Greetings, and welcome to TPG Real Estate Finance Trust Third Quarter 2020 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Ginsberg, Vice President, Secretary and General Counsel. Thank you. You may begin.

Good morning, and welcome to TPG Real Estate Finance Trust's Third Quarter 2020 Conference Call. I'm joined today by Greta Guggenheim, Chief Executive Officer; Matt Coleman, President; and Bob Foley, Chief Financial Officer. Greta and Bob will share some comments about the quarter, and then we'll open up the call for questions. Yesterday evening, we filed our Form 10-Q and issued a press release 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 most recent 10-K and our 10-Q. We do not undertake any duty to update these statements, and 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, it is my pleasure to turn the call over to Greta Guggenheim, Chief Executive Officer of TPG Real Estate Finance Trust.

Thank you, Deborah, and good morning. We are pleased to report our third quarter performance and the progress we've made since we last spoke. We realize there are a few distractions this week. So we will be concise, stick to what really matters and get right to your questions. Beginning with asset management, we collected 100% of interest due on our loan portfolio during the quarter. This includes PIK income of $3.3 million or 5.2% of total interest payments. At quarter end, we had 8 loans with partial PIK interest with an UPB of $526 million. This compares to 4 loans and $254 million at the end of the last quarter. Total loans modified with deferral of interest during the quarter were 4. Rent collections have declined slightly for our office loans to 91%, but remained steady at 92% for our multifamily loans. Hotel occupancy and RevPAR have steadily increased for each of our loans secured by hotel assets, with the best profits from our 2 resort properties, one that caters to the high-end market and the other, which is very much a mid-market property. As well, our select service properties have performed quite well. The office property in Brooklyn, securing our one office loan in that market was sold to a third-party, which happens to be an existing sponsor of TRT on other loans and our loan was assumed by the borrower. The VaR capitalized that asset with $13.5 million in new cash at closing and is expected to contribute another $5.5 million over the life of the loan. The new loan was paid down by $3 million and the borrower funded a 6-month interest reserve plus guaranteed interest for 9 months. We sold a $50 million mezzanine interest at no gain or loss in our largest loan on…

Thank you, Greta, and good morning, everyone. We reported yesterday afternoon for the branding September 30, GAAP earnings per share of $0.40 GAAP earnings per diluted share of $0.39. And as Greta said, core earnings for the quarter ended were $0.42 per common share. That's up $0.19 per share from the prior quarter, due almost entirely to the absence in the third quarter of a loss we recognized last quarter on the loan we sold in June. We declared on September 15 and paid on October 23, a dividend per common share of $0.20. Book value per share increased quarter-over-quarter by $0.23 to $16.78 per share. On the strength of diluted earnings per share that exceeded our dividend by about $0.19 per share. For the past 2 quarters, core earnings have outstripped our dividend by an average of 1.63x. The primary drivers of our strong earnings were: first, that we collected 100% of our scheduled interest; second, LIBOR floors on 100% of our loans, all of which are in the money with a weighted average LIBOR floor of 1.69%; third, a quarter-over-quarter decline in interest expense of $4.4 million because LIBOR fell to 15 basis points from an average of 35 basis points during the second quarter, and that's a benefit that's magnified because only 8% of our liabilities involve non-zero LIBOR floors; and finally, our borrowings declined by approximately $123 million during the quarter. In terms of liquidity, cash on hand at quarter end was $225.6 million. And due in part to the $309.4 million of loan repayments that occurred in October, we have $140 million of cash in our CLOs awaiting reinvestment. Given the political, economic and public health uncertainties, we believe it's prudent for us to hold through the year-end higher than normal cash levels despite the…

[Operator Instructions] Our first question comes from the line of Stephen Laws with Raymond James.

Greta, I know you provided some comments on the asset in Las Vegas. Can you give us a little more color on expected time line towards reaching a resolution there, if you know that yet? I know, it's a couple of weeks in. And also, how much interest income, Bob, did that loan contribute in Q3 that we need to think about coming out now that it's on nonaccrual?

