Good morning, and welcome to the TPG RE Finance Trust first quarter 2023 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then 1 on your telephone keypad. To withdraw your question, please press Star then 2. Please note, this event is being recorded. I would now like to turn the conference over to Deborah Ginsberg, General Counsel, Vice President, and Secretary. Please go ahead.
Good morning, and welcome to the TPG Real Estate Finance Trust conference call for the first quarter 2023. I'm joined today by Doug Bouquard, Chief Executive Officer, and Bob Foley, Chief Financial Officer. Doug and Bob will share some comments about the quarter, then we'll open up the call for questions. Yesterday evening, we filed our Form 10-Q and issued a press release and earnings supplemental with a presentation of our operating results, all of which are available on our website in the investor relations section. I'd like to remind everyone that today's call may include forward-looking statements which are uncertain and outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our Form 10-Q and Form 10-K . We do not undertake any duty to update these statements.
We will also refer to certain non-GAAP measures on this call, and for reconciliations, you should refer to the press release and our 10-Q. With that, I turn the call over to Doug Bouquard, who's Chief Executive Officer of TPG Real Estate Finance Trust.
Thank you, Deborah. Good morning, and thank you for joining our call today. The broad real estate credit and equity markets continue to face headwinds driven by elevated interest rates, reduced available liquidity, and continued pressure on valuations. Over the past quarter, these trends were exacerbated by the current regional banking crisis, a greater sense of concern over commercial real estate broadly, and the secular pressures facing the office property market. Transaction activity continues to slow across all real estate sectors and is reflected in our relatively modest investment and repayment activity during the past quarter. We continue to be front-footed in acknowledging these market trends and have positioned TRTX accordingly. We've maintained ample liquidity, we've been selective with new investments, and we have continued to proactively asset manage our current balance sheet.
Over the past quarter, we originated two loans with total commitments of $124 million, comprised of one portfolio of industrial assets and one hotel asset with a blended LTV of 59%. Each of these loans was financed with match term non-recourse, non-mark-to-market financings. On the repayment side, we had $228 million of repayments during the quarter, of which 50% of the loan repayments were office loans, bringing our total office exposure down to 27% at quarter end. Subsequent to quarter end, we had a $46 million office loan repay, bringing our total office exposure down to 26%, which reflects a 38% decrease in office exposure over the past five quarters.
Despite our reduction in net income quarter-over-quarter, our CECL reserve and blended risk ratings remain approximately flat, and we continue to be steadfast in our proactive asset management approach. We work collaboratively with our borrowers in the most effective manner possible, avoiding the kick-the-can-down-the-road approach, while acknowledging that one size does not fit all when it comes to resolving individual assets. In short, the broad resources of TPG's global investment platform and our deep experience across both the real estate debt and equity business afford us a wide array of asset management tools that TRTX will employ to maximize shareholder value. From a liquidity perspective, we continue to be highly focused on striking the appropriate balance between deploying capital into new investments on a highly selective basis and maintaining sufficient liquidity for needs as they may arise.
Our quarter-end liquidity totaled $663 million and included $133 million of balance sheet cash and $457 million of CLO reinvestment cash. We intend to continue to maintain ample liquidity to navigate an increasingly volatile market environment. Lastly, our ability to deliver for our shareholders and execute on our business plan is rooted in two key advantages. One, the tremendous insights and perspectives gained through our $20 billion AUM TPG Real Estate platform. Two, a deeply experienced leadership team with an average of 25+ years of experience in the real estate credit markets across numerous cycles. With that, I will turn it over to Bob for a review of our financial results.
Thank you, Doug. Good morning, everyone, and thanks for joining us. Regarding operating results, GAAP net income for the first quarter was $3.8 million or $0.05 per common share, reflecting a decline of $28.8 million from the prior quarter. The principal drivers of this change were a net change in quarter-over-quarter CECL expense of $18.6 million, largely because the prior quarter included a CECL benefit rather than an expense, and an $8.6 million decline in interest income due largely to an increase during the quarter of $359.7 million in non-accrual loans. Distributable earnings was $13.4 million or $0.17 per common share, down from $23.3 million and $0.30 per share quarter-over-quarter.
