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  Title	Q4 2024 TPG RE Finance Trust Inc Earnings Call
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  Published Date	Feb. 20, 2025, 1:43 a.m.
  Summary	Unlock stock picks and a broker-level newsfeed that powers Wall Street. Upgrade Now Q4 2024 TPG RE Finance Trust Inc Earnings Call Thomson Reuters StreetEvents Thu, Feb 20, 2025, 1:43 AM 38 min read I
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  Content	Unlock stock picks and a broker-level newsfeed that powers Wall Street. Upgrade Now Q4 2024 TPG RE Finance Trust Inc Earnings Call Thomson Reuters StreetEvents Thu, Feb 20, 2025, 1:43 AM 38 min read In This Article: TRTX -0.78% Participants Doug Bouquard; Chief Executive Officer, Director; TPG RE Finance Trust Inc Tom Catherwood; Analyst; BTIG Steven Laws; Analyst; Raymond James Steve Delaney; Analyst; JMP Securities Don Fandetti; Analyst; Wells Fargo Rick Shane; Analyst; JP Morgan Presentation Operator Good morning ladies and gentlemen, thank you for standing by. Welcome to TPG Real Estate Finance Trust, Fourth Quarter and Full Year 2024 Earnings Conference Call. (Operator Instructions) It is now my pleasure to turn the call over to Mansion. Thank you, maybe again. 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 Bouquard, 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 10K and issued a press release and earnings supplemental with the 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. Actual results may differ materially. For a discussion of risks that could affect results, please see the risk factor section of the company's Form 10K. 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 reconciliation, you should refer to the press release and the form 10K. At this time, I'll turn the call over to Doug. Doug Bouquard Thank you. Over the past quarter, strong economic growth and a resilient labor market continued to power the US 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. 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 TRTX. Regardless of causal factors, we intend to continue to provide acquisition and tailored financing to recapitalize broken capital structures and 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. Biometrics 2024 was a successful year for TRTX. 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 CECIL reserves throughout the year. And four, generate distributable earnings after realized losses that fully covered our $0.96 per share common dividend for 2024. 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 2024, we increased net earning assets by 3% due to $446 million of new loan commitments comprised primarily of multi-family and industrial portfolio loans across the US with an LTV of approximately 60% and a weighted average spread of Sour Plus 325. 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 million 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 the 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. 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 million down to $130 million. Our recent amendment attracted an infusion of $60 million 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 leverages of accretive growth, all of which are immediately actionable to drive earnings and shareholder value. 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. Story Continues 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 million of new loan commitments. With a strong liquidity of $320.8 million, leverage of only 2.14 to 1, a Cecil 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 3.0 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 1.1 times, TRTX continues its march to increase earnings and shareholder value. TRTX's share price performance is the strongest among its peers since January 2023, with a cumulative return of 61% through last Friday. The leverage 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 10K, all of which were filed with the SEC after yesterday's market closed and are available on the TRTX website. Regarding our loan portfolio, 100% of our loan portfolio is performing and current. We have only 2 rated 4 rated loans and no 5 rated loans. Our weighted average risk rating is 3.0, consistent with the prior four quarters. For the year we originated 8 loans totaling $562.3 million of commitments. For the fourth quarter, we originated two loans totaling $242 million of commitments. We funded $4.7 million of deferred fundings on existing loans, and we collected full and partial loan repayments of $110.2 million. 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 $160 million of fresh equity capital into the joint venture. As part of the amendment, we received a $20 million dollar principal repayment that reduced our loan amount to $130.5 million. 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 leased land beneath one of the connected buildings. We enhance property cash flow because our borrower leased the remaining 13% of the building's net rentable square footage to an existing tenant through early 2032. Consequently, our loan now has an in-place debt yield of 11.7%, a stabilized debt yield of 14.4%, leased 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 leveraged return on equity. Combined with previous principal repayments totaling $40 million our asset management team has over time engineered a $70 million dollar 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 $275.8 million comprising 7.4% of our total assets. Four multi-family 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 multi-family loans, one in San Antonio and the other in Chicago. We immediately seized operational control and are now stabilizing and re-energizing 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 million. Assuming a 9.5% net ROE on loan investments, every $100 million of recycled REO equity equals $0.03 per share of distributable earnings per quarter. 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 to 1. Paired with $4 billion of financing capacity, our liability structure will drive continued growth and earning assets as market dynamics continue to improve. Last week we closed on a three-year extension and $85 million dollar upsize to $375 million of an existing non-marked 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 node on (noe) 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 December 31, 2024. Regarding liquidity, we have substantial immediate and near term liquidity to support accelerating loan investment activity. At year end, liquidity of $320.8 million included $190.2 million of cash in excess of our covenant requirements, plus an additional $128.1 million of undrawn capacity under our secured credit agreements. We also have $33.4 million of unencumbered loan assets plus several unlevered REO properties. During the quarter, we funded $4.7 million of commitments under existing loans. At quarter end, our deferred funding obligations under existing loan commitments totaled only $127.9 million, a mere 3.7% of our total loan commitments. 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 a highly predictive (CIA) reserve that has steadily declined in dollar amount and basis points. 