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TRTX TPG RE Finance Trust

Filed: 4 May 21, 4:25pm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended March 31, 2021  

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from      to       

Commission file number 001-38156

 

TPG RE Finance Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

36-4796967

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

888 Seventh Avenue, 35th Floor

New York, New York 10106

(Address of principal executive offices)(Zip Code)

(212) 601-4700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.001 per share

 

TRTX

 

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes   No 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

Accelerated Filer

Non-accelerated Filer

 

Smaller Reporting Company

Emerging Growth Company

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  No 

As of April 30, 2021, there were 76,897,102 shares of the registrant’s common stock, $0.001 par value per share, outstanding.

 

 

 


 

 

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which reflect our current views with respect to, among other things, our operations and financial performance. You can identify these forward-looking statements by the use of words such as “outlook,” “believe,” “expect,” “potential,” “continue,” “may,” “should,” “seek,” “approximately,” “predict,” “intend,” “will,” “plan,” “estimate,” “anticipate,” the negative version of these words, other comparable words or other statements that do not relate strictly to historical or factual matters. By their nature, forward-looking statements speak only as of the date they are made, are not statements of historical fact or guarantees of future performance and are subject to risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them. However, there can be no assurance that management’s expectations, beliefs and projections will occur or be achieved, and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth under the heading “Risk Factors” in this Form 10-Q and in our Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2021, as such risk factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Such risks, uncertainties and other factors include, but are not limited to, the following:

 

the general political, economic and competitive conditions in the markets in which we invest;

 

the level and volatility of prevailing interest rates and credit spreads;

 

adverse changes in the real estate and real estate capital markets;

 

general volatility of the securities markets in which we participate;

 

changes in our business, investment strategies or target assets;

 

difficulty in obtaining financing or raising capital;

 

reductions in the yield on our investments and increases in the cost of our financing;

 

adverse legislative or regulatory developments, including with respect to tax laws;

 

acts of God such as hurricanes, floods, earthquakes, wildfires, mudslides, volcanic eruptions, and other natural disasters, acts of war and/or terrorism and other events that may cause unanticipated and uninsured performance declines and/or losses to us or the owners and operators of the real estate securing our investments;

 

the ultimate geographic spread, severity and duration of pandemics such as the outbreak of novel coronavirus (“COVID-19”), actions that may be taken by governmental authorities to contain or address the impact of such pandemics, and the potential negative impacts of such pandemics on the global economy and our financial condition and results of operations;

 

changes in the availability of attractive loan and other investment opportunities, whether they are due to competition, regulation or otherwise;

 

deterioration in the performance of properties securing our investments that may cause deterioration in the performance of our investments, adversely impact certain of our financing arrangements and our liquidity, and potentially expose us to principal losses on our investments;

 

defaults by borrowers in paying debt service on outstanding indebtedness;

 

the adequacy of collateral securing our investments and declines in the fair value of our investments;

 

adverse developments in the availability of desirable investment opportunities;

 


 

 

 

difficulty in successfully managing our growth, including integrating new assets into our existing systems;

 

the cost of operating our platform, including, but not limited to, the cost of operating a real estate investment platform and the cost of operating as a publicly traded company;

 

the availability of qualified personnel and our relationship with our Manager (as defined below);

 

the potential unavailability of the London Interbank Offered Rate (“LIBOR”) after December 31, 2021, or after June 30, 2023;

 

conflicts with TPG (as defined below) and its affiliates, including our Manager, the personnel of TPG providing services to us, including our officers, and certain funds managed by TPG;

 

our qualification as a real estate investment trust (“REIT”) for U.S. federal income tax purposes and our ability to maintain our exemption or exclusion from registration under the Investment Company Act of 1940, as amended (the “Investment Company Act”); and

 

authoritative U.S. generally accepted accounting principles (or “GAAP”) or policy changes from such standard-setting bodies such as the Financial Accounting Standards Board, the SEC, the Internal Revenue Service, the New York Stock Exchange and other authorities that we are subject to, as well as their counterparts in any foreign jurisdictions where we might do business.

There may be other risks, uncertainties or factors that may cause our actual results to differ materially from the forward-looking statements, including risks, uncertainties, and factors disclosed under the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Form 10-Q. You should evaluate all forward-looking statements made in this Form 10-Q in the context of these risks, uncertainties and other factors.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We caution you that the risks, uncertainties and other factors referenced above may not contain all of the risks, uncertainties and other factors that are important to you. In addition, we cannot assure you that we will realize the results, benefits or developments that we expect or anticipate or, even if substantially realized, that they will result in the consequences or affect us or our business in the way expected. All forward-looking statements in this Form 10-Q apply only as of the date made and are expressly qualified in their entirety by the cautionary statements included in this Form 10-Q and in other filings we make with the SEC. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, except as required by law.

Except where the context requires otherwise, the terms “Company,” “we,” “us,” and “our” refer to TPG RE Finance Trust, Inc., a Maryland corporation, and its subsidiaries; the term “Manager” refers to our external manager, TPG RE Finance Trust Management, L.P., a Delaware limited partnership; and the term “TPG” refers to TPG Global, LLC, a Delaware limited liability company, and its affiliates.

 


 

TABLE OF CONTENTS

 

Part I. Financial Information

1

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

Consolidated Balance Sheets as of March 31, 2021 (unaudited) and December 31, 2020

1

 

 

 

 

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) (unaudited) for the Three Months ended March 31, 2021 and March 31, 2020

2

 

 

 

 

Consolidated Statements of Changes in Equity (unaudited) for the Three Months ended March 31, 2021 and March 31, 2020

3

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the Three Months ended March 31, 2021 and March 31, 2020

4

 

 

 

 

Notes to the Consolidated Financial Statements (unaudited)

5

 

 

 

Item 2. 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

40

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

64

 

 

 

Item 4. 

Controls and Procedures

67

 

 

 

Part II. Other Information

68

 

 

Item 1. 

Legal Proceedings

68

 

 

 

Item 1A. 

Risk Factors

68

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

69

 

 

 

Item 3. 

Defaults Upon Senior Securities

69

 

 

 

Item 4. 

Mine Safety Disclosures

69

 

 

 

Item 5. 

Other Information

69

 

 

 

Item 6. 

Exhibits

70

 

 

 

Signatures

71

 

 

 


 

 

Part I. Financial Information

Item 1. Financial Statements

TPG RE Finance Trust, Inc.

Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share data)

 

 

 

March 31, 2021

 

 

December 31, 2020

 

ASSETS(1)

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

301,607

 

 

$

319,669

 

Restricted Cash

 

 

813

 

 

 

 

Accounts Receivable

 

 

755

 

 

 

785

 

Collateralized Loan Obligation Proceeds Held at Trustee

 

 

310,070

 

 

 

174

 

Accounts Receivable from Servicer/Trustee

 

 

177

 

 

 

418

 

Accrued Interest and Fees Receivable

 

 

29,229

 

 

 

27,391

 

Loans Held for Investment

 

 

4,580,179

 

 

 

4,516,400

 

Allowance for Credit Losses

 

 

(56,641

)

 

 

(59,940

)

Loans Held for Investment, Net (includes $1,305,947 and $2,259,467, respectively,

   pledged as collateral under secured credit facilities)

 

 

4,523,538

 

 

 

4,456,460

 

Real Estate Owned

 

 

99,200

 

 

 

99,200

 

Other Assets

 

 

3,871

 

 

 

4,646

 

Total Assets

 

 

5,269,260

 

 

$

4,908,743

 

LIABILITIES AND EQUITY(1)

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accrued Interest Payable

 

$

2,379

 

 

$

2,630

 

Accrued Expenses and Other Liabilities

 

 

10,440

 

 

 

14,450

 

Secured Credit Agreements (net of

   deferred financing costs of $5,869 and $8,831, respectively)

 

 

854,998

 

 

 

1,514,028

 

Collateralized Loan Obligations (net of deferred financing costs of $16,338 and $9,192,

   respectively)

 

 

2,851,709

 

 

 

1,825,568

 

Mortgage Loan Payable (net of deferred financing costs of $783 and $853)

 

 

49,217

 

 

 

49,147

 

Payable to Affiliates

 

 

5,094

 

 

 

5,570

 

Deferred Revenue

 

 

1,682

 

 

 

1,418

 

Dividends Payable

 

 

15,510

 

 

 

29,481

 

Total Liabilities

 

 

3,791,029

 

 

 

3,442,292

 

Commitments and Contingencies—See Note 15

 

 

 

 

 

 

 

 

Temporary Equity

 

 

 

 

 

 

 

 

Series B Cumulative Redeemable Preferred Stock ($0.001 par value per share; 13,000,000

   and 13,000,000 shares authorized, respectively; 9,000,000 and 9,000,000 shares issued and outstanding, respectively)

 

 

201,003

 

 

 

199,551

 

Permanent Equity

 

 

 

 

 

 

 

 

Series A Preferred Stock ($0.001 par value per share; 100,000,000 shares authorized;

   125 and 125 shares issued and outstanding, respectively)

 

 

 

 

 

 

Common Stock ($0.001 par value per share; 302,500,000 and 302,500,000 shares authorized,

   respectively; 76,897,102 and 76,787,006 shares issued and outstanding, respectively)

 

 

77

 

 

 

77

 

Additional Paid-in-Capital

 

 

1,559,685

 

 

 

1,559,681

 

Accumulated Deficit

 

 

(282,534

)

 

 

(292,858

)

Total Stockholders' Equity

 

$

1,277,228

 

 

$

1,266,900

 

Total Permanent Equity

 

$

1,277,228

 

 

$

1,266,900

 

Total Liabilities and Equity

 

$

5,269,260

 

 

$

4,908,743

 

 

(1)

The Company’s consolidated Total Assets and Total Liabilities at March 31, 2021 include assets and liabilities of variable interest entities (“VIEs”) of $3.5 billion and $2.9 billion, respectively. The Company’s consolidated Total Assets and Total Liabilities at December 31, 2020 include assets and liabilities of VIEs of $2.3 billion and $1.8 billion, respectively. These assets can be used only to satisfy obligations of the VIEs, and creditors of the VIEs have recourse only to these assets, and not to TPG RE Finance Trust, Inc. See Note 6 to the Consolidated Financial Statements for details.

See accompanying notes to the Consolidated Financial Statements

1


 

TPG RE Finance Trust, Inc.