Dividend coverage did decline from 1.25 times to 0.71 times. Cumulative distributable earnings for the preceding four quarters covered our dividend at a ratio of 1.17 to 1. Book value per share declined $0.17 per quarter-over-quarter to $14.31 due to an increase in the CECL reserve that was roughly $0.11 per share and a common stock dividend that exceeded distributable earnings by approximately $0.07 per share. Our CECL reserve increased by $7.8 million or 3.6% to $222.4 million. Our CECL reserve rate, measured against loan commitments, increased to 420 basis points from 395 basis points.
We remain entirely focused on creating value for shareholders through the judicious balancing of boosting book value, share price, and distributable earnings. Our decisions regarding liquidity, speedy resolution of challenged loan investments, liability management, and asset allocation follow directly from this overarching goal. Regarding liquidity, we have intentionally maintained high levels of liquidity, roughly 12% of total assets, to enable us to seize opportunities that we create or that arise in our loan investment and asset management businesses. At quarter end, liquidity totaled $662.2 million, including $132.5 million of cash, $457.2 million of CLO reinvestment cash, plus $43.8 million of undrawn capacity under our secured credit agreements. $265.4 million of CLO reinvestment cash relates to FL four, whose reinvestment period closed in mid-March 2023.
Pursuant to the terms of the indenture, we committed prior to the mid-March closure of that reinvestment window to contribute $265.4 million of existing performing loans to FL four before the mid-May distribution date. These reinvestments will fully absorb this cash, reduce borrowings under our secured credit facilities by approximately $189.4 million, and generate $76 million of net cash proceeds for the REIT's balance sheet. Excluding pro forma earnings from that potential reinvestment of the cash generated from this reinvestment transaction, this activity alone is estimated to generate approximately $0.04 per quarter of net interest margin. Our third CLO remains open for reinvestment through February of next year. We had $192.3 million of reinvestable cash at March 31 in that CLO.
This term non-mark-to-market, non-recourse financing with a credit spread of 202 basis points is valuable to us in supporting new loan investments, optimizing our current financing arrangements, and sustaining or boosting investment-level ROE. Unfunded commitments under existing loans declined by $72.2 million or 17% to $353.9 million, merely 6.7% of our total loan commitments. Regarding credit, limited liquidity and higher interest rates combined to place increased pressure on the ability of borrowers to repay their loans at maturity via refinancing or sale. Our CECL reserve increased by $7.8 million or 3.6%.
This slight increase reflects our clear-eyed assessment of current and expected future conditions in the property and capital markets, and that TRTX was an early mover four quarters ago in identifying looming challenges and adjusting our risk ratings and our CECL reserve accordingly. Last week, we took ownership via deed in lieu of foreclosure of a 375,440 square feet , 73.5% leased office building in downtown Houston. The loan had an unpaid principal balance of $55 million, a 5 risk rating, and has an unleveraged cash-on-cash yield to our carrying value of 10%. We are pursuing strategies to optimize property value for shareholders using the expertise of TPG's $20 billion real estate platform and its portfolio companies to augment our asset management team and our very experienced senior management group.
Non-accrual loans increased to $550.1 million across 6 loans from $190.4 million across 2 loans, which reflects operating challenges faced by several of our borrowers in the office sector and the asset management strategies we have selected for certain of our loans to optimize shareholder value. This increase is a symptom, not a cause, of our earlier increase in CECL reserves and our downgrades in risk ratings. Higher nonaccruals caused a reduction of $8.6 million of interest income quarter-over-quarter. Regarding 2 of our loans, we adopted cost recovery accounting during the quarter, which means that cash interest payments received each month have been and will be applied to reduce the loan balance rather than recognized as current income.
