TPG RE Finance Trust, Inc. (TRTX) Q1 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the TPG Real Estate Finance Trust 2018 First Quarter Earnings Conference Call. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Brad Cohen. Please go ahead, sir.

Good morning, and welcome to TPG Real Estate Finance Trust’s First Quarter 2018 Conference Call. On the call today are Greta Guggenheim, Chief Executive Officer; and Bob Foley, Chief Financial and Risk Officer. Greta and Bob will share some comments about the quarter, and then we'll open up the call for questions. Yesterday evening, the company filed its Form 10-Q and issued a press release with a supplemental earnings presentation detailing its operating results for the quarter ended March 31, 2018, 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 the company's operating results, please see the Risk Factors section of the company's Form 10-Q filed on May 7, 2018, with the SEC. The company does not undertake any duty to update forward-looking statements. During this call, the company will also refer to certain non-GAAP measures. For reconciliations of these non-GAAP measures, please refer to the Form 10-Q and earnings supplemental, which are posted on the website and have been filed with the SEC. With that, it is my pleasure to turn the call over to Ms. Greta Guggenheim, Chief Executive Officer of TPG Real Estate Finance Trust. Greta?

Thank you, Brad, and good morning to you all, especially those of you who're calling in from the West Coast, and thank you for joining us as we present our first quarter results. We kicked off the year with a strong first quarter originating seven high-quality first mortgage loans totaling about $580 million. On a net basis, we deployed $422 million and had repayments of roughly $156 million. Second quarter to date, we are in the process of closing $650 million of loans, including $200 million that was signed up after we filed the Q yesterday. And we are also pursuing additional transactions for the quarter in a very active pipeline. As we experienced in the fourth quarter, credit spreads continued to compress. Our weighted average spread on new originations declined 42 basis points to 380 basis points over LIBOR as compared to the fourth quarter. Our response to decreasing credit spreads is to identify and utilize more cost-efficient capital. In February, we successfully issued a $932 million CLO, which was the second largest issued since the end of the global financial crisis and was executed with the tighter spreads. It provided us with an 80% advance rate and an initial spread of 108 basis points over LIBOR. The CLO was primarily responsible for a 41 basis point decrease in our weighted average cost of funds quarter-over-quarter, offsetting the spread compression from new originations. Interestingly, the activity in the CLO market has also put pressure on providers of warehouse capital. Major banks seeking to agent CLO transactions are reducing spreads on warehouse lines as a means to having leading roles in CLO transactions. Consistent with my remarks from our fourth quarter call, the environment remains highly competitive among mortgage REITs, private debt funds, insurance company-managed funds and foreign banks. Credit spreads have dramatically come in. As an example, we are refinancing a loan that we originated in 2016 at a spread of 475 basis points at a new spread of 325 basis points. This reduction is in part a result of recent leasing momentum but really more indicative of the market. Interestingly that 150 basis point reduction correlates with the increase in LIBOR over that same period of time. Despite a challenging competitive environment, commercial real estate fundamentals remained healthy, and the private bid for real estate investment persists. In the broader real estate market, we see rental rates on the rise in most property types and occupancies at or near historic highs. As we have discussed before, our preferred asset type is multifamily, particularly workforce housing given strong supporting demographics in this income cohort and a relative shortage of supply. The multifamily sector is highly stable, and it's not - and it was much less volatile than other property types during the recession. Affordable and workforce housing experiences little new supply, and we find the supply-demand dynamics of this sector highly attractive, and in fact, nearly half of our originations in the first quarter measured by capital deployed were multifamily. We anticipate continued penetration in the multifamily sector. In addition to multifamily, our remaining originations in the quarter were in office properties in major metropolitan areas on both coasts and Hawaii, as well as some mixed-use properties. A comment on retail. While we do not believe the broad-brush applies to all retail assets, and we have spent considerable time reviewing retail assets financing requests. In the first quarter, we reviewed over $800 million of retail transactions and began testing the market by quoting several power lifestyle center acquisitions by strong sponsors with assets that have very strong tenant sales and attractive occupancy cost. Our quotes were significantly wider spread relative to non-retail asset classes that we are quoting, and we lost each of these transactions to private debt funds and insurance companies. So it appears the market is distinguishing among various types of retail assets, and we will continue to evaluate retail loan opportunities that meet our credit standards. The collective loan to as is value for our Q1 originations was 71.3% with an expected return on equity of 9.2%. Please note that our Q1 originations were secured by moderate transitional and cash flowing assets, which generally support higher loan-to-values than more heavily transitional assets. We had no construction loans to supplement our originations. A benefit of construction loans is that they reduced the reported LTV as the L in the LTV is calculated based on the small initial funding and the V represents the discounted value of the completed project. In addition, they are considerably easier to source and carry wider spreads. We are not convinced that these benefits outweigh the tail risk. Given the fund up over 36 months or longer, the dollar profits generated by these investments are not as attractive as the wider spread would imply. While we see construction loans that have great merit and will seriously evaluate the better ones, at this point in the cycle, we prefer assets that have stabilization periods over shorter time frames. The recurring theme to our loan originations is the emphasis on credit. We have said it before, but it bears repeating. We will always prioritize credit. Credit decisions endure and last through the life of the loan while market pricing and economics change frequently. Our lending experience and borrower relationships continue to provide us with the pipeline of high-quality deals. We may not win on price alone. We often win based on our history, quality of service and responsiveness to our clients' needs. These principles were evident again in the first quarter originations as 4 of the 7 loans we closed were won through our direct relationships and/or previous experiences with the borrower. We take great pride in developing these relationships and work hard to deliver flexibility in structuring our loans and providing responsive asset management during the life of the loan. Our intensive focus on new client - on the client ensures that we are either the first or last call for our borrowers’ next investment. As we move through the balance of the year, we expect to increase origination volumes as we have added another senior originator this quarter and as our platform has begun to scale. Our activity since the quarter-end is very strong, and our pipeline is growing. I would like to emphasize that as we scale our business, we are maintaining our standards. We feel very good about the quality of our book and our pipeline. Credit spreads, given the competitive environment, are likely to narrow further. We don't like it, but we are ready for it. This makes our differentiated origination approach, ability to incrementally drive down our funding costs and our disciplined expense control of critical importance to sustaining our return on equity. I will now turn the discussion over to Bob.