Consolidated Statements of Income (Loss)

and Comprehensive Income (Loss) (Unaudited)

(in thousands, except share and per share data)

 

 

 

Three Months Ended

March 31,

 

 

 

2021

 

 

2020

 

INTEREST INCOME

 

 

 

 

 

 

 

 

Interest Income

 

$

58,148

 

 

$

81,749

 

Interest Expense

 

 

(20,290

)

 

 

(38,457

)

Net Interest Income

 

 

37,858

 

 

 

43,292

 

OTHER REVENUE

 

 

 

 

 

 

 

 

Other Income, net

 

 

96

 

 

 

328

 

Total Other Revenue

 

 

96

 

 

 

328

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

Professional Fees

 

 

1,198

 

 

 

1,819

 

General and Administrative

 

 

1,030

 

 

 

980

 

Stock Compensation Expense

 

 

1,456

 

 

 

1,401

 

Servicing and Asset Management Fees

 

 

328

 

 

 

276

 

Management Fee

 

 

5,094

 

 

 

5,000

 

Total Other Expenses

 

 

9,106

 

 

 

9,476

 

Securities Impairments

 

 

 

 

 

(203,493

)

Credit Loss Benefit (Expense)

 

 

4,038

 

 

 

(63,348

)

Income (Loss) Before Income Taxes

 

 

32,886

 

 

 

(232,697

)

Income Tax Expense, net

 

 

(931

)

 

 

(93

)

Net Income (Loss)

 

$

31,955

 

 

$

(232,790

)

Series A Preferred Stock Dividends

 

 

(4

)

 

 

(3

)

Series B Cumulative Redeemable Preferred Stock Dividends

 

 

(6,120

)

 

 

 

Net Income (Loss) Attributable to TPG RE Finance Trust, Inc.

 

$

25,831

 

 

$

(232,793

)

Earnings (Loss) per Common Share, Basic

 

$

0.32

 

 

$

(3.05

)

Earnings (Loss) per Common Share, Diluted

 

$

0.30

 

 

$

(3.05

)

Weighted Average Number of Common Shares Outstanding

 

 

 

 

 

 

 

 

Basic:

 

 

76,895,615

 

 

 

76,465,322

 

Diluted:

 

 

80,673,236

 

 

 

76,465,322

 

OTHER COMPREHENSIVE INCOME (LOSS)

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

31,955

 

 

$

(232,790

)

Unrealized Loss on Available-for-Sale Debt Securities

 

 

 

 

 

(974

)

Comprehensive Net Income (Loss)

 

$

31,955

 

 

$

(233,764

)

 

See accompanying notes to the Consolidated Financial Statements

 

 

2


 

 

TPG RE Finance Trust, Inc.

Consolidated Statements of

Changes in Equity (Unaudited)

(In thousands, except share and per share data)

 

 

 

Permanent Equity

 

 

Temporary

Equity

 

 

 

Series A Preferred Stock

 

 

Common Stock

 

 

Class A Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Par

Value

 

 

Shares

 

 

Par

Value

 

 

Shares

 

 

Par

Value

 

 

Additional

Paid-

in-Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders'

Equity

 

 

Series B

Preferred

Stock

 

January 1, 2021

 

 

125

 

 

$

 

 

 

76,787,006

 

 

$

77

 

 

 

 

 

$

 

 

$

1,559,681

 

 

$

(292,858

)

 

$

 

 

$

1,266,900

 

 

$

199,551

 

Issuance of Common Stock

 

 

 

 

 

 

 

 

110,096

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortization of Share-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,456

 

 

 

 

 

 

 

 

 

1,456

 

 

 

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

31,955

 

 

 

 

 

 

31,955

 

 

 

 

Dividends on Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,124

)

 

 

 

 

 

(6,124

)

 

 

 

Accretion of Discount on Series B Cumulative Redeemable Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,452

)

 

 

 

 

 

 

 

 

(1,452

)

 

 

1,452

 

Dividends on Common Stock (Dividends Declared

   per Share of $0.20)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15,507

)

 

 

 

 

 

(15,507

)

 

 

 

March 31, 2021

 

 

125

 

 

$

 

 

 

76,897,102

 

 

$

77

 

 

 

 

 

$

 

 

$

1,559,685

 

 

$

(282,534

)

 

$

 

 

$

1,277,228

 

 

$

201,003

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Permanent Equity

 

 

Temporary

Equity

 

 

 

Series A Preferred Stock

 

 

Common Stock

 

 

Class A Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

Par

Value

 

 

Shares

 

 

Par

Value

 

 

Shares

 

 

Par

Value

 

 

Additional

Paid-

in-Capital

 

 

Accumulated

Deficit

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

Stockholders'

Equity

 

 

Series B

Preferred

Stock

 

January 1, 2020

 

 

125

 

 

$

 

 

 

74,886,113

 

 

$

75

 

 

 

1,136,665

 

 

$

1

 

 

$

1,530,935

 

 

$

(28,108

)

 

$

1,051

 

 

$

1,503,954

 

 

$

 

Issuance of Common Stock

 

 

 

 

 

 

 

 

628,218

 

 

 

1

 

 

 

 

 

 

 

 

 

12,894

 

 

 

 

 

 

 

 

 

12,895

 

 

 

 

Conversions of Class A Common Stock to Common Stock

 

 

 

 

 

 

 

 

1,136,665

 

 

 

1

 

 

 

(1,136,665

)

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity Issuance, Shelf Registration, and Equity

   Distribution Agreement Transaction Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(206

)

 

 

 

 

 

 

 

 

(206

)

 

 

 

Amortization of Share-Based Compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,401

 

 

 

 

 

 

 

 

 

1,401

 

 

 

 

Cumulative Effect of Adoption of ASU 2016-13

   (See Note 2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,645

)

 

 

 

 

 

(19,645

)

 

 

 

Net Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(232,790

)

 

 

 

 

 

(232,790

)

 

 

 

Other Comprehensive Loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(974

)

 

 

(974

)

 

 

 

Dividends on Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3

)

 

 

 

 

 

(3

)

 

 

 

Dividends on Common Stock (Dividends Declared

   per Share of $0.43)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(33,219

)

 

 

 

 

 

(33,219

)

 

 

 

March 31, 2020

 

 

125

 

 

$

 

 

 

76,650,996

 

 

$

77

 

 

 

 

 

$

 

 

$

1,545,024

 

 

$

(313,765

)

 

$

77

 

 

$

1,231,413

 

 

$

 

 

See accompanying notes to the Consolidated Financial Statements

 

3


 

 

TPG RE Finance Trust, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net Income (Loss)

 

$

31,955

 

 

$

(232,790

)

Adjustment to Reconcile Net Income (Loss) to Net Cash Provided by Operating Activities:

 

 

 

 

 

 

 

 

Amortization and Accretion of Premiums, Discounts and Loan Origination Fees, Net

 

 

(1,600

)

 

 

(3,194

)

Amortization of Deferred Financing Costs

 

 

3,818

 

 

 

3,340

 

Increase in Capitalized Accrued Interest

 

 

(816

)

 

 

 

Loss on Sales of Loans Held for Investment and CRE Debt Securities, Net

 

 

 

 

 

203,493

 

Stock Compensation Expense

 

 

1,456

 

 

 

1,401

 

(Benefit) Allowance for Credit Loss Expense

 

 

(4,038

)

 

 

63,348

 

Cash Flows Due to Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts Receivable

 

 

30

 

 

 

2,338

 

Accrued Interest Receivable

 

 

(1,447

)

 

 

102

 

Accrued Expenses and Other Liabilities

 

 

(3,329

)

 

 

2,748

 

Accrued Interest Payable

 

 

(250

)

 

 

(1,533

)

Payable to Affiliates

 

 

(478

)

 

 

(1,550

)

Deferred Fee Income

 

 

264

 

 

 

125

 

Other Assets

 

 

775

 

 

 

(302

)

Net Cash Provided by Operating Activities

 

 

26,340

 

 

 

37,526

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Origination of Loans Held for Investment

 

 

(37,091

)

 

 

(351,650

)

Advances on Loans Held for Investment

 

 

(29,566

)

 

 

(61,720

)

Principal Repayments of Loans Held for Investment

 

 

4,314

 

 

 

312,687

 

Purchase of Available-for-Sale CRE Debt Securities

 

 

 

 

 

(168,888

)

Sales and Principal Repayments of Available-for-Sale CRE Debt Securities

 

 

 

 

 

86,439

 

Net Cash Used in Investing Activities

 

 

(62,343

)

 

 

(183,132

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Payments on Collateralized Loan Obligations

 

 

(4,212

)

 

 

 

Proceeds from Collateralized Loan Obligation

 

 

728,434

 

 

 

 

Payments on Secured Credit Agreements - Loan Investments

 

 

(661,991

)

 

 

(337,306

)

Proceeds from Secured Credit Agreements - Loan Investments

 

 

 

 

 

612,861

 

Payments on Secured Credit Agreements - CRE Debt Securities

 

 

 

 

 

(216,638

)

Proceeds from Secured Credit Agreements - CRE Debt Securities

 

 

 

 

 

132,122

 

Payment of Deferred Financing Costs

 

 

(7,875

)

 

 

(421

)

Proceeds from Issuance of Common Stock

 

 

 

 

 

12,895

 

Dividends Paid on Common Stock

 

 

(29,482

)

 

 

(32,551

)

Dividends Paid on Class A Common Stock

 

 

 

 

 

(284

)

Dividends Paid on Series B Cumulative Redeemable Preferred Stock

 

 

(6,120

)

 

 

 

Payment of Equity Issuance and Equity Distribution Agreement Transaction Costs

 

 

 

 

 

(206

)

Net Cash Provided by Financing Activities

 

 

18,754

 

 

 

170,472

 

Net Change in Cash, Cash Equivalents, and Restricted Cash

 

 

(17,249

)

 

 

24,866

 

Cash, Cash Equivalents and Restricted Cash at Beginning of Period

 

 

319,669

 

 

 

79,666

 

Cash, Cash Equivalents and Restricted Cash at End of Period

 

$

302,420

 

 

$

104,532

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest Paid

 

$

16,723

 

 

$

36,090

 

Taxes Paid

 

$

852

 

 

$

4

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Collateralized Loan Obligation Proceeds Held at Trustee

 

$

308,916

 

 

$

 

Dividends Declared, not paid

 

$

15,510

 

 

$

33,222

 

Principal Repayments of Loans Held for Investment Held by Servicer/Trustee, Net

 

$

1,154

 

 

$

881

 

Change in Accrued Deferred Financing Costs

 

$

58

 

 

$

484

 

Sales and Principal Repayments of Available-for-Sale CRE Debt Securities Held by Servicer/Trustee, Net

 

$

 

 

$

33,983

 

Unrealized Loss on Available-for-Sale CRE Debt Securities

 

$

 

 

$

(974

)

 

See accompanying notes to the Consolidated Financial Statements

4


 

TPG RE Finance Trust, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

(1) Business and Organization

TPG RE Finance Trust, Inc. (together with its consolidated subsidiaries, “we,” “us,” “our” or the “Company”) is organized as a holding company and conducts its operations primarily through TPG RE Finance Trust Holdco, LLC (“Holdco”), a Delaware limited liability company that is wholly owned by the Company, and Holdco’s direct and indirect subsidiaries. The Company conducts its operations as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. The Company is generally not subject to U.S. federal income taxes on its REIT taxable income to the extent that it annually distributes all of its REIT taxable income to stockholders and maintain its qualification as a REIT. The Company also operates its business in a manner that permits it to maintain an exclusion from registration under the Investment Company Act of 1940, as amended.