We're evaluating our options. We're proceeding to evaluate a foreclosure on the mortgage or the pledge of equity and also exploring a deed-in-lieu. I really don't know the timing. My sense is, given our strong security position and the borrowers, I think, willingness to move on, I think it could happen relatively quickly, but these things are unpredictable, and I can't really give you any assurances of that in terms of our getting control of the collateral.

Okay. And Bob, how much interest income did that asset contribute, if you know that number?

I'll come back to the group during this call. My computer has frozen up. So the schedule and calling up with that data on it, I can't quite access yet.

No problem. Greta, next question. You mentioned that, that type for new investments kind of in the new year, can you talk about opportunities and returns you're seeing there versus looking at some type of stock repurchase, given where the stock trades relative to book value? I know you cited confidence in the value of the portfolio during your prepared remarks. So I wanted to get your thoughts on how you think about new investments versus stock repurchase.

Yes. Well, this year, and certainly, in the third quarter and as we continue in the fourth quarter, there remains a high degree of uncertainty. There's still uncertainty over the election, and we're now in our second day of it. But the -- And in coronavirus cases, I read today have reached a new peak of 100,000. I mean, I -- at this moment, we still believe it's prudent to be defensive just given the uncertainty, we are hopeful that by the next time we all speak, there will be a vaccine and there will be a newly elected President with a lot of that uncertainty underway. And at that point, we'll evaluate the returns we can get on deploying our cash and -- versus considering a stock purchase. And we'll also look to see how it's helped other companies who bought shares, how that's impacted their share price and therefore, the return to shareholders, which is the main goal here is to maximize shareholder value.

Great. And you guys have made a lot of headway on the increasing of the non-mark-to-market financing. Is there a target percentage you're moving to or are there other loans? I know you've now got all the hotel loans financed with no mark-to-market for 2 years. But can you -- are there other assets you're specifically looking to do that or is there a target or how should we think about that number and where you'd like to get that in the next 6 months or so?

It's a very good question. It's very asset-specific. Our -- when we look at our portfolio, our multifamily assets have been very steady performance wise. And when you look at the investment sales market, in minimarkets other than New York City, Manhattan, you're seeing apartment projects trade at the same or even better levels than pre pandemic. So we're not as concerned about those assets, particularly maintain moderate leverage. We'll watch our office assets more quickly. We feel we don't have major valuation concerns on our office, and we can talk about our New York City office and explain why we're comfortable with that as well. But it's -- I guess to answer your question and not be so long winded. It is -- it's very asset-specific in general, having less mark-to-market financing is desirable, and we're going to continue to work on getting that higher, particularly as the CLO market looks like it's returning in terms of financing options. So we don't have a specific target in mind. In general, more is better, but it also depends on the asset side.

Great. I guess one last follow-up on that. But when we look at the recent financing at L plus 4.5% with the 25 bps floor, is that kind of the market now for that non-mark-to-market financing or is that specific because the line was designed for the hotel loans? And so therefore, a little higher expense. How do we think about that as we forecast our financing costs?

I think it was specific to hotel loans in the middle of a health pandemic.

And Steve, in direct response to your earlier question, the NIM, with respect to the Las Vegas land loan on a monthly basis, is approximately $420,000.

Our next question comes from the line of Steve Delaney with JMP Securities.

Congrats on the progress, and I certainly respect your caution on the current market. Curious if you could comment a little bit about repayments. You have seen some that's, I think, a positive $309 million here in the fourth quarter. Do you have some visibility looking out for the rest of this year and early next year, if there may be additional repayments coming beyond the $309 million that you cited?

It's the -- ever since the -- this health pandemic came on, we really spent a lot of time trying to understand, which of our loans would be in a position to repay in the third and fourth quarter. And the ones that we projected, we were pretty much, I would say, close to 100% accurate, and that really is because we have such great borrower engagement. The further out you are, it's a little less uncertain. But when you get within 90 and 60 days, you can have a little more confidence. We feel pretty good that repayments will continue. This year, they were -- they're expected to be slightly over $1 billion. Last year, they were $1.9 billion. I think going forward, it's going to be closer to what this year was, maybe plus or minus, and that's also just based on the age of some of our loans, too, because we did originate a bit in the fourth quarter of '19 and the early parts of the first quarter of 2020. So in the -- even pre-COVID, the average life of the loan was somewhere between 2 and 2.5 years. So given the combination of a still in a inefficient economy and some of the newer assets, I think it's going to be closer to this year's level.

