TPG RE Finance Trust Q4 2024 Earnings Call Transcript

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Provided by Quartr
February 19, 2025
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Operator

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to TBG Real Estate Finance Trust Fourth Quarter and Full Year twenty twenty four Earnings Conference Call. Please note this conference is being recorded. It is now my pleasure to turn the call over to management. Thank you.

Operator

You may begin.

Executive

Good morning, and welcome to the TPG Real Estate Finance Trust earnings call for the fourth quarter and full year of 2024. We're joined today by Doug Bucard, our Chief Executive Officer and Bob Foley, our Chief Financial Officer. Doug and Bob will share some comments about the quarter and the year, and then we will open up the call for questions. Yesterday evening, we filed our Form 10 K and issued a press release and earnings supplemental with a presentation of operating results, all of which are available on the company's website in the Investor Relations section. As a reminder, today's call is being recorded and may include forward looking statements, which are uncertain and outside of the company's control.

Executive

Actual results may differ materially. For a discussion of risks that could affect results, please see the Risk Factors section of the company's Form 10 K. The company does not undertake any duty to update these statements, and today's call participants will refer to certain non GAAP measures. And for reconciliations, you should refer to the press release and the Form 10 K. At this time, I'll turn the call over to Doug.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

Thank you. Over the past quarter, strong economic growth and a resilient labor market continued to power The U. S. Economy. Positive economic sentiment and the lingering concern over inflationary pressures appear to have caused the Fed to pause and potentially forego additional rate cuts in 2025.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

We expect real estate investment activity to increase in 2025, driven by the deployment of dry powder in the new acquisitions and the forcing mechanism of elevated short term and long term interest rates. These factors create an excellent dynamic for opportunistic debt investing, especially for well positioned platforms like DRTx. Regardless of causal factors, we intend to continue to provide acquisition and tailored financings to recapitalize broken capital structures at reset valuations. We expect our increased 2024 loan investment volume to accelerate in 2025, driven by one, an offensively oriented balance sheet with substantial liquidity and a flexible liability structure and two, robust sourcing channels fed by TPG's fully integrated global real estate platform encompassing both credit and equity investing. Well, Metrix '20 '20 '4 was a successful year for TRTX.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

We accomplished precisely what we set out to do. Number one, build a fortress balance sheet with substantial liquidity. Number two, maintain a 100% performing balance sheet at year end with stable credit risk ratings. Number three, register consistent reductions in our CECL reserve throughout the year. And four, generate distributable earnings after realized losses that fully covered our $0.96 per share common dividend for 2024.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

And on a pre realized loss basis, we generated $1.08 per share for the year, covering our dividend at 1.1 times. We are exceptionally well positioned to pull on the many levers that TRTX possesses to grow earnings, including: number one, deployment of excess liquidity into new investments two, recycling equity currently supporting REO assets three, accessing undrawn capacity from our existing lenders and four, creating additional liquidity by taking advantage of the improving capital markets environment. Our strong operating results for the full year 2024 reflect the success of our strategy and confirm TRTX is advantageously positioned to continue its loan investment activity in 2025 and beyond. In the second half of twenty twenty four, we increased net earning assets by 3% due to $446,000,000 of new loan commitments comprised primarily of multifamily and industrial portfolio loans across The U. S.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

With an LTV of approximately 60% and a weighted average spread of SOFR plus three twenty five. In the new year, our investment team has built a substantial investment pipeline that will fuel new origination activity in 2025. We currently have in excess of $300,000,000 of live investment opportunities that we are in various stages of pursuit and diligence, we look forward to updating you on progress in subsequent quarters. With our shift to a more active new investment posture, we have not taken our eye off strategy that created our comparative advantage, thoughtful, assertive, value oriented risk and asset management. Our latest example is a recently completed accretive amendment to a loan secured by a Class A office building in New York City.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

Bob will share more granular details, but I will highlight three key facts that speak to our risk management approach. Over the past three years, the loan commitment amount has been reduced from $200,000,000 down to $130,000,000 Our recent amendment attracted an infusion of $60,000,000 of new institutional equity capital and the newly amended lower LTV loan is expected to generate an improved return on equity for our shareholders as compared to the pre amendment loan. Most importantly, this deal is illustrative of the expertise of TPG's asset management team when buttressed by our broader TPG real estate investing platform. This combined experience allows us to confidently navigate through complex transactions to maximize shareholder value. In summary, we intend to continue in 2025 to pull on our levers of accretive growth, all of which are immediately actionable to drive earnings and shareholder value.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