The Company’s principal business activity is to directly originate and acquire a diversified portfolio of commercial real estate related assets, consisting primarily of first mortgage loans and senior participation interests in first mortgage loans secured by institutional-quality properties in primary and select secondary markets in the United States. The Company has in the past invested in commercial real estate debt securities (“CRE debt securities”), primarily investment-grade commercial mortgage-backed securities (“CMBS”) and commercial real estate collateralized loan obligation securities (“CRE CLOs”).

(2) Summary of Significant Accounting Policies

Basis of Presentation

The interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The interim consolidated financial statements include the Company’s accounts, consolidated variable interest entities for which the Company is the primary beneficiary, and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated. The Company believes it has made all necessary adjustments, consisting of only normal recurring items, so that the consolidated financial statements are presented fairly and that estimates made in preparing the consolidated financial statements are reasonable and prudent. The operating results presented for interim periods are not necessarily indicative of the results that may be expected for any other interim period or for the entire year. These interim consolidated financial statements should be read in conjunction with the Company’s Form 10-K filed with the SEC on February 24, 2021.

Risks and Uncertainties

The coronavirus pandemic (“COVID-19”) resulted in broad challenges globally, has contributed to significant volatility in financial markets and continues to adversely impact global commercial activity. The impact of the outbreak has evolved rapidly around the globe, with many countries taking drastic measures to limit the spread of the virus by instituting quarantines or lockdowns and imposing travel restrictions. Such actions have created significant disruptions to global supply chains, and adversely impacted several industries, including but not limited to, airlines, hospitality, retail and the broader real estate industry.

COVID-19 has had a continued and prolonged adverse impact on economic and market conditions and triggered a period of global economic slowdown which has and could continue to have a material adverse effect on the Company’s results and financial condition. Many jurisdictions have re-opened with social distancing measures implemented to curtail the spread of COVID-19, and multiple vaccines have been approved for use in the United States. Although the Company has observed preliminary signs of economic recovery, the Company cannot predict the time required for a meaningful economic recovery to take place. Additional surges in new cases of COVID-19 and mutated strains of the virus have caused additional quarantines and lockdowns, which could delay any economic recovery. The nationwide vaccination program is ongoing and its effectiveness remains uncertain. These factors could further materially and adversely affect the Company’s results and financial condition.

The full impact of COVID-19 on the real estate industry, the credit markets and consequently on the Company’s financial condition and results of operations is uncertain and cannot be predicted currently since it depends on several factors beyond the control of the Company including, but not limited to (i) the uncertainty surrounding the severity and duration of the outbreak, including possible recurrences and differing economic and social impacts of the outbreak in various regions of the United States, (ii) the effectiveness of the United States public health response, (iii) the pandemic’s impact on the United States and global economies, (iv) the timing, scope and effectiveness of additional governmental responses to the pandemic, (v) the timing and speed of economic recovery, including the availability of a treatment and effectiveness of vaccines approved for COVID-19, (vi) changes in how certain

5


 

types of commercial property are used while maintaining social distancing and other techniques intended to control the impact of COVID-19, and (vii) the negative impact on the Company’s borrowers, real estate values and cost of capital.

Reclassifications

Certain amounts in the Company’s prior period consolidated financial statements have been reclassified to conform to the presentation of the Company’s current period consolidated financial statements. These reclassifications had no effect on the Company’s previously reported net income. Amounts related to Collateralized Loan Obligation Proceeds Held at Trustee were reclassified from Accounts Receivable from Servicer/Trustee balance in prior period balance sheet to conform to current period presentation.

Use of Estimates

The preparation of the interim consolidated financial statements in conformity with GAAP requires estimates of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities at the date of the interim consolidated financial statements. Actual results could differ from management’s estimates, and such differences could be material. Significant estimates made in the interim consolidated financial statements include, but are not limited to, the adequacy of our allowance for credit losses and the valuation inputs related thereto and the valuation of financial instruments. Actual amounts and values as of the balance sheet dates may be materially different than the amounts and values reported due to the inherent uncertainty in the estimation process and the limited availability of observable pricing inputs due to market dislocation resulting from the COVID-19 pandemic. Also, future amounts and values could differ materially from those estimates due to changes in values and circumstances after the balance sheet date and the limited availability of observable prices.

Principles of Consolidation

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810—Consolidation (“ASC 810”) provides guidance on the identification of a variable interest entity (“VIE”), for which control is achieved through means other than voting rights, and the determination of which business enterprise, if any, should consolidate the VIE. An entity is considered a VIE if any of the following applies: (1) the equity investors (if any) lack one or more of the essential characteristics of a controlling financial interest; (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support; or (3) the equity investors have voting rights that are not proportionate to their economic interests and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. The Company consolidates VIEs in which the Company is considered to be the primary beneficiary. The primary beneficiary is defined as the entity having both of the following characteristics: (1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance; and (2) the obligation to absorb losses and right to receive the returns from the VIE that would be significant to the VIE. The Company determined that TRTX 2021-FL4, a collateralized loan obligation issued on March 31, 2021, is a VIE and is consolidated in accordance with GAAP. See Note 6 for details regarding issuance of TRTX 2021-FL4.

At each reporting date, the Company reconsiders its primary beneficiary conclusions for all its VIEs to determine if its obligation to absorb losses of, or its rights to receive benefits from, the VIE could potentially be more than insignificant, and will consolidate or not consolidate in accordance with GAAP. See Note 6 for details.

Revenue Recognition

Interest income on loans is accrued using the interest method based on the contractual terms of the loan, adjusted for expected or realized credit losses, if any. The objective of the interest method is to arrive at periodic interest income, including recognition of fees and costs, at a constant effective yield. Premiums, discounts, and origination fees are amortized or accreted into interest income over the lives of the loans using the interest method, or on a straight-line basis when it approximates the interest method. Extension and modification fees are accreted into income on a straight-line basis, when it approximates the interest method, over the related extension or modification period. Exit fees are accreted into interest income on a straight-line basis, when it approximates the interest method, over the lives of the loans to which they relate unless they can be waived by the Company or a co-lender in connection with a loan refinancing, or if timely collection of principal and interest is doubtful. Prepayment penalties from borrowers are recognized as interest income when received. Certain of the Company’s loan investments have in the past, and may in the future, provide for additional interest based on the borrower’s operating cash flow or appreciation of the underlying collateral. Such amounts are considered contingent interest and are reflected as interest income only upon certainty of collection. Certain of the Company’s loan investments have in the past, and may in the future, provide for the accrual of interest (in part, or in whole) instead of its current payment in cash, with the accrued interest (“PIK interest”) added to the unpaid principal balance of the loan. Such PIK interest is recognized currently as interest income unless the Company concludes eventual collection is unlikely, in which case the PIK interest is written off.

6


 

All interest accrued but not received for loans placed on non-accrual status is subtracted from interest income at the time the loan is placed on non-accrual status. Based on the Company’s judgment as to the collectability of principal, a loan on non-accrual status is either accounted for on a cash basis, where interest income is recognized only upon receipt of cash for interest payments, or on a cost-recovery basis, where all cash receipts reduce the loan’s carrying value, and interest income is only recorded when such carrying value has been fully recovered.

Loans Held for Investment

Loans that the Company has the intent and ability to hold for the foreseeable future, or until maturity or repayment, are reported at their outstanding principal balances net of cumulative charge-offs, interest applied to principal (for loans accounted for using the cost recovery method), unamortized premiums, discounts, loan origination fees and costs. Loan origination fees and direct loan origination costs are deferred and recognized in interest income over the estimated life of the loans using the interest method, or on a straight-line basis when it approximates the interest method, adjusted for actual prepayments. Accrued but not yet collected interest is separately reported as accrued interest and fees receivable on the Company’s consolidated balance sheets.

When loans are designated as held for investment, the Company’s intent is to hold the loans for the foreseeable future or until maturity or repayment. If subsequent changes in real estate or capital markets occur, the Company may change its intent or its assessment of its ability to hold these loans. Once a determination has been made to sell such loans, they are immediately transferred to loans held for sale and carried at the lower of cost or fair value in accordance with GAAP.

Non-Accrual Loans

Loans are placed on non-accrual status when the full and timely collection of principal and interest is doubtful, generally when: management determines that the borrower is incapable of, or has ceased efforts toward, curing the cause of a default; the loan becomes 90 days or more past due for principal and interest; or the loan experiences a maturity default. The Company considers an account past due when an obligor fails to pay substantially all (defined as 90%) of the scheduled contractual payments by the due date. In each case, the period of delinquency is based on the number of days payments are contractually past due. A loan may be returned to accrual status if all delinquent principal and interest payments are brought current, and collectability of the remaining principal and interest payments in accordance with the loan agreement is reasonably assured. Loans that in the judgment of the Company’s external manager, TPG RE Finance Trust Management, L.P., a Delaware limited partnership (the “Manager”), are adequately secured and in the process of collection are maintained on accrual status, even if they are 90 days or more past due.

Troubled Debt Restructurings

A loan is accounted for and reported as a troubled debt restructuring (“TDR”) when, for economic or legal reasons, the Company grants a concession to a borrower experiencing financial difficulty that the Company would not otherwise consider. The Company does not consider a restructuring that includes an insignificant delay in payment as a concession. A delay may be considered insignificant if the payments subject to the delay are insignificant relative to the unpaid principal balance of the loan or collateral value, and the contractual amount due, or the delay in timing of the restructured payment period, is insignificant relative to the frequency of payments, the debt’s original contractual maturity or original expected duration.

