TPG RE Finance Trust: A Solid Income Opportunity In Commercial RE – TPG RE Finance Trust, Inc. (NYSE:TRTX)

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Introduction

TPG RE Finance Trust (TRTX) or “TPG” as we will refer to throughout this article has been a solid income-oriented investment the past few years due to its historical 8-10% dividend yield and improving quarter-over-quarter earnings as shown below.

07/29/2019 8-K Report

07/29/2019 8-K Report

The continual increase in net income quarter over quarter (4.1% CAGR) has largely been a result of increasing quarter-over-quarter book value per share.

ChartData by YCharts

As far as the mREIT universe is concerned, TPG is around the median in terms of dividend yield. However, as pure balance sheet lenders go, TGP has among the highest of yields with only ARI ahead of them. Other examples of pure balance sheet lenders are BXMT and KREF which are in the table below. A pure balance sheet lender originates or purchases loans for their own balance sheet and holds these loans on their balance sheets while conduit lenders originate and/or purchase loans for their own balance sheet or sell them into a securitized vehicle such as a CMS.

Company Ticker Div. Yield
New York Mortgage Trust Inc. (NYMT) 13.2%
Invesco Mortgage Capital (IVR) 11.6%
AG Mortgage Investment Trust, Inc. (MITT) 11.6%
Annaly Capital Inc. (NLY) 11.3%
MFA Financial Inc. (MFA) 10.6%
Apollo Commercial Real Estate Finance, Inc. (ARI) 9.4%
TPG RE Finance Trust, Inc (TRTX) 8.63%
KKR Real Estate Finance Trust Inc (KREF) 8.6%
PennyMac Mortgage Investment Trust (PMT) 8.5%
Ladder Capital Corp. (LADR) 7.9%
Starwood Property Trust Inc. (STWD) 7.8%
Blackstone Mortgage Trust Inc. (BXMT) 6.8%
Median 9.0%

Source: Author’s Tables

As I discussed in my previous article, MFA Financial: A Solid Income Opportunity With An 11% Yield, mREITs are akin to managing a fixed income portfolio and their success is largely driven by their risk management practice most notably with respect to interest rate and credit risk.

TPG manages credit risk by deploying capital in investments with:

  • LTVs of less than 70% with respect to individual properties.
  • Floating rate loans tied to LIBOR and spreads of 280 to 410 basis points over LIBOR.
  • Secured by properties that are in the office, mixed use, multi-family, industrial, retail and hospitality real estate sectors. Not only in these sectors but also properties that are expected to reach stabilization (80% occupancy) within 24 months of the origination date and are located in U.S. markets with robust economic growth.
  • Maintain reasonable loan risk ratings, as the loan book risk rating at March 31, 2019, was only 2.8.

TPG is a senior secured lender for over $4.3 billion of loans, diversified across 68 first mortgage loans and one mezzanine loan (99.9% first mortgage loan commitments). 100% of TRTX’s loans are performing with no credit losses or impairments.

07/29/2019 8-K Report

TRTX focuses on financing properties that are underserved by regulated financial institutions and other traditional commercial real estate lending firms. The company has exposure to real estate markets in 21 different states with California having its highest exposure at only 14.5% and the top 10 markets only occupying 52.8% of the total portfolio.

07/29/2019 8-K Report

TRTX’s preferred asset type is multifamily, particularly workforce housing given strong supporting demographics in this income cohort and a relative shortage of supply. The multifamily sector is highly stable, and it’s much less volatile than other property types during the recession.

TPG also underwrites different types of loans as described below (percentage of loan book in brackets):

Bridge/Stabilization Loan (49.2%): A loan with limited deferred fundings, generally less than 10% of the total loan commitment, which fundings are commonly conditioned on the borrower’s satisfaction of certain collateral performance tests. The related business plan generally involves little or no capital expenditure related to base building work (e.g., building mechanical systems, lobbies, elevators, common areas, or other amenities), with most deferred fundings related to leasing activity. The primary focus is on maintaining or improving current operating cash flow, or addressing minimal lease expirations or existing tenant vacancies.

Light Transitional Loan (27.3%): A transitional loan with deferred fundings ranging from 10% to 20% of the total loan commitment, which fundings are commonly conditioned on the borrower’s completion of specified improvements to the property or satisfaction of certain collateral performance tests. The related business plan is to lease existing or forecasted tenant vacancy to achieve stabilized occupancy and cash flow. Capital expenditure is primarily to fund leasing commissions and tenant improvements for new tenant leases, and capital expenditure allocated to base building work generally does not exceed 20%. Deferred fundings may also be budgeted to fund operating deficits, or interest expense, during the period prior to stabilized occupancy.

