TRTX - NYSE

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to TPG Real Estate Finance Trust First Quarter 2025 Earnings Conference Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. It is now my pleasure to turn the call over to management. Thank you. You may begin.

Good morning and welcome to TPG RE Finance Trust earnings call for the first 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 will answer questions from call participants. Yesterday evening, 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 and webcast 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 broadcasts or reproductions 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.

Over the past quarter, global markets continue to adjust to the new tariff regime as investors wrestle with the potential short and long-term effects of a protracted global trade war. Initially, asset prices reacted violently with a sharp sell-off in equities and then accompanying widening of credit spreads across all parts of the market, including real estate credit. In general, real estate credit spreads have moved in sympathy with broader credit markets. However, investor sentiment at this stage indicates that real estate credit is considered somewhat of a safe haven relative to corporate credit and equity risk. Certain corporate borrowers have direct first-order risk to the new tariffs, which can drive defaults sooner. By contrast, real estate credit has more indirect exposure. Hence, we expect the effects of tariffs will likely lag on a relative basis with real estate credits. Consequently, TRTX remains on offense, but with its usual cautious eye towards downside protection and tail risks. We continue to prefer the housing sector, particularly multifamily, given its resilient and stable NOI profiles. However, our pipeline contains transactions across various property types and geographies driven by the thematic insights of TPG's integrated real estate, debt, and equity investment platform. Despite the broader market disruption, we made steady positive progress toward our strategic goals. From a balance sheet perspective, we maintain substantial liquidity, a 100% performing loan portfolio, and stable risk ratings. From a capital allocation perspective, we closed two multifamily loans after quarter end, totalling 131 million, and have executed term sheets on another 310 million of transactions. We also repurchased $9 million worth of TRTX common shares, which we continue to believe delivers value and liquidity to our shareholders. From a liability perspective, we priced and closed our sixth series CLO, FL6, which generated 191 million of cash to our balance sheet and provided another stable, long-term financing vehicle for our loan investment activity. This increased our non-mark-to-market financing exposure to 91% of total borrowings. Our capital markets team did an excellent job driving the execution of the transaction before bond spreads widened out dramatically beginning in late March. As a reminder, this series CLO financing provides us with matched term, non-mark-to-market, non-recourse financing with a 30-month reinvestment window. The attractiveness, tenor, and stability of this financing creates tremendous long-term value for TRTX shareholders. We've discussed for several quarters the many levers TRTX possesses to drive growth in distributable 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. I am pleased to report that we've pulled each of the four levers to our advantage. Number one, we have closed or executed term sheets on approximately $441 million of new investments and repurchased approximately $9 million worth of shares. Number two, we expect to close shortly the sale of two office properties within our REO portfolio. Number three, we lowered our cost of funds from SOFR plus 200 to SOFR plus 194. And fourth, we redeemed FL3 and issued FL6, which generated net liquidity of $260 million for deployment in coming quarters. Lastly, we achieved all of this without any credit migration and while increasing liquidity quarter-over-quarter by $137 million. From a market comparable perspective, we are uniquely positioned amongst our competitors to take advantage of the attractive real estate credit market. In particular, the last few weeks have seen our investment pipeline grow dramatically, especially as certain lenders have paused or slowed their activity driven by the broader market pullback. A combination of $457 million of dry powder, a 91% non-market market liability structure, a credit stable balance and the real-time insights gained from TPG's global real estate business provide TRTX with a comparative advantage in a dislocated, opportunity-rich investing environment. Furthermore, TRTX shares trading at a 13% dividend yield and a 33% discount-to-book value offer a compelling value proposition to the market even after considering broader market uncertainty. With that, I will turn it over to Bob to provide a detailed summary of our financial results.

