TPG RE Finance Trust(TRTX) - 2023 Q3 - Quarterly Report

Cautionary Note Regarding Forward-Looking Statements This section outlines the nature and risks of forward-looking statements, cautioning that actual results may differ Forward-Looking Statements Disclosure This section highlights that the Form 10-Q contains forward-looking statements, which are not historical facts and are subject to significant risks and uncertainties... - Forward-looking statements are identified by words like 'outlook,' 'believe,' 'expect,' 'potential,' and are not guarantees of future performance, subject to unpredictable risks and uncertainties[7] - Key risks include general political, economic, regulatory, and competitive conditions, interest rate volatility, adverse changes in real estate and capital markets, financing difficulties, and global economic trends like inflation and recession[8] - The Company cautions that the listed risks may not be exhaustive and undertakes no obligation to update forward-looking statements, except as required by law[11] Part I. Financial Information This part presents the unaudited consolidated financial statements and management's discussion for the period Item 1. Financial Statements This section presents the unaudited consolidated financial statements of TPG RE Finance Trust, Inc. for the period ended September 30, 2023... Consolidated Balance Sheets This section presents the Company's financial position, including assets, liabilities, and equity at specific dates Consolidated Balance Sheet Metrics | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :------------------ | | Total Assets | $4,457,323 | $5,545,138 | | Total Liabilities | $3,319,868 | $4,223,142 | | Total Stockholders' Equity | $1,137,455 | $1,321,996 | - Total assets decreased by approximately $1.09 billion from December 31, 2022, to September 30, 2023, primarily driven by a reduction in loans held for investment[18] - Total stockholders' equity decreased by approximately $184.5 million, mainly due to an accumulated deficit of $584.3 million as of September 30, 2023, compared to $395.0 million at December 31, 2022[18] Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) This section details the Company's financial performance, including revenues, expenses, and net income (loss) Consolidated Income (Loss) Metrics | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net interest income | $19,549 | $30,425 | $67,431 | $106,954 | | Total other revenue | $7,467 | $1,362 | $17,474 | $2,009 | | Total other expenses | $12,419 | $9,603 | $35,064 | $34,346 | | Credit loss expense, net | $(75,805) | $(136,666) | $(172,658) | $(183,840) | | Net (loss) income | $(61,213) | $(114,607) | $(123,011) | $(96,260) | | Net (loss) income attributable to common stockholders | $(64,636) | $(117,914) | $(133,537) | $(106,286) | | (Loss) earnings per common share, basic | $(0.83) | $(1.52) | $(1.72) | $(1.38) | - Net interest income decreased by $10.876 million (35.7%) for the three months ended September 30, 2023, compared to the same period in 2022, and by $39.523 million (36.9%) for the nine months ended September 30, 2023, primarily due to increased interest expense[22] - Credit loss expense, net, significantly decreased by $60.861 million (44.5%) for the three months ended September 30, 2023, compared to the same period in 2022, contributing to a reduced net loss[22] Consolidated Statements of Changes in Equity This section outlines changes in the Company's equity, reflecting net income, dividends, and other adjustments Consolidated Equity Changes | Metric (in thousands) | January 1, 2023 | September 30, 2023 | | :-------------------- | :-------------- | :----------------- | | Total stockholders' equity | $1,321,996 | $1,137,455 | | Metric (in thousands) | January 1, 2022 | September 30, 2022 | | :-------------------- | :-------------- | :----------------- | | Total stockholders' equity | $1,464,706 | $1,306,394 | - Total stockholders' equity decreased by $184.5 million from January 1, 2023, to September 30, 2023, primarily due to net losses and common stock dividends, partially offset by amortization of stock compensation[24] - Accumulated deficit increased from $(395.0) million at January 1, 2023, to $(584.3) million at September 30, 2023, reflecting the net losses incurred during the period[24] Consolidated Statements of Cash Flows This section summarizes the Company's cash inflows and outflows from operating, investing, and financing activities Consolidated Cash Flow Summary | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $56,903 | $82,540 | | Net cash provided by (used in) investing activities | $982,534 | $(616,841) | | Net cash (used in) provided by financing activities | $(991,407) | $509,840 | | Net change in cash, cash equivalents, and restricted cash | $48,030 | $(24,461) | - Cash flows from investing activities significantly shifted from a net outflow of $616.8 million in 2022 to a net inflow of $982.5 million in 2023, driven by higher principal repayments and loan sales[27] - Cash flows from financing activities changed from a net inflow of $509.8 million in 2022 to a net outflow of $991.4 million in 2023, primarily due to increased payments on collateralized loan obligations and secured financing agreements[27] Notes to the Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements (1) Business and Organization This note describes