Well, it would seem to me that as far as modeling, it would be prudent for us to assume that whether it's at year-end, the portfolio could shrink to somewhere in the neighborhood of $5 billion from the current $5.4 billion. And then maybe even though you are looking at new opportunities, it might -- is it possible that it might shrink further early in the year to something approaching $4.5 billion?

We're -- As I mentioned, we're seeing some interesting opportunities. So I think their -- countering that will be some asset growth.

Okay. All right. Bob -- Stephen asked about the cited the rate on the hotel loan. Are you -- as you look at that financing and you look at the interest that you're accruing on the properties. Is that still in a net positive, net interest spread situation or is it kind of a push at this point? It sounds like we need to factor in a slightly compressed overall blended NIM for the portfolio with the hotel financing, which, by the way, is a great accomplishment on the nonrecourse, no mark-to-market, right?

Thank you, and the whole team here did a super job on that very important financing. With respect to NIM, I think, and following up on Stephen's call, the cost of funds for that transaction clearly reflects the nature of the underlying collateral, which is hotels. I think there are some instructive comps in the market today. Several CRE, CLOs have been executed over the last month, some by public commercial mortgage REITs and other by private debt funds. And frankly, those weighted average spreads are in the pre-fees or in the 170 over LIBOR to, call it, 200 over LIBOR range. So there's a big range between those 2 endpoints. I think that for the rest of our financing costs in the rest of the space, you should be thinking more towards the low end of that range, but probably higher than the 164 basis points or so, that's our weighted average cost of capital. The capital markets have clearly shown some legitimate signs of recovery. That's been a cost-effective borrower, and we think that we'll continue to be that way. Obviously, getting more term is an important strategic objective, as Greta stated. And that sometimes comes at a premium, but it seems to be an increasingly modest one.

Okay. Just one final thing. And just to follow-up on Stephen's comment there. Cash, it sounds like you were going to stay high on cash, $250 million or better through the end of the year. As you get clarity on the economy, the election, all of this, at some point, if the stock remains in the 50% to 60% of book value range, do you believe that the Board would consider activating a buyback program?

I think they will consider all alternatives. As you can imagine, we've covered a lot of these alternatives year-to-date in numerous Board discussions. And you just really have to weigh how impactful is it to the stock price to do it and look at examples that are in the market where others have done it. And how -- as we -- you don't get that capital back and you also need to grow. So we'll weigh all of those various important considerations in coming up with the right decision, but the underlying fundamental goal will be what's in the best interest of our shareholder.

[Operator Instructions] Our next question comes from the line of Charlie Arestia with JPMorgan.

I appreciate that you guys disclosed the breakout of light-to-moderate transitional loan categories. With moderate at around 1/3 or so of the portfolio, just wondering how you guys are thinking about the future funding commitments on those loans. And I'm also wondering if that's where the most of the loan modifications so far have taken place.

In terms of the loan modifications, no, there's really not a great correlation to that category -- if the loan is falling into that categorization. The biggest correlation is how badly was that property type affected by the pandemic and which unsurprisingly is our hotel loans. And the -- as I briefly touched on in my opening comments, we have very moderate deferred funding. And frankly, we had none related to any construction loans. And the -- And we are also able to back lever in the 70% to 73% type of range on our preferred funding obligation. So it's really -- I think that is a relatively low number, I think, among the CM REIT peer set, the amount of deferred fundings we have. So it's not something that -- we have things we worry about. That's really not one of them.

Ms. Guggenheim, We have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Well, again, thank you all for taking time today. I know that there's numerous distractions as well as other important calls going on. And we thank you for taking the time, and we look forward to speaking to you at 3 months out when hopefully, it's a much better time for all of us. Have a great holiday season. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.