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. A 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. We expect our dividend yield will decline as the market fully recognizes our prior performance, solid credit quality, accelerating growth and earning assets, and the results generated by the growth levers discussed this morning. And with that we'll open the floor to questions operator. Question and Answer Session Operator Thank you. We'll now be conducting a question-and-answer session. If you'd like to ask a question, please press 1 on your telephone keypad. (Operator Instructions) And our first question comes from Tom Catherwood with BTIG. Please proceed with your question. Tom Catherwood Thanks and good morning everybody. Maybe Bob starting with you on the two multi-family loans that you took in for foreclosure, those were for risk rateded last quarter. Can you talk us through kind of what the change was over the course of the quarter that took those from? The four risk rating, all the way to foreclosure, and then how much needs to be done to bring those properties to stabilization. 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 you, everyone, I think will recall that. We said these things might be modified and resolved, or we might enforce our remedies. 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 is going to meet the terms that we'd set forth that for modification was consistent with our principles which are meaningful reduction in principle, outstanding replenishment of interest reserves, and so on, we went immediately toward 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 SWAT transition and property management teams in place. We've used them on other properties that we've taken back in the past. In San Antonio, we're working to stabilize and rebuild the 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. Tom Catherwood 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 and could we see you out in the market looking to do a new CLO as well? 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 necro 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 inspecting 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. I mentioned the table funding facility that we renewed for three years upsize. We're 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 quarter to 3 quarter. TRTX has been a leader in the CRE CLO market since it revived in early 2018, 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 issue in that market at some point in 2025. Actually, one last thing and and I didn't fully answer your question, so our current leverage is 2.141. We have historically operated the business in the sort of 3 times to 3.3 times leverage, as we continue to increase the pace of our deployment, I think you'll see that that equity ratio March up steadily. Tom Catherwood Got it thank you Bob and the 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 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? How how do you, how do you kind of think of that statement that you made? Doug Bouquard Yeah, I mean it's a little bit of all the above. I would say that you know when we think about the interest rate market. Look, I think first, with the, 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 you know there there might be a need for. A newly capitalized debt financing and we are looking at those types of transactions where we can be opportunistic, but I would say again that with sour 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 10-year treasury has, kind of hovered around 4.5%, 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 opportunities that and I think all 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 2024 is really characterized by elevated interest rate volatility and that there's a lot of uncertainty in terms of the path of sour, kind of where perhaps the, 10 year would settle for what it's worth, as we've turned the calendar in the 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. 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. Tom Catherwood Got it appreciate. All the thoughts thanks everyone. Operator Thank you. Thank you. And our next question comes from Steven Laws with Raymond James. Please proceed with your question. Steven Laws Hi, good morning. Two questions, I guess. 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, so we'd love to get a little bit of color on your exposures there and how those loans are performing. Doug Bouquard 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 they're 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 a kind of a function of identifying tenants for those spaces. 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 think, 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 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 90 days to 120 days. So while we fully acknowledge that I'd say business plans are going certainly slower than they were one year or two years ago, we've been investing in this ethic for many years and we are starting to see a little bit of pick up in terms of activity. Steven Laws Great, appreciate those comments, Doug. Bob, a couple of questions related to REO. Excuse me. I think, REO revenue is flat. I think that makes sense given your comments. Expenses, I believe I read in the (Ky) were up $1.2 million 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% lease but probably came in late in the quarter. So maybe add some some real estate income there but then expenses we need a full quarter impact from the partial impact from Q4. Is that fair or there are other factors I'm not considering? Oh, thanks for your question, Stephen. 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 multi-family properties in particular that we own, the two Chicago properties that we own are both 90+% leased, they're very cash flow positive, expenses are stable, so we would expect those to move, to, sale reasonably quickly, and I would add, although you didn't ask, we don't really envision much in the way of capital expenditure, excuse me. Across the portfolio as a whole. Steven Laws Right. And I'll ask the difficult question is, how do you define it reasonably quickly? I think you mentioned in your prepared remarks, I think the two California assets may be 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. 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 whole decision, and then executing accordingly. We did that and we have two properties in the market right now, and we would expect those to. Resolve themselves in this, at or near the end of the second quarter. 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 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 2025, I would expect that our existing REO portfolio would be reduced by about half. Just to give you a general sense of timing. Steven Laws That's great. 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. Steve Delaney 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 $3.4 billion. It certainly sounds like. You have the opportunity to grow and you have the relatively low leverage of 2.1 times. 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 in 2025. If we model a portfolio of somewhere between $4.5 billion and $5 billion even, how realistic in your mind would that level of portfolio growth be for 2025? Thank you. 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 that the year has set up very nicely for increased investment activity, and he's described the factors driving that. 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 million of that at, 3 or 4 to 1, that's $800 to a billion of new loan investment activity, off the bat. In our peak years, the company's typically done, around $2 billion a little more than $2 billion 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 loans a little bit different. But we've had strong steady repayments throughout the year, including the life science deal that Doug mentioned earlier. So you know 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. Steve Delaney No, understood, that's very helpful call 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, but my little quick follow up, you covered so much in these first few questions of the two new loans of $242 million. 