Thanks, Greta, and good morning, everyone. First, a recap of our fourth quarter performance. We posted GAAP net income of $25.1 million or $0.42 per diluted share as compared to $24.8 million or $0.41 per diluted share for the preceding quarter. Our earnings were driven primarily by net growth in earning assets of $421.5 million, a decline in our weighted average cost of funds of roughly 40 basis points, which was driven primarily by the closing in mid-February of our CLO. The CLO interest savings were offset by the write-off of approximately $520,000 of deferred financing costs on certain loan investments that were refinanced into the CLO. MG&A expense was in line with our expectations. We declared in March and paid in April a cash dividend of $0.42 per common share. That was an increase of $0.04 per share over the prior quarter, and that translates into an annualized dividend yield of 8.5% on our book value per share at March 31, 2018, of $19.82. The trajectory of our capital deployment and our dividend ramp remains on course. During the first quarter, we originated seven loans totaling $579.2 million. Net growth in earning assets was $421.5 million, a 13.2% growth rate over the prior quarter. Initial fundings under our new originations totaled $516.7 million. The ratio of initial loan fundings to total new commitments for the quarter was 89.2%, which highlights our continued emphasis on bridge and transitional loans with limited amounts of deferred funding. This strategy allows us to put more capital to work at the time of loan origination and lessens our exposure to business plans with lengthy execution periods. For first quarter originations, our estimated asset level return on equity, which is net of overhead and management fees was 9.2%. We've maintained ROE by reducing the cost of funds on our credit facilities, executing our latest CLO, prudently employing more leverage against certain loan investments and carefully managing our operating expenses. Capital deployment and efficiency remains our primary goal in driving sustainable ROE at the investment level and dividend growth at the corporate level. For the first quarter, our asset level leverage, defined as borrowings divided by the unpaid principal balance of our loan investments, rose to 71.3% from 65.1% in the prior quarter. The CLO, which is levered at 80%, was a big driver here, but so were higher advance rates in a number of newly originated loans. For loan investments pledged during the first quarter, the lender-approved weighted average advance rate was 77%. Our debt-to-equity ratio rose to 2.14:1 from 1.71:1 during the previous quarter, another clear indication of the prudent application of increased leverage as a key ingredient of our ramp strategy. Using the momentum of our recent CLO, we are aggressively pursuing differentiated ways to further reduce our cost of funds, extend the maturity of our liabilities and enhance the flexibility needed to remain a leader in the transitional lending space. For our $579 million of new loan originations, the weighted average credit spread was 376 basis points as compared to 418 for the fourth quarter. For the entire portfolio, the comparable measure is 452 basis points. Property types included office, multifamily and mixed-use. Metro areas of note include the San Francisco Bay Area, Metro New York and Chicago, confirming that our investment footprint remains anchored in the top markets. Loan repayments totaled $156.2 million in line with our expectations. A meaningful share of loan repayments for the remainder of 2018 will be driven by accelerating repayments of our condominium construction loan portfolio, where we have virtually no net exposure. Regarding investment pace and net asset growth, we do focus on year-over-year patterns since the timing of loan originations and repayments can and will fluctuate quarter-over-quarter for reasons that are beyond our control. In terms of investment capacity, at quarter-end, our liquidity and capital position was strong. In addition to cash balances of $74.4 million, we had available to fund new investments the following. Shifting to some changes in covenants. We undertook a change in our - I'm sorry - let me get back to liquidity for a moment. We had $10.9 million of immediately available undrawn capacity under our secured revolving repurchase facilities. We have $1.2 billion of available financing capacity under our five secured repurchase facilities and our one secured warehouse facility for a total of almost $2.8 billion of commitments. Additionally, we have the ability to recycle into new loan investments all or portions of our short-term CMBS investment portfolio, which totaled $148.5 million at quarter-end. Unfunded loan commitments were $530.5 million at quarter-end, $93.2 million of those are associated with construction loans funded by our asset-specific financings. Unfunded commitments associated with construction loans declined $31.4 million from $166.4 million during the prior quarter, and that reflects the rapid wind down of our construction loan book. Last week, we amended all of our primary borrowing arrangements to harmonize our financial covenants. The principal impacts were: first, a reduction in minimum liquidity from a hard $50 million requirement to the greater of $10 million or 5% of recourse indebtedness. We estimate our current threshold under this revised covenant is roughly $25 million. We also negotiated for an increase in allowable total leverage from 3 to 3.5:1. Assuming asset leverage - level leverage of 3.5:1, our estimated potential new loan investment capacity based on our current capitalization and no loan repayments is approximately $1.2 billion. Turning quickly to risk management. Portfolio risk, as measured by our internal risk rating system, remains steady and strong. The weighted average risk rating of our portfolio at quarter-end was 2.7. We had no loans on non-accrual status nor were any impaired. Consequently, we did not record a reserve for loan loss in the quarter nor have we since inception. Rising LIBOR continues to help us since substantially all of our assets and all of our liabilities are tied to LIBOR. The 50 basis point increase in LIBOR we estimate will generate an additional $0.09 per share of annual net interest income. And with that, Greta and I would be happy to entertain any questions you might have. Thanks again. Operator?

