TPG RE Finance Trust(TRTX) - 2020 Q1 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements The financial statements for the quarter ended March 31, 2020, reflect a significant net loss of $232.8 million, a stark contrast to the $28.4 million net income in the prior-year period, primarily driven by $203.5 million in securities impairments and a $63.3 million credit loss expense largely due to the economic impact of the COVID-19 pandemic, resulting in a slight decrease in total assets to $5.83 billion, an increase in total liabilities to $4.59 billion, and a reduction in stockholders' equity from $1.50 billion to $1.23 billion, following the adoption of the new CECL accounting standard which increased the allowance for credit losses by $19.6 million at the period's start Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Unaudited) | Metric | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash and Cash Equivalents | $103,622 | $79,182 | | Loans Held for Investment, net | $5,020,695 | $4,980,389 | | Allowance for Credit Losses | ($75,658) | — | | Investment in AFS CRE Debt Securities, net | $604,801 | $787,552 | | Total Assets | $5,826,301 | $5,892,870 | | Liabilities & Equity | | | | Total Liabilities | $4,594,888 | $4,388,916 | | Total Stockholders' Equity | $1,231,413 | $1,503,954 | - Total Stockholders' Equity decreased significantly from $1.50 billion at year-end 2019 to $1.23 billion at the end of Q1 2020, primarily due to a large accumulated deficit resulting from net losses during the quarter[15] Consolidated Statements of Income and Comprehensive Income Consolidated Income Statement Highlights (Unaudited) | Metric | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :--- | :--- | :--- | | Net Interest Income | $43,292 | $37,234 | | Securities Impairments | ($203,493) | — | | Credit Loss Expense | ($63,348) | — | | Net Income (Loss) | ($232,790) | $28,412 | | Diluted Earnings (Loss) per Common Share | ($3.05) | $0.42 | - The company reported a substantial net loss of $232.8 million, or ($3.05) per share, for Q1 2020, driven by significant securities impairments and credit loss expenses, which were absent in the same period of 2019[18] Consolidated Statements of Changes in Equity - Total equity decreased from $1.504 billion at the start of 2020 to $1.231 billion at March 31, 2020. The decline was primarily driven by a net loss of $232.8 million and the adoption of ASU 2016-13 (CECL), which had a negative impact of $19.6 million on the accumulated deficit[20] Consolidated Statements of Cash Flows Cash Flow Summary (Unaudited) | Cash Flow Activity | Three Months Ended March 31, 2020 (in thousands) | Three Months Ended March 31, 2019 (in thousands) | | :--- | :--- | :--- | | Net Cash Provided by Operating Activities | $37,526 | $26,033 | | Net Cash Used in Investing Activities | ($183,132) | ($590,071) | | Net Cash Provided by Financing Activities | $170,472 | $579,149 | | Net Change in Cash | $24,866 | $15,111 | Notes to the Consolidated Financial Statements - The company's business is primarily originating and acquiring commercial real estate first mortgage loans and CRE debt securities. It operates as a REIT[24][25] - The COVID-19 pandemic has adversely impacted global commercial activity and financial markets, creating significant uncertainty for the company's financial condition and results of operations[27][28][29] - On January 1, 2020, the company adopted the CECL accounting standard (ASU 2016-13), resulting in a cumulative-effect adjustment that increased the allowance for credit losses by $17.8 million and the liability for unfunded commitments by $1.9 million, with a corresponding $19.6 million reduction to retained earnings (accumulated deficit)[88][90] - Subsequent to quarter-end, from April 1 to April 29, 2020, the company sold 39 CRE debt securities for gross proceeds of $614.8 million, recording aggregate losses of $167.3 million, which equaled the impairment charge taken at March 31[210][343] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights the severe impact of the COVID-19 pandemic, which led to a GAAP Net Loss of $232.8 million, or ($3.05) per share, for Q1 2020, primarily due to $203.5 million in securities impairments from the sale and write-down of its CRE debt securities portfolio and a $63.3 million credit loss expense under the newly adopted CECL standard, causing significant liquidity pressure from margin calls that prompted the sale of its entire CRE debt securities portfolio, raising substantial doubt about the company's ability to continue as a going concern, though management believes its plans to extend debt maturities are probable of alleviating this doubt, as book value per share dropped to $16.06 from $19.78 at year-end 2019 Overview and COVID-19 Impact - The company focuses on originating and managing commercial mortgage loans and other CRE-related investments, primarily floating-rate first mortgage loans secured by properties undergoing transition[218] - The COVID-19 pandemic caused significant disruptions, volatility, and widening credit spreads in the real estate securities markets, negatively impacting the company's CRE debt securities portfolio and leading to a reduction in new investment activity[222] Going Concern - The company's financial statements were prepared on a going concern basis, but management noted that conditions raise substantial doubt about the company's ability to continue as a going concern[225][227] - Management projects insufficient liquidity to repay maturing debt of $432.2 million and meet obligations over the next year. However, they believe it is probable that they will successfully execute lender extensions to alleviate this doubt[227][228] Key Financial Measures and Indicators Key Performance Indicators | Metric | Q1 2020 | Q4 2019 | | :--- | :--- | :--- | | Diluted EPS | ($3.05) | $0.44 | | Core Earnings