Greetings and welcome to TPG Real Estate Finance Trust Earnings Call for the Fourth Quarter and Full Year of 2023. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, today’s call is being recorded. It is now my pleasure to turn the call over to the company. Thank you. You may begin.

Good morning and welcome to TPG RE Finance Trust earning call for the fourth quarter and full year of 2023. We are joined today by Doug Bouquard, Chief Executive Officer; and Bob Foley, Chief Financial Officer. Doug and Bob will share some comments about the quarter and then we will open the floor for questions. Last evening, the company filed its Form 10-K and issued a press release and earnings supplemental with a presentation of operating results, all of which are available on the company’s website in the Investor Relations section. As a reminder, 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 risks that could affect results, please see the Risk Factor section of the company’s Form 10-K. The company does not undertake any duty to update these statements, and today’s call participants will refer to certain non-GAAP measures, and for reconciliations you should refer the press release and the Form 10-K. At this time, I’ll turn the call over to Doug Bouquard, Chief Executive Officer.

Good morning and thank you for joining the call. Over the past quarter, the market has rallied broadly, driven by a mix of robust economic growth, a tight labor market and the expectation that the worst is behind us in terms of both inflation and restrictive Fed policy. Not only is the S&P 500 up about 5% since the start of the year, it’s worth noting that since October 2022, the S&P has rallied a remarkable 40%. In credit markets, corporate credit spreads continue to tighten in sympathy with the equity markets. However, real estate credit spreads continue to underperform on a relative basis, driven by the same themes that have been affecting the real estate market for the last several quarters. Broad pressure on values, secular challenges to office, elevated borrowing costs and reduced liquidity. Many traditional providers of real estate debt capital, particularly regional banks, remain defensively positioned. While there are multitude of dynamics at play within real estate capital markets, the pace of Fed rate cuts will be a key driver of credit performance, particularly among floating rate lenders. On the positive side, thus far in 2024, credit spreads in the CMBS and Series CLO markets have tightened with particularly strong demand from the bond buying community in favor property types such as multifamily and industrial. However, real estate as an asset class has lagged the broader market rally. I expect 2024 will be a year of increased transaction volumes and price discovery across the sector. In the fourth quarter, TRTX followed through decisively on the strategy that we have steadily articulated to the market. Number one, maintain elevated levels of liquidity given the broader market pressure and uncertainty. Number two, resolve identified credit challenged loans with an eye towards maximizing shareholder value. And number three, position…

Thank you, Doug. Good morning, everyone and thanks for joining us. Our results for the fourth quarter and full year illustrate our success in executing our 2023 operating, which was to efficiently resolve or identify credit challenge loans, primarily office, at the best values available in the market, sustain high levels of liquidity, maintain or reduce our already low leverage levels and position TRTX at year end to play offense, defense or both in 2024. Regarding our operating results, GAAP net income attributable to common shareholders was $2.6 million for the fourth quarter as compared to a loss of $64.6 million for the third quarter. Net interest margin for our loan portfolio was $21.3 million versus $19.5 million in the prior quarter, an increase of $1.8 million or $0.02 per common share, due largely to repayment of borrowings associated with non-performing loans resolved during the fourth quarter. Distributable earnings before realized credit losses was $24.4 million or $0.31 per common share as compared to $13.7 million or $0.18 per common share in the prior quarter. Distributable earnings before realized credit losses averaged $0.23 per quarter for the full year 2023, which we view as a solid foundation from which to build in 2024. Distributable earnings declined quarter-over-quarter to a loss of $159.7 million versus a loss of $103.7 million in the prior quarter due entirely to realized losses incurred from the resolution of all of our non-performing and 5 rated loans during the fourth quarter. The realized losses recognized in the fourth quarter were nearly identical to the CECL reserves associated with the resolved loans. Our CECL reserve decreased quarter-over-quarter by $166.8 million or 70.5% to $69.8 million from $236.6 million as of September 30th, 2023. Our CECL reserve rate declined to 190 basis points from 560 basis points. This…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Arren Cyganovich with Citi. Please go ahead.