At our current share price, TRTX generates an 11% dividend yield, a compelling return in the context of several comparatively favorable fundamental metrics, including number one, liquidity as a percentage of total assets number two, low leverage and number three, a 100% performing loan portfolio at year end. From a risk and liquidity perspective, we are fortunate to be able to remain both committed to our share repurchase plan and make new investments at the same time. We will continue to optimize capital allocation to the benefit of our shareholders. When you combine these factors with a 0.24 per quarter dividend, which is supported by our current run rate with upside potential embedded in our deployable cash, untapped financing capacity, the near term prospect of capital recycled from our REO portfolio and the sourcing and investing of TPG's integrated real estate debt and equity investment platform, we believe today's share price offers an attractive value proposition. With that, I will turn it over to Bob to provide a detailed summary of our financial results.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Thank you, Doug. Good morning, everyone, and thanks for joining us. Our strong operating results for the full year 2024 and its fourth quarter reflect the success of our strategy and provide a springboard for increasing loan investment activity in 2025 and beyond. In the fourth quarter, we increased net earning assets for the second consecutive quarter due to $242,000,000 of new loan commitments. With a strong liquidity of $320,800,000 leverage of only 2.14 to one, a CECL reserve of 187 basis points that has continued to decline in response to the solid credit performance of our loan book and stabilizing real estate market conditions, a weighted average risk rating of three point zero that hasn't wavered in four quarters, distributable earnings for the year that fully covered our $0.96 annual dividend throughout 2024 and distributable earnings before realized losses that covered our annual dividend by 1.1x, TRTX continues its march to increase earnings and shareholder value.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

TRTX's share price performance is the strongest among its peers since January 2023 with a cumulative return of 61% through last Friday. The levers that Doug detailed further support the compelling value TRTX offers at today's share price. Our operating results for the year and the quarter are amply reported in our earnings release, earnings supplemental and Form 10 ks, all of which were filed with the SEC after yesterday's market close and are available on the TRTX website. 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.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Our weighted average risk rating is three point zero, consistent with the prior four quarters. For the year, we originated eight loans totaling $562,300,000 of commitments. For the fourth quarter, we originated two loans totaling $242,000,000 of commitments. We funded $4,700,000 of deferred fundings on existing loans and we collected full and partial loan repayments of 110,200,000 Earlier this month, we amended an existing office loan as part of the sale by the original institutional equity investor of its interest in the property to another sizable, highly experienced global institutional real estate investor. The new investor injected $60,000,000 of fresh equity capital into the joint venture.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

As part of the amendment, we received a $20,000,000 principal repayment that reduced our loan amount to $130,500,000 dollars Improve the seniority of our credit position because the recapitalization terminated a former ground lease on a portion of the building site, thus facilitating consolidation into a single fee interest, the lease land beneath one of the connected buildings. We enhanced property cash flow because our borrower leased the remaining 13% of the building's net rentable square footage to an existing tenant through early two thousand and thirty two. Consequently, our loan now has an in place debt yield of 11.7%, a stabilized debt yield of 14.4%, lease to occupancy of 100% and a weighted average remaining lease term greater than eight years. We extended our loan for three years through February 2028. We preserved our advantageous financing of this investment and consequently boosted our asset level leveraged return on equity.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Combined with previous principal repayments totaling $40,000,000 our asset management team has over time engineered a $70,000,000 reduction in our loan commitment amount and improved our credit position in an already strong New York City office property. Regarding REO, we own eight REO properties with an aggregate carrying value of $275,800,000, comprising 7.4% of our total assets. The four multifamily properties represent 56.5% of our REO holdings and four office properties represent the remainder. The integrated TPG real estate platform continues to apply its experience, intellectual capital, platforms and network resources to improve operating performance of our REO, determine the best strategy to optimize shareholder returns and execute each business plan efficiently and quickly. As previewed last quarter, we foreclosed during the fourth quarter on two multifamily loans, one in San Antonio and the other in Chicago.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

