected. Turning to our quarterly results. Global markets have continued to adjust to the effects of ongoing tariff negotiations. Over the past week, U.S. equity markets have rallied meaningfully as the S&P 500 reached yet another all-time high yesterday. Equity markets remain very well bid, and corporate credit markets have tightened to levels not seen since early March of this year. Meanwhile, in the real estate credit markets, tariff volatility drove widening in loan spreads, while banks continued their reluctance to lean into direct lending. This market backdrop afforded TRTX an excellent window of opportunity during the quarter as widening direct loan spreads outpaced the widening of back-levered spreads, thus generating attractive risk-adjusted returns for new investments on behalf of our shareholders. During the second quarter, TRTX delivered a standout performance, decisively executing the plan we previously outlined to drive earnings growth and maximize shareholder value. In previous earnings calls, we outlined the many levers available to TRTX to grow earnings, including: one, deployment of excess liquidity; two, utilizing untapped financing capacity; three, recycling equity currently invested in REO; and four, creating additional liquidity via capital markets activity. During the second quarter, we pulled on each lever to build a strong foundation for high-quality earnings growth. The deep sourcing and investing capabilities of TPG's integrated real estate debt and equity platform drove our 15% net earning loan growth in the second quarter. Our balance sheet is poised for further capital deployment with $236 million of available liquidity, a stable and 100% performing loan portfolio, a continued reduction in our REO portfolio, and a debt-to-equity ratio now at 2.6x that is still materially less than our peers. Despite the tariff-driven market disruption earlier in the second quarter, our investment team took advantage of this opportunity and, buoyed by substantial dry powder and a stable liability structure, closed seven new loans totaling $696 million with a weighted average loan-to-value ratio of 68%. This investment activity was concentrated in our thematic sectors of multifamily and industrial and was diverse across geographic markets and institutional borrowers. In addition, we currently have more than $200 million of newly executed term sheets and an extensive pipeline, which will fuel continued growth in earnings for TRTX shareholders. In capital markets, we continue to take advantage of our industry-leading liquidity position in terms of dry powder and 95% non-mark-to-market liability structure. In addition, the sale of two REO office properties generated a $7 million GAAP gain, reduced our REO exposure to approximately 5% of total assets, and our remaining REO exposure is now 74% multifamily, with office REO now representing approximately 1% of our balance sheet. These REO sales proceeds are being actively deployed in new loan investments, demonstrating our well-established ability to efficiently redeploy capital. Lastly, in the second quarter, we repurchased common stock, which generated $0.08 per share of net book value accretion. Our second quarter investment activity and operating results demonstrated our ability to leverage every available tool to grow earnings, recycle and allocate capital efficiently, all while maintaining a disciplined approach to credit risk and liquidity. TRTX currently trades at a 25% discount to book value and an 11.5% dividend yield. We continue to believe our current share price presents a compelling investment opportunity backed by a 100% performing loan book, a stable liability structure, and an offensively oriented liquidity position, led by the investment insights of TPG's industry-leading integrated debt and equity real estate platform. With that, I will turn it over to Bob to review our financial results.