Fully 64% of the non-accrual adjustment relates to a loan in Philadelphia secured by a 76% leased office building. We are simultaneously engaged in restructuring discussions with the borrower and the pursuit of our legal remedies and will provide an update next quarter. Our financing of this loan is non-mark-to-market and includes the right at our option to convert our financing to a mortgage should we eventually acquire the property. This valuable optionality strengthens our ability to generate the best shareholder value from this loan. Our weighted average risk ratings remained unchanged quarter-over-quarter at 3.2, and the dispersion of ratings across our portfolio was largely unchanged.
Regarding our loan portfolio, we originated two new loans involving $123.8 million of commitments, $111.2 million of initial fundings, we utilized only $8 million of balance sheet cash to do so. For the quarter, we received total repayments of $227.8 million, of which $144.4 million were repayments in full.
Nearly 50% of these repayments were office loans, including 1 four-rated office loan. Quarter-over-quarter, our office exposure declined 26.5% from 28.5% of our loan portfolio, due primarily to full and partial loan repayments of office loans totaling $113.4 million. As Doug mentioned, after quarter end, a $45.9 million office loan repaid. Our emphasis on low cost, non-mark-to-market, non-recourse term funding with maximum available duration remains unwavering. At quarter end, 74.1% of our secured financing was non-mark-to-market, virtually unchanged from the prior quarter and consistent with our long-standing financing policy.
During the quarter, we extended the maturity through May 2024 of a $500 million secured credit facility, and we're in the final throes of documentation of a three-year extension of another existing $200 million secured credit facility. We have three other credit facilities within maturities in the second half of this year, which we intend to extend under existing contractual options to do so. Our leverage remains modest. Total debt to equity was 2.95 to 1 at quarter end, virtually unchanged from last quarter's 2.97 to 1. We remain in compliance with our financial covenants. With that, we'd be happy to open the floor for questions. Operator?
Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you're using a speakerphone equipment , please pick up your headset before pressing the star keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Stephen Laws with Raymond James. Please go ahead.
Hi, good morning.
Morning, Stephen.
Hi, good morning, Doug and Bob. You know, first, can we start with the non-accruals. Do you think this number's peaked? You know, how do you think about any additional non-accruals, possibly on some loans you've identified early to watch versus, you know, resolution path of the 6 existing non-accruals? Yeah, I guess start with that.
Yeah, sure. On that specific question, I think what's important to highlight first of all is our last 2 quarters, we have seen 4-rated loans pay off at par. Our general comment on this is that, you know, fours do not necessarily, you know, become fives. We actually had again, it was Marriott Burbank, also Colton Corporate Center that were fours over the last 2 quarters that did pay off at par. But in terms of our fours, generally speaking, you know, it really kind of ties back into our general strategy, which we've been pretty consistent about over the last few quarters, which is we are focused on maximizing shareholder value, we acknowledge that there is pressure within the real estate market.
However, if we end up with loans that are on non-accrual as we have, if we're heading towards maximizing shareholder value, we still feel comfortable. I would say lastly, it's really important to highlight that our quarter-over-quarter, you know, risk ratings and also CECL reserves remained relatively unchanged quarter-over-quarter. No change to how we're approaching it from a risk management perspective. I think, you know, to Bob's point, just to put a really fine point on this, you know, about 64% of that non-accrual is related to one office loan in Philadelphia. I think it's worth highlighting on that loan that we are currently in discussions with the borrower about a potential modification, and we are actively trading proposals.
In the interim, we've begun to enforce our remedies, and we've applied $5 million of cash flow to reduce our basis in that loan.
Great. Appreciate those comments, Doug.
Okay.
A second question for me, if you don't mind, Bob. Appreciate the color on the CLO reinvestment opportunity. Still seems like outside of the action that'll take place during Q2, with regards to, I think, FL four. Can you talk about the other $200 million of capacity? You know, if you reinvested that, what type of pickup would we see in net interest income? I guess along the CLO front, you know, any thoughts on FL three, which is amortizing down, and could that be collapsed with those loans being put into, I guess, FL five?