per Share | ($2.20) | $0.45 | | Book Value per Share | $16.06 | $19.78 | | Dividends Declared per Share | $0.43 | $0.43 | - The Q1 2020 dividend of $0.43 per share was deferred from its original April payment date to July 14, 2020, with the board to determine if it will be paid in cash or a combination of cash and stock[230] Portfolio Overview Loan Portfolio Statistics as of March 31, 2020 | Metric | Value | | :--- | :--- | | Number of loans | 66 | | Total loan commitments | $5.8 billion | | Unpaid principal balance | $5.1 billion | | Weighted average LTV | 65.7% | | Floating rate loans | 100.0% | - The weighted average risk rating of the loan portfolio increased to 3.1 from 2.9 at year-end 2019, primarily due to downgrading nine hotel loans to a risk rating of '4' because of challenges caused by the COVID-19 pandemic[256] Investment Portfolio Financing Total Indebtedness by Type | Financing Type | March 31, 2020 (in thousands) | December 31, 2019 (in thousands) | | :--- | :--- | :--- | | Secured revolving repurchase agreements - loans | $1,834,531 | $2,314,417 | | CLO financing | $1,824,521 | $1,820,060 | | Secured revolving repurchase agreements - CRE debt | $608,282 | — | | Senior secured and secured credit agreements | $208,280 | $145,637 | | Asset-specific financing | $77,000 | $77,000 | | Total Indebtedness | $4,552,614 | $4,357,114 | - The company's debt-to-equity ratio increased to 3.61x as of March 31, 2020, from 2.84x at December 31, 2019[296] Liquidity and Capital Resources - Total available liquidity decreased significantly to $167.9 million at March 31, 2020, from $359.8 million at December 31, 2019[319] - The company faced significant margin calls on its CRE CLO portfolio, funding $89.8 million in cash during the quarter. Unpaid margin calls of $19.0 million at quarter-end were satisfied in April[322][279] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks include interest rate, credit, and liquidity risk, with interest rate risk managed by match-indexing floating-rate assets and liabilities, as 100% of the loan portfolio is floating rate, creating a net positive exposure to rising rates, while credit risk has increased due to the COVID-19 pandemic, prompting active monitoring of borrower performance, and liquidity risk is significant, highlighted by recent margin calls on secured repurchase agreements which forced asset sales, with the pandemic also heightening prepayment and extension risk as borrowers may delay repayments - The company's business model aims to minimize interest rate risk by match-indexing floating-rate assets and liabilities. As of March 31, 2020, 100% of loans were floating rate, creating a net positive correlation to rising interest rates[357] - Liquidity risk is a principal concern, associated with financing longer-maturity investments with shorter-term borrowings like repurchase agreements. The company is subject to margin call risk, which materialized during the quarter, forcing asset sales to maintain liquidity[363][364] - Credit risk is elevated due to the COVID-19 pandemic's impact on borrowers' ability to operate properties and generate cash flow. The company anticipates an increase in delinquencies and defaults[361][391] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as of March 31, 2020, concluding that these controls and procedures were effective at a reasonable assurance level, with no material changes to the company's internal control over financial reporting during the quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2020[380] - No material changes were made to the internal control over financial reporting during the first quarter of 2020[381] Part II. Other Information Item 1. Legal Proceedings As of March 31, 2020, the company was not involved in any material legal proceedings - The company reports no material legal proceedings as of the end of the reporting period[384] Item 1A. Risk Factors The primary risk factors discussed are centered on the significant negative impact of the COVID-19 pandemic, with key risks including market and economic disruptions leading to asset value declines, margin calls, and forced asset sales at a loss ($203.4 million in aggregate losses from CRE debt securities), as the pandemic is expected to adversely affect borrowers' financial health, increasing delinquencies and defaults, particularly in concentrated sectors like hotels and retail, and the company's liquidity has been strained, impacting its ability to make distributions and potentially causing defaults on financial covenants, which did occur post-quarter end but were subsequently cured and waived - The COVID-19 pandemic has caused significant market disruptions, leading to volatility and illiquidity which negatively impacted the company's CRE debt securities portfolio, resulting in material margin calls and forced sales[386][387] - The company sold its entire CRE debt securities portfolio, recording aggregate losses of $203.4 million, to mitigate the impact of market volatility and meet liquidity needs[387][388] - The pandemic is expected to adversely impact borrowers' financial conditions, leading to an anticipated increase in delinquencies and defaults. The company has received requests for loan modifications from several borrowers[391] - Negative impacts from COVID-19 may cause defaults on financial covenants. The company was not in compliance with its debt-to-equity ratio covenant as of March 31, 2020, but cured the non-compliance on April 2, 2020, and received waivers[401][403] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities during the period - None[405] Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None[406] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including corporate governance documents, an amendment to a financing agreement, and certifications by the CEO and CFO as required by the Sarbanes-Oxley Act