[Operator Instructions] Today's first question comes from Rick Shane of JP Morgan. Please go ahead.

Well, I am first this morning. Just want to ask a quick question, sort of - and I don’t want to get into the secret sauce here, but given the competitive environment, I would like to understand the dynamics of ultimately how borrowers choose. Obviously, funding is intensely competitive. Are you finding that what happens is when you get to the final decision point, borrower comes back and says, Hey, here's where you need to be in terms of pricing. We'd really want to work with you, but this is where you need to be?

Very good question. And there is a little bit of secret sauce to the answer. But in general, I believe that our high hit ratio, and I believe, we have a high success ratio on deals that we have quoted, is that we are a nimble, all-hands shop with very experienced people. And we say it a lot, and I know it sounds a bit trite, but relationships truly matter. And Bob, myself, Peter Smith, Deborah Ginsberg, we've all been doing this for decades. Deborah, working with borrowers when she was a transaction attorney with Blackstone. Bob, myself and Peter had been interacting with borrowers and brokers for 25, 30 years. And it truly matters, when the person to call. When it's down to the final two or three lenders and you call that principal or you go and you go to their office and say, Hey, I'm dropping by for a moment. I wanted to hand-deliver you this term sheet. And when a CEO does that, it truly makes a difference. And yes, you have to be competitive. That's without a doubt. But being all hands-on and using every cylinder you have to bring in business is important.