Thanks. I guess maybe now that you’ve worked through some of your most challenged loans, is your time now just focusing on realizing the value of the REO? Or can you start to get on a more offensive footing and start to look at investing in some new loans as well?

Thank you for the question. On that point, I think based on where we are as a company, we’re in a really unique spot where we actually are able to start and play, frankly, a lot more offensively. Our record in terms of managing and owning REO, I know that Bob spent some time in his prepared remarks speaking to our experience there, but from a capital allocation perspective, we will be deploying capital into new loans in 2024. Part of that, of course, will be by deploying our Series CLO reinvestment capacity. And then beyond that, we will have the ability to deploy excess cash, which, of course, can help drive earnings power of the company.

I guess on the last point, I guess, where we stand at the end of the year or today, where is the earnings power that you see right now? Now that you’ve had a lot of activity in the fourth quarter.

Sure. So I think to maybe anchor everyone for a moment. One thing that we mentioned earlier in the call is that, when you look at our average distributable earnings before credit losses in 2023, on a quarterly basis, we averaged about $0.23. And that $0.23, of course, was during a period of time where we were generally playing, I’d say, more defense had elevated cash levels. So I think starting from that $0.23 per share number is, I think, a relatively good base. And then really from there, I really describe it as our having three levers of how much we can build the earnings power of the company up. The first of which, as I mentioned is deploying the Series CLO reinvestment capacity, which we’re well in the process of, as Bob mentioned, we have $274 million of capacity within those CLOs. We have already deployed thus far about $71 million of that, and we fully intend to fund that remaining amount. Secondly, we may look to deploy excess cash into investments as well. We are fortunate to have a series of financing counterparties that would like to continue to grow our relationship. So from a back leverage perspective, there’s ample liquidity. So again, sort of lever two would be deploying excess cash. And then third, just from a leverage perspective, we are relatively low levered. When you look at, really, across the landscape, we’re levered at 2.5 to 1. So we do have the opportunity to potentially have a bit more leverage at our company level.

Thank you.

Thank you.

Thank you. [Operator Instructions] Next question comes from the line of Stephen Laws with Raymond James. Please go ahead.

Hi. Good morning. Congratulations –

Good morning, Stephen.

Good morning – a busy fourth quarter and a lot of progress. I wanted to touch base, Bob, revisit, I think you said $0.07 per share. Is that a quarterly number? Once I guess we won’t get a full quarter impact till later this year. But is that a full quarter impact of $0.07 once the CLOs are topped off?

Yes, that’s correct, Stephen.

Right. Just wanted to confirm that.

Yeah, $247 million was uninvested at year end. We’ve deployed about $71 million since, and so that leaves about $176 million. So we’re all that deployed based on where we’re originating loans today in the first quarter. That’s how you get to the $0.07.

Great. And that is a great lead into my next question. So the $71 million done so far, were those new originations closed this year? Were those existing that were in other facilities? And what are you looking at in the current new investment pipeline that’s likely to go into those CLO vehicles?

Yeah. So those two investments were both – those were both new investments and both within the multifamily sector. And I think as we think about deploying capital in 2024, we still do prefer housing as a broad theme, while we do acknowledge that there are parts of the multifamily market which are under pressure due to either an increased amount of supply in certain markets, and then sort of on the borrower level, in some cases, seeing pressure with elevated short-term rates. But beyond those two factors, we really do like the multifamily space, specifically longer-term. So my expectation is that, we will be deploying capital within the housing sector. But when we look at the current leverage points that we’re basically able to lend at in today’s market, we are, I would say, generally lending at a lower going and loan to value than I think a lot of where the market was lending in 2021 and ‘22.

Appreciate the color there. And then on the REO, I know one of your assets that’s currently there generating a fairly attractive return, but can you talk about the timeline of maybe moving the others off the balance sheet? Are they assets you need to lease up over time and stabilize? Are there some that may find other homes sooner than others? Can you give us a little color on that?

Sure, Bob, why don’t you start that one?