the Company's business, its structure as a REIT, and primary investment activities - TPG RE Finance Trust, Inc. operates as a REIT for U.S. federal income tax purposes, primarily originating and acquiring diversified commercial real estate credit investments, mainly first mortgage loans and senior participation interests[29][30] (2) Summary of Significant Accounting Policies This note outlines the key accounting principles and methods used in preparing the financial statements - The financial statements are prepared in accordance with GAAP, consolidating the Company's accounts, variable interest entities (VIEs) where it is the primary beneficiary, and wholly-owned subsidiaries[31][33] - The Company uses the Current Expected Credit Loss (CECL) model for its allowance for credit losses on loans held for investment, recognizing periodic changes through net income[40] - Loans are risk-rated on a 5-point scale (1=least risk, 5=greatest risk), with a general initial rating of '3' for new originations[43][44] - The Company has successfully transitioned its loans and liabilities from LIBOR to Term SOFR, applying optional expedients under ASU 2020-04, which did not require contract remeasurement[89] (3) Loans Held for Investment and the Allowance for Credit Losses This note details the Company's loan portfolio, including originations, repayments, and credit loss provisions - During the nine months ended September 30, 2023, the Company originated three mortgage loans totaling $167.4 million, received $803.9 million in loan repayments, and sold three loans for $221.8 million, converting two loans to REO with an unpaid principal balance of $132.1 million[92] Loan Portfolio Statistics | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :------------------ | | Number of loans | 59 | 70 | | Total loan commitment | $4,223,672 | $5,429,146 | | Unpaid principal balance | $3,970,164 | $5,004,798 | | Unfunded loan commitments | $247,568 | $426,061 | | Amortized cost | $3,952,102 | $4,978,674 | | Weighted average credit spread | 3.7 % | 3.4 % | | Weighted average all-in yield | 9.3 % | 8.1 % | | Weighted average term to extended maturity (in years) | 2.6 | 2.8 | Loan Risk Rating Distribution | Risk Rating | September 30, 2023 (Amortized Cost in thousands) | December 31, 2022 (Amortized Cost in thousands) | | :---------- | :--------------------------------------------- | :--------------------------------------------- | | 2 | $178,552 | $511,878 | | 3 | $3,135,811 | $3,231,324 | | 4 | $257,712 | $990,337 | | 5 | $380,027 | $245,135 | | Total | $3,952,102 | $4,978,674 | | Weighted average risk rating | 3.2 | 3.2 | - The allowance for credit losses increased by $22.0 million during the nine months ended September 30, 2023, reaching $236.6 million, primarily due to deterioration in office sector fundamentals and macroeconomic assumptions, partially offset by loan sales and REO conversions[111] - As of September 30, 2023, four first mortgage loans with an amortized cost of $318.1 million were on non-accrual status, compared to two loans with $190.4 million at December 31, 2022[115] (4) Real Estate Owned This note provides information on properties acquired through foreclosure and their operational results - As of September 30, 2023, REO assets included an office property in Houston, TX (acquired April 2023) and a multifamily property in Los Angeles, CA (acquired August 2023), with a total carrying value of $111.96 million[120][121][123][126] - The Company obtained a $31.2 million first mortgage loan secured by the Houston office property in June 2023[125] Real Estate Owned Operations | REO Operations (in thousands) | 3 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2023 | | :---------------------------- | :-------------------------- | :-------------------------- | | Revenue from real estate owned operations | $2,028 | $3,556 | | Expenses from real estate owned operations | $3,098 | $4,946 | | Net loss from REO | $(1,070) | $(1,390) | (5) Variable Interest Entities and Collateralized Loan Obligations This note explains the Company's involvement with VIEs and its collateralized loan obligation structures - The Company consolidates its CRE CLO Issuers as VIEs, recognizing them as primary beneficiaries due to control over significant activities and the obligation to absorb losses/receive benefits[143] VIE and CLO Metrics | Metric (in thousands) | September 30, 2023 | December 31, 2022 | | :-------------------- | :----------------- | :------------------ | | Total assets (VIEs) | $2,647,925 | $3,267,374 | | Total liabilities (VIEs) | $1,983,701 | $2,467,254 | | Collateralized loan obligations, net | $1,973,911 | $2,452,212 | - As of September 30, 2023, the Company had three consolidated CRE CLOs (TRTX 2019-FL3, TRTX 2021-FL4, TRTX 2022-FL5) with total collateral loan investments of $2.55 billion and financing provided of $1.98 billion, all indexed to Term SOFR[150] - The reinvestment period for TRTX 2021-FL4 ended on March 11, 2023, and the Company completed committed contributions by mid-May 2023[139] (6) Investment Portfolio Financing This note details the Company's various financing arrangements for its investment portfolio Investment Portfolio Financing Overview | Financing Type (in thousands) | September 30, 2023 | December 31, 2022 | | :---------------------------- | :----------------- | :------------------ | | Collateralized