Got it. Look, we know how much time you personally spend on the road, so we know that that's part of the formula.

Thank you.

And today's next question comes from Steve Delaney of JMP Securities. Please go ahead.

Good morning everyone. Congratulations on executing the plan just as you promised at the IPO despite the competition. Bob, I'd like to get a little more clarity, if I could, on capacity, in terms of loan growth capacity. I mean, obviously, it takes cash or free capital plus the borrowing capacity on your lines that you alluded to. And when you roll those two together, I think you're about $3.6 billion outstanding at March 31. If you look at your balance sheet and your availability on lines, can you get - with your current situation and balance sheet, can you get the portfolio off to approximately $4 billion, which is pretty much what we had modeled for June 30? I think we were $3.95 billion or something in that area. Is that - is there growth still in the portfolio in terms of outstandings with the existing balance sheet?

Thanks for your question, Steve. The answer is yes. With our current equity base with cash on hand or near-term securities like CMBS that we can roll into cash and with untapped capacity on our six credit facilities, five repo facilities plus one warehouse, we do have sufficient capacity. And frankly, that's before factoring in repayments, which year-to-date have been in line with our projections. The CLO presented or created several benefits for us, and we have discussed on previous calls sort of the corporate finance benefits. But one of the other benefits was we were able to recycle about $660 million of capacity on three of our existing lines, which among other things means that we don't have to pay those providers or other providers for additional capacity. And frankly, by recycling the existing capacity, we can amortize the upfront fees we paid in connection with those facilities over more investment dollars. So there is some first order benefits, and then there are some second order knock-on benefits as well. But to specifically answer your question, yes, we are comfortable with our current capitalization that we can execute the business plan that Greta has outlined and the asset growth figures that you and your competitors have modeled for us.

Great. Thank you. That's very clear, and I appreciate you being that specific. And Greta, just one follow-up for you, if I may, your CLO execution was exceptional. I think the CLO market is presenting a bit of a double-edged sword when you look at loan spreads. What's the chicken and the egg? I mean, is the tight spreads in CLOs, is that pulling spreads down, or is it more the competition? I suspect it's somewhere in the middle, but are - is the CLO market something of a causal factor for the spread tightening on loans that we're seeing?

Well, for us, when we quote a loan, it has to work on our existing financing facility. So we're not counting on the CLO market to be there to finance our assets when we quote a loan. So I think, the larger loan originators like ourselves, I think the CLO is less of a factor. I think the CLO changed the dynamic a lot for the smaller originators that didn't have access to differentiated warehouse pricing. I mean being affiliated with TPG, we had market power and get the most favored nation kind of pricing. The smaller originators really didn't have that. So I do think the CLO market was somewhat of a game changer for them last year. We saw the small loan spreads tightened dramatically such that there really wasn't an advantage to being a small loan originator, and I believe that was because of the CLO market.

And I would add - I'm sorry, go ahead.

I was just asking, can you classify small loans? Are we talking $25 million? What's sort of the range that you put in the small bucket?

Yes. I would say it's that $25 million-ish, less than $15 million - almost all of the loans originated are in that $40 million or less and where the originators are contributing whole loans as opposed to participated interest in loans, which large loan originators need to do.

The last point to add, Steve, in the answer to your question is I think another differentiating factor is for midsized and larger public commercial mortgage REITs, they, generally speaking, are originating the larger loans that Greta described. The CLO has been or can be very constructive to building a capital structure. But there are other tools and financing techniques available to better establish platforms apart from the CLO that can also help drive down cost of funds and improve a company's competitiveness.

But I think also you asked what - are there market pressures. There are definitely market pressures. I think a lot of the spread compression is the amount of capital in the debt fund mortgage REIT space chasing deals today.

Got it. Thank you both for the comments.

Thank you, Steve.

And our next question today comes from Stephen Laws of Raymond James. Please go ahead.

Hi, good morning.

Good morning.

Just to follow up on the yield discussion, Greta, as you see the competition out there, you just mentioned a lot of capital in the debt funds. But is there a floor where you think the investor is just no longer getting the levered return? Or are they kind of backing into this from a retired return on capital? And if so, how close are we to that floor? Or where do you think asset yield settled given what you see in the market today?