TDRs that are performing and on accrual status as of the date of the modification remain on accrual status. TDRs that are non-performing as of the date of modification usually remain on non-accrual status until the prospect of future payments in accordance with the modified loan agreement is reasonably assured, which is generally demonstrated when the borrower maintains compliance with the restructured terms for a predetermined period. TDRs with temporary below-market concessions remain designated as a TDR regardless of the accrual or performance status until the loan is paid off. However, if the TDR loan has been modified in a subsequent restructure with market terms and the borrower is not currently experiencing financial difficulty, then the loan may be de-designated as a TDR.

Credit Losses

Allowance for Credit Losses for Loans Held for Investment

On January 1, 2020, the Company adopted Accounting Standard Update (“ASU”) 2016-13, Financial Instruments-Credit Losses, and subsequent amendments, which replaced the incurred loss methodology with an expected loss model known as the Current Expected Credit Loss ("CECL") model. The initial CECL reserve recorded on January 1, 2020 is reflected as a direct charge to retained earnings on the Company’s consolidated statements of changes in equity. Subsequent changes to the CECL reserve are recognized through net income on the Company’s consolidated statements of income (loss) and comprehensive income (loss). The

7


 

allowance for credit losses measured under the CECL accounting framework represents an estimate of current expected losses for the Company’s existing portfolio of loans held for investment, and is presented as a valuation reserve on the Company’s consolidated balance sheets. Expected credit losses inherent in non-cancelable unfunded loan commitments are accounted for as separate liabilities included in accrued expenses and other liabilities on the consolidated balance sheets. The allowance for credit losses for loans held for investment, as reported in the Company’s consolidated balance sheets, is adjusted by a credit loss benefit (expense), which is reported in earnings in the consolidated statements of income (loss) and comprehensive income (loss) and reduced by the charge-off of loan amounts, net of recoveries and additions related to purchased credit-deteriorated (“PCD”) assets, if relevant. The allowance for credit losses includes a modeled component and an individually-assessed component. The Company has elected to not measure an allowance for credit losses on accrued interest receivables related to all of its loans held for investment because it writes off uncollectable accrued interest receivable in a timely manner pursuant to its non-accrual policy, described above.

The Company considers key credit quality indicators in underwriting loans and estimating credit losses, including but not limited to: the capitalization of borrowers and sponsors; the expertise of the borrowers and sponsors in a particular real estate sector and geographic market; collateral type; geographic region; use and occupancy of the property; property market value; loan-to-value (“LTV”) ratio; loan amount and lien position; debt service and coverage ratio; the Company’s risk rating for the same and similar loans; and prior experience with the borrower and sponsor. This information is used to assess the financial and operating capability, experience and profitability of the sponsor/borrower. Ultimate repayment of the Company’s loans is sensitive to interest rate changes, general economic conditions, liquidity, LTV ratio, existence of a liquid investment sales market for commercial properties, and availability of replacement short-term or long-term financing. The loans in the Company’s commercial mortgage loan portfolio are secured by collateral in the following property types: office; multifamily; hotel; mixed-use; condominium; and retail.

The Company’s loans are typically collateralized by real estate, or in the case of mezzanine loans, by a partnership interest or similar equity interest in an entity that owns real estate. As a result, the Company regularly evaluates on a loan-by-loan basis, typically no less frequently than quarterly, the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property, and the financial and operating capability of the borrower/sponsor. The Company also evaluates the financial strength of loan guarantors, if any, and the borrower’s competency in managing and operating the property or properties. In addition, the Company considers the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such analyses are completed and reviewed by asset management personnel and evaluated by senior management, who utilize various data sources, including, to the extent available (i) periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections, (iii) sales and financing comparables, (iv) current credit spreads for refinancing and (v) other market data.

Quarterly, the Company evaluates the risk of all loans and assigns a risk rating based on a variety of factors, grouped as follows: (i) loan and credit structure, including the as-is LTV structural features; (ii) quality and stability of real estate value and operating cash flow, including debt yield, property type, dynamics of the geography, property type and local market, physical condition, stability of cash flow, leasing velocity and quality and diversity of tenancy; (iii) performance against underwritten business plan; and (iv) quality, experience and financial condition of sponsor, borrower and guarantor(s). Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from least risk to greatest risk, respectively, which ratings are defined as follows:

 

1-

Outperform—Exceeds performance metrics (for example, technical milestones, occupancy, rents, net operating income) included in original or current credit underwriting and business plan;

 

2-

Meets or Exceeds Expectations—Collateral performance meets or exceeds substantially all performance metrics included in original or current underwriting / business plan;

 

3-

Satisfactory—Collateral performance meets or is on track to meet underwriting; business plan is met or can reasonably be achieved;

 

4-

Underperformance—Collateral performance falls short of original underwriting, material differences exist from business plan, or both; technical milestones have been missed; defaults may exist, or may soon occur absent material improvement; and

 

5-

Default/Possibility of Loss—Collateral performance is significantly worse than underwriting; major variance from business plan; loan covenants or technical milestones have been breached; timely exit from loan via sale or refinancing is questionable; significant risk of principal loss.

The Company generally assigns a risk rating of “3” to all loan investments originated during the most recent quarter, except in the case of specific circumstances warranting an exception.

8


 

The Company’s CECL reserve reflects its estimation of the current and future economic conditions that impact the performance of the commercial real estate assets securing the Company’s loans. These estimations include unemployment rates, interest rates, price indices for commercial property, and other macroeconomic factors that may influence the likelihood and magnitude of potential credit losses for the Company’s loans during their anticipated term. The Company licenses certain macroeconomic financial forecasts to inform its view of the potential future impact that broader economic conditions may have on its loan portfolio’s performance. The forecasts are embedded in the licensed model that the Company uses to estimate its CECL reserve as discussed below. Selection of these economic forecasts requires significant judgment about future events that, while based on the information available to the Company as of the balance sheet date, are ultimately unknowable with certainty, and the actual economic conditions impacting the Company’s portfolio could vary significantly from the estimates the Company made for the periods presented.

Due to the COVID-19 pandemic and the dislocation it has caused to the national economy, the commercial real estate markets, and the capital markets, the Company’s ability to estimate key inputs for estimating the allowance for credit losses has been materially and adversely impacted. Key inputs to the estimate include, but are not limited to, LTV, debt service coverage ratio, current and future operating cash flow and performance of collateral properties, the financial strength and liquidity of borrowers and sponsors, capitalization rates and discount rates used to value commercial real estate properties, and market liquidity based on market indices or observable transactions involving the sale or financing of commercial properties. Estimates made by management are necessarily subject to change due to the lack or sharply limited number of observable inputs and uncertainty regarding the duration of the COVID-19 pandemic and its aftereffects.

Credit Loss Measurement

The amount of allowance for credit losses is influenced by the size of the Company’s loan portfolio, loan asset quality, risk rating, delinquency status, historic loss experience and other conditions influencing loss expectations, such as reasonable and supportable forecasts of economic conditions. The Company employs two methods to estimate credit losses in its loan portfolio: a loss-given-default (“LGD”) model-based approach utilized for substantially all of its loans; and an individually-assessed approach for loans that the Company concludes are ill-suited for use in the model-based approach, or are individually-assessed based on accounting guidance contained in the CECL framework.

Once the expected credit loss amount is determined, an allowance for credit losses equal to the calculated expected credit loss is established. Consistent with ASC 326, a loan will be charged off through the allowance for credit losses when it is deemed non-recoverable upon a realization event. This is generally at the time the loan receivable is settled, transferred or exchanged, but non-recoverability may also be concluded by the Company if, in its determination, it is nearly certain that all amounts due will not be collected. This loss shall equal the difference between the cash received, or expected to be received, and the book value of the asset. Factors considered by management in determining if the expected credit loss is permanent or not recoverable include whether management judges the loan to be uncollectible; that is, repayment is deemed to be delayed beyond reasonable time frames, or the loss becomes evident due to the borrower’s lack of assets and liquidity, or the borrower’s sponsor is unwilling or unable to support the loan. This policy is reflective of the investor’s economics as it relates to the ultimate realization of the loan.

Allowance for Credit Losses for Loans Held for Investment – Model-Based Approach

The model-based approach to measure the allowance for credit losses relates to loans which are not individually-assessed.

The Company licenses from Trepp, LLC historical loss information, incorporating loan performance data for over 100,000 commercial real estate loans dating back to 1998, in an analytical model to compute statistical credit loss factors (i.e., probability-of-default and loss-given-default). These statistical credit loss factors are utilized together with individual loan information to estimate the allowance for credit losses. This methodology considers the unique characteristics of the Company’s commercial mortgage loan portfolio and individual assets within the portfolio by considering individual loan risk ratings, delinquency statuses and other credit trends and risk characteristics. Further, the Company incorporates its expectations about the impact of current conditions and reasonable and supportable forecasts on expected future credit losses in deriving its estimate. For the period beyond which the Company is able to make reasonable and supportable forecasts, the Company reverts to unadjusted historical loan loss information based on systematic methodology determined at the input level. Determining the appropriateness of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. In future periods, evaluations of the overall loan portfolio, in light of the factors and forecasts then prevailing, may result in significant changes in the allowance and credit loss expense.

9


 

Allowance for Credit Losses for Loans Held for Investment – Individually-Assessed Approach

In instances where the unique attributes of a loan investment render it ill-suited for the model-based approach because it no longer shares risk characteristics with other loans, or because the Company concludes repayment of the loan is entirely collateral-dependent, or when it is deemed probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan, the Company separately evaluates the amount of expected credit loss using other real estate valuation techniques, considering substantially the same credit factors as utilized in the model-dependent method. In these cases, expected credit loss is measured as the difference between the amortized cost basis of the loan and the fair value of the collateral, if repayment is expected solely from the collateral, as determined by management using valuation techniques, frequently discounted cash flow. The fair value of the collateral is adjusted for the estimated cost to sell if repayment or satisfaction of a loan is dependent on the sale (rather than the operation) of the collateral.