Stephen, at year end, our REO portfolio was comprised of five properties, one of which is an office building in Houston that we’ve owned since earlier in 2023. And as you just mentioned, generates a very attractive 9%-plus ROE. For each of the others, we have evaluated alternative business plans for each. That was an important part of the employing the investment framework to determine whether we were in fact in a foreclose or pursue another resolution strategy for each of what is now REO. I would say, generally speaking, properties that we own that generate less current cash, we require more capital for investment and have a longer hold period in order to fully realize on the investment, probably have a higher return bar and therefore are likely to be owned for shorter periods of time and the opposite would hold true. So, for example, we now own a very nice Class A multifamily project in the western suburbs of Chicago. That property is completed several years ago in lease up. We’ve actually improved occupancy by about 5 or 6 points in the seven weeks since we acquired it. That’s probably something that we lease up, stabilize, and then sell. There are some other assets that may have more complex business plans and we’ll report back to the market as we work through those.

Great. And one last quick one. The K mentioned the interest coverage ratio covenant reverts back to 1.4 at the end of this quarter. Can you give us an update on where you stand on that with that moving from 1.3 back to 1.4 and any moving pieces we need to know there?

Sure. Absolutely correct in your assessment. We’re obviously monitoring that closely – in constant discussions with our lenders about a number of things, including that, but we don’t expect that, that will be an issue come quarter end. We’re moving – just want to add one more thing in response to your question. Retiring the substantial borrowings that we had in connection with the NPLs, which we no longer have, was an important point in addressing the interest coverage ratio. And the other thing I would just remind investors and analysts, is that, that test is a trailing 4-quarter test. So you sort of earn your way into it and out of it. Thanks, Stephen.

Thanks, Bob. Appreciate the comments.

Thank you. [Operator Instructions] Next question comes from the line of Steve DeLaney with Citizens JMP. Please go ahead.

Good morning, Steve.

Mr. DeLaney, please go ahead with your question.

Do you have a question?

Apologies. I was on mute, my apologies. Thanks for taking the question. Following-up on Stephen’s comment about the cleanup that you’ve done was truly remarkable. So we have to applaud that. Now that sort of the credit is boxed in, if you will, and you’re looking at new loan opportunities, where in the ranking of priorities would you put share buybacks with the stock slightly under 50% of book value? I realized that scale and growth are important, but what should shareholders expect, if anything, on buybacks at this point? Thanks.

Thank you. So a share repurchase is certainly a potential tool in the capital allocation arsenal for us. That being said, we really will be looking at both new investments and other ways for us to be deploying our capital. So just to be very, very direct about it, we, along with our Board, are carefully considering the option and are seeking the best returns for our investors.

Sure. Understand. Now you did not have – I’m looking at the balance sheet, I don’t see a convert or any high-yield debt. Is that correct? I just see secured debt. Am I missing something?

That’s correct.

That’s correct.

Steve, you’re absolutely right.

Okay. Yeah, because we’ve seen some really nice buybacks on those. But look, I know capital allocation is – it’s part offense and part defense. So for now, we’ll just say congratulations on the great cleanup effort. And I’m sure your Board will make the right calls moving forward. So all the best in 2024.

All right. Thank you very much. We appreciate it.

Thank you. Next question comes from the line of Sarah Barcomb with BTIG. Please proceed.

Hey, good morning, everyone. Thanks for taking the question. So my first question is about the run rate distributable earnings on the performing loan portfolio. Could you walk me through your thoughts on go-forward earnings power now that you’ve gotten zero non-performing loans? Basically like, what needs to happen in order for you to remain constructive on that credit? You mentioned in the prepared remarks that the timing and pace of a Fed pivot is important here. Would we need to see that within the next few months? Or can you speak to any sensitivity there? And any other variables that we should consider as we think about the go-forward non-accrual risk? Thank you.