loan obligations | $1,979,543 | $2,461,170 | | Secured credit agreements | $1,003,062 | $1,108,386 | | Asset-specific financing arrangements | $214,330 | $565,376 | | Secured revolving credit facility | $27,923 | $44,279 | | Mortgage loan payable | $31,200 | — | | Total | $3,256,058 | $4,179,211 | - The Company's total investment portfolio financing decreased by $923.153 million from December 31, 2022, to September 30, 2023[161] - Secured credit agreements are generally 25% recourse to Holdco and include mark-to-market provisions based on credit marks, with one agreement also subject to spread marks[162][167][168] - The Company obtained a waiver for the Interest Coverage ratio covenant, reducing the minimum ratio to 1.30 to 1.0 for Q3 and Q4 2023, from 1.40 to 1.0[186] (7) Schedule of Maturities This note presents the maturity schedule for the Company's total indebtedness Indebtedness Maturity Schedule | Year | Total Indebtedness (in thousands) | | :--- | :-------------------------------- | | 2023 | $234,761 | | 2024 | $955,053 | | 2025 | $1,018,184 | | 2026 | $331,475 | | 2027 | $76,426 | | Thereafter | $640,159 | | Total | $3,256,058 | - The largest portion of total indebtedness matures in 2025 ($1.018 billion), followed by 2024 ($955.053 million)[187] - The Company plans to meet debt obligations through maturity extensions, new capital raises (equity/debt), structured finance vehicles, loan sales, and applying loan repayments[370] (8) Fair Value Measurements This note describes the fair value hierarchy and measurements for the Company's financial instruments - The Company's financial assets and liabilities, including loans held for investment, CLOs, and secured financing, are primarily classified as Level III fair value measurements due to significant unobservable inputs[190][193] Fair Value of Financial Instruments | Financial Instrument (in thousands) | September 30, 2023 Fair Value | | :-------------------------------- | :---------------------------- | | Loans held for investment | $3,933,425 | | Collateralized loan obligations | $1,937,693 | | Secured credit agreements | $982,835 | | Asset-specific financing arrangements | $213,691 | | Secured revolving credit facility | $27,369 | | Mortgage loan payable | $31,200 | - The estimated fair value of the loans held for investment portfolio was $3.9 billion as of September 30, 2023, approximating its carrying value[191] (9) Income Taxes This note explains the Company's REIT tax status and its income tax provisions - The Company qualifies and elects to be taxed as a REIT, generally avoiding U.S. federal income taxes on distributed REIT taxable income[194] - Excess Inclusion Income (EII) generated by CRE CLOs is allocated to a Taxable REIT Subsidiary (TRS) and not to common stockholders, with the TRS bearing a tax liability of approximately 21%[197] Income Tax Metrics | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Income tax expense, net | $5 | $125 | $194 | $328 | | Effective tax rate | 0.4% | 0.6% | 0.4% | 0.6% | (10) Related Party Transactions This note discloses transactions and arrangements with related parties, including management fees - The Company is externally managed by TPG RE Finance Trust Management, L.P. (the 'Manager'), paying a base management fee and potential incentive compensation[202] Management Fees Incurred | Management Fees (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Management fees incurred | $5,545 | $5,906 | $17,513 | $17,471 | | Incentive management fee incurred | — | — | — | $5,183 | - No incentive management fee incurred was earned during the three and nine months ended September 30, 2023, compared to $5.2 million earned in the nine months ended September 30, 2022[205] (11) Earnings per Share This note details the calculation of basic and diluted earnings per share for common stockholders - The Company calculates basic and diluted earnings per share using the two-class method, including unvested stock-based compensation awards as participating securities[210] Earnings Per Share Metrics | Metric (in thousands, except per share) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Net (loss) income attributable to common stockholders | $(64,636) | $(117,914) | $(133,537) | $(106,286) | | (Loss) earnings per common share, basic | $(0.83) | $(1.52) | $(1.72) | $(1.38) | | (Loss) earnings per common share, diluted | $(0.83) | $(1.52) | $(1.72) | $(1.38) | - Warrants are excluded from diluted EPS calculation in periods of net losses as their effect would be anti-dilutive[211] (12) Stockholders' Equity This note provides information on the Company's capital structure, including preferred stock and warrants - The Company issued 8,050,000 shares of Series C Cumulative Redeemable Preferred Stock in June 2021, with a liquidation preference of $25.00 per share and a 6.25% annual dividend rate[215][216] - The Series C Preferred Stock is redeemable by the Company at its option on or after June 14, 2026, at $25.00 per share plus accrued dividends[217] - Warrants to purchase common stock, initially issued in May 2020, had their exercise price reduced twice during the nine months ended September 30, 2023, to $7.02 per share due to non-qualifying dividends[222] - Common stock dividends of $0.24 per share were declared for Q3 2023 and Q3 2022, totaling $56.9 million and $56.1 million for the nine months ended September 30, 2023 and 