And I don't know if this is wishful thinking that's influencing my answer, but I do - I don't feel that the compression will continue at the same pace that it has in the last 12 to 24 months. I do expect to see more compression. I was meeting with a commercial banker just yesterday, who originates for their balance sheet, but they do transitional type loans on their balance sheet. And she reminded me that in 2007, they were doing loans - balance sheet loans on somewhat transitional assets at LIBOR plus 95, and today, her quote would be LIBOR plus 250. So we have seen very tight spread markets. And if you just look at the CMBS market, I mean, AAAs, 10-year AAAs are trading around in the 80 to 90 handle, and pre-crisis, they were in the 20s. So when I look at that data, it's a little frightening, but there was also a lot more financing available for - and leverage in the system than there is now. So I don't see us going to those kind of levels, but I do think there is - to answer your question, I do think there is a natural floor. I think we're closer to it, but I do expect to see some further spread tightening.

Great. I appreciate the color there. And the follow-up on the CLO markets, what are you - I know there's only been a handful of transactions, but what are the markets like today? How does a little more volatility or lift in interest rates change that, and do you anticipate doing another CLO this year? How do you view that as a financing option moving forward?

We certainly are keeping that wide open as an option. We - as well as, other capital market opportunities to us as well. We are very actively evaluating almost on a daily basis all the financing and capital raising options available to us. But at this moment, we would still like to do a CLO this year. We're not quoting deals assuming that we are, but we think it's quite possible.

Great. I appreciate it. And Bob, one follow-up on the leverage side of things, clearly, the advantage of the CLO financing is the non-recourse and match funded duration. When you guys think internally about debt, do you look at it, obviously, the total debt number for the covenants in your agreements, but also, do you really think about it versus recourse debt, versus the CLO debt or kind of as I think forward on a financing mix, how should I think about CLO debt versus the recourse repurchase agreements?

Well, we do - I mean, there are a couple of different layers to how we think about financing. Since we've been primarily a secured borrower to date, let's focus first on that. We believe that there is an optimal credit spread and advance rate for every loan that we do, and they vary. In fact, they vary pretty widely. We said that during the quarter just ended, we - our average advance rate was 77%. We have other loans on our book right now that have materially lower advance rates. They tend to be older vintage loans, but there is a right advance rate for each deal, and then clearly, on a weighted average basis, that aggregates to what our overall leverage is. In terms of corporate finance objectives, no mark-to-market and long tenure is clearly a very important component of our financing strategy in the CLO market. In the arena of secured financing, it's the best alternative available to us now. There are some variance to that that we're also exploring. And then I think the next ingredient as any company matures including ours is building the capitalization that allows one to borrow on an unsecured basis. And finally with respect to recourse in particular, it's a tool in our toolbox, but we don't believe it's appropriate to rely entirely on it, and we don't. And to that end, our credit facilities, generally speaking, are only 25% recourse. Does that answer your question, Stephen?

It does. That color is helpful, Bob. Thank you. I appreciate taking my questions.

Thank you. You bet. Thanks for dialing in.

And today's next question comes from Ken Bruce of Bank of America Merrill Lynch. Please go ahead.

Hi, good morning to everyone. Thanks for the questions. I guess my first question is just make sure I understand some of the moving pieces here. So spreads are obviously tightening, and we've seen that kind of across the board, and you've been talking about it for a while. And I guess, from the standpoint of being able to negotiate a lower cost of capital, that's helping to offset that. But I guess I'm also sensing that you're going to be willing to take up leverage in order to essentially keep the economics of the business more or less intact, am I understanding that properly?

Yes. Ken, the answer to that is yes, although I will condition our answer by saying that if you think back to the IPO and the quarter since, when we went public, we were underlevered by any measure certainly in comparison to the mean of our public competitors. And today, we're still underlevered on a macro basis. So a big part of our push the last several quarters has been to deploy our equity and to prudently deploy more leverage. We're not yet to our target. I think implicit in your question might be, are we pushing leverage in order to sustain returns? And our view is, at this point, the answer is no. We're just getting to the target leverage that we had originally identified.

And I would also like to add that leverage also depends on the type of assets that you're originating. We're generally originating cash flowing assets that are pretty far along in their value-add strategy, and these warrant higher leverage. We shifted out of construction loans. When we went public, we still had a fairly high percentage of construction loans. Those are winding down for a variety of reasons, some I explained earlier in my conversation. Construction loans have very low LTVs, and when you take those out, your leverage automatically goes up. And also, we're predominantly first mortgages, and we lever first mortgages. If we had a higher percentage of mezzanine loans, you would see a lower leverage number on our balance sheet. So you have to factor in what type of assets we're talking about leveraging.