Sure. Happy to address that, and thanks for the question. I’ll sort of start just once again, just around, again, anchoring on our average distributable earnings in 2023 before credit losses, again, just to use it as a guidepost of approximately $0.23 per quarter. And then from there, again, there is ways to grow the balance sheet in terms of – sorry, to grow earnings power by deploying the Series CLO reinvestment capacity, deploying excess cash and then also potentially adding more leverage given that we are relatively modestly levered within our cohort at 2.5 to 1. As we look forward, and I think that why both Bob and I kind of spoke into the fact that we are respectful of where we are in the cycle. Even though we are really pleased as to where our balance sheet is and our ability to frankly deploy capital in 2024, we remain respectful of the fact that the real estate market is in no way out of the woods. So when we think about how we’ve positioned our balance sheet 2024, we continue to have flexibility if the market does get more challenging. Specific to the comment relating to Fed rate cuts. When we look at our balance sheet now, particularly now that we’ve resolved a substantial portion of our credit challenged assets, the one area that we look through 2024 when it comes to risk is, of course, that the Fed is slower. And when you think about SOFR at roughly 5, 5.3, that may put pressure on certain multifamily borrowers. So we just want to be respectful of that risk. But when it comes down to it, ultimately, again, we’ve positioned the balance sheet where can play a lot more offense this year relative to defense, but also just want to be really respectful in terms of where we are in terms of the market.

Okay, great. Thank you. And my second question relates to liquidity needs for the REO portfolio. You’ve already given some good details here, and thanks again for reminding us on those successful resolutions for the previous REO assets. Just digging into these four new REO properties, how much liquidity do you think is needed to manage these? And will you lever these up or run them unlevered? Just curious about CapEx plans here and overall liquidity needs. Thank you.

Sure. Thanks for your question, Sarah. The answer is going to be different for each of the assets just to provide goalposts. The multifamily projects I alluded to earlier in the suburbs of Chicago really doesn’t require any capital. The properties, call it, 75%, 76% leased and occupied. So that’s a pure operations exercise, which we’re confident will go well under our control. At the other end of the spectrum, there are some assets that would require capital, perhaps reconditioning, perhaps for new leasing. Our liquidity projections for the company, obviously, incorporate our expectations there. But we’re not going to provide at this point, specific budgets, you’ll be able to see the spend over time as we undertake our business plans here. But generally speaking, as I mentioned earlier, one of the criteria is we’re looking for the best return for our investors. And all else being equal, we’d rather limit the capital spend where we can.

Okay, great. And then just really quickly, I wanted to clarify that $0.07 earnings income benefit that you mentioned, is that layering in your expectations for going on offense and making new loans? Or is that just the benefit of moving existing loans that are currently on warehouse lines over to the CLOs?

Well, it’s actually a blend of the two. But as Doug and I think I mentioned a few minutes ago, the utilization of the $71 million of the $247 million, those were two new loan originations. We did originate almost $300 million of loans last year, and we’ve originated close to $90 million thus far this year. So we have not been idle.

And also just to expand on that, Sarah, which I think is just a helpful context. If you think about where we are liquidity-wise, both from a cash perspective, from a Series CLO capacity perspective, and then also all of the new available secured financing that we just lined up, we really have a lot of different ways for us to deploy capital. So even though we will, of course, use every dollar of that Series CLO capacity, there are certain loans where we may opt to fund that even today outside of the Series CLO if we have a more attractive channel in terms of available back leverage. I think a lot of what we’ve seen from the bank community so far this year is although they are generally more cautious about direct lending, we’ve seen actually a pretty strong appetite from banks to be providing us back leverage as we’re out there making new investments. So I think that that’s really what provides us some flexibility where, again, we, of course, will be fully populating that Series CLO reinvested capacity, but we do have many other liquidity alternatives. And as we deploy more and more capital, we will optimize between the two.

Thank you.

Thank you very much.

Thank you. Next question comes from the line of Rick Shane with JPMorgan. Please go ahead.

Thanks, everybody for taking my questions this morning. Look, cleaning up the book at the end of ‘23 gives you a tremendous amount of flexibility as you head into ‘24. Steve DeLaney had asked about repurchases, one of the other places that you have flexibility is related to dividend policy. And I understand there have been a lot of questions about, hey, what’s the run rate on distributable earnings. But the reality is, at this point, given the realized losses in ‘23, dividend is, I assume, going to be a return of capital. I understand that there is a signaling to the dividend level, but the reality is even with the stock running up, it’s trading at a 16%-plus yield. In the spirit of preserving flexibility and not really getting full credit for that dividend, does it make sense – and again, I realized this is not out of necessity, but perhaps out of efficiency to maintain the dividend at the current level even if you can.