2022, respectively[224][226][227] (13) Stock-based Compensation This note describes the Company's stock-based compensation plans and related expenses - Stock-based compensation is granted to employees of the Manager's affiliates and Board members under the 2017 Equity Incentive Plan, with 1,149,064 common stock awards outstanding as of September 30, 2023[229][230][231] - Total unrecognized compensation costs were $9.2 million as of September 30, 2023, expected to be recognized over a weighted average period of 1.2 years[233] Stock Compensation Expense | Stock Compensation Expense (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Stock compensation expense | $1,153 | $932 | $4,770 | $3,526 | (14) Commitments and Contingencies This note outlines the Company's unfunded loan commitments and potential legal contingencies - The Company had $247.6 million in unrecognized unfunded loan commitments as of September 30, 2023, down from $426.1 million at December 31, 2022[235] - An allowance for credit losses on these unfunded commitments was $23.4 million as of September 30, 2023, reflecting potential future losses[236] - The Company was not involved in any material legal proceedings as of September 30, 2023, and had not recorded any accrued liability for loss contingencies[238] (15) Concentration of Credit Risk This note details the Company's credit risk concentrations by property type and geographic region Loan Portfolio by Property Type | Property Type | Sep 30, 2023 Loan UPB (in thousands) | Dec 31, 2022 Loan UPB (in thousands) | | :------------ | :----------------------------------- | :----------------------------------- | | Multifamily | $1,891,039 | $2,380,672 | | Office | $950,790 | $1,397,392 | | Hotel | $446,705 | $473,790 | | Life Science | $350,292 | $311,508 | | Mixed-Use | $131,084 | $268,279 | | Industrial | $98,957 | $87,057 | | Self Storage | $67,000 | $57,100 | | Other | $34,297 | $29,000 | | Total | $3,970,164 | $5,004,798 | Loan Portfolio by Geographic Region | Geographic Region | Sep 30, 2023 Loan UPB (in thousands) | Dec 31, 2022 Loan UPB (in thousands) | | :---------------- | :----------------------------------- | :----------------------------------- | | West | $1,414,792 | $1,450,623 | | East | $1,220,662 | $1,772,155 | | South | $981,311 | $1,358,087 | | Midwest | $220,441 | $302,820 | | Various | $132,958 | $121,113 | | Total | $3,970,164 | $5,004,798 | - Multifamily and Office properties represent the largest concentrations by property type, while the West and East regions hold the largest geographic concentrations[239][241] (16) Subsequent Events This note discloses significant events that occurred after the reporting period - Subsequent to September 30, 2023, the Company sold a defaulted first mortgage loan on an office property in Arlington, VA, with an unpaid principal balance of $86.7 million and a '5' risk rating[243] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion and analysis of the Company's financial condition, results of operations, and cash flows for the three and nine months ended September 30, 2023... Overview This section provides a high-level summary of the Company's business, strategy, and macroeconomic context - TPG RE Finance Trust, Inc. is a commercial real estate finance company externally managed by TPG, focusing on originating and acquiring floating rate first mortgage loans secured by transitional commercial real estate in North America[246] - The Company operates as a REIT and aims to provide attractive risk-adjusted returns through cash distributions and capital appreciation[246][247] - Macroeconomic concerns, including rising interest rates, inflation, banking system stress, and geopolitical tensions, led the Company to curtail loan origination and increase liquidity in the first three quarters of 2023[248] Third Quarter 2023 Activity This section summarizes key financial and operational activities during the third quarter of 2023 - Net loss attributable to common stockholders was $(64.6) million, an $8.1 million increase from Q2 2023, primarily due to a decrease in credit loss expense[252] - The Company originated one first mortgage loan with a $43.6 million commitment, received $297.0 million in total loan repayments, and sold two mortgage loans for $174.0 million, resulting in a $109.3 million loss on sale[252] - Available liquidity as of September 30, 2023, totaled $570.6 million, comprising cash-on-hand, cash in CRE CLOs, and undrawn capacity under financing agreements[252] Key Financial Measures and Indicators This section presents and discusses the Company's primary financial performance metrics and indicators Key Financial Metrics Comparison | Metric (in thousands, except per share) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Jun 30, 2023 | | :-------------------------------------- | :-------------------------- | :-------------------------- | | Net (loss) attributable to common stockholders | $(64,636) | $(72,724) | | (Loss) earnings per common share, diluted | $(0.83) | $(0.94) | | Dividends declared per common share | $0.24 | $0.24 | - Distributable Earnings (loss) per diluted common share was $(1.33) for Q3 2023, a decrease of $1.15 from Q2 2023, primarily due to increased realized losses on loan sales and REO conversion[256] - Book value per common share decreased to $12.04 as of September 30, 2023, from $14.48 at December 31, 2022, mainly