So for those keeping score at home, after the call, if you look at Page 8, in the supplemental, you see we laid out three representative transactions for the quarter, which have in place debt yields of 8%, 6% and 8.2%, respectively. So Greta has driven us towards the strategy, as she stated repeatedly, shorter business plans, more in place cash flow. We think that's the right risk profile for this point in the market environment and it also lends itself to the use of appropriate levels of leverage.

And again, I believe you did increase your covenants though on leverage. So I guess the way I'm kind of thinking about that, obviously, the progression of leverage for your business plan is appropriate. And so I guess this is - it's not an absolute term, and I'm asking if you're bringing up leverage. Just it appears that you're taking a set of assets that maybe have more stabilized cash flows, but you're applying more leverage. And I just want to make sure I understand if that is or is not what's going on?

That's true. That's true. One other thing I would add is what this covenant package did was really allow us to fulfill our target leverage of 3.5:1, which has been our consistent targeted leverage since we went public.

Got it. Okay, thanks. And then I guess in the context of - Greta, you kind of detailed obviously some of the things that differentiates TRTX from some of the other competitors in the marketplace in terms of relationship. And obviously, having a competitive cost of capital is a very important one in terms of making that work. I guess do you see that as being a defensible competitive advantage? When I look at either the CLO market or just the general wholesale capital market, a lot of these, if you will, competitive advantages get essentially replicated very quickly by others. And I'm interested what your perspective is on that.

Well, I think it's - from the relationships and the history of doing it, I don't think someone who's only been doing this 10 years are going to have a hard time catching up with me in terms of the 30 years. But yes, we recognize that the market is highly competitive and very dynamic, and people evolve. But we evolve too with the market. And I just think we are nimble, we're scrappy, we run very efficiently. And it's hard to point to truly absolute and objective reasons why we're going to outperform. But I just think that given our performance to date and looking at our pipeline, which is filled with transitional loans not augmented by us taking on more risk to fill the pipeline. I mean, I'm very much a follower of Howard Marks letters, and I do believe in times like this, you do not stretch on deals. And we're very disciplined with that, but we are still able to have a very robust pipeline with already, for this quarter, $650 million of loans that are likely to close in the next couple of weeks. So I just think - we're going have to demonstrate it to you quarter-after-quarter, and we're working really hard to do it. But I think every shop has its differences, and I think ours is that we are - have been consistently, throughout our careers, balance sheet lenders. We didn't switch to this career late cycle, and I truly believe that gives us a competitive advantage.

Got it. And maybe just lastly, where do you think we are in this cycle? It feels - just in terms of some of the behavior we're seeing - and this is not a comment around you. It's really around everything going on more broadly in the market. It feels a little late cycle. I'm just wondering if you agree with that, or where do you think we are in this cycle?

I think this cycle is unusually long, but that maybe the new paradigm. We just have longer cycles this time around. I throughout my career, I think if I was leaning one way or the other, I usually was more of a bear than a bull when I looked at the overall economy. So I try to find the cracks. And looking at the economy today, I really don't see what the disruption will be. I do think, I mean - and I do this all the time. I write 10 reasons why the economy is going to continue going well and 10 reasons why it won't. And I could list those for you now. But if I had a concern, it would be that corporate leverage is unusually high, that if you look at Corporate America, earnings are up, and interest rates are low, yet debt service coverage is lower than it has been. So there's not a lot of room for error if we see interest rates rising. And yes, while the Fed is likely to raise the rates, they're saying 3x this year, I'm not sure if I believe it's 3. Those are the short-term rates. Yet if you look at the long-term rates, which really are more of an indicator of the economy, and you look at the relationship of the 10-year treasury to the 2-year treasury, it is historically tight right now. It's very flat, and it wasn't as flat as it is now since before the financial crisis. Yet there could be a lot of reasons for that. It could be that we've been in a world of quantitative easing for many years, and it's changed the paradigm. It could be because our rates are higher than foreign - overseas government rates. So the money is still coming here, but it is something to watch. But that being said, in the real estate world, I do believe that, in general, the market looks very healthy. I mean, we have seen pockets of slowness. I think if I look through our portfolio and looked at loan requests that we see, [hotel] operating performance is not as strong as we would like it to be, in general. We don't see any credit problems, but it just didn't - value-add plan just didn't materialize as quickly. High-end apartments are - there are more concessions. So you have to look - watch them. But in general, I don't see anything that's really worsened. So to answer your question, I think I'm not sure inning is the right terminology today because it just implies that there are certain finite number of innings. I think we're just in a longer period of recovery in the cycle.