Look, it’s a great question, and we, of course, spend a lot of time being very thoughtful about our dividend policy. I’ll first start with, we continue to think about our dividend policy along with our Board really to be anchored around a level that is reflective of the long-term earnings power of the company. I think as you can see from what we were able to achieve, particularly in the fourth quarter and really in all 2023, that really allows us, to your point, to have, frankly, a much clear window into the sort of long-term earnings power of the company. And frankly, that’s exactly what we’ll be using as we think through the dividend policy going forward.

Got it. And look, I see that the flipside of it is that the realized losses last year probably equate to, call it, almost three years of dividend distributions. And so, again, I just think of it preserving capital, being able to – you guys have as a unique problem, which is that you can’t really retain and reinvest capital you’re in a situation right now where you’re probably looking at above historical norm returns on marginal investments. Doesn’t it make sense to, in this window, where you actually can retain capital, to retain and reinvest?

Yeah. Look, I think you’re asking a really thoughtful questions. And again, we are evaluating dividend policy, but again, we really used the guiding light as the long-term earnings power of the company. And I think that as we evolve in our balance sheet and we see opportunities out in the market, that’s exactly what’s going to help us shape our policy and navigate some of the complexities that frankly, you laid out quite eloquently.

Okay, thank you so much. And again, look, understanding the policy is really helpful. And I realized there’s an enormous amount of uncertainty, ambiguity and what is optimal for shareholders. I’m not saying that this is the right choice. I’m just trying to weigh what the different – what you guys will consider as you think about this.

Absolutely –

I’d like to just add one more thing to Rick’s thoughtful line of questioning, which is that, dividend policy is an important and big linear programming problem or application. And none of us should forget that one of the other overlays or constraints that all REITs operate under is that, in order to preserve your REIT qualification, you need to distribute at least 90% of your taxable income. So the discussion today seems to have been focused on situations where the REIT in question, which I think this morning is TRTX doesn’t have taxable income, but there have been – there are instances where there is taxable income. And so that’s something that every REIT management team and Board needs to consider as well. Thanks, Rick.

Thanks guys.

Thank you.

Thank you. The final question comes from the line of Don Fandetti with Wells Fargo. Please go ahead.

Hi. As you look out over the next quarter or two, how are you thinking about the risk of migration from 3 to 4s and also reserve build over the next quarter or two?

Hey Don, it’s Bob. Thanks for your question. I’ll sort of take those in order. In terms of risk ratings, I would say two things. At the end of every quarter, we carefully scrub all the loans and our risk ratings reflect our assessment of current and expected future macro conditions, real estate conditions and our assessment of our individual loan collateral, loan sponsor and so on. So, our risk ratings at the end of any quarter, including December 31st, are based on both current reality and our expectations of the future. With respect to our expectations for the future, Doug had mentioned earlier that, we are in a period of uncertainty and correction, uncertainty in the broader real estate or in the broader economy and certainly correction of real estate. And that Fed policy, in particular, weighs heavily on real estate. So, if the actual path of the economy and rates proves to be different than what we currently expect it will be, that could weigh on borrower behavior and consequently on risk ratings to the negative or the positive. With respect to CECL, you mentioned build and build is not the way CECL is structured. So at any period end, the CECL reserve, again, is supposed to reflect management’s assessment of the – it’s a current assessment of expected losses over the life of the loan. So, our reserves at any quarter end are intended to reflect that and do to the best of our ability. I think to-date, our empirical evidence of realized losses in comparison to CECL reserves has been pretty tight. And so the short answer to your question is, we’re comfortable today with our CECL reserve based on what we see in the future. If the market environment in the future is materially different than our current assessment, then we’ll adjust at the appropriate time. But again, thus far, our reserves have been pretty on target.

Thanks, Bob.

I hope that answers your question.

Yep.

Thank you. Ladies and gentlemen, we have reached the end of question-and-answer session. I would now like to turn the floor over to the management for closing comments.

Yes. I’d just like to thank you all for joining today, and we look forward to speaking with you again on our next earnings call.

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.