due to a $172.7 million increase in credit loss expense[257][266] Investment Portfolio Overview This section provides a summary of the Company's investment portfolio composition and characteristics - As of September 30, 2023, the investment portfolio consisted of 59 first mortgage loans (or interests therein) with $4.2 billion in commitments and an unpaid principal balance of $4.0 billion, all floating rate[267] - The Company held $247.6 million in unfunded loan commitments and owned one multifamily and one office property (REO) with an aggregate carrying value of $117.8 million[267][268] Loan Portfolio This section details the Company's loan portfolio activities, including fundings, repayments, and sales - During Q3 2023, the Company funded $21.4 million in future funding obligations, received $287.2 million in loan repayments, and $9.8 million in cost-recovery proceeds from non-accrual loans[269] - Two mortgage loans were sold for $174.0 million, resulting in a $109.3 million loss on sale, and one multifamily property was acquired through foreclosure[269] Loan Portfolio Statistics | Loan Portfolio Statistics | September 30, 2023 | | :------------------------ | :----------------- | | Number of loans | 59 | | Floating rate loans | 100.0 % | | Total loan commitments | $4,223,672 | | Unpaid principal balance | $3,970,164 | | Weighted average credit spread | 3.7 % | | Weighted average all-in yield | 9.3 % | | Weighted average LTV | 67.2 % | - The weighted average interest rate floor for the loan portfolio was 1.06% as of September 30, 2023[272] Real Estate Owned This section describes the Company's real estate owned (REO) assets acquired through foreclosure - In August 2023, the Company acquired a multifamily property in Los Angeles, CA, via foreclosure, with a carrying value of $71.1 million at foreclosure[274] - In April 2023, an office property in Houston, TX, was acquired via deed-in-lieu of foreclosure, with a carrying value of $46.0 million at acquisition. A $31.2 million mortgage loan was subsequently obtained on this property[275] Asset Management This section outlines the Company's approach to managing its portfolio assets - The Company actively manages its portfolio assets through a dedicated asset management team provided by Situs Asset Management, LLC, under the Manager's oversight, focusing on financial, legal, and quantitative analyses[276] Loan Portfolio Review This section reviews the Company's loan portfolio by risk rating and changes in credit quality Loan Risk Rating Distribution | Risk Rating | Number of Loans (Sep 30, 2023) | Amortized Cost (Sep 30, 2023, in thousands) | Number of Loans (Dec 31, 2022) | Amortized Cost (Dec 31, 2022, in thousands) | | :---------- | :----------------------------- | :------------------------------------------ | :----------------------------- | :------------------------------------------ | | 2 | 4 | $178,552 | 8 | $511,878 | | 3 | 46 | $3,135,811 | 46 | $3,231,324 | | 4 | 4 | $257,712 | 12 | $990,337 | | 5 | 5 | $380,027 | 4 | $245,135 | | Total | 59 | $3,952,102 | 70 | $4,978,674 | | Weighted average risk rating | 3.2 | | 3.2 | | - The weighted average risk rating remained at 3.2 as of September 30, 2023, unchanged from December 31, 2022[281] - During Q3 2023, two multifamily loans and one office loan were downgraded from risk category '4' to '5' due to deteriorating operating results and tenant departures[282] Loan Modification Activity This section discusses the Company's loan modification practices and their impact - Loan modifications are common and may include extensions, waivers of performance tests, or deferral of principal payments, often in exchange for partial principal repayment, PIK interest, or increased loan coupon[285] - None of the loan modifications during the nine months ended September 30, 2023, resulted in significant modifications[285] Allowance for Credit Losses This section details the Company's allowance for credit losses and factors influencing its changes - The allowance for credit losses decreased by $41.7 million in Q3 2023 but increased by $22.0 million for the nine months ended September 30, 2023, reaching $236.6 million[287] - The increase reflects concerns over geopolitical tensions, market volatility, recession potential, limited capital market liquidity, banking sector distress, and declining office market fundamentals[287] Allowance for Credit Losses Breakdown | Allowance for Credit Losses (in thousands) | Loans held for investment | Unfunded loan commitments | Total | | :--------------------------------------- | :------------------------ | :------------------------ | :---- | | General reserve | $59,360 | $1,976 | $61,336 | | Specific reserve | $153,898 | $21,395 | $175,293 | | Total | $213,258 | $23,371 | $236,629 | | Total basis points | | | 560 bps | Investment Portfolio Financing This section describes the various financing sources used for the Company's investment portfolio Investment Portfolio Financing Overview | Financing Type (in thousands) | September 30, 2023 | December 31, 2022 | | :---------------------------- | :----------------- | :------------------ | | Collateralized loan obligations | $1,979,543 | $2,461,170 | | Secured credit agreements | $1,003,062 | $1,108,386 | | Secured revolving credit facility | $27,923 | $44,279 | | Asset-specific financing arrangements | $214,330 | $565,376 | | Mortgage loan payable | $31,200 | — | | Total | $3,256,058 | $4,179,211 | - Non-mark-to-market financing sources accounted for 68.9% of total loan portfolio borrowings as of September 30, 2023[291] Secured Credit Agreements This section provides details on the Company's secured credit agreements and their terms - As of September 30, 2023, aggregate borrowings under secured credit agreements totaled $1.0 billion, with a weighted average interest rate of Term SOFR plus 2.05% and an advance rate of 76.8%[293][294] - These agreements are generally 25% recourse to Holdco and include margin maintenance provisions based on credit marks, with one agreement also subject to spread marks[293][303] - The weighted average haircut for secured credit agreements was 23.2% as of September 30, 2023, compared to 21.9% at December 31, 2022[305] Secured Revolving Credit Facility This section outlines the Company's secured revolving credit facility and its outstanding balance - The Company has a $290.0 million secured revolving credit facility with a 3-year term, bearing interest at Term SOFR plus 2.00%, and is 100% recourse to Holdco[309] - As of September 30, 2023, $27.9 million was outstanding, secured by one loan investment with a collateral principal balance of $37.2 million[309] Asset-Specific Financing Arrangements This section describes the Company's asset-specific financing arrangements and their characteristics - As of September 30, 2023, the Company had four asset-specific financing arrangements totaling $214.3 million outstanding, providing non-mark-to-market, matched-term financing[310][311] - These arrangements include facilities with Axos Bank (15% recourse), BMO Harris Bank (25% recourse), Institutional Lender 2 (non-recourse), and Customers Bank (non-recourse)[310] Collateralized Loan Obligations This section details the Company's collateralized loan obligations (CLOs) and their financing terms - The Company had three CRE CLOs (TRTX 2022-FL5, TRTX 2021-FL4, TRTX 2019-FL3) totaling $2.0 billion, financing 64.3% of its loan portfolio, and holding $237.5 million cash for reinvestment as of September 30, 2023[314] - These CLOs provide low-cost, non-mark-to-market, non-recourse financing with a weighted average interest rate of Term SOFR plus 1.94% and an advance rate of 79.4%[314] - All CLO borrowings and underlying mortgage assets are now indexed to Term SOFR, following conversions in May and September 2023 for TRTX 2021-FL4 and TRTX 2022-FL5, respectively[317] Mortgage Loan Payable This section provides information on the Company's mortgage loan payable secured by an REO asset - The Company has a $31.2 million non-recourse mortgage loan, secured by an REO asset, with an interest-only five-year term and a 7.7% interest rate[320] Non-Consolidated Senior Interests and Retained Mezzanine Loans This section clarifies the status of non-consolidated senior interests and retained mezzanine loans - As of September 30, 2023, there were no non-consolidated senior interests or retained mezzanine loans outstanding[322] Financial Covenants for Outstanding Borrowings This section confirms the Company's compliance with financial covenants for its borrowings - The Company was in compliance with all financial covenants for its secured credit agreements and revolving credit facility as of September 30, 2023[324] - A waiver was obtained for the Interest Coverage ratio covenant, reducing the minimum ratio to 1.30 to 1.0 for Q3 and Q4 2023, reverting to 1.40 to 1.0 thereafter[324] Floating Rate Portfolio This section discusses the Company's floating rate investment portfolio and interest rate exposure management - As of September 30, 2023, 100.0% of the Company's loan investments earned a floating rate of interest and were financed with floating rate liabilities, resulting in a net floating rate exposure of $745.3 million[326][327] - The business model aims to minimize interest rate exposure by match-indexing assets and liabilities, with rising rates generally increasing net interest income due to interest rate floors on loans[326] Interest-Earning Assets and Interest-Bearing Liabilities This section analyzes the Company's interest-earning assets and interest-bearing liabilities Interest-Earning Assets and Liabilities Analysis | Metric (in thousands) | 3 Months Ended Sep 30, 2023 | 3 Months Ended Jun 30, 2023 | | :-------------------- | :-------------------------- | :-------------------------- | | Average amortized cost (First mortgage loans) | $4,346,596 | $4,771,543 | | Interest income (First mortgage loans) | $90,046 | $96,716 | | Wtd. avg. yield (First mortgage loans) | 8.3 % | 8.1 % | | Total interest-bearing liabilities (Average amortized cost) | $3,558,563 | $3,910,487 | | Total interest-bearing liabilities (Interest expense) | $70,497 | $70,570 | | Total interest-bearing liabilities (Wtd. avg. financing cost) | 7.9 % | 7.3 % | | Net interest income | $19,549 | $26,146 | Interest-Earning Assets and Liabilities Analysis | Metric (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------- | :-------------------------- | :-------------------------- | | Average amortized cost (First mortgage loans) | $4,697,917 | $4,951,235 | | Interest income (First mortgage loans) | $278,488 | $199,132 | | Wtd. avg. yield (First mortgage loans) | 7.9 % | 5.4 % | | Total interest-bearing liabilities (Average amortized cost) | $3,841,737 | $4,006,725 | | Total interest-bearing