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 in a, [25 or 50], and is that just reflecting sort of TPG from an institutional standpoint, your borrower mix. Would you consider yourself more upper middle market? 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 $100million to $150 million 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 Yeah, 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 portfolios. So as we do kind of lean perhaps, above the $100 million dollar 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, so we're seeing a lot of that both in the deals that we closed in. The second half of 2024 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, we've again in approximate terms, average typically loan size is closer to kind of the $75 million range. So I think that even while we're. Somewhat uniquely positioned is that we do have range. I mean we can go down to, $25million to $50 million 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 million or more, we can pursue that as well so. 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. Steve Delaney That's helpful. Nice kind of nice wide bandwidth there for you. So, thank you for your comment. Doug Bouquard Thank you, appreciate it. Operator Thank you. And our next question comes from Don Fandetti with Wells Fargo. Please proceed with your question. Don Fandetti Bob, can you talk a little bit about the moving pieces in the allowance? Looks like there was around $4.6 million of provision and then were reserved sufficient to cover the conversion to the REO loan REO this quarter. Sure. 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 million. As previewed, we converted the two loans we've been discussing in REO that occasioned, a relief of the CISA reserve of $10 million which was within about. $250 to $300,000 of the reserve that we had previously been carrying with respect to those two loans. 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 million 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've had no specific reserves for a while. It's all general, and so, inflation, steeper yield curve, higher rates, a lot of these factors is a 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 million dollar boost. So 69 minus $10 gets you to $59 plus 5 gets you to 64, that's 187 basis points, which is actually 15, almost 20 basis points lower than the preceding quarter and just reinforces the steady decline in that reserve rate expressed in basis points that we've engineered over the last number of quarters. Don Fandetti 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 you know what is your thought. Yeah, what are you, what's your thought process in terms of like three rated to four rated? Do you feel like you're pretty stable there, and just kind of generally thinking about provision expense going forward? Well, let me disaggregate your question into two parts. The first is where do we see CECL 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 Cecil's been in effect for only five years, 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 can track with other companies to get. So I would expect that, the rate would, 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. So I hope that answers that question. The second part of the question was, I think really about migration. We have only 2 rated and 4 rated loans that's less than, or it's about 3% of our current loan book. Otherwise, our risk rating average has been 3.0 for a number of quarters, so we don't anticipate much migration, historically, most of the four rated loans that we've had have either reperformed and become threes 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. Don Fandetti Okay, thanks for all the details. Operator Thank you. And our final question comes from Rick Shane with JP Morgan. Please proceed with your question. Rick Shane 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 clear about the potential path of the fours, the two of the fours becoming REO. You've got two remaining 4s. Are you going, is your intent to be as aggressive potentially in terms of REO solutions or do you see different paths on those? 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. 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 principle, 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's an office property in Honolulu and the borrower looks like they're going to sell that property and repay us, and the other is a mixed use property in Southern California. We continue to engage in discussions with the borrower about the potential modification that if it occurred would you need to conform with the framework that I just described. Rick Shane Got it. Okay, thank you. Second question, you guys have been, We recently renewed your facility, so you are as close to that market as anybody. You're also, as you pointed out, very experienced CLO issuers. We've seen the market reopen. There's been over $5 billion issued year-to-date. When you look at the terms that you just received on your 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? Sure, well, 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. 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. We don't really have restrictions on what we can put on it, which is 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've heard in our previous discussions and seen in our filings that we've been really active in that market. Advanced 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 issuances 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. And we've also seen investor demand for transactions that have property types other than multi-family only, and that includes season 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. 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 initial Cecil 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. I'm curious when you think about the models, how they adjust for that sort of recency bias. Will we see initial Cecil general reserve rates be higher because of this and how do you sort of manage that sort of barbell time frame? Sure, good question. I do remember that conversation, and you're right that, these data sets are different today than they were in early 2020 because we've been through a fairly, pronounced commercial real estate correction where values have declined in some instances materially, but all of that (lo) data is timely and accurately captured by the various, providers and compilers of the data. And look, the idea in these models and frankly in the 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 loss data. And so that will inform how we and others, apply those loss rates to their Cecil estimates each quarter, 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. Rick Shane 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 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. Doug Bouquard Remarks. Yeah, just wanted to thank everyone for joining us this morning on our call and we look forward to updating all of you on the continue to progress here at TRTX. Have a great day. Thank you very much. Operator Thank you, and that does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time. Goodbye. View Comments Terms and Privacy Policy Your Privacy Choices More Info Recommended Stories
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