Unfunded Loan Commitments

The Company’s first mortgage loans often contain provisions for future funding conditioned upon the borrower’s execution of its business plan with respect to the underlying collateral property securing the loan. These deferred fundings are typically for base building work, tenant improvement costs and leasing commissions, and occasionally to fund forecasted operating deficits during lease-up, or for interest reserves. These deferred funding commitments may be for specific periods, often require satisfaction by the borrower of conditions precedent, and may contain termination clauses at the option of the borrower or, more rarely, at the Company’s option. The total amount of unfunded commitments does not necessarily represent actual amounts that may be funded in cash in the future, since commitments may expire without being drawn, may be cancelled if certain conditions are not satisfied by the borrower, or borrowers may elect not to borrow some or all of the unused commitment. The Company does not recognize these unfunded loan commitments in its consolidated financial statements.

The Company applies its expected credit loss estimates to all future funding commitments that cannot be contractually terminated at the Company’s option. The Company maintains a separate allowance for credit losses from unfunded loan commitments, which is included in accrued expenses and other liabilities on the consolidated balance sheets. The Company estimates the amount of expected losses by calculating a commitment usage factor over the contractual period for exposures that are not unconditionally cancellable by the Company and applies the loss factors used in the allowance for credit loss methodology described above to the results of the usage calculation to estimate the liability for credit losses related to unfunded commitments for each loan.

CRE Debt Securities

In the past, the Company acquired CRE debt securities for investment purposes. The Company designated CRE debt securities as available-for-sale (“AFS”) on the acquisition date. CRE debt securities that were classified as AFS were recorded at fair value through other comprehensive income or loss in the Company’s consolidated financial statements. The Company recognized interest income on its CRE debt securities using the interest method, or on a straight-line basis when it approximated the effective interest method, with any premium or discount amortized or accreted into interest income based on the respective outstanding principal balance and corresponding contractual term of the CRE debt security. Accrued but not yet collected interest was separately reported as accrued interest receivable on the Company’s consolidated balance sheets. The Company used a specific identification method when determining the cost of a CRE debt security sold and the amount of unrealized gain or loss reclassified from accumulated other comprehensive income or loss into earnings on the trade date.

AFS debt securities in unrealized loss positions were evaluated for impairment related to credit losses at least quarterly. For the purpose of identifying and measuring impairment, any applicable accrued interest was excluded from both the fair value and the amortized cost basis. The Company had elected to write off accrued interest by reversing interest income in the event the accrued interest is deemed uncollectible, generally when the security became 90 days or more past due for principal and interest.

The Company first assessed whether it intended to sell the debt security or more likely than not was required to sell the debt security before recovery of its amortized cost basis. If either criterion regarding intent or requirement to sell was met, the debt security’s amortized cost basis was written down to its fair value and the write down was charged against the allowance for credit losses, with any incremental impairment reported in earnings as a loss in the consolidated statements of income (loss) and comprehensive income (loss).

10


 

Any AFS debt security in an unrealized loss position which the Company did not intend to sell or was not more likely than not required to sell before recovery of the amortized cost basis was assessed for expected credit losses. The performance indicators considered for CRE debt securities related to the underlying assets and included default rates, delinquency rates, percentage of nonperforming assets, debt-to-collateral ratios, third-party guarantees, current levels of subordination, vintage, geographic concentration, analyst reports and forecasts, credit ratings and other market data. In assessing whether a credit loss exists, the Company compared the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected was less than the amortized cost basis for the security, a credit loss existed and an allowance for credit losses was recorded, limited by the amount the fair value was less than amortized cost basis.

Declines in fair value of AFS debt securities in an unrealized loss position that were not due to credit losses, such as declines due to changes in market interest rates, were recorded through other comprehensive income. Any impairment that had not been recorded through an allowance for credit losses was recognized in other comprehensive income. Unrealized gains and losses on AFS debt securities presented in the consolidated statements of income (loss) and comprehensive income (loss) included the reversal of unrealized gains and losses at the time gains or losses were realized.

Real Estate Owned

Real estate acquired as a result of foreclosure or by deed-in-lieu of foreclosure is classified as real estate owned (REO) held for investment until the Company makes a determination to sell. The Company's cost basis in REO is equal to the estimated fair value of the collateral at the date of acquisition, less estimated costs to sell. The estimated fair value of the REO is determined using a discounted cash flow model using inputs that include the highest and best use for each asset, estimated future values based on extensive discussions with local brokers, investors and other market participants, the estimated holding period for the asset, and discount rates that reflect estimated investor return requirements for the risks associated with the expected use of each asset. If the fair value of the REO is lower than the carrying value of the loan, the difference, along with any previously recorded specific CECL reserve, is recorded as a realized loss in the consolidated statements of income (loss) and comprehensive income (loss). Thereafter, events or circumstances may occur that result in a material and sustained decrease in the cash flows generated from the assets, potentially leading to impairment. REO is not measured at fair value on an ongoing basis but subject to fair value adjustments only in certain circumstances, such as when there is evidence of impairment. Any impairment loss, revenue and expenses from operations of the properties and resulting gains or losses on sale are included within the consolidated statements of income (loss) and comprehensive income (loss) in Other Income, net.

Portfolio Financing Arrangements

The Company finances its portfolio of loans, or participation interests therein, and REO using secured credit agreements, including secured credit facilities, mortgage loans payable, and collateralized loan obligations. The related borrowings are recorded as separate liabilities on the Company’s consolidated balance sheets. Interest income earned on the investments and interest expense incurred on the related borrowings are reported separately on the Company’s consolidated statements of income (loss) and comprehensive income (loss).

In certain instances, the Company creates structural leverage through the co-origination or non-recourse syndication of a senior loan interest to a third party. For all such syndications the Company has completed through March 31, 2021, the Company transferred, on a non-recourse basis, 100% of the senior mortgage loan that the Company originated to a third-party lender, and retained as a loan investment a separate mezzanine loan investment secured by a pledge of the equity in the mortgage borrower. With respect to the senior mortgage loan so transferred, the Company retains: no control over the mortgage loan; no economic interest in the mortgage loan; and no recourse to the purchaser or the borrower. Consequently, based on these circumstances and because the Company does not have any continuing involvement with the transferred senior mortgage loan, these syndications are accounted for as sales under GAAP and are removed from the Company’s consolidated financial statements at the time of transfer. The Company’s consolidated balance sheets only include the separate mezzanine loan remaining after the transfer.

For more information regarding the Company’s portfolio financing arrangements, see Note 7.

11


 

Fair Value Measurements

The Company follows ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), for its holdings of financial instruments. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accordance with GAAP and expands disclosure of fair value measurements. ASC 820-10 determines fair value to be the price that would be received for a financial instrument in a current sale, which assumes an orderly transaction between market participants on the measurement date. The Company determines the estimated fair value of financial assets and liabilities using the three-tier fair value hierarchy established by GAAP, which prioritizes the inputs used in measuring fair value. GAAP establishes market-based or observable inputs as the preferred source of values followed by valuation models using management assumptions in the absence of market inputs. The financial instruments recorded at fair value on a recurring basis in the Company’s consolidated financial statements are cash and cash equivalents and restricted cash. The three levels of inputs that may be used to measure fair value are as follows:

Level I—Valuations based on quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level II—Valuations based on quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly.

Level III—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

For certain financial instruments, the various inputs that management uses to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the determination of which category within the fair value hierarchy is appropriate for such financial instrument is based on the lowest level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. The Company may use valuation techniques consistent with the market and income approaches to measure the fair value of its assets and liabilities. The market approach uses third-party valuations and information obtained from market transactions involving identical or similar assets or liabilities. The income approach uses projections of the future economic benefits of an instrument to determine its fair value, such as in the discounted cash flow methodology. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risk associated with investing in these financial instruments. Transfers between levels of the fair value hierarchy are assumed to occur at the end of the reporting period.

The following methods and assumptions are used by our Manager to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value:

 

Cash and cash equivalents: the carrying amount of cash and cash equivalents approximates fair value.

 

Loans held for investment, net: using a discounted cash flow methodology employing a discount rate for loans of comparable credit quality, structure, and LTV based upon appraisal information and current estimates of the value of collateral property performed by the Manager, and credit spreads for loans of comparable risk (as determined by the Manager based on the factors previously described) as corroborated by inquiry of other market participants.

 

Secured credit facilities and mortgage loan payable: based on the rate at which a similar secured credit facility or mortgage loan payable would currently be priced, as corroborated by inquiry of other market participants.

 

CRE Collateralized Loan Obligations, net: utilizing indications of value from dealers active in trading similar or substantially similar securities, observable quotes from market data services, reported prices and spreads for recent new issues, and Manager estimates of the credit spread on which similar bonds would be issued, or traded, in the new issue and secondary markets.

 

Other assets and liabilities subject to fair value measurement, including receivables, payables and accrued liabilities have carrying values that approximate fair value due to their short-term nature.

As discussed above, market-based or observable inputs are generally the preferred source of values for purposes of measuring the fair value of the Company’s assets under GAAP. The commercial property investment sales and commercial mortgage loan markets have and continue to experience extreme volatility, sharply reduced transaction volume, reduced liquidity, and disruption as a result of COVID-19, which has made it more difficult to rely on market-based inputs in connection with the valuation of the Company’s assets under GAAP. Key valuation inputs include, but are not limited to, future operating cash flow and performance of collateral properties, the financial strength and liquidity of borrowers and sponsors, capitalization rates and discount rates used to value commercial real estate properties, and observable transactions involving the sale or financing of commercial properties. In the

12


 

absence of market inputs, GAAP permits the use of management assumptions to measure fair value. However, the considerable market volatility and disruption caused by COVID-19 and the considerable uncertainty regarding the ultimate impact and duration of the pandemic have made it more difficult for the Company’s management to formulate assumptions to measure the fair value of the Company’s assets.

Income Taxes

The Company qualifies and has elected to be taxed as a REIT for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended, commencing with its initial taxable year ended December 31, 2014. To the extent that it annually distributes at least 90% of its REIT taxable income to stockholders and complies with various other requirements as a REIT, the Company generally will not be subject to U.S. federal income taxes on its distributed REIT taxable income. In 2017, the Internal Revenue Service issued a revenue procedure permitting “publicly offered” REITs to make elective stock dividends (i.e. dividends paid in a mixture of stock and cash), with at least 20% of the total distribution being paid in cash, to satisfy their REIT distribution requirements. Pursuant to this revenue procedure, the Company may elect to make future distributions of its taxable income in a mixture of stock and cash. If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company’s four subsequent taxable years. Even though the Company currently qualifies for taxation as a REIT, the Company may be subject to certain U.S. federal, state, local and foreign taxes on the Company’s income and property and to U.S. federal income and excise taxes on the Company’s undistributed REIT taxable income.

Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the periods in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period in which the enactment date occurs. Under ASC Topic 740, Income Taxes (“ASC 740”), a valuation allowance is established when management believes it is more likely than not that a deferred tax asset will not be realized. The Company intends to continue to operate in a manner consistent with, and to continue to meet the requirements to be treated as, a REIT for tax purposes and to distribute all of its REIT taxable income. Accordingly, the Company does not expect to pay corporate level federal taxes.

Earnings per Common Share

The Company utilizes the two-class method when assessing participating securities to calculate earnings per common share. Basic earnings per common share is computed by dividing net income attributable to common stockholders (i.e., holders of common stock and, when it was outstanding, Class A common stock), by the weighted-average number of common shares (both common stock and, when it was outstanding, Class A common stock) outstanding during the period. The preferences, rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of the Class A common stock were identical to the common stock, except (1) the Class A common stock was not a “margin security” as defined in Regulation U of the Board of Governors of the U.S. Federal Reserve System (and rulings and interpretations thereunder) and could not be listed on a national securities exchange or a national market system and (2) each share of Class A common stock was convertible at any time or from time to time, at the option of the holder, for one fully paid and non-assessable share of common stock. See Note 13 for details regarding the conversion of Class A common stock.

Diluted earnings per share is computed under the more dilutive of the treasury stock method or the two-class method. The computation of diluted earnings per share is based on the weighted average number of participating securities outstanding plus the incremental shares that would be outstanding assuming exercise of warrants (the “Warrants”, see Note 13) issued in connection with the Company’s Series B Cumulative Redeemable Preferred Stock (“Series B Preferred”), which are exercisable only on a net-share settlement basis. The number of incremental shares is calculated utilizing the treasury stock method. The Company accounts for unvested share-based payment awards that contain non-forfeitable dividend rights or dividend equivalents (whether paid or unpaid) as participating securities, which are included in the computation of earnings per share pursuant to the two-class method. The Company excludes participating securities and warrants from the calculation of diluted weighted average shares outstanding in periods of net losses since their effect would be anti-dilutive.

Share-Based Compensation

Share-based compensation consists of awards issued by the Company to certain employees of affiliates of the Manager and certain members of the Company’s Board of Directors. These share-based awards generally vest in installments over a fixed period of time. Deferred stock units granted to the Company’s Board of Directors fully vest on the grant date and accrue dividends that are paid-

13


 

in kind through additional deferred stock units on a quarterly basis. Compensation expense is recognized in net income on a straight-line basis over the applicable award’s vesting period. Forfeitures of share-based awards are recognized as they occur.

Deferred Financing Costs

Deferred financing costs are reflected net of the collateralized loan obligations, secured credit arrangements, and mortgage loan payable on the Company’s consolidated balance sheets. These costs are amortized in interest expense using the interest method, or on a straight-line basis when it approximates the interest method, as follows: (a) for secured credit arrangements other than our CRE CLOs, the initial term of the financing arrangement, or in case of costs directly associated with the loan, over the life of the facility or the loan, whichever is shorter; (b) for deferred financing costs related to mortgage loan payable, the initial maturities of the underlying loan(s) pledged to support the specific borrowing; and (c) for CRE CLOs issued by the Company’s subsidiaries, over the estimated life of the liabilities issued based on the initial maturity dates of the underlying loans currently held by each trust based upon the expected repayment behavior of the loans collateralizing the notes after giving effect to the reinvestment period, all as of the closing date.

Cash and Cash Equivalents

Cash and cash equivalents include cash held in banks or invested in money market funds with original maturities of less than 90 days. The Company deposits its cash and cash equivalents with high credit quality institutions to minimize credit risk exposure. The Company maintains cash accounts at several financial institutions, which are insured up to a maximum of $250,000 per account as of March 31, 2021 and December 31, 2019. The balances in these accounts may exceed the insured limits.

Pursuant to financial covenants applicable to Holdco, which is the guarantor of the Company’s recourse indebtedness, the Company is required to maintain minimum cash equal to the greater of (i) $10 million or (ii) the product of 5% and the aggregate recourse indebtedness of the Company. To comply with this covenant, the Company held as part of its total cash balances $10.8 million and $19.1 million, respectively, at March 31, 2021 and December 31, 2020.

Restricted Cash

Restricted cash primarily represents deposit proceeds from potential borrowers which may be returned to borrowers, after deducting transaction costs paid by the Company for the benefit of the borrowers, upon the closing of a loan transaction.

 

Collateralized Loan Obligation Proceeds Held at Trustee

Collateralized Loan Obligation Proceeds Held at Trustee represent the TRTX 2021-FL4 Ramp-Up Account in an amount of approximately $308.9 million available to purchase eligible collateral interests from the Company during a ramp-up period of approximately six months following the FL4 Closing Date. See Note 6 for details of the TRTX 2021-FL4 issuance. Also included is cash held by the Company’s CRE CLOs pending reinvestment in eligible collateral.

Accounts Receivable from Servicer/Trustee

Accounts receivable from Servicer/Trustee represents cash proceeds from loan activities that have not been remitted to the Company based on established servicing and borrowing procedures. Such amounts are generally held by the Servicer/Trustee for less than 30 days before being remitted to the Company.

Temporary Equity

Equity instruments that are redeemable for cash or other assets are classified as temporary equity if the instrument is redeemable, at the option of the holder, at a fixed or determinable price on a fixed or determinable date or upon the occurrence of an event that is not solely within the control of the issuer. Redeemable equity instruments are initially carried at the relative fair value of the equity instrument at the issuance date, which is subsequently adjusted at each balance sheet date if the instrument is currently redeemable or probable of becoming redeemable. The Series B Preferred Stock issued in connection with the Investment Agreement described in Note 13 is classified as temporary equity in the accompanying financial statements. The Company elected the accreted redemption value method under which it accretes changes in the redemption value over the period from the date of issuance of the Series B Preferred Stock to the earliest costless redemption date (the fourth anniversary) using the effective interest method, as described in Note 13. Such adjustments are included in Accretion of Discount on Series B Cumulative Redeemable Preferred Stock on the Company’s Consolidated Statements of Changes in Equity and treated similarly to a dividend on preferred stock for GAAP purposes.

14


 

Recently Issued Accounting Guidance

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting ("ASU 2020-04"). ASU 2020-04 provides optional expedients and exceptions to GAAP requirements for modifications to debt agreements, leases, derivatives, and other contracts, related to the expected market transition from LIBOR, and certain other floating rate benchmark indices, or collectively, IBORs, to alternative reference rates. ASU 2020-04 generally considers contract modifications related to reference rate reform to be an event that does not require contract remeasurement at the modification date nor a reassessment of a previous accounting determination. In January 2021, the FASB clarified the scope of that guidance with the issuance of ASU 2021-01, “Reference Rate Reform: Scope.” This ASU provides optional guidance for a limited period of time to ease the burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. This would apply to companies meeting certain criteria that have contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. This standard is effective for the Company immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company continues to evaluate the documentation and control processes associated with its assets and liabilities to manage the transition away from LIBOR to an alternative rate endorsed by the Alternative Reference Rates Committee of the Federal Reserve System, and continues to utilize required resources to revise its control and risk management systems to ensure there is no disruption to our day-to-day operations from the transition, when it does occur. The Company will continue to employ prudent risk management as it relates to the potential financial, operational and legal risks associated with the expected cessation of LIBOR, and to ensure that its assets and liabilities generally remain match-indexed following this event. The Company is currently evaluating the impact of ASU 2020-04 on its consolidated financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815 – 40) (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company is currently evaluating the impact of ASU 2020-06 on its consolidated financial statements.

In October 2020, the FASB issued ASU 2020-10, Codification Improvements, which updates various codification topics by clarifying or improving disclosure requirements to align with the SEC’s regulations. The ASU’s amendments are effective for annual periods beginning after December 15, 2021. The Company is currently evaluating the impact of ASU 2020-04 on its consolidated financial statements.

(3) Loans Held for Investment and the Allowance for Credit Losses

The Company originates and acquires first mortgage and mezzanine loans secured by commercial properties. The Company considers these loans to belong to a single portfolio of mortgage loans, and the Company has developed its systematic methodology to determine the allowance for credit losses based on a single portfolio. For purposes of certain disclosures herein, the Company disaggregates this portfolio segment into the following classes of finance receivables: Senior loans; and Subordinated and Mezzanine loans. These loans can potentially subject the Company to concentrations of credit risk as measured by various metrics, including, without limitation, property type collateralizing the loan, loan size, loans to a single sponsor and loans in a single geographic area. The Company’s loans held for investment are accounted for at amortized cost. Interest accrued but not yet collected is separately reported as accrued interest and fees receivable on the Company’s consolidated balance sheets. Amounts within that caption relating to loans held for investment were $14.3 million and $14.0 million as of March 31, 2021 and December 31, 2020.

During the three months ended March 31, 2021, the Company originated 1 mortgage loan, with a total commitment of $45.4 million, an initial unpaid principal balance of $37.5 million, and unfunded commitment at closing of $7.9 million.

15


 

The following table details overall statistics for the Company’s loan portfolio as of March 31, 2021 (dollars in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Balance Sheet

Portfolio

 

 

Total Loan Portfolio

 

 

Balance Sheet

Portfolio

 

 

Total Loan Portfolio

 

Number of loans

 

 

58

 

 

 

59

 

 

 

57

 

 

 

58

 

Floating rate loans

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

 

 

100.0

%

Total loan commitment(1)

 

$

4,983,745

 

 

$

5,115,745

 

 

$

4,943,511

 

 

$

5,075,511

 

Unpaid principal balance(2)

 

$

4,587,358

 

 

$

4,587,358

 

 

$

4,524,725

 

 

$

4,524,725

 

Unfunded loan commitments(3)

 

$

401,726

 

 

$

401,726

 

 

$

423,487

 

 

$

423,487

 

Amortized cost

 

$

4,580,179

 

 

$

4,580,179

 

 

$

4,516,400

 

 

$

4,516,400

 

Weighted average credit spread(4)

 

 

3.2

%

 

 

3.2

%

 

 

3.2

%

 

 

3.2

%

Weighted average all-in yield(4)

 

 

5.2

%

 

 

5.2

%

 

 

5.3

%

 

 

5.3

%

Weighted average term to extended maturity (in years)(5)

 

 

2.9

 

 

 

2.9

 

 

 

3.1

 

 

 

3.1

 

 

(1)

In certain instances, the Company creates structural leverage through the co-origination or non-recourse syndication of a senior loan interest to a third-party. In either case, the senior mortgage loan (i.e., the non-consolidated senior interest) is not included on the Company’s balance sheet. When the Company creates structural leverage through the co-origination or non-recourse syndication of a senior loan interest to a third-party, the Company retains on its balance sheet a mezzanine loan. Total loan commitment encompasses the entire loan portfolio the Company originated, acquired and financed. At March 31, 2021, the Company had one non-consolidated senior interest outstanding of $132.0 million.