We immediately seized operational control and are now stabilizing and reenergizing these properties to ripen them for sale. Both of our California office properties are currently in the market for sale. Only one of our REO properties is encumbered by mortgage debt. We expect REO sales will over time generate capital for reinvestment, and we have a track record of selling REO properties at or in excess of our carrying values. Our net equity in REO totals approximately $250,000,000 Assuming a 9.5% net ROE on loan investments, every $100,000,000 of recycled REO equity equals $0.03 per share of distributable earnings per quarter.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Refer to footnote four of our financial statements for a snapshot of our REO portfolio. As usual, we've been quick to take advantage of improving capital market conditions. Our cost of liabilities for new loan investments continues to decline and we expect to capture further savings in 2025. Our share of non mark to market non recourse term financing held steady at 77% at year end, confirming our long standing emphasis on non mark to market term funding of our investment portfolio. Our total leverage was virtually unchanged quarter over quarter at 2.14:one.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Paired with $4,000,000,000 of financing capacity, our liability structure will drive continued growth in earning assets as market dynamics continue to improve. Last week, we closed on a three year extension and $85,000,000 upsize to $375,000,000 of an existing non mark to market secured borrowing arrangement. All six of our current syndicate members renewed and upsized their commitments, plus we added a seventh lender. Improving terms and conditions in the CRE CLO and note on note markets make this an opportune time for TRTX to refinance certain existing liabilities at a higher advance rate and lower cost of funds. We were in compliance with all financial covenants at 12/31/2024.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Regarding liquidity, we have substantial immediate and near term liquidity to support accelerating loan investment activity. At year end, liquidity of $320,800,000 included $190,200,000 of cash in excess of our covenant requirements, plus an additional $128,100,000 of undrawn capacity under our secured credit agreements. We also have $33,400,000 of unencumbered loan assets plus several unlevered REO properties. During the quarter, we funded $4,700,000 of commitments under existing loans. At quarter end, our deferred funding obligations under existing loan commitments totaled only $127,900,000 a mere 3.7% of our total loan commitments.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

We expect another strong year in 2025. We set the table last year and for the past few quarters have focused on executing our growth strategy. Our advantages include accelerating momentum due to two consecutive quarters of net growth and earning assets. We outrank our primary public peers in a variety of key financial measures. We have a 100% performing loan portfolio and highly predictive CECL reserve that has steadily declined in dollar amount and basis points.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

We have stable loan risk ratings. We have a low share of REO and non accrual loans. In fact, we've had no non accrual loans for five consecutive quarters. Our run rate distributable earnings that covers our $0.24 per quarter dividend with upside potential due to deployable cash, untapped financing capacity, the near term prospect of capital recycled from our REO portfolio and the sourcing and investment strength of TPG's integrated real estate credit and equity platform. Our ample liquidity and financing capacity means our new loan investment activity is not reliant on loan repayments.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

We expect our dividend yield will decline as the market fully recognizes our prior performance, solid credit quality, accelerating growth in earning assets and the results generated by the growth levers discussed this morning. And with that, we'll open the floor to questions. Operator?

Operator

Thank you. We will now be conducting a question and answer session. And our first question comes from Tom Catherwood with BTIG. Please proceed with your question.

Thomas Catherwood
MD & REITs Equity Research at BTIG

Thanks and good morning everybody. Maybe Bob starting with you on the two multifamily loans that you took in foreclosure, those were for risk rated last quarter. Can you talk us through kind of what the change was over the course of the quarter that took those from the for risk rating all the way to foreclosure? And then how much needs to be done to bring those properties to stabilization?

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Sure. Good morning, Tom. Thanks for the question. As we discussed in the third quarter call and pretty heavily previewed, these were two loans where we've been pretty engaged with the borrower. And on the third quarter call, everyone I think will recall that we said these things might be modified and resolved or we might enforce our remedies.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

In both situations, we did choose to enforce our remedies in the fourth quarter. That's consistent with our overarching REO philosophy, which is the max value for our shareholders. And after reaching a point with both borrowers where it became clear to us that either borrower was going to meet the terms that we've set forth for modification was consistent with our principles, which are meaningful reduction in principle, outstanding replenishment of interest reserves and so on, we went immediately towards the enforcement path and took back all three properties in two in November and one in December. In terms of the path forward from here, the two properties in San Antonio, well, with respect to all the properties, we immediately put our slot transition and property management teams in place. We've used them on other properties that we've taken back in the past.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

In San Antonio, we're working to stabilize and rebuild occupancy and we expect to do some work on the properties to achieve that. Property in Chicago is well leased. It's in excess of 90% leased and we would expect that we would move reasonably quickly to sell that.