liabilities (Interest expense) | $211,057 | $95,581 | | Total interest-bearing liabilities (Wtd. avg. financing cost) | 7.4 % | 3.2 % | | Net interest income | $67,431 | $106,954 | Our Results of Operations This section provides a detailed analysis of the Company's financial performance and operational results Comparison of the Three Months Ended September 30, 2023 and June 30, 2023 This section compares the Company's financial results for the third quarter of 2023 against the prior quarter Quarterly Results Comparison | Metric (in thousands) | Sep 30, 2023 | Jun 30, 2023 | Variance | | :-------------------- | :----------- | :----------- | :------- | | Net interest income | $19,549 | $26,146 | $(6,597) | | Total other revenue | $7,467 | $6,488 | $979 | | Total other expenses | $12,419 | $12,733 | $(314) | | Credit loss expense, net | $(75,805) | $(89,069) | $13,264 | | Net (loss) income | $(61,213) | $(69,173) | $7,960 | | Net (loss) income attributable to common stockholders | $(64,636) | $(72,724) | $8,088 | - Net interest income decreased by $6.6 million QoQ due to full loan repayments[339] - Credit loss expense decreased by $13.3 million QoQ, primarily due to realized losses on loan sales and REO conversion, partially offset by an increase in allowance for credit losses[342] Comparison of the Nine Months Ended September 30, 2023 and September 30, 2022 This section compares the Company's financial results for the nine months ended September 30, 2023, against the prior year Year-to-Date Results Comparison | Metric (in thousands) | Sep 30, 2023 | Sep 30, 2022 | Variance | | :-------------------- | :----------- | :----------- | :------- | | Net interest income | $67,431 | $106,954 | $(39,523)| | Total other revenue | $17,474 | $2,009 | $15,465 | | Total other expenses | $35,064 | $34,346 | $718 | | Gain on sale of real estate owned, net | — | $13,291 | $(13,291)| | Credit loss expense, net | $(172,658) | $(183,840) | $11,182 | | Net (loss) income | $(123,011) | $(96,260) | $(26,751)| | Net (loss) income attributable to common stockholders | $(133,537) | $(106,286) | $(27,251)| | (Loss) earnings per common share, diluted | $(1.72) | $(1.38) | $(0.34) | - Net interest income decreased by $39.5 million YoY, primarily due to an increase in non-accrual loans[346] - Total other revenue increased by $15.5 million YoY, driven by higher interest rates on cash balances and revenue from REO operations[347] - Credit loss expense decreased by $11.2 million YoY, despite a $172.7 million increase to the allowance for credit losses, due to $150.6 million in realized losses from loan sales and REO conversions[350] Liquidity and Capital Resources This section discusses the Company's liquidity position, capital structure, and funding strategies Key Financial Ratios | Ratio | September 30, 2023 | December 31, 2022 | | :---------------- | :----------------- | :------------------ | | Debt-to-equity ratio | 2.60x | 2.97x | | Total leverage ratio | 2.60x | 2.97x | Sources of Liquidity | Source of Liquidity (in thousands) | September 30, 2023 | December 31, 2022 | | :--------------------------------- | :----------------- | :------------------ | | Cash and cash equivalents | $302,262 | $254,050 | | Secured credit agreements (available borrowings) | $30,536 | $38,380 | | Collateralized loan obligation proceeds held at trustee | $237,521 | $297,168 | | Total | $570,649 | $590,924 | - Primary liquidity needs include interest and principal payments on $3.2 billion of outstanding borrowings, funding $247.6 million in unfunded loan commitments, and dividend distributions[359] Cash Flow Summary | Cash Flow Activity (in thousands) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :-------------------------------- | :-------------------------- | :-------------------------- | | Net cash provided by operating activities | $56,903 | $82,540 | | Net cash provided by (used in) investing activities | $982,534 | $(616,841) | | Net cash (used in) provided by financing activities | $(991,407) | $509,840 | | Net change in cash, cash equivalents, and restricted cash | $48,030 | $(24,461) | Corporate Activities This section outlines key corporate actions, including dividend declarations and REIT compliance - The Board of Directors declared a cash dividend of $0.24 per common share for Q3 2023 and $0.3906 per share for Series C Preferred Stock[375][376] - The Company intends to distribute at least 90% of its taxable income annually to maintain REIT qualification[374] Critical Accounting Policies and Use of Estimates This section highlights the significant accounting policies and estimates critical to financial reporting - The preparation of financial statements requires significant management estimates and judgments, particularly for allowance for credit losses and valuation of financial instruments[381] - The Company adopted the CECL model on January 1, 2020, for credit losses, which estimates current expected losses for the loan portfolio[383] - Key credit quality indicators include borrower capitalization, collateral type, property market value, LTV ratio, and the Company's internal risk rating (1-5 scale)[384][386] Recent Accounting Pronouncements This section refers to disclosures regarding recently issued accounting pronouncements - For a discussion of recently issued accounting pronouncements, refer to Note 2 to the Consolidated Financial