Sure. Great. Well, let's take those in order. With respect to FL five, as I mentioned, we do have reinvestment cash available there. Doug described earlier that occasionally, most frequently, when we've recently originated loans, we've funded them directly into one of our two CLOs, now only one CLO that has reinvestment capacity. We can also, you know, shift loans from other forms of financing, whether it's repo or note on note or A-note or what have you, into the CLOs. We do have a reinvestment plan for that cash as well. I chose in my remarks to focus on FL four because the quantum of cash was higher and the timeframe was nearer. The mechanics work the same.
In terms of the, you know, marginal benefit of reinvesting that cash, it's a function of, you know, frankly, having the interest income from the assets contributed and then avoiding the interest cost that was used to fund those assets prior to their contribution to the CLO, since we're paying the interest costs on the CLOs every month, you know, whether we use it or not, so to speak. That's the math there. With respect to FL Three, you know, we monitor that very closely. That deal's been in hyper-AM since the reinvestment window closed at the end of 2021. We're obviously focused on our potential alternative sources of financing. Although the advance rate is lower and the cost of funds is higher, that's a 2019 deal.
Even with the deleveraging, the, you know, the cost of funds is actually not bad. Yep.
I think one final point on that, which is, I believe I mentioned in the prior quarter, is, you know, we remain very comfortable with liquidity as a function of the fact that we have, you know, demand in really a variety of different financing sources, and that's, you know, a mix of A notes, our series CLO capacity, our secured credit facilities, and then other potential private financings that we can arrange. You know, from a, from a back leverage and financing perspective, you know, we have a variety of levers, and frankly, over the last three quarters, we've used each of those. But, but really in, you know, recent, you know, in the past quarter, really in the past two quarters, we've predominantly employed the series CLOs.
Great. Appreciate the comments this morning. Thank you.
Thank you.
Thanks, Steven.
Next question comes from Steven DeLaney with JMP Securities. Please go ahead.
Thanks. Good morning, Doug and Bob. A little surprising, given the overall report to see the stock open down so weak, you know, about 10%. Thankfully, it's come back a little. The only thing that I see in the report, and I guess specifically in the press release, was the subsequent event about the Houston foreclosure. I'm just curious if you could tell us, and I know it's subsequent, so it's not in your first quarter data, but can you comment on what the carrying when you transferred that from a loan to REO in April, I guess, what the carrying value of that office, as real estate owned, what that carrying value would be, and do you expect any loss or charges, charge-offs in the second quarter results related to that subsequent event? Thanks.
Sure. Thanks for the question, Steve. The short answer to that is, we'll report on that at the end of the second quarter. We acquired the property last Friday.
Okay.
We have not yet established what the value as REO will be. The accounting rules for REO are a little bit different than they are for loans. As you suggest, the math will be, you know, the UPB, the CECL reserve will be reversed. Then we will establish a new value that needs to be corroborated by, you know, appraisals and market comps and so on. That will be our carrying value going forward for the duration of our ownership.
Okay. Was this loan number 39 in your disclosures?
Um...
I guess Chris sent me this. I guess it was from the ten-Q or...
Yeah.
from your deck.
Yeah, it's on the mortgage schedule. We'll come back during this call to confirm...
Okay.
deny that.
All right.
Yes, it is.
Thanks.
You and Chris were correct.
Yeah.
in your Sherlock Holmesian work.
Okay. Thank you. Just one quick follow-up, if I may. Interesting to see the hotel lending in first quarter. Can you comment just very generally on the REO profile of those new loan opportunities, how you would compare it sort of to your historical overall expected ROE on the portfolio? Does TPG have specific expertise experience on the private equity side in the hospitality industry? Thanks very much.