Robert R. Foley, CFO

Thank you, Doug. Good morning, everyone. Thank you for joining us. For the second quarter of 2025, TRTX reported GAAP net income of $16.9 million or $0.21 per common share and distributable earnings of $0.24 per common share, which again covered our quarterly dividend of $0.24 per common share. Book value per common share was $11.20 versus $11.19 for the previous quarter. Our results reflect accelerating execution of our business strategy, which is predicated on a durable liability structure, strong liquidity, prudent and commercial portfolio construction, rigorous asset management, and disciplined capital allocation. Regarding capital allocation, we directly originated seven loans with total commitments of $695.6 million, $670.5 million of initial unpaid principal balance and a weighted average credit spread of 2.86%. We repurchased 1.7 million common shares for an aggregate price of $12.5 million or $7.52 per share, generating approximately $0.08 per share of book value accretion. At quarter end, $9.3 million of repurchase capacity remained under existing Board authorization. In capital markets, we financed our nearly $700 million of new loan investments using reinvestment capacity in TRTX 2025-FL6 of $172.2 million, including $103 million of cash from loan repayments and $69.2 million of ramp cash. We used our secured revolver pending transfer primarily to non-mark-to-market term financing arrangements, balance sheet cash intentionally deployed to reduce idle liquidity and lessen earnings drag, and defer borrowings to reduce interest expense. Our liquidity management strategy reflects our 100% performing loan book and 95% non-mark-to-market liability structure. We'll back lever in future quarters and recycle borrowed cash into new loan investments as we originate them. In Asset Management, we maintained a 100% performing loan portfolio with an unchanged weighted average risk rating of 3.0 and no credit migration. We sold two REO properties, both at gains, which combined to a GAAP gain of $7 million and a contribution to distributable earnings of $1.9 million. Consequently, our REO carrying value declined by $32.5 million or approximately 12%. We intend to launch sales processes for several more REO investments in the coming quarters. Refer to footnote 4 of our financial statements for additional information regarding our REO investment portfolio. Regarding our loan portfolio, it grew by 15% during the second quarter, driven by strong origination volume and repayments consistent with our expectations. 100% of our loan portfolio is performing. We have no 5-rated loans and only two 4-rated loans. Our weighted average risk rating is 3.0, consistent with the prior six quarters. Our CECL reserve rate declined to 176 basis points from 199 basis points. This 12% decline reflects our 100% performing loan book and 15% growth in our loan portfolio quarter-over-quarter. Portfolio composition is detailed on Page 7 of our earnings supplemental, where you will note growth in multifamily and industrial exposure accompanied by declines in life sciences, hotel, and office ratings, low leverage, a cost-efficient, stable liability structure that is 95% non-mark-to-market and meaningful capacity for continued non-mark-to-market financing increased to 95% from 91% of our secured liabilities, reinforcing our industry-leading position. Total leverage increased modestly to 2.6x from 2.2x in support of loan portfolio growth. At quarter end, we had $1.7 billion of financing capacity available to support loan investment activity, and we were in compliance with all financial covenants. Regarding liquidity, we deployed balance sheet cash into new loan investments and share repurchases. Quarter end liquidity of $236.4 million or 5.7% of total assets included $165.9 million of cash, including $20.7 million to satisfy our covenant requirements, $66.1 million of undrawn capacity under our secured credit agreements and asset-specific financing arrangements and $1.8 million of CRE CLO investment cash. We funded during the quarter $8.8 million of commitments under existing loans. At quarter end, our deferred funding obligations under existing loan commitments were $116.4 million, only 3% of our total loan commitments. In summary, our second quarter results demonstrate the disciplined execution of our business plan translates into loan portfolio including loan investments and share repurchases. TRTX has strong liquidity, a 100% performing loan portfolio with stable risk growth. TRTX's share price performance continues to lead its peers with a cumulative return of 68% since January of 2023. We remain focused on sustaining that momentum to eliminate the gap between our share price and book value. And with that, we'd like to open the floor to questions.

Operator, Operator

And our first question comes from John Nickodemus with BTIG.

John Ryan Nickodemus, Analyst

We were obviously excited to see almost $700 million of originations during the quarter with $112 million already in the pipeline so far in July. Just curious how we should think about quarterly origination volumes going forward. That is to say, will volumes like that of second quarter become the norm? Or is that higher than what we'll likely see the rest of this year?

Doug Bouquard, CEO

Yes. Apologies there for the technical difficulty. Yes. So as we think about pacing, again, first and foremost, we have a number of levers available to us on our balance sheet that I shared in my prepared remarks. What we found recently is that I'd say there's really kind of two things happening. One is we continue to see a very attractive lending opportunity as banks have continued to basically pull back. And then I would say, secondly, from a pacing perspective, because we have a number of these levers, we're not really bound by the pace of repayments or really other sort of balance sheet-related constraints from a pacing perspective. So I think that it's safe to say that you'll continue to see, I would say, an elevated pace of new investments over coming quarters as we begin to relever and frankly, grow our balance sheet.

John Ryan Nickodemus, Analyst

Great. That's super helpful. And then for my other question, similar lines I wanted to ask about loan size. We noticed that two of your loans originated last quarter are now in your top five largest loans in your book. Was that an active decision by your team to target loans of that size? Or did those opportunities just sort of present themselves that way?

Doug Bouquard, CEO

Yes. Sure. So I think our scale and size of loans that we're investing in has generally remained somewhat consistent over the past number of years. Specific to the larger loans that are included, these are institutional borrowers and institutional assets. So we like the fact that we can traffic in the, I'll call it, like the $40 million to $100 million range, which I'd say is more of a middle-market type of lending. And then also given the size and scale of our balance sheet, we can also kind of scale up into loans that are in the context of $200 million. Additionally, with some of these larger loans, we are able to, within those loans, actually have diversity. And for example, one of the largest transactions that we did, which was an industrial portfolio that provided diversification of industrial exposure, frankly, across the U.S. So we do like where we can gain a little bit more diversity through the form of a larger size.

Operator, Operator

Our next question comes from Chris Muller with Citizens Capital Markets.

Christopher Muller, Analyst

Congrats on a really solid quarter. So I wanted to hit on some of the REO. It's great to see that gain you guys got on those sales there. And I know you won't be able to give any specifics or guidance on this. But given the timing of when you took back some of the other REO properties compared to current market valuations, could we see some other gains come through when those properties get sold?