(2)

Unpaid principal balance includes PIK interest of $5.5 million as of March 31, 2021.

(3)

Unfunded loan commitments may be funded over the term of each loan, subject in certain cases to an expiration date or a force-funding date, primarily to finance property improvements or lease-related expenditures by the Company’s borrowers, to finance operating deficits during renovation and lease-up, and in limited instances to finance construction.

(4)

As of March 31, 2021, all of the Company’s loans were floating rate and were indexed to LIBOR. In addition to credit spread, all-in yield includes the amortization of deferred origination fees, purchase price premium and discount if any, loan origination costs and accrual of both extension and exit fees. Credit spread and all-in yield for the total portfolio assumes the applicable floating benchmark rate as of March 31, 2021 for weighted average calculations.

(5)

Extended maturity assumes all extension options are exercised by the borrower; provided, however, that the Company’s loans may be repaid prior to such date. As of March 31, 2021, based on the unpaid principal balance of the Company’s total loan exposure, 23.0% of the Company’s loans were subject to yield maintenance or other prepayment restrictions and 77.0% were open to repayment by the borrower without penalty.

 

The following tables present an overview of the mortgage loan investment portfolio by loan seniority as of March 31, 2021 and December 31, 2020 (dollars in thousands):

 

 

 

March 31, 2021

 

Loans Held for Investment, Net

 

Outstanding

Principal

 

 

Unamortized

Premium

(Discount), Loan

Origination Fees, net

 

 

Amortized Cost

 

Senior loans

 

$

4,553,826

 

 

$

(7,046

)

 

$

4,546,780

 

Subordinated and mezzanine loans

 

 

33,532

 

 

 

(133

)

 

 

33,399

 

Total

 

$

4,587,358

 

 

$

(7,179

)

 

$

4,580,179

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

 

(56,641

)

Loans Held for Investment, Net

 

 

 

 

 

 

 

 

 

$

4,523,538

 

 

 

 

December 31, 2020

 

Loans Held for Investment, Net

 

Outstanding

Principal

 

 

Unamortized

Premium

(Discount), Loan

Origination Fees, net

 

 

Amortized Cost

 

Senior loans

 

$

4,492,209

 

 

$

(8,161

)

 

$

4,484,048

 

Subordinated and mezzanine loans

 

 

32,516

 

 

 

(164

)

 

 

32,352

 

Total

 

$

4,524,725

 

 

$

(8,325

)

 

$

4,516,400

 

Allowance for credit losses

 

 

 

 

 

 

 

 

 

 

(59,940

)

Loans Held for Investment, Net

 

 

 

 

 

 

 

 

 

$

4,456,460

 

 

16


 

 

For the three months ended March 31, 2021, loan portfolio activity was as follows (dollars in thousands):

 

 

 

Carrying Value

 

Balance at December 31, 2020

 

$

4,456,460

 

Additions during the period:

 

 

 

 

Loans originated and acquired

 

 

37,091

 

Additional fundings

 

 

30,382

 

Amortization of origination fees

 

 

1,600

 

Deductions during the period:

 

 

 

 

Collection of principal

 

 

(5,294

)

Change in allowance for credit losses

 

 

3,299

 

Balance at March 31, 2021

 

$

4,523,538

 

 

 

At March 31, 2021 and December 31, 2020, there were 0 unamortized loan purchase discounts or premiums included in loans held for investment at amortized cost on the consolidated balance sheets.

At March 31, 2021 and December 31, 2020, there was $7.2 million and $8.3 million, respectively, of unamortized loan fees and discounts included in loans held for investment, net in the consolidated balance sheets. The Company did 0t recognize any accelerated fee component of prepayment fees during the three months ended March 31, 2021 and 2020, and recognized $0 million and $0.3 million of such payments, respectively, during the three months ended March 31, 2021 and 2020.

Loan Risk Rating

As discussed in Note 2, the Company evaluates all of its loans to assign risk ratings on a quarterly basis. Based on a 5-point scale, the Company’s loans are rated “1” through “5,” from least risk to greatest risk, respectively, which ratings are described in Note 2. The Company generally assigns a risk rating of “3” to all loan investments originated during the most recent quarter, except in the case of specific circumstances warranting an exception.

The following tables present amortized cost basis by origination year, grouped by risk rating, as of March 31, 2021 (dollars in thousands):

 

 

 

March 31, 2021

 

 

 

Amortized Cost by Origination Year

 

 

 

2021

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

Prior

 

 

Total

 

Senior loans by internal risk ratings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

2

 

 

 

 

 

 

 

 

31,863

 

 

 

337,382

 

 

 

 

 

 

 

 

 

369,245

 

3

 

 

37,098

 

 

 

251,019

 

 

 

1,696,788

 

 

 

1,102,412

 

 

 

255,407

 

 

 

 

 

 

3,342,724

 

4

 

 

 

 

 

 

 

 

434,291

 

 

 

46,910

 

 

 

297,382

 

 

 

25,049

 

 

 

803,632

 

5

 

 

 

 

 

 

 

 

 

 

 

31,179

 

 

 

 

 

 

 

 

 

31,179

 

Total mortgage loans

 

$

37,098

 

 

$

251,019

 

 

$

2,162,942

 

 

$

1,517,883

 

 

$

552,789

 

 

$

25,049

 

 

$

4,546,780

 

Subordinated and mezzanine loans by

   internal risk ratings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

33,399

 

 

 

 

 

 

 

 

 

 

 

 

33,399

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total subordinated and mezzanine

   loans

 

 

 

 

 

 

 

 

33,399

 

 

 

 

 

 

 

 

 

 

 

 

33,399

 

Total

 

$

37,098

 

 

$

251,019

 

 

$

2,196,341

 

 

$

1,517,883

 

 

$

552,789

 

 

$

25,049

 

 

$

4,580,179

 

 

17


 

 

 

 

December 31, 2020

 

 

 

Amortized Cost by Origination Year

 

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Total

 

Senior loans by internal risk ratings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

2

 

 

 

 

 

 

 

 

337,738

 

 

 

 

 

 

 

 

 

337,738

 

3

 

 

247,770

 

 

 

1,705,783

 

 

 

1,099,503

 

 

 

255,255

 

 

 

 

 

 

3,308,311

 

4

 

 

 

 

 

433,334

 

 

 

46,882

 

 

 

301,628

 

 

 

25,049

 

 

 

806,893

 

5

 

 

 

 

 

 

 

 

31,106

 

 

 

 

 

 

 

 

 

31,106

 

Total mortgage loans

 

$

247,770

 

 

$

2,139,117

 

 

$

1,515,229

 

 

$

556,883

 

 

$

25,049

 

 

$

4,484,048

 

Subordinated and mezzanine loans by

   internal risk ratings:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

 

$

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 

 

 

 

 

32,352

 

 

 

 

 

 

 

 

 

 

 

 

32,352

 

4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total subordinated and mezzanine

   loans

 

 

 

 

 

32,352

 

 

 

 

 

 

 

 

 

 

 

 

32,352

 

Total

 

$

247,770

 

 

$

2,171,469

 

 

$

1,515,229

 

 

$

556,883

 

 

$

25,049

 

 

$

4,516,400

 

 

Loans acquired rather than originated are presented in the table above in the column corresponding to the year of origination, not acquisition.

The table below summarizes the amortized cost, and results of the Company’s internal risk rating review performed as of March 31, 2021 and December 31, 2020 (dollars in thousands):

 

Rating

 

March 31, 2021

 

 

December 31, 2020

 

1

 

$

 

 

$

 

2

 

 

369,245

 

 

 

337,738

 

3

 

 

3,376,123

 

 

 

3,340,663

 

4

 

 

803,632

 

 

 

806,893

 

5

 

 

31,179

 

 

 

31,106

 

Total

 

$

4,580,179

 

 

$

4,516,400

 

Allowance for Credit Losses

 

 

(56,641

)

 

 

(59,940

)

Carrying Value

 

$

4,523,538

 

 

$

4,456,460

 

Weighted Average Risk Rating(1)

 

 

3.1

 

 

 

3.1

 

 

(1)

Weighted Average Risk Rating calculated based on amortized cost balance at period end.

 

The weighted average risk ratings of the Company’s loans remain unchanged at 3.1 as of March 31, 2021 and December 31, 2020. During the three months ended March 31, 2021, the Company upgraded 1 loan from risk category “3” to “2” because the collateral property achieved lease occupancy at rents in excess of underwriting.


 Allowance for Credit Losses

The Company’s reserve developed pursuant to ASC 326 reflects its current estimate of potential credit losses related to its loan portfolio as of March 31, 2021. As part of its allowance for credit losses, the Company maintains a separate allowance for credit losses related to unfunded loan commitments, and this amount is included in accrued expenses and other liabilities on the consolidated balance sheets. For further information on the policies that govern the estimation of the allowances for credit loss levels, see Note 2.