Statements[391] Subsequent Events This section refers to disclosures regarding events occurring after the reporting period - For a discussion of subsequent events, refer to Note 16 to the Consolidated Financial Statements[392] Loan Portfolio Details This section provides a detailed breakdown of individual loans within the Company's investment portfolio - The table provides a loan-by-loan breakdown of the Company's loans held for investment as of September 30, 2023, including origination date, total loan commitment, principal balance, amortized cost, interest rate, all-in yield, maturity, property type, LTV, and risk rating[393] - All loans are floating rate, with a weighted average credit spread of 3.7% and a weighted average LTV of 67.2%[395] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details the Company's exposure to various market risks, including interest rate, credit, prepayment, extension, non-performance, real estate, liquidity, capital markets, counterparty, and currency risks... Investment Portfolio Risks This section details the various risks associated with the Company's investment portfolio, including interest rate and credit risks - The Company's business model aims to minimize interest rate exposure by match-indexing assets and liabilities, with rising rates generally increasing net interest income due to interest rate floors[400] Interest Rate Sensitivity Analysis | Interest Rate Sensitivity (in thousands) | 25 Basis Point Increase | 25 Basis Point Decrease | | :------------------------------------- | :---------------------- | :---------------------- | | Total change in net interest income | $1,863 | $(1,863) | | Interest Rate Sensitivity (in thousands) | 50 Basis Point Increase | 50 Basis Point Decrease | | :------------------------------------- | :---------------------- | :---------------------- | | Total change in net interest income | $3,727 | $(3,716) | | Interest Rate Sensitivity (in thousands) | 75 Basis Point Increase | 75 Basis Point Decrease | | :------------------------------------- | :---------------------- | :---------------------- | | Total change in net interest income | $5,590 | $(5,329) | - The Company is exposed to credit risk, prepayment risk (accelerated amortization of premiums/discounts), extension risk (loan life extending beyond debt terms), and non-performance risk (borrower default due to high interest rates)[403][405][407][408] Operating and Capital Market Risks This section discusses risks related to the Company's operations and access to capital markets - Liquidity risk is associated with financing longer-maturity investments with shorter-term borrowings, exposing the Company to margin calls if collateral values decline[411] - Capital markets risk stems from the need to raise capital through equity and debt issuances due to REIT distribution requirements, with global macroeconomic conditions impacting funding costs and availability[413][414] - Counterparty risk exists with financial institutions for cash holdings and financing, and with borrowers for loan payments. Currency risk may arise from foreign currency denominated assets, which the Company intends to hedge[415][416][417][418] Item 4. Controls and Procedures This section confirms the effectiveness of the Company's disclosure controls and procedures as of September 30, 2023, and states that there were no material changes in internal control over financial reporting during the quarter - The Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective at a reasonable assurance level as of September 30, 2023[421] - No material changes in internal control over financial reporting occurred during the most recently completed fiscal quarter[422] Part II. Other Information This part covers legal proceedings, risk factors, equity sales, defaults, and other required disclosures Item 1. Legal Proceedings This section confirms the absence of material legal proceedings involving the Company - As of September 30, 2023, the Company was not involved in any material legal proceedings[425] Item 1A. Risk Factors This section confirms no material changes to previously disclosed risk factors - There have been no material changes to the risk factors previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2022[426] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section reports no unregistered sales of equity securities or use of proceeds - No unregistered sales of equity securities or use of proceeds to report[427] Item 3. Defaults Upon Senior Securities This section reports no defaults upon senior securities - No defaults upon senior securities to report[428] Item 4. Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the Company - Mine safety disclosures are not applicable[429] Item 5. Other Information This section indicates no other information to report for the period - No other information to report[430] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q - The exhibits include Articles of Amendment and Restatement, Bylaws, Articles Supplementary for preferred stock, specimen common stock certificate, CEO and CFO certifications (Sarbanes-Oxley Act), and Inline XBRL taxonomy documents[432] Signatures This section contains the required certifications and signatures for the report filing - The report is signed by Doug Bouquard, Chief Executive Officer, and Robert Foley, Chief Financial Officer, on October 31, 2023[435][436]