Thank you, Doug. Good morning, everyone. Thanks for joining us. For the first quarter of 2025, we reported gap net income of $10 million or $0.12 per common share, book value per common share of $11.19 and distributable earnings of $0.24 per common share in line with our quarterly dividend of $0.24 per common share. We registered wins in every aspect of our business. In capital markets, we issued a new $1.1 billion CRE CLO, thus further extending our maturities, reducing our cost of funds and increasing our proportion of non-mark-to-market, non-recourse term match liabilities to 91%. In asset management, we maintained a 100% performing loan portfolio, an unchanged weighted average risk rating of 3.0 with no credit migration and slightly increased our general reserve to $67.2 million or 199 basis points from $64 million or 187 basis points. In capital allocation, we've repurchased thus far in 2025 1.1 million common shares for an aggregate purchase price of $8.8 million, boosting book value per share by $0.05. Roughly $16.1 million of share repurchase capacity remains under existing Board authorization. And after quarter end, we originated two multifamily mortgage loans totalling $131 million with a weighted average as is LTV of 68% and a weighted average credit spread of 284 basis points. Currently, three loans totalling $310 million are subject to signed loan applications and are in the closing process. TRTX's share price performance remains the strongest among its peers since January of 2023 with a cumulative return of 47% through yesterday's close. Regarding our loan portfolio, 100% of our loan portfolio is performing and current. We have only two four-rated loans and no five-rated loans. Our weighted average risk rating is 3.0, consistent with the prior five quarters. Portfolio composition is largely unchanged and reflects our continuing focus on our key investment themes of multifamily and industrial. Regarding CECL, our general reserve increased to $67.2 million from $64 million, or 199 basis points from 187 basis points, due primarily to assumptions in the loan loss forecasting model that reflect higher interest rates, the potential impact of likely tariffs, and an increased probability of an economic recession. We are on track to monetize our REO to optimize shareholders' returns. Our two California office buildings are in the market for sale. One is under contract. The other is expected to be very shortly. Please refer to Footnote 4 of our financial statements for additional information regarding our REO portfolio. Regarding liabilities in our capital base, during the first half of March, we redeemed TRTX 2019-FL3 and priced TRTX 2025-FL6, a $1.1 billion CRE CLO with a weighted average spread of 183 basis points. TRTX has traditionally been a first quarter issuer, and 2025 was no exception. These two capital transactions boosted balance sheet cash by 191 million and added 69.2 million of investment cash to FL6. We also enlarged our table funding facility by $85 million to $375 million, added an additional lender to the syndicate, and extended the facility for three years. Non-mark-to-market, non-recourse term financing is now an industry-leading 91% of our secured liabilities, up from 77% last quarter. Our total leverage increased very slightly, to 2.2x from 2.1x last quarter. We have $2 billion of financing capacity available to support loan investment activity. We were in compliance with all financial covenants at March 31, 2025. Regarding liquidity, at 11.6% of total assets, our liquidity is strong and highly supportive of our capital allocation strategy. At March 31, on the heels of settlement of FL6, our liquidity was 457.6 million, including 348 million of cash in excess of our covenant requirements, 25.4 million of undrawn capacity under our secured credit agreements, and 69.2 million of CRE CLO investment cash. We funded, during the quarter, $13.6 million of commitments under existing loans. At quarter end, our deferred funding obligations under existing loan commitments were $109.8 million, only 3.2% of our total loan commitments. TRTX is optimally positioned to navigate the uncertain current market and capture the special situation and other lending opportunities in our current and future pipelines. We have strong liquidity, low leverage, substantial low-cost financing capacity, 91% of our liabilities are non-mark-to-market, non-recourse and match term, and a 100% performing loan portfolio with stable risk ratings. We're poised to drive growth in net earning assets and distributable earnings and are not reliant on loan repayments to do so. And with that, we'll open the floor to questions. Operator?

Thank you. [Operator Instructions]. Our first questions come from the line of Steve Delaney with JMP Securities. Please proceed with your questions.

Hi, good morning, everyone. Congrats on a strong quarter, and we certainly applaud the buyback. Doug, if I could start with you. Sort of big picture, can you provide us with any color about the risk profile that you're seeing in your current originations and pipeline? Compared to what the bridge loan market looked like in 2021-2022, both from maybe a loan structure but also a borrower attitude, it just seems like that there is a more realistic or healthier market, but that's my observation. I'd love to hear your view of the comparative opportunity today from a risk-reward profile in bridge lending versus that post-COVID period? Thank you.

Sure. Thank you, Steve. I would say first, just as you kind of zoom out, and it's an interesting kind of arc of time to think through, one of the biggest differences from 2021 and 2022 versus now is just frankly entry point. I think despite the fact that we have seen loan spreads kind of, let's call it probably move in sympathy with perhaps corporate credit, and we've been most excited about the fact that we really haven't on the margin seen any kind of proceeds creep. I think that was a lot of what characterized that moment in time was you saw loans that were kind of creeping above that 70% loan-to-value threshold generally speaking. So, I'd say first and foremost, it's definitely proceeds. I would add secondly, from a borrower mentality perspective, I think that just looking at the available alternatives in terms of cost of funds, I mean right now in sort of round numbers, agency borrowing is about a 6% cost. A conduit loan is about a 7% cost. And then transitional loans are obviously in excess of conduits. So let's just call it kind of generally, so for plus 275 to 400 depending on the risk profile. So the cost of borrowing is elevated, but I think that borrowers are being a bit more disciplined about the amount of debt that they want to put on an asset, just acknowledging also some of the uncertainties more broadly in the market.

Very helpful. And could you just roughly estimate, I know you've got a new CLO and we could use that for the financing side of things, but could you estimate what your kind of range of expected levered return on equity is on the new bridge loans that you're making?

