TPG RE Finance Trust, Inc. (TRTX) Earnings Call Transcript & Summary

Great. Good afternoon, everyone, and welcome to the last session of Day 2 at Citi's Global Property Virtual Conference. I'm Michael Bilerman. I'm here with Arren Cyganovich from Citi Research. We're extraordinarily pleased to have with us TPG Real Estate Finance, President, Matthew Coleman. This session is for investing clients only. If media or other individuals are on the line, please disconnect now. And the disclosures are up on the webcast. And if you are watching the slide on the webcast, there is a question box. You can enter any questions into there, and they'll come directly to myself and to Arren, and we'll try our best to weave those into our conversation. Matt, I'll turn it over to you, introduce the company and any opening comments, and then we have some questions already prepared for the session, including the 3 reasons. I didn't know you if you want to answer that or you want to give an introduction first.

Well, maybe I'll use that as a segue to do an intro and segue it into the 3 reasons. So how about that?

All right. Perfect.

First of all, thanks for having us. It's great to be here. I'm sure as everybody wishes, we wish we were doing this in-person, but maybe next year. It feels like we're making real progress. So in any event, as Michael said, I'm Matt Coleman, President of TPG Real Estate Finance Trust. We're a transitional first mortgage lender sponsored by TPG. And with that, I'm happy to circle back to any more background, Michael, as we go along, but maybe I'll just get to -- I'll get to the meat of it, which are the 3 reasons, if somebody were going to buy real estate stock this year, why TRTX? I think first of all, as I hit on, we do sit within the larger TPG, which is an $85 billion-ish multi-strategy asset manager with a real estate platform that includes, not only the TRTX manager, but also includes a real estate private equity business. And so we have -- I think there's unique insights, intellectual capital that spans not only North American real estate, and TRTX is an active lender in America -- in the United States only, but also spans a number of industries that are, I think, adjacent to real estate. So if we look at a life sciences deal, not only can we talk to our partners and our colleagues that are active on the equity side, but we can talk to our health care group, and we can talk to others in the firm. And that's illustrative, I think, only of small slice where there's advantages to being part of the larger TPG, but we think that's compelling across the business. It informs our underwriting. It informs our sourcing, and we think it's an advantage generally for TRTX. That's one. Two, we're really poised for growth here as we sit here in the first quarter of 2021. We ended the year, I think, as we said in our earnings call, with $300 million of cash on the balance sheet. We have, for the first time in several quarters, restarted our originations engine. I'm sure we'll get to that part of the conversation where we talk about what we're seeing, but we're reasonably excited about the volume and the quality that we're seeing. And we know that we're going to have some repayments this year. We always do, and we know that we've got abundant cash on hand. And we're at a point now where we are beginning again to invest that and deploy that productively, and we're excited about what 2021 brings in that regard. The final point I would make is the strength of our portfolio. We have a portfolio that's concentrated in major markets, institutional quality real estate with high-quality sponsors. And while we're kind of working our way back from a stock price perspective, we think our price represents a really attractive entry point as it relates to a portfolio that we think is still underrepresented given where the stock is in the market today, and we think that's attractive.

Thanks for that, Matt. I recognize this is a CEO conference, and you just announced a CEO transition. So maybe you can just talk just a moment about the drivers of Greta's retirement and sort of the process in terms of finding a new CEO.

Yes. So as people listening will know, and as you appreciate, Michael, Greta had an incredibly productive tenure at TPG, beginning with this business many years ago, I think personally overseeing more than $9 billion of originations, helping build out an exceedingly talented team and getting this business public in 2017. I think Greta, was, I think, looking for a little bit of a break in some ways that's -- and so what better way to achieve that for herself than by moving to Florida as many New Yorkers have done and getting herself a bit of a breather. And so we obviously wish Greta well in her retirement. As it relates to the transition, I'm serving kind of in a little bit of a dual role at this point as the COO of the firm's broader real estate business and then also running TRTX on a day-to-day basis. And I'm hopeful that the business can benefit not only from my insights into the U.S. real estate markets, but also from my connectivity, hopefully deeply and broadly within TPG. We've talked about the benefits of that to TRTX. At the same time, the firm is -- soon will be initiating a search for a permanent CEO. In terms of timing, I think the beginnings of these things are easy to predict. So that search will begin promptly. The end of a search like this is a little harder to predict. So the firm, in connection with the Board, will, I'm sure, undertake a careful search. And at the end of the day, as opposed to acting quickly, it'll be most importantly, I think, to act prudently and find exactly that right fit.

