TPG RE Finance Trust, Inc. Q1 FY2025 earnings call

• Global markets adjust to new tariff regime, with real estate credit seen as a safe haven relative to corporate credit and equity risk. - Remain on offense with cautious eye on downside protection, preferring housing sector especially multifamily. - Made steady progress: substantial liquidity, 100% performing loan portfolio, stable risk ratings; closed $131 million multifamily loans and executed term sheets on $310 million of transactions; repurchased $9 million of common shares; priced and closed sixth series CLO generating $191 million cash; pulled four levers to drive distributable earnings growth including new investments and share repurchases, REO sales, lowering cost of funds, and CLO activity.

For the loan portfolio, the company maintains substantial liquidity, a 100% performing loan portfolio, and stable risk ratings. From a capital allocation perspective, they closed two multifamily loans after quarter end totalling $131 million and executed term sheets on another $310 million of transactions, and repurchased $9 million worth of common shares. The sixth series CLO, FL6, generated $191 million of cash to the balance sheet, increasing non-mark-to-market financing exposure to 91% of total borrowings. In terms of revenue contribution, the loan portfolio and CLO financing activities are key components of the company's performance.

• Expect to close sale of two office properties in REO portfolio shortly. - Sixth series CLO financing provides matched term, non-mark-to-market, non-recourse financing with 30-month reinvestment window, creating long-term value. - Closed or executed term sheets on approximately $441 million of new investments and repurchased $9 million of shares; lowered cost of funds; redeemed FL3 and issued FL6 generating net liquidity for deployment.

• Global markets adjusting to new tariff regime with certain corporate borrowers having direct risk to tariffs driving defaults sooner, real estate credit having indirect exposure so effects may lag. - Broader market disruption poses risks; REO处置 has uncertainties.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: 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?

A: 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.