18


 

The following tables present activity in the allowance for credit losses for the mortgage loan investment portfolio by class of finance receivable for the three months ended March 31, 2021 and 2020 (dollars in thousands):    

 

 

 

For the Three Months Ended March 31, 2021

 

 

 

Senior Loans

 

 

Subordinated and

Mezzanine Loans

 

 

Total

 

Allowance for credit losses for loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

CECL reserve as of December 31, 2020

 

$

58,210

 

 

$

1,730

 

 

$

59,940

 

Decrease in CECL reserve

 

 

(3,055

)

 

 

(244

)

 

 

(3,299

)

Subtotal

 

 

55,155

 

 

 

1,486

 

 

 

56,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses on unfunded loan commitments:

 

 

 

 

 

 

 

 

 

 

 

 

CECL reserve as of December 31, 2020

 

 

2,756

 

 

 

132

 

 

 

2,888

 

Decrease in CECL reserve

 

 

(672

)

 

 

(67

)

 

 

(739

)

Subtotal

 

 

2,084

 

 

 

65

 

 

 

2,149

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for credit losses

 

$

57,239

 

 

$

1,551

 

 

$

58,790

 

 

 

 

 

For the Three Months Ended March 31, 2020

 

 

 

Senior Loans

 

 

Subordinated and

Mezzanine Loans

 

 

Total

 

Allowance for credit losses for loans held for investment:

 

 

 

 

 

 

 

 

 

 

 

 

CECL reserve as of December 31, 2019

 

$

 

 

$

 

 

$

 

Cumulative-effect adjustment upon adoption of ASU 2016-13

 

 

16,903

 

 

 

880

 

 

 

17,783

 

Increase in CECL reserve

 

 

56,717

 

 

 

1,158

 

 

 

57,875

 

Subtotal

 

 

73,620

 

 

 

2,038

 

 

 

75,658

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses on unfunded loan commitments:

 

 

 

 

 

 

 

 

 

 

 

 

CECL reserve as of December 31, 2019

 

 

 

 

 

 

 

 

 

Cumulative-effect adjustment upon adoption of ASU 2016-13

 

 

1,862

 

 

 

 

 

 

1,862

 

Increase in CECL reserve

 

 

3,945

 

 

 

1,528

 

 

 

5,473

 

Subtotal

 

 

5,807

 

 

 

1,528

 

 

 

7,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for credit losses

 

$

79,427

 

 

$

3,566

 

 

$

82,993

 

 

During the three months ended March 31, 2021, the Company recorded a decrease of $4.0 million in the allowance for credit losses, thus reducing the total CECL reserve to $58.8 million as of March 31, 2021. This decline was primarily due to expectations of improving macroeconomic conditions and actual improvements in operating results for many collateral properties adversely affected by COVID-19. For the three months ended March 31, 2020, the allowance for credit losses increased to $83.0 million, comprised of $19.6 million in connection with the adoption of ASC 326 on January 1, 2020, and $63.3 million increase in provision due to changes in economic outlook resulting from the impact of the COVID-19 pandemic. The average risk ratings of the Company’s loans remain unchanged at 3.1 as of March 31, 2021 and December 31, 2020. The overall economic slowdown due to the COVID-19 pandemic has caused reduced investment sales and financing activity in most sectors of the commercial real estate capital markets, which may moderate the pace of loan repayments and likely impact commercial property values and valuation inputs. While the ultimate impact of these trends remains uncertain, the Company has made certain forward-looking adjustments to the inputs of its calculation of the allowance for credit losses to reflect uncertainty regarding the timing, strength and distribution of the economic recovery, and the post-COVID levels of economic activity that may result.  

19


 

NaN loan secured by a retail property was on non-accrual status as of March 31, 2021 and December 31, 2020 due to a default caused by non-payment of interest in December 2020. The amortized cost of the loan was $31.2 million and $31.1 million as of March 31, 2021 and December 31, 2020, respectively. In accordance with the Company’s revenue recognition policy on loans placed on non-accrual status, the Company suspended accrual of interest income on this first mortgage loan. At March 31, 2021 and December 31, 2020, the Company determined that this first mortgage loan met the CECL framework’s criteria for individual assessment. Accordingly, the Company utilized the estimated fair value of the collateral on March 31, 2021 and December 31, 2020 to estimate a loan loss reserve of $10.0 million, which is included in the CECL reserve. The Company’s estimate of the collateral’s fair market value was determined using a discounted cash flow model and Level 3 inputs, which include estimates of property-specific cash flows over a specific holding period, a discount rate of 12.5%, and a terminal capitalization rate of 7.5%. These inputs are based on the location, type and nature of the property, current and anticipated market conditions, and management’s knowledge, experience, and judgment. With the passage of time and continuation of the COVID-19 pandemic, certain borrowers may fail to pay interest which may result in additional loans being placed on non-accrual status during later periods.

During the three months ended March 31, 2021, the Company executed 5 loan modifications with borrowers. As of March 31, 2021, these loans had an aggregate commitment amount of $397.7 million and an aggregate unpaid principal balance of $393.5 million. None of these loan modifications trigger the requirements for accounting as TDRs. The Company’s loan modifications typically temporarily reduce the amount of cash interest collected, permit the accrual of a portion (typically not more than 50%) of the interest due, to be repaid at a later date by the borrower, and/or permit the use of existing reserves to pay interest and other property-level expenses, as well as providing accommodations on conditions for extension, such as waiving debt yield tests, and/or modifying the conditions upon which the underlying borrower may extend the maturity date. In exchange, borrowers and sponsors have made partial principal repayments and/or provided additional cash for payment of interest, operating expenses, and replenishment of interest reserves or capital reserves in amounts and combinations acceptable to the Company. All of the modified loans are performing as of March 31, 2021. As of March 31, 2021, the aggregate number of modified loans outstanding was 11 with an unpaid principal balance of $943.5 million. Total PIK interest of $0.8 million on two loans was deferred and added to the outstanding loan principal during the three months ended March 31, 2021. During the three months ended March 31, 2021, the Company collected 99.4% of interest collections, including PIK interest of 1.2%, compared to 96.7% of interest collections, including PIK interest of 1.7% during the three months ended December 31, 2020. The Company collected 99.1% of interest collections during the three months ended March 31, 2020. The Company did 0t defer any PIK interest during the three months ended March 31, 2020. The following table presents the activity in the PIK balance during the three months ended March 31, 2021 (dollars in thousands):  

 

 

 

March 31, 2021

 

Balance at December 31, 2020

 

$

4,701

 

PIK accrued

 

 

816

 

PIK repayments

 

 

 

Balance at March 31, 2021

 

$

5,517

 

The following table presents the aging analysis on an amortized cost basis of mortgage loans by class of loans as of March 31, 2021 (dollars in thousands):

 

 

 

Days Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

30-59 Days

 

 

60-89 Days

 

 

90 Days

or More

 

 

Total

Loans

Past Due

 

 

Current

 

 

Total

Loans

 

 

90 Days or

More Past

Due and

Accruing

 

Loans Receivable:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior loans

 

$

 

 

$

 

 

$

31,179

 

 

$

31,179

 

 

$

4,515,601

 

 

$

4,546,780

 

 

$

 

Subordinated and mezzanine loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,399

 

 

 

33,399

 

 

 

 

Total

 

$

 

 

$

 

 

$

31,179

 

 

$

31,179

 

 

$

4,549,000

 

 

$

4,580,179

 

 

$

 

 

At December 31, 2020, all loans were current.

20


 

(4) Real Estate Owned

In December 2020, the Company acquired 2 undeveloped commercially-zoned land parcels on the Las Vegas Strip comprising 27 acres (the “Property”) pursuant to a negotiated deed-in-lieu of foreclosure. At September 30, 2020, this property served as collateral for a first mortgage loan receivable held for investment with an unpaid principal balance of $112.0 million, an independently-assessed credit loss reserve of $12.8 million, and a net carrying value of $99.2 million. On October 9, 2020, the first mortgage loan reached final maturity without repayment or satisfaction of extension conditions, which triggered a maturity default. On December 31, 2020, the Company took ownership of the Property, extinguished the first mortgage loan receivable, and realized a loss of $12.8 million, equal to the previously recorded specific CECL reserve on the first mortgage loan. At March 31, 2021, the Company continued to hold the Property at its estimated fair value at the time of acquisition, net of estimated selling costs, of $99.2 million. The Company’s estimate of the Property’s fair value was determined using a discounted cash flow model and Level 3 inputs, which include estimates of parcel-specific cash flows over a specific holding period, at a discount rate that ranges between 8.0% - 17.5% based on the risk profile of estimated cash flows associated with each respective parcel, and an estimated capitalization rate of 6.25%, where applicable. These inputs are based on the highest and best use for each parcel, estimated future values for the parcels based on extensive discussions with local brokers, investors and other market participants, the estimated holding period for the parcels, and discount rates that reflect estimated investor return requirements for the risks associated with the expected use of each sub-parcel. The Company obtained from a third party a $50.0 million non-recourse first mortgage loan secured by the Property, which is classified as Mortgage Loan Payable on the Company’s consolidated balance sheets. See Note 7 for details of the Mortgage Loan Payable.

For the three months ended March 31, 2021, operating revenues from the REO asset were sufficient to cover the operating expenses and were immaterial to the financial results of the Company.

(5) Available-for-Sale Debt Securities  

As of March 31, 2021 and December 31, 2020, the Company did 0t own any CRE debt securities. The Company did 0t acquire any CRE debt securities during the three months ended March 31, 2021.

During the three months ended March 31, 2020, the Company sold 11 of its CRE CLO investments for total net proceeds of $151.6 million, recognizing a loss on sale of $36.2 million in Securities Impairments on the consolidated statements of income (loss) and comprehensive income (loss).

During the quarter ended March 31, 2020, all but one of the Company’s CRE debt securities portfolio was pledged as collateral under daily mark-to-market secured credit facilities. Fluctuations in the value of the Company’s CRE debt securities portfolio resulted in the Company being required to post cash collateral with the Company’s lenders under these facilities. To mitigate the impact to the Company’s business from these developments, the Company decided to sell substantially all of the Company’s CRE debt securities portfolio. Accordingly, at March 31, 2020, the Company determined it no longer had the intent and ability to retain its investment portfolio of CRE debt securities, wrote down the entire portfolio to its estimated fair value (on securities where amortized cost basis exceeded fair value), and recorded an impairment charge of $167.3 million, which is recognized as expense in Securities Impairments on the consolidated statements of income (loss) and comprehensive income (loss). During the three months ended March 31, 2020, the Company recorded a total loss of $203.5 million recognized as expense in Securities Impairments on the consolidated statements of income (loss) and comprehensive income (loss), offset by a small realized gain.  

(6) Variable Interest Entities and Collateralized Loan Obligations

Subsidiaries of the Company have outstanding at March 31, 2020 3 collateralized loan obligations to finance approximately $3.2 billion or 69.0% of the Company’s loan investment portfolio, measured by unpaid principal balance.

On March 31, 2021 (the “FL4 Closing Date”), TPG RE Finance Trust CLO Sub-REIT (“Sub-REIT”), a subsidiary of the Company, entered into a collateralized loan obligation (“TRTX 2021-FL4” or “FL4”) through its wholly-owned subsidiaries TRTX 2021-FL4 Issuer, Ltd., an exempted company incorporated in the Cayman Islands with limited liability, as issuer (the “FL4 Issuer”), and TRTX 2021-FL4 Co-Issuer, LLC, a Delaware limited liability company, as co