Right. And then maybe you can sort of give some of that overview in terms of what you're seeing on the real estate equity side versus the loan side and how connected the 2 are together as you're evaluating opportunities.

Yes. I mean I think they're connected and one certainly informs the other. We would -- we would not, for instance, quote and underwrite a multifamily deal on the TRTX side without talking to our partners in the equity side who cover U.S. residential markets. So they're certainly connected. Needless to say, the businesses have totally different objectives, which, I think, informs the posture that one takes to the market. So to state the obvious, investing opportunistic private equity capital with opportunistic return targets, I think, leads to a different posture when one is approaching the market than when you're loaning at 65% LTV or whatever your entry point may be or your exposure point may be. And you're certainly paid differently. And so the fundamental risk reward proposition is very different, although I think, as we've said, the intellectual capital sharing can be synergistic and hopefully good to both. I do think as we see -- as we look at the environment, I do think that there are market observations and takeaways that are constant in many cases across the 2 different strategies. I think in both cases, we're interested in those markets with strong secular tailwinds. We're interested in strong demographic drivers, population growth, job growth, income, high education levels. And that remains constant across the businesses. We're also seeing unsurprisingly, as I think people will have heard throughout this conference, we're seeing lots of interest in both sides of the business in asset classes like life science, industrial. Multifamily, although I'd say those returns generally don't work for an opportunistic equity business in most cases, but I think those pockets of strength, those macro themes are reasonably consistent. And one part of the business can certainly inform the other as we look at those. [indiscernible]

Matt, maybe we could talk a little bit about what you're seeing from sponsor activity these days in terms of the conversations. You just mentioned some areas that are more popular than others and how willing are sponsors these days to really start to transact in the areas that might be a little bit more out of favor in hospitality and in retail. And maybe you could talk a little bit about your thoughts in -- on broader investment across the platform.

Yes. I think we are seeing sponsor activity, including in, certainly, lodging. I don't know so much about retail. I'm not seeing a lot of that. We are seeing some, I think, selective sponsor activity in lodging. And TPG on the equity side has been one of those active sponsors. I think there are again markets that will be attractive. I think, unsurprisingly, drive to leisure will be attractive. And business-driven, convention-driven CBD hotels are going to continue, I think, to lag in terms of recovery, but it's not necessarily to say that there might not, over time, be attractive entry points. I think from the TRTX perspective, we have hotel exposure currently in our portfolio that's around 15-ish percent. I would say we're open to the possibility of lending on additional hospitality assets, and we think there actually could be some attractive opportunities to get some more yield than you might see, for instance, in multifamily, although we are bullish on multifamily and would expect this year to do the bulk of our lending there. But I think, again, with a reasonable focus on keeping our hospitality exposure, I would say at 20% or less, is it possible that you could see a hotel acquisition with kind of a reset basis, an opportunity to come in at 60% LTV to get some more yield and to feel pretty good about that credit, I think, in what we all hope and what is starting to feel like, I think, certainly a recovering environment on the lodging side as more and more people get vaccinated. And hopefully, we prove out over time that vaccines are either totally or largely effective against some of the variants that may be improving as we kind of look at this COVID and, hopefully, post-COVID world.

And maybe just we could talk a little bit about the office market. You have more than half your portfolio backed by office. Are you seeing any signs of improvement there? And what is it that your expectation is to get back to some sort of a normal over the next 12 to 24 months?