Moderate Transitional Loan (22.9%): A transitional loan with deferred fundings greater than 20% of the total loan commitment, which fundings are commonly conditioned on the borrower’s completion of specified improvements to the property or satisfaction of certain collateral performance tests. The related business plan generally involves capital expenditure for base building work needed before substantial leasing activity can be achieved, followed by capital expenditure for tenant improvements and leasing commissions to achieve stabilized occupancy and cash flow. Deferred fundings may also be budgeted to fund operating deficits, or interest expense, during the period prior to stabilized occupancy.

Construction Loan (0.6%): A loan made to a borrower to fund the ground‐up construction of a commercial real estate property.

2019 YTD TPG has closed on eight first mortgage loans with total commitments of $755MM, and with a weighted average credit spread of 364 basis points.

TPG’s weighted average loan to value (or LTV) of originations in Q2-19 was 60.1% on an average loan size of $94.4 million. The quarter-over-quarter drop in the weighted average LTV was because of the $62MM committed moderate transitional loan on the Calistoga, CA, hotel property with a 48.6% LTV (far left below).

The credit spread increased since year end from 326 bps to 364 bps at 2019 Q2. Note that these attractive spreads were achieved without any originations of construction or mezzanine loans.

Although 100% floating rate loans tend to be more sensitive to interest rate changes, TPG manages this risk well as rising rates are actually a positive for it since substantially all of the assets and all liabilities are tied to the LIBOR index. In addition, TRTX generally requires borrowers to purchase out of the money interest rate caps to protect them and the company from sharp rises in interest rates that might occur during the term of the loan.

Net floating rate mortgage loan exposure of $1.1 billion tends to generate an annualized increase in net interest income of approximately $5.5 million for every 50 basis point increase in one‐month LIBOR.

Liquidity

At June 30, 2019, TPG had unrestricted cash available for investment of $70MM, a portion of which is subject to certain liquidity covenants, and CMBS and CRE CLO investments with an aggregate face amount of $677.8MM available for sale.

At June 30, 2019, TPG had undrawn capacity (liquidity available to us without the need to pledge more collateral to our lenders) of $101.4 million under secured revolving repurchase agreements, senior secured and secured credit agreements, and a term loan facility, with eight lenders. These financing arrangements have an aggregate maximum commitment amount of $4.0 billion and a weighted average interest rate of LIBOR plus 1.9% as of June 30, 2019, providing stable financing, with mark-to-market provisions limited to asset and a weighted average term of 3.1 years.

As of June 30, 2019, TPG had $1.6 billion of financing capacity under secured revolving repurchase agreements, senior secured and secured credit agreements, and a term loan facility, provided by nine lenders. TPG’s ability to draw on this capacity is dependent upon its lenders’ willingness to accept as collateral loan or CMBS and CRE CLO investments they pledge to them to secure additional borrowings.

Valuation

Company Ticker P/B
AG Mortgage Investment Trust, Inc. (MITT) 0.87x
Invesco Mortgage Capital (IVR) 0.94x
Annaly Capital Inc. (NLY) 0.94x
MFA Financial Inc. (MFA) 0.98x
TPG RE Finance Trust, Inc (TRTX) 1.00x
New York Mortgage Trust Inc. (NYMT) 1.05x
PennyMac Mortgage Investment Trust (PMT) 1.06x
Apollo Commercial Real Estate Finance, Inc. (ARI) 1.10x
Ladder Capital Corp. (LADR) 1.26x
Blackstone Mortgage Trust Inc. (BXMT) 1.28x
Starwood Property Trust Inc. (STWD) 1.47x
KKR Real Estate Finance Trust Inc (KREF) 1.59x
Median 1.06x

As we can see, TPG trades 1:1 with BV although mREITs don’t tend to trade at high premiums to BV like many banks or insurance companies. However, it does trade below the median of its mREIT universe and is the cheapest among the pure balance sheet lenders like ARI, BXMT or KREF.

Conclusion

TPG is one of the most attractively priced mREITs given its ability to manage credit and interest rate risk and has a juicy 8.63% dividend yield.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in TRTX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

2019-10-06 13:17:00

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