Yeah, absolutely. You know, first, just to speak a little bit about TPG's broader platform, we're, we had about $20 billion of assets under management across both debt and equity. You know, the short answer is that, you know, we do have tremendous experience from both the debt and equity lens within hotels. The loan specifically is an asset in Miami, it's a market that we are very excited about. Frankly, it was a transaction that needed to close in a relatively tight timeframe.
We were able to move quickly as a function of the, you know, depth and breadth of our team, but also our financing in place that we had on our balance sheet to be able to provide capital with some real certainty to that borrower. Just, you know, some other metrics on it, you know, for high level is...
Mm-hmm.
You know, the asset itself, you know, from a leverage perspective has an as is LTV of approximately 58%. The, the interest rate on it was SOFR plus 510. In terms of an expected ROE, it's approximately 12%. I think when we look at, you know, today's market, the ability to originate a new loan at, you know, SOFR plus 510 at a 58% LTV is a really attractive allocation of capital.
Great. I would agree. Congratulations on that. Thanks for the comments.
Thank you.
Next question comes from Rick Shane with JPMorgan . Please go ahead.
Hey, guys. Thanks for taking my questions this morning. I don't think this is gonna be a surprise given the questions I've been asking throughout earnings for your peers. You're using $75 million a year in cash currently to pay the dividend. Two questions. One, given the taxable income over the last 18 months, what are your dividend what is the minimum dividend distribution you would need to make? Do you have any NOLs that you can use to reduce the payout? Does it make sense, given particularly where the stock's trading now, to reallocate return of capital or balance it a little bit between dividend and repurchase?
Got it. Yeah. Happy to provide some context there. You know, I think from a, you know, dividend coverage perspective, I know that Bob mentioned it, but it's worth re-highlighting, which is that, you know, over the last year, you know, we did have a 1.17 times coverage, and then the last quarter, we had a 1.25 coverage of the dividend. I think it kinda goes, if you zoom out just a moment, about the fact that, you know, from a quarter-over-quarter perspective, you know, we're roughly unchanged on both CECL and on our risk ratings.
We think that, you know, frankly, this, near term volatility in terms of DE is really more a function of our extreme focus on maximizing shareholder value. I think that's what the most important trend is, one. Two, you know, I'll pause there and then perhaps, Bob, if you wanna add.
Yeah. Just, Rick, in response to your quasi-technical question, you know, like all REITs, we need to distribute, you know, really not less than 90% of our taxable income. Once you get below that, you begin to subject yourselves to some excise taxes, which are really inefficient. As we made clear, we were undistributed last year, from a taxable income standpoint, we do have some spill forward into this year, which we'll evaluate. You get a year to figure out how to apply all of that. You know, distributable earnings is gonna move about a little bit over the next several quarters. We've made this clear in our calls the last several quarters as we speedily resolve these loans, in part to reduce the sub-earning assets that Steven was asking about earlier.
That's, that's our plan, or that's the technical answer in that regard. The second part of your question had to do with net operating losses. We do have capital loss carryforwards in the neighborhood of $170 million. We have utilized some of those to effectively shelter gains, capital gains, on property transactions that we've had where gains were realized. That's not available under the tax code to, you know, shelter ordinary income that lenders like us earn. I hope that directly answers your question.
It does. The second part of that is, in theory, distributions in the form of a repurchase or distributions in terms of a form of dividend, shareholders should be, if the stock's trading at par, relatively indifferent. Given where the stock's trading, it starts to become more compelling to repurchase shares. Is there flexibility? Is there interest in doing that?
Well, I think as we've thought about, you know, just kind of acknowledging the cycle that we're in, what's happening in the market, we have really put liquidity at the top of our list and think that having that marginal capital on our balance sheet to address any needs as they may arise is really paramount for us.
Yeah. Thank you, guys.
Thanks, Rick.
Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Doug, Chief Executive Officer, for any closing remarks.
No, I just wanted to thank everyone for joining this morning and, look forward to keeping you updated on our progress. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.