Yes. I mean normal sounds great. I'm -- you can probably tell from my background, I'm sitting here in my home office doing this desperately helping my dogs not going to bark at me as we do this. So normal would be excellent. We don't have a crystal ball. As I said, I think we probably share what's probably a reasonably widely held sentiment that it certainly feels like things are getting better. I think we're seeing meaningful increases in vaccine supply. I think in many parts of the country, you are seeing people back to office. Here, I'm San Francisco-based, we're not -- and I don't know exactly what the time line is, but I think that a return to office on some basis is starting to be in sight probably for many, if not most people. Exactly what that looks like, I mean, I have a sense that's not for many of us and many people in the knowledge economy, I have a sense that's not going to be a 9 to 7, 5-day a week return to office under any circumstances. I think we've proven some things about working from home that may be lasting. However, I think for those -- many of us who have been not in an office for a year, we also recognize the productivity that comes from being in office. We recognize the culture building, the training that happens for people who work in apprenticeship-based industries. It's very hard to recreate those things that people get from an office. And so I think my own personal view is that the return to office is not for most people going to result in a decision to work from home forever. I think there's going to be continued widespread office usage. As it relates to our portfolio, as you said, Arren, we're about 55% office. That part of our portfolio has performed quite well with 100% collections. Even in some markets, I think, that have felt some more pain, for instance, in New York City, we've got good Microsoft and Netflix credit. And so we feel quite good actually about how our office portfolio has performed. I do think as we look forward to 2021 and where we're going to be investing, we weight, I think, prospectively our activity more toward multifamily than toward office for some of the uncertainties that we've talked about, but that's not to say that in the right markets with the right business plan, again, taking advantage of some of those secular tailwinds that we've talked about, that we couldn't see ourselves doing some light transitional office as we look forward to this year.

So I guess segueing off of office to multifamily, you mentioned that might be an area of focus. Would that be in the urban multifamily? You tend to have more of a top 10 market type of bent. And looking at rents, rents are coming down, I've seen 10%, 20% in various urban centers. Is it really that much of a safer area in your view versus that of office?

It's a good question. I think as we think about those markets that are attractive for multifamily, it's not just the 5 gateway markets, for instance. I think we're interested in a broader set of market opportunities. Historically, we've been kind of, I think, 88% of our portfolio or something like that in top 25 markets in America. And I think if you think about those areas again of relative strength, we think about markets like Raleigh, Durham. We think about some markets in North Florida. We think about places where either migration trends coming out of COVID or tax-driven migration trends that we we're even seeing before COVID, business-friendly jurisdictions could be attractive for multifamily investing and lending. And so I wouldn't necessarily think of this as an urban multifamily strategy. I think it's broader than that, and I think that's what we're seeing as we're looking at opportunities that are coming in front of us now.

So the sponsor activity has been kind of more in those -- I guess that makes sense. If you have the demographic trends going in your favor, that's where the opportunities are going to be.

I think that's right. And we've got important sponsor and repeat borrower relationships that drive a lot of that business for us, and I think that is what we're seeing from our sponsor and borrower clients.

Okay. And then maybe we could just talk a little bit on the funding environment, the CLOs have been very active, getting some pretty tight pricing there. What are your thoughts in terms of accessing that from the right side of your balance sheet?

Yes. Well, we -- I think just generally, we're -- we have a focus on and have had a focus on reducing our mark-to-market exposure. And if you look at the progress that we made during 2020, we ended the year with I think about 63% of our liabilities being non-mark-to-market. And we're interested in increasing that further to the extent that we can do so efficiently. And as you alluded to, Arren, the current state of the CLO market suggests that those opportunities are there. Since 2018, I think we've been one of the more active CRE CLO issuers. And there's no reason to think that we wouldn't continue to have, I think, an active interest in that market. While we're seeing overall coupons come in a bit on the loan side, I think we're seeing some historically advantageous debt capital markets that we think can continue to help drive attractive ROEs for the business going forward. And I think tapping into those markets will be an important part of driving those ROES.

Okay. And then talking to some of your competitors, they have both kind of a U.S. and a Western Europe approach to the portfolios. Have you thought about expanding overseas and looking at opportunities from that standpoint, too?

We really haven't, to be honest. I think one of the pros in that regard would be the scope and scale of our real estate franchise generally, which is a North American and European business. That being said, I think we have found good actionable volume that presents good risk reward for TRTX here in America. And so we really haven't seriously considered expanding the business to Europe. It's -- it would obviously open up some extra markets. On the other hand, there's issues with creditors' rights in various jurisdictions and things that we generally don't have to think about as much here in America where there's a good system that we know and we understand fully. And as I've said, I think we've currently got $3.5 billion or so of loans under some form of evaluation. And if we look at our targets for the year, I think we're going to find plenty to do in America in markets that we know and we like with attractive risk reward.