Thank you for your comments. I appreciate them. Thanks.

Thanks Ken.

And our next question comes from George Bahamondes of Deutsche Bank. Please go ahead.

Hi, good morning. Greta, in your opening remarks, did you reference $650 million of loans closed or in the process of closing subsequent to March 31?

Yes.

Great. Okay. I just wanted to make sure I had that down here correctly. Do you have a sense for what repayments were like subsequent to 3/31, either repaid or expected to repay? I understand the expected to repay probably isn't [indiscernible], so maybe any color around what has been paid since 3/31, that may be helpful.

I think the first quarter, we had $156 million of repayments. The fourth quarter was also a relatively light repayment. In the next two quarters, we're anticipating a little over $400 million. Bob has the exact numbers. And then it drops down again. But for the year, we're projecting about $1.1 billion of repayments, $436 million of which are coming from construction loan paying down as condominium units are sold and delivered. And this pretty much reduces our construction and condominium exposure to zero, almost zero.

Got it. Okay, thank you. That is helpful color.

And our next question today comes from Arren Cyganovich of Citi. Please go ahead.

Thanks. Did you just say you're going to have $1.4 billion of repayments over the next two quarters?

No. 400 - a little over $400 million in the next two quarters.

Okay. All right. Got it. I misheard that. Good. So on the LTV side, you differentiated the fact that you're investing in, I guess, higher quality, multifamily, et cetera. How are these LTVs kind of moving in general by asset class? So if you were to look at a like-to-like multifamily or office from the prior year, how does that compare to what you're able to finance today?

I would say that borrowers who are asking for 65% are now asking for 70%, and those who are 70% are asking for 75%. And it's often where the borrower's adviser is saying, Hey, you can ask for more. Go for it. And they are. They're not always taking it, but they want to see the quote at the higher leverage. I think 5%.

All right. So I guess kind of back to one of the previous questions, just if you think about like some of the overall overarching trends we're seeing, spread compression, LTVs rising, banks willing to provide more debt financing, it seems like we're getting kind of toppy. And you've made some interesting comments about the past cycles, and we're not near as tight as we used to be. But at the same time, it just feels like the risk is rising, yet you're talking about increasing the amount of originations into this type of market. Could you just kind of comment on where can investors feel comfort in this kind of strategy?

Well, firstly, we do focus on major top markets, and we do focus on high-quality institutional borrowers. And the borrower is equally - almost equally important to location. I don't know if - I could go either way on that. But location is clearly important for real estate. So I think in the type of lending we do, which is first mortgage lending, predominantly first mortgage lending on assets that will be stabilized within two years, we see less volatility in those. There's still the value-add component so that there will be continued value creation at the asset level. So we look at what is our debt yield today, what is our stabilized debt yield, where do we think interest rates - fixed rates for the permanent take-out will be, and we stress those. Are loans that we're seeing in general higher leverage than they were three years ago? Yes. Is it like it was pre-financial crisis? Nowhere close. We're not seeing those types of leverage. And still close to 50% of our loans, it depends quarter-to-quarter, are acquisitions. So you're seeing new cash in. And we're very mindful when we do refinancings of how much equity the borrower has in the asset so that our incentives are aligned. So I mean, I think the type of lending we're doing, where we can see the end of the tunnel for the property in terms of the value-add strategy, as I mentioned, we have deemphasized the 36 to 48-month construction loan followed by another 24-month lease-up because we just can't see that far down the road of what's going to happen. So we do feel comfortable with that. And I still believe that the types - and particularly, the types of lending we're doing is a very defensive strategy if one does believe we're toppy in real estate because of the equity cushion that we have behind our loans.