Robert R. Foley, CFO

Chris, thanks for your question. We're always hesitant to provide forward guidance, but I'll make a couple of general observations about our experience in REO. The first is that historically, we've been very aggressive about managing the performance of properties we take back and then moving them to market relatively quickly and frankly, with good results. And by that, I mean to say that to date, every piece of REO that we've sold, we've sold at a book gain. We have plans in place with respect to our remaining REO properties. We've improved the operating performance of virtually all of them, and we will be moving to market several of them for sale in the not-too-distant future.

Christopher Muller, Analyst

Got it. That's helpful. And then I guess kind of following up on that a little bit. On the multifamily REO you guys have on the books still, it looks like you don't have any financing against those assets. Is that mainly just due to expecting those properties being listed for sale in the coming quarters?

Robert R. Foley, CFO

You're correct. We don't have secured financing against them, and the frictional cost of financing investments that we think will be relatively short term in nature is one of the principal reasons we haven't financed those. But we always have that option to finance them if we choose to do so, and they're eminently financeable.

Christopher Muller, Analyst

Glad to see you guys firing on all cylinders over there.

Operator, Operator

Next question comes from Rick Shane with JPMorgan.

Richard Barry Shane, Analyst

Look, when we consider activity in commercial real estate lending and property sales throughout the country, there's really a pretty wide discrepancy, both geographically and by property type. As you look at portfolio opportunity and repositioning, where are you going to be trying to lean in on the offensive side? And where do you want to continue to be defensive?

Doug Bouquard, CEO

Thanks, Rick. That's a significant question. Based on our past quarter, we are still focused primarily on multifamily and industrial sectors, which are both active markets with ongoing transactions. These two property types are preferred across our integrated real estate debt and equity platform due to their liquidity. Historically, these assets have shown better performance in terms of loss and default through various economic cycles. However, we are not limited to just multifamily and industrial, as we are actively exploring other asset classes, such as student housing. Presently, most of our activity is in multifamily and industrial. Regarding our pipeline, we have observed a consistent trend over the last two years, mainly centered on refinancings. We would like to see more acquisition loans in our pipeline that we can eventually close on our balance sheet. We believe that as clarity improves concerning interest rates and as the negotiation gap between buyers and sellers decreases, acquisition activity will increase. This is a key trend we are closely observing.

Richard Barry Shane, Analyst

One of the significant themes that is arising is that we seem to be nearing peak delivery in the multifamily sector. There will be a slight delay as we reach the peak leasing phase. Are you noticing any improvement in the underlying economics of multifamily from a cash flow standpoint? As the market absorbs this extra capacity, are you beginning discussions regarding any potential rebound in multifamily development for new builds?

Doug Bouquard, CEO

Yes. I think that what we’ve observed in our portfolio is that the fundamentals for multifamily are generally very strong across nearly every market. This is supported by a slowdown in new construction, high borrowing rates in the residential sector, which are keeping renters in their current units. Additionally, there seems to be a hesitance among homeowners regarding purchasing new homes, which further contributes to strong multifamily fundamentals. We expect this trend to continue over time. Regarding multifamily starts, our integrated debt and equity platform is closely monitoring any new activity. Currently, we are not witnessing a significant increase in new construction deals in either debt or equity, which reinforces the strength of our existing multifamily investments. Lastly, some Sunbelt markets that had high levels of supply in recent years are starting to absorb that supply. Therefore, the outlook for multifamily appears very strong over the next one to two years.

Richard Barry Shane, Analyst

Got it. Okay. I really appreciate your thoughtful comments about everything that happened yesterday. I think everybody is feeling it, and you expressed it so well for all of us. Thank you.

Operator, Operator

And our final question will come from Don Fandetti with Wells Fargo.

Donald James Fandetti, Analyst

Yes. How are you thinking about credit risk migration from here? It's been very stable. And I guess, let's say, the Fed does not cut, would that lead you to need some additional reserves? Or do you feel like that scenario is baked into your current reserves?

Robert R. Foley, CFO

Thanks for your question, Don. Taking them in reverse order. Under CECL, registrants' reserves should always reflect their future expectations. So we've incorporated into our current estimates, forecasts about changing interest rates and inflation, GDP growth, and so on. So I don't think those factors in particular would directly weigh on the future direction of our CECL reserve. In terms of credit migration and portfolio performance, our risk ratings have been very stable. We've had virtually no credit migration. And as it stands right now, we wouldn't expect any. Specific circumstances can change. But right now, we feel good about the profile of our loan book. And in connection with multifamily, in particular, some of the factors that Doug just mentioned are really important in our assessment.

Operator, Operator

This now concludes our question-and-answer session. I would like to turn the floor back over to management for closing comments.

Doug Bouquard, CEO

Yes. I just want to thank everyone for joining the call today. We're very proud of the team's accomplishments this quarter and look forward to providing further updates to the market. Thank you.

Operator, Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.