Matt, can you break down that sort of pipeline in terms of either property type or geography, where you are sort of within the capital stack, just to give it a little bit more color?

Yes. Unsurprisingly, I think as we've all just talked about, heavy multi. We are seeing a fair amount of life sciences conversions as well, although that -- it's just less volume. And I think that's an area where really paying attention to conversion costs, sponsor quality, obviously, market, making sure there's sufficient depth of market is very important. We're seeing, I would say, a lot of activity in the southern tier states, and that's all the way from the Eastern Seaborne straight across the southern tier of the country all the way to the West Coast. So I would say we're seeing kind of a Southern market multifamily tilt overall if you were going to kind of draw out kind of your top geographic and your top asset class drivers out of the portfolio or the pipeline that we're seeing.

Right. And then on those multifamily, are those all transaction-driven? I.e., assets are trading and you're stepping in to provide the financing? Are they refinancing opportunities? Are they just unlevered assets? Just to give a little bit more flavor of what's driving that incremental loan demand and just how you can be competitive relative to a Fannie and a Freddie backed deal.

Yes. I mean, ultimately, we're obviously going to not price as attractively as the agencies price. So there's a little story to each of these. It's a mix, I would say. I'm not sure that we're seeing unlevered assets where sponsors and borrowers are looking to put on leverage for the first time or having -- after some other capital event. But otherwise, I think all of the above. I mean we're certainly seeing construction takeout, which is a place, I think, where we like to be. We are seeing transactions. There's -- I think there is a fair amount of trading. Just as there's a lot of capital in the debt capital markets, there's a lot of capital in the equity capital markets as well for people who are active multifamily owners and operators. And so I think it's a mix of all of those things. In terms of competition, it's variable, obviously, by loan size and geography. But as I alluded to earlier, we have a good, I think, stable of firm relationships with repeat borrowers and sponsors and where those can be some of our most fruitful sources of new business as we look to stay competitive in what is, admittedly, an extremely competitive lending environment.

Yes. Where would you put TPG in terms of their overall view on real estate investment today relative to other private equity? I mean where do you sort of fall on the spectrum of putting capital out or a desire to put capital out?

Yes. I mean I think, ultimately, some of this has to do at the very highest level with kind of global capital flows. And I think what you're seeing is in a world of exceedingly low yields, you're seeing lots of global capital. And that includes capital that gets invested in various forms of private equity generally coming into, broadly speaking, Western real estate, and that's Europe, and that's North America. And I think at the end of the day, both on the lending side and on the equity side, high-quality U.S. real estate is going to remain an attractive yield asset for global investors. And that's true whether that's a firm like TPG that's allocating capital or I think that's true if you're a big sovereign wealth fund or a pension plan or whatever that may be and you're looking to allocate capital. I think the relative risk reward and a relative yield compared to many other asset classes across the world where yields have cratered, and obviously, yields come down in real estate as well, remains relatively attractive. It's asset backed. There are -- depending on the market, there's certainly place just to take advantage of good macroeconomic tailwinds and, hopefully, what will be some pretty attractive growth coming out of what has really been kind of an unthinkable set of circumstances in the last 4 quarters. So I think broadly, as a firm, and I think this informs the views of TRTX and how we'll go about deploying our own capital during this year, I mean, we continue to see American real estate being a place of serious interest and serious capital flows, and that'll drive opportunities, I think, broadly across the firm, but it should certainly be driving opportunities for TRTX. And I think we're beginning to see volumes that are consistent with that coming off, as I said, just an exceedingly unthinkable period that we've all been through and are continuing to go through.

With the idea of the opportunities that you're seeing, and you had mentioned potential for growth, would you expect your use of leverage to rise? Presumably, with your stock where it is, it would be very difficult to raise equity. So would you expect to have net growth? And I guess, along with that activity, you're also likely to have repayments. So it would be a bit of net growth with a lot of recycling of those repayments?