Thanks. That's very helpful. I appreciate that. And then in the supplemental, you have on Slide 12 the asset sensitivity chart, which is always fairly meaningful. Is this sensitivity actually achievable in this kind of spread tightening environment? You're lowering your cost of debt, which helps, but I guess I would assume that there's going to be some sort of floor on that as well. Can you actually get expansion of your margin related to this LIBOR increase?

As LIBOR increases, will that cause margins to further compress? Is that what you're asking?

Well, I guess I have a gut feeling that margins are going to compress, and that these are - you'll clearly benefit from rising LIBOR. But are you going to give up that benefit of rising LIBOR because margins are going to further compress?

I do believe that margins are more likely to compress than go the other way in the very near term. But I don't believe we're going to see the type of percentage decreases that we've experienced in the last one to two years. I do feel - and again, this could be wishful thinking influencing my opinion here, but I do feel the tightening is - the worst of the tightening is behind us. But that being said, everyday, we're in the market quoting deals, and every day, we're asked to tighten further.

All right. Thank you very much.

Thank you, Arren.

And our final question today comes from [indiscernible]. Please go ahead.

Good morning and thanks for taking my questions. So we've spoken quite a bit about amending the guarantee agreements for - to allow additional leverage. To be a little more detailed, when you break your loan portfolio into the four categories, bridge, light and moderate transitional, construction, do you think you'd be able to get this 3.5:1 multiple on just the lightly transitional bucket, or do you think you can employ it for the majority of your collateral base except for the construction portion, which is already in decline?

Well, the covenant - the specific leverage covenant to which you referred, Ben, is a macro or a blanket covenant. It doesn't apply to advance rates on individual loans. So in and of itself, it's not a binding constraint on our financing decision with respect to an individual loan investment. Having said that, as Greta has made clear in the past, we do believe there is an appropriate and optimal advance rate for each loan that we originate. And all else being equal, a multifamily property with a relatively high in place debt yield that can be refinanced with any number of GSEs or another - or other capital providers is likely to support a higher advance rate. And at the other end of the spectrum, even though we're not actively originating construction loans, those tend to have much, much lower advance rates, typically in the range of 55% or 60%. And everything else falls along the spectrum between those two goalposts.

That makes sense, and I think it's important that we always have to remember each loan is unique and bespoke. I know that we also touched on investment capacity, and we highlighted some quarter-end figures. If I'm kind of thinking about everything correctly, on your liquidity requirements, future fundings, I mean, you've got to be pretty close to fully deployed. And I know you mentioned CMBS as a good source of capital that could be reallocated, but is the fact that you guys aren't necessarily flush with capital right now at this point in the market maybe something of an advantage over your peers? Are you able to be a little bit more choosy and cherry-pick those loans? Just how are you feeling about your competitive position in that regard?

Let's take that in two points, and I'll go first. And then I know Greta has a view on this. I think that our investment selectivity in terms of quality of sponsorship, market, credit and so on, we have a high bar in all market environments. And Greta can touch more on that in a moment. In terms of investment capacity, as I said earlier, we feel very confident that with our current capital base, we can achieve the origination targets that Greta mentioned earlier and that we see in the models that the analyst community prepares, between cash and near-term cash on our balance sheet and between untapped financing capacity already in place with our six credit facilities with some ability to reinvest cash from our CLO to put in the CLO more participation interest in loans that are already in the CLO. Yes, we have a number of different sources of capital to fund new investment activity. And that's before accounting for repayments, which Greta highlighted earlier, which wouldn't necessarily contribute to net asset growth but clearly drives gross production numbers.

Yes, no, I think that covered it well. And the only thing I would add is that we're - whether we're flush with cash or not, we are always highly selective. I mean, we have a certain band of type of transitional loans that we'll focus on. But presently, we do not feel constrained from a capital standpoint when we're evaluating opportunities.

That's very helpful. I think it's important that we remember quickly repaying construction loans and also the replenishment feature of your structured financing. Appreciate the comments, guys and congrats for the quick start in 2Q.

Thank you, Ben.

And this concludes our question-and-answer session. I'd like to turn the conference back over to Ms. Guggenheim for any closing remarks.

Well, thank you all for your questions. I felt that they were very thoughtful and interesting. And just to conclude, we're very excited about what we have accomplished since the IPO. We're very excited about our progress year-to-date and even more excited about our pipeline. And we look forward to speaking to you next quarter. Thank you.

And thank you, ma'am. Today's conference has now concluded, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.