Yes, sure. So I think from that perspective, first just worth highlighting that we just from a timing perspective did a fantastic job of executing that series CLO in the kind of simplest sense I would describe it as. We were able to lock in bond spreads, which really kind of drive our cost of financing when they were kind of closer to the tights of the year. Whereas now we're actually able to use that financing as we're out there deploying new capital at much wider loan spreads. So when you do think about our ROEs, that's kind of all been kind of moving in our favor that you really haven't seen yet flow into a lot of our numbers, but that'll be one of the benefits that our balance sheet has versus competitors is that we were able to, again, kind of lock that deal in just before we saw a very meaningful widening within bond spreads. But generally speaking right now, we've seen loan spreads over the last, let's call it four to six weeks move anywhere from 25 basis points to 75 basis points wider. That's definitely very much a moving target. And I think if anything, you're seeing a little bit of a steepness where loans that are perhaps are more challenging property types or in more challenging markets, you could see even the cost of borrow outside of that 75 basis point range, as I mentioned. But when we're out there making investments, we're generally still generating gross ROEs in the low to mid-teens range consistently.

Thank you so much for the color.

Thanks, Steve.

Thank you. Our next questions come from the line of John Nicodemus with BTIG. Please proceed with your questions.

Morning, everyone. Thanks for taking my question. You noted in your prepared remarks during your last call that TRTX had over 300 million of live investment opportunities. Obviously, none came in in the first quarter. Saw the 131 come in so far in the second quarter. Was that just a question of timing why there weren't any originations in the first quarter? Was it something broader that your team saw that led to you holding off or something else entirely? Thanks.

Yes, sure. It was a combination of a few things. First, when we looked at loan spreads in January and February, the market particularly as we got into February was getting tighter and tighter. So we were very disciplined in terms of loans that we signed up and kind of where we were pursuing new investments and that's one. Two, I think just as a function of the dislocation in markets and a lot of the heavy refinancing volume that we're seeing in our pipeline, loans have been just taking longer to close, frankly. We're really pleased that if you think about how we've been able to time our entry into markets, March and April for us have been a very attractive moment for us to be deploying capital as evidenced in the $441 million of transactions that we either have closed or committed to. So again, just to put it in the simplest terms there was a lot of discipline with the team in Jan and Feb as we saw deals get a little bit too tight and then I would say secondly the sort of average time to close deals has been probably a little bit longer than our typical historical experience. Again, some of that a mix of the heavy refine in the pipeline and also just driven by the sort of a broader market backdrop that, of course, just increases uncertainty and can extend out the closing timing.

Great. Thanks, Doug. That's really helpful. And then my other question just goes into REO. You mentioned that you're close on the sale of the two California office properties, which is exciting. Just another call back to the last call. You mentioned you thought the REO portfolio could be reduced by about half by year end. Is this sort of still how you're viewing the pacing there or has that changed at all given some of the broader market moves since the last call? Thanks.

Thanks for your question, John. We are excited about the prospect of these two near-term sales in California. I would say that our plans and expectations are to stick to the cadence that we described on last quarter's call. The events of the last four to six weeks have certainly increased uncertainty and unsettledness in the market, but whether they cause the pace to slow down is not yet clear. I can assure you that we have a plan. We've been executing it. We would expect to move forward with some of the other properties we have teed up over the next several quarters.

Great. Thanks so much, Bob. That's all for me.

Thank you.

Thank you. Our next question has come from the line of Rick Shane with JPMorgan. Please proceed with your questions.

Hi, this is AJ [ph] on for Rick. For the two REOs that it sounds like you're about to sell, how do the transaction prices compare to the carrying values? Should we be expecting gains or losses on those?

Morning, AJ. Thanks for your question. Well, when the transaction is closed, we'll obviously report the prices at which we close those deals. We're in contract on one and we're just about to be in contract on the other, so we and I don't believe it's appropriate to share that information right now, but you're familiar with the company and our track record with respect to REO dispositions in the past, and we've generally sold REO at prices in excess of our carrying value.

Okay. Fair enough. And then just one more. Are there any other REO resolutions in the pipeline that are getting close to resolution where that might be worth flagging right now?

As I said in my last answer, there's nothing else that we are actively marketing at this time, but we have a plan for each of our REO assets, which we've discussed on previous calls. There are some properties that are sort of next in queue, and as these two properties clear, then we'll address and enter the market with the next tranche, for lack of a better term.

Okay. Thank you very much.

Thank you, AJ.

Thank you. [Operator Instructions]. We have reached the end of our question-and-answer session. I would now like to turn the floor back over to management for any closing comments.

Just wanted to thank everyone for joining the call this morning, and we look forward to updating you on our progress in about 1 quarter. Thank you very much.