Yes. I think it's probably going to be driven a lot by recycling of those payments. As I said, we've got $300 million of cash on hand. And I think last year, we had just shy of $1 billion of repayments. And so -- and that's not inconsistent with what we've seen historically. And so I think if you think about the deployment of that cash on hand where we're under deployed right now, that's starting to change with our new originations activity. And if you think about kind of a normalized pace of repayments, that does suggest originations at or above kind of the $2 billion level. And that's within the range of historical norms for this business where I think we had topped out at $2.9 billion of originations in 2019. And it kind of bounced around between 2 and something that had -- was starting to approach 3. And so I think that's probably something around $2 billion, $2.2 billion is probably something around what we would be looking at if you assume a normalized level of repayments, which we obviously don't control, but we do plan for.

It's always good to get repaid in the loans. So it's...

That's right. That's the fundamental proposition. Yes.

The LIBOR floors across the industry, including in your portfolio, have been helping returns come in a bit higher than they normally would have. As you're recycling, getting those repayments and putting on new loans with lower floors, maybe you could talk a little bit about the return profile and how your earnings power might change over the coming years.

Yes. So across our portfolio, we have a weighted average LIBOR floor right now of 166 basis points. So that's -- that has definitely been an asset for us, and that's to state the obvious, not where floors are going to be on new originations. Floors ultimately price often begin at spot, and you go from there. So what had been 150 basis point floor market is going to be a 25 basis point floor market on a good day. So there's no doubt that, that's going to change. As we look at our repayments and the effect of repayments on the erosion of that floor, there's a reasonably even dispersion of that floor across our portfolio. So we don't expect to see it erode disproportionately, but it is going to erode with repayments, and there's no way around that. So I think we now find ourselves in a spot where the LIBOR floor market has come in. The spreads to LIBOR are wider than they were, I think at the time when we had the bigger LIBOR floors put on, but not wide enough, I think, to make up for the drop in base rate. And so we find ourselves in a slightly, I think, lower coupon market. And is that 50 basis points, 25 basis points, 75 basis points, it's something like that. It's in that range. At the same time, we have the benefit of effectively being financed with no LIBOR floors as a general matter. And so I think what you'll see in terms of overall returns is a slight degradation in overall coupons, which is probably the easiest way to talk about these things when you've got the floor and spread moving in opposite directions. But the availability, abundantly available, we think, reasonably priced debt capital. And I think all of that -- we'll see ultimately what that does to returns across the business and the industry, but it's probably not so different than where things were pre-COVID when you account for all of those puts and takes. Time will tell as we get through the year and figure out where both the debt markets and the originations markets go.

Yes. And the forward curve is actually starting to look as though we may have rate hikes sooner than we may have anticipated. I guess we'll have to see how that rolls out, too.

Yes, you're right. We're being convinced that rates are going to be effectively 0 forever to being terrified about rising rates in the span of about 10 days.

Exactly. So we're getting towards the end of the session here. Let's switch over to the rapid fire. Michael, do you want to do the rapid fires?

Sure. So Matt, when we're sitting physically together in Florida next -- a year from now, what will be the one thing that will have surprised people the most about your business over the prior 12 months?

Well, I hope it's not a surprise, but we're going to spend the next 12 months improving on our book value, having positive credit resolutions, restarting the originations engine, as we've talked about. And I think people should be positively surprised about the performance of this business over the next 12 months.

What do you think your corporate travel budget will be in 2022 as a rough percentage of what it was in 2019?

2022, I would guess probably pretty similar. I think there's a lot of pent-up travel demand. There's going to be a lot of we want to get out and see assets and see their sponsor and borrower clients. I think it will be the same. I think travel will be a little bit different, but I think there's a lot of pent-up travel that's on its way.

We have the new term bleisure, business leisure.

I like that.

We can work from anywhere at this point, right? So the 2-week vacation becomes 1 week of working and 1 week of vacation. I don't think -- Arren, you're not asking the same-store question, I take it, not the same [indiscernible]

Right.

It doesn't work with [ the mortgages ].

It doesn't work with the [ mortgagees ].

10-year treasury yield a year from today? It's 1.55% now.

Higher but [ sub 2 ].

So if we have to put a number in a spreadsheet, 1.85%?

1.90%.

1.90%? All right. Great. Well, thank you so much. Really appreciate it. Have a great rest of the conference and look forward to seeing you soon.

Thanks so much for hosting, guys, and thanks for having us.

Great.

Thank you.