Thomas Catherwood
MD & REITs Equity Research at BTIG

Okay. Appreciate that, Bob. And then following up on another item you discussed, you talked about tapping your financing capacity as you continue to ramp originations. How do you expect leverage to scale through the year? And could we see you out in the market looking to do a new CLO as well?

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Good question. First, with respect to overall scaling of financing, I would say that as we continue to invest, which we've been doing on a macro basis the past couple of quarters, we've got substantial liquidity already in place on the balance sheet. We have significant cash as you can see by expecting our balance sheet. I would expect that we would and are in the process actually of deploying that first, then we'll back lever. We have ample capacity to do that with existing credit facilities.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

I mentioned the table funding facility that we renewed for three years upsized. We're a very active borrower in the note on note market, which is I mentioned in my prepared remarks, continues to become more liquid and cheaper from the standpoint of borrowers like TRTX. And last, with respect to the CRE CLO market, that market has become increasingly active over the last couple of, call it, 2.5 to three quarters. TRTX has been a leader in the CRE CLO market since it revived in early twenty eighteen. And so I wouldn't be surprised, although I'm not committing here and now that we would be a participant again as a new issuer in that market at some point in 2025.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Actually one last thing and I didn't fully answer your question. So our current leverage is 2.14 to one. We have historically operated the business in the sort of three to 3.3 times leverage, as we continue to increase the pace of our deployment, I think you'll see that debt to equity ratio march up steadily.

Thomas Catherwood
MD & REITs Equity Research at BTIG

Got it. Thank you, Bob. And last one for me, Doug, in your prepared remarks, you noted the steeper yield curve as a forcing mechanism. Is that do you think of that as kind of forcing borrowers to sell assets if they can't find relief? Is it forcing borrowers into shorter term floating rate paper or is it forcing something else in the CRE market?

Thomas Catherwood
MD & REITs Equity Research at BTIG

How do you kind of think of that statement that you made?

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

Yes. I mean, it's a little bit of all the above. I would say that when we think about the interest rate market, look, I think first with the move in forward, so for let's just say kind of generally anchoring around 4%, that does put pressure on existing transactions that are out in the market where there might be a need for a newly capitalized debt financing and we are looking at those types of transactions or we can be opportunistic. But I would say again that with SOFR being elevated, the forcing mechanism is just that some borrowers may look to kind of fix their broken capital structures and that's one. And then I would say two, as it relates to interest rates as well, clearly on the fixed rate takeout side as the ten year treasury has kind of hovering around 4.5%.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

I think that's also putting a little bit of pressure on the timing for certain kind of term out financings within perhaps the conduit or agency market. So I think all of that again will help drive opportunity set. And I think all of that is founded in the fact that the interest rate market is also shifted so far from a pipeline perspective in that the second half of twenty twenty four is really characterized by elevated interest rate volatility. And that there was a lot of uncertainty in terms of the path of SOFR, kind of where perhaps the ten year would settle. For what it's worth, as we've turned the calendar into January and February, we have begun to see a reduction in interest rate volatility, which generally means that should be met with an increase in real estate activity.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

I think that when real estate owners have a little bit more clarity in terms of the path of rates, they tend to deploy capital with, I would say, a bit higher pace. So I think those are kind of some of the big macro trends that are affecting our business. And again, all signs point to a very active 2025 investment pipeline.

Thomas Catherwood
MD & REITs Equity Research at BTIG

Got it. Appreciate all the thoughts. Thanks, everyone.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

Thank you.

Operator

Thank you. And our next question comes from Stephen Laws with Raymond James. Please proceed with your question.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Hi, good morning. Two questions, I guess. Good morning, Doug. Can you give us an update on your life sciences exposure? I know things in that property type really seem to be asset by asset.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

So we'd love to get a little bit of color on your exposures there and how those loans are performing?

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

Absolutely. So we began the quarter with four life sciences deals on our books. We actually had one of the four pay off. And so we're actually now down to three life sciences transactions. When you think about our current exposure, I think that one of the things that are kind of really important to highlight is that, first of all, none of our assets are in shell condition and that they're all built out and it's really just kind of a function of identifying tenants for those spaces.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

Secondly, from a borrower perspective, we've really kind of centered on the highest quality borrowers, experienced borrowers in the market and those that we think are going to have a particular edge in terms of that lease up. And then I'd say, lastly, if you zoom out for a moment and kind of think about TPG's expertise within life sciences, it really is kind of first class, both in terms of having real estate equity and debt exposure within life sciences and then also just the broader TPG healthcare investing platform, which can provide some insights into some of the trends around the demand for life sciences space. And I'd say, lastly, Stephen, as we have some insights in terms of our real estate equity business, we actually have seen a slight uptick in terms of leasing and touring activity over the last ninety to one hundred and twenty days. So while we fully acknowledge, I'd say business plans are going certainly slower than they were one to two years ago. We've been investing in this asset class for many years and we are starting to see a little bit of pickup in terms of activity.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Great. Appreciate those comments, Doug. Bob, a couple of questions related to REO. I think REO revenue is flat. I think that makes sense given your comments.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Expenses, I believe I read in the K, were up $1,200,000 related to the new assets. Can you talk about how you expect those line items to move forward? I think the Chicago, you mentioned 90% leased, but probably came in late in the quarter. So maybe add some real estate income there, but then expenses, we need a full quarter impact from the partial impact from Q4. Is that fair?

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Are there other factors I'm not considering?

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Thanks for your question, Steven. I think there's a sort of macro and then some property specific answers. I would say, generally speaking, most of our current REO properties are cash flow positive. The increase in real estate owned expenses that you cite was a one timer and related entirely to the San Antonio property that we converted in early November. And with respect to Chicago and other multifamily properties in particular that we own, own.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

The two Chicago properties that we own are both 90 plus percent leased. They're very cash flow positive. Expenses are stable. So we would expect those to move toward sale reasonably quickly. And I would add, although you didn't ask, we don't really envision much in the way of capital expenditure across the portfolio as a whole.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Great. And I'll ask the difficult question is how do you define reasonably quickly? I think you mentioned in your prepared remarks, I think the two California assets maybe being marketed for sale. You mentioned Chicago is leased up, so something that could move quickly. When you think about the eight properties in the REO bucket, is there a way to estimate how many may move in the first half or in 2025 or other side of it, how many are kind of longer term execution pass?

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Sure. Well, let me I won't answer very specifically, but let me revisit again. Our job one with respect to REO is to maximize shareholder value. And for us that means constantly evaluating the buy versus hold decision and then executing accordingly. Second quarter.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

We have offers on one and we expect offers on the other in early March. We then have a second tranche of properties that we have seasoned, and we would expect to bring those to market shortly thereafter. I would say in general terms, by the end of twenty twenty five, I would expect that our existing REO portfolio would be reduced by about half, just to give you a general sense of timing.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

That's great color. Thanks, Bob. Appreciate the comments this morning.

Operator

Thank you. Now our next question comes from Steve Delaney with JMP Securities. Please proceed with your question.

Steven Delaney
Analyst at Citizens JMP Securities, LLC

Thanks. Good morning, everyone, and congrats on a strong close to what was certainly a challenging year for the broad CRE market. From your comments, it sounds like you have a far more constructive view of 2025. I'm hearing that's not only from your own internal and view of the economy, but also a lot of feedback from real estate equity investors in the marketplace. So cutting right to the portfolio, which was $3,400,000,000 it certainly sounds like you have the opportunity to grow and you have the relatively low leverage of 2.1 times.

Steven Delaney
Analyst at Citizens JMP Securities, LLC

Is it realistic to think and I'll just go straight to some specific numbers and you can talk me off the mountain, but just year end 2025, if we model a portfolio of somewhere between $4,500,000,000 and $5,000,000,000 even, How realistic in your mind would that level of portfolio growth be for 2025? Thank you.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Morning, Steve, and thanks for your question. As you know and as everybody on the call knows, we've never been in the practice of providing guidance. Having said that, let me offer a little illumination on how we're thinking about the year. Doug was very clear that we think the year has set up very nicely for increased investment activity. He's described the factors driving that.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

From our standpoint, we've got significant liquidity on the balance sheet today that's available to us for new investment, frankly, without leverage, without recycling REO capital, without anything else. So in rough terms, if we were to deploy, say, $200,000,000 of that at three or four to one, that's $800,000,000 to $1,000,000,000 of new loan investment activity off the bat. In our peak years, the company has typically done around $2,000,000,000 a little more than $2,000,000,000 of investment activity. On the repayment side, Doug made clear in his remarks that higher rates and this more steeply sloped yield curve, excuse me, would suggest that on balance, existing loans are probably more likely to lengthen a little bit than prepay. Obviously, every loan is a little bit different.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

But we've had strong steady repayments throughout the year, including the life science deal that Doug mentioned earlier. So I would expect that new investment activity would comfortably outpace loan repayment activity for the year. And so we would expect pretty significant growth in net earning assets, but I'm not in a position nor are we in the practice of providing a specific number.

Steven Delaney
Analyst at Citizens JMP Securities, LLC

No, understood. That's very helpful color and we'll Chris and I'll work that out. But I've heard more positive than negative in terms of the opportunity that you're facing to invest capital in 2025 vis a vis the past year. Just curious a little bit, my little quick follow-up, you covered so much in these first few questions. The two new loans of $242,000,000 I mean, on the surface it looks a bit chunky, but then again, it's pretty clear you guys are not in the small balance CRE lending market, which we would normally put it at $25,000,000 or $50,000,000 And is that just reflecting sort of TPG from an institutional standpoint, your borrower mix, would you consider yourself more upper middle market?

Steven Delaney
Analyst at Citizens JMP Securities, LLC

I don't know really how CRE lenders other than the small balance segment, which is so obvious, how you really kind of peg yourself in between the very mega borrowers and the small borrowers. But it seems like to me what you're saying, a loan of $100,000,000 to $150,000,000 on an individual loan to one borrower. I'm hearing that that's not any kind of a heavy lift for TRTX. Is that a fair statement?

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

Yes. And happy to kind of speak to sort of how we think about loan sizing. I would first highlight that the two loans that we did in Q4, both of those do have some inherent diversity within the loans and that they are portfolio. So as we do kind of lean perhaps above the $100,000,000 size, we will also orient ourselves towards portfolio where we get the benefit of diversity and that's statement one. I would say secondly, these deals as well, we also are very focused on repeat borrowers.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

So we're seeing a lot of that both in the deals that we closed in the second half of twenty twenty four and a lot of what we're seeing in our pipeline is repeat borrower heavy. When you think about sort of average loan size to kind of go back to the data, we've again in approximate terms, average typically loan size is closer to kind of the $75,000,000 range. So I think that, Stephen, while we're somewhat uniquely positioned is that we do have range. I mean, we can go down to $25,000,000 to $50,000,000 if we do see opportunities there, which we have done over the past year. But also if we do see a deal that's $150,000,000 or more, we can pursue that as well.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

So to put a fine point on it, I would say that we're really trafficking really across both the middle market and upper middle market. And I think as we look at more and more institutional borrowers and institutional real estate is where we tend to sometimes have some somewhat larger loan sizes.

Steven Delaney
Analyst at Citizens JMP Securities, LLC

That's helpful. Nice kind of nice wide bandwidth there for you. So thank you both for your comments.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

Thank you. Appreciate

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

it.

Operator

Thank you. And our next question comes from Don FanDetti with Wells Fargo. Please proceed with your question.

Donald Fandetti
Donald Fandetti
Managing Director at Wells Fargo

Bob, can you talk a little bit about the moving pieces in the allowance? Looks like there was around $4,600,000 of provision and then were reserve sufficient to cover the conversion to the loan to REO this quarter?

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Good morning, Don. Thanks for the question. So, I'll speak in numbers rounded to the nearest million. At the end of last quarter, our CECL reserve was about $69,000,000 As previewed, we converted the two loans we've been discussing into REO. That occasioned a relief of the CECL reserve of $10,000,000 which was within about $250,000 to $300,000 of the reserve that we had previously been carrying with respect to those two loans.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

So the answer to your question is yes, it was fully reserved for. And those results are actually consistent with our historical CECL results where our realized losses have been around 3% within 3% of what our CECL reserves were at the end of the quarter preceding the period in which the realized loss was taken. And then there was about $5,000,000 of expense, as you said, during the quarter, which was really driven by the macro factor impact on our general reserve. We have no specific reserves and we had no specific reserves for a while. It's all general.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

And so inflation, steeper yield curve, higher rates, a lot of these factors as they course through the loss given default model that we and many of our competitors use to develop our CECL reserve, that's what gave rise to that approximately $5,000,000 boost. So $69,000,000 minus $10,000,000 gets you to $59,000,000 plus $5,000,000 gets you to 64 That's 187 basis points, which is actually 15, almost 20 basis points lower than the preceding quarter end and just reinforces the steady decline in that reserve rate expressed in basis points that we've engineered over the last number of quarters.

Donald Fandetti
Donald Fandetti
Managing Director at Wells Fargo

So do you think what's your sense on provision going forward because you could argue that there are some improving areas of commercial real estate. And I guess what's your thought process in terms of like move three is to four rated? Do you feel like you're pretty stable there? And just kind of generally thinking about provision expense going forward?

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Let me just aggregate your question into two parts. The first is sort of where do we see see sold reserve going on a forward looking basis. I would expect given where we are in the cycle and the 100% performing nature of our current book that the CECL rate expressed in basis points would not increase. And theoretically over time that rate should converge with sort of the long term loss rate for us as a company or our peers as a company. As you know, CECL has been in effect for only five years.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

So all of us are still building our own sample center universe of actual loans and losses. And in the interim, we're using these large data sets that we contract with other companies to get. So I would expect that the rate would kind of be flat or decline, but it's probably not going to go up. In dollar terms, as we continue to grow our book, which we have been doing, we expect and you should expect that the dollar amount of the CECL reserve will increase because it has to given how the CECL pronouncement is applied. Every loan is going to attract some amount of general reserve as soon as it's booked.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

So I hope that answers that question. The second part of the question was, I think really about migration. We have only two four rated loans that's less than or it's about 3% of our current loan book. Otherwise, our risk rating average has been three point zero for a number of quarters. So we don't anticipate much migration.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Historically, most of the four rated loans that we've had have either re performed and become 3s or they've been resolved through payoffs. Obviously, some have migrated in the other direction, but that's not the majority, it's the minority.

Donald Fandetti
Donald Fandetti
Managing Director at Wells Fargo

Okay. Thanks for all the details.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

You bet.

Operator

Thank you. And our final question comes from Rick Shane with JPMorgan. Please proceed with your question.

Richard Shane
Richard Shane
Analyst at JP Morgan

Hey guys, thanks for taking my questions this morning. I've got a few actually and a lot's been sort of covered. Just curious, last quarter you were very, very clear about the potential path of the fours the two of the fours becoming REO. You've got two remaining fours. Are you going is your intent to be as aggressive potentially in terms of REO solutions or do you see different paths on those?

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Good morning, Rick, and thanks for your question. Before commenting specifically on those two loans, allow me to restate again, our view about loan asset management and REO management as well as our job is to max shareholder value. So we're going to make the decision in based on the facts and circumstances of each loan as they develop and as the situation presents itself. So we've got two four rated loans currently. I don't think it's really a matter of us being more or less aggressive.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

We've been very clear to the investor market and we're very clear to the borrower market that we'll be commercially reasonable on loan modifications and extensions. But commercially reasonable to us means that a borrower is going to reduce its loan principal, it's going to replenish an interest reserve, it's going to buy the interest cap that it's obligated to buy under the loan agreement and so on. And if people do that, then we'll be commercial. And if they won't, our view is that shareholder value is best delivered by us owning it and doing whatever needs to be done and then monetizing the property at the right time. With respect to the two properties, I think one is an office property in Honolulu and the borrower looks like they're going to sell that property and repay us.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

And the other is a mixed use property in Southern California. We continue to engage in discussions with the borrower about a potential modification that if it occurred would need to conform with the framework that I just described.

Richard Shane
Richard Shane
Analyst at JP Morgan

Got it. Okay. Thank you. Second question, you guys have been recently renewed your facility. So you were as close to that market as anybody.

Richard Shane
Richard Shane
Analyst at JP Morgan

You're also, as you pointed out, very experienced CLO issuers. We've seen the market reopen. There have been over $5,000,000,000 issued year to date. When you look at the terms that you just received on your renewed facility and you look at what is happening in the CLO market, can you compare give us some context in terms of available leverage, spreads? What are the puts and takes versus the two markets right now?

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Sure. Well, look, we're fortunate that we're part of TPG, so we have constant feelers out into the capital markets and here within the real estate credit platform and TRTX in particular, we're active users of the capital markets. With respect to the bank facility that you referenced, that market is pretty well developed and I would say recovering. I'm going to distinguish the market we just tapped from the repo market. The repo market we're moderately active in.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

We don't use a lot of repo. It's typically 20% to 25% of our borrowings max. But in the syndicated bank loan market, it's pretty active, it's receptive to companies like ours that have strong credit profiles and a good track record. I would say specifically on that deal, we found strong receptivity to our pricing, to the structure. We're able to move things on and off of that facility.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

We don't really have restrictions on what we can put on it, which is really, really valuable to us as we optimize the liability structure of the company. We have seen over the last couple of years, very strong investor interest in the note on note market and you've seen in our you heard in our previous discussions and seen in our filings that we've been really active in that market. Advance rates have held steady strong in the mid to high, I call 75% to 80% range and spreads have come in. Finally, with respect to the CRE CLO market, we have seen a lot of new issuance and the industry observers expect that to remain strong for the remainder of the year. We've seen improved structure, in particular, longer reinvestment periods for managed transactions And we've seen spreads come in steadily.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

And we've also seen investor demand for transactions that have property types other than multifamily only, and that includes seasoned collateral as well as newly originated collateral. So we see that as really interesting market where we have a strong brand and reputation. And so we monitor all these markets and we try to optimize. That's our job on behalf of shareholders.

Richard Shane
Richard Shane
Analyst at JP Morgan

Got it. And then if I could one last question and this goes back to a discussion that actually the two of us had almost five years ago to the day. You talked about loan growth and implementation or initial CECL reserves. Five years ago, the industry was somewhat encumbered by the fact that you were using data where there was for the past decade very little default inventory. Now we're entering a period where there's a high degree of defaulted inventory.

Richard Shane
Richard Shane
Analyst at JP Morgan

I'm curious when you think about the models, how they adjust for that sort of recency bias? Will we see initial CECL general reserve rates be higher because of this? And how do you sort of manage that sort of barbell timeframe?

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

Sure. Good question. I do remember that conversation. And you're right, but these data sets are different today than they were in early twenty twenty because we've been through a fairly pronounced commercial real estate correction where values have declined in some instances materially. But all of that lost data is timely and accurately captured by the various providers and compilers of the data.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

And look, the idea in these models and frankly in management's judgment of how to apply them is to, if necessary, adjust for what you term recency bias. But clearly, loss rates for the couple of years leading into 2020 were quite low. But if you had looked at those loss rates extending back to 1998, which is when the data set actually begins, they had been through a couple of cycles as well. And now we have, I hate to say this, but the benefit of the last five years, at least in terms of lost data. And so that will inform how we and others apply those loss rates to their CECL estimates each quarter.

Robert Foley
Robert Foley
Chief Financial Officer at TPG RE Finance Trust

But I feel confident of our ability to do that. But I do believe that again, these are forward looking. The pronouncement is focused on forward. It's a current estimate of expected losses in the future. And so it needs to take into account not only past loss experience, but also the macroeconomic data rates, GDP growth, LTV, basis per square foot, the consumer property price index and a lot of other factors that are prospective, not historical.

Richard Shane
Richard Shane
Analyst at JP Morgan

Got it. Okay. Thank you very much. It's going to be interesting to see how that develops over time, particularly as the industry resumes starting to grow loans again. Thanks guys.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

Thanks Rick.

Operator

Thank you. And with that, there are no further questions at this time. I would like to turn the floor back to management for closing remarks.

Doug Bouquard
Doug Bouquard
CEO at TPG RE Finance Trust

Yes. Just wanted to thank everyone for joining us this morning on our call and we look forward to updating all of you on the continued progress here at TRTX. Have a great day. Thank you very much.

Operator

Thank you. And that does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.

Executives
    • Doug Bouquard
      Doug Bouquard
      CEO
    • Robert Foley
      Robert Foley
      Chief Financial Officer
Analysts
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Earnings Conference Call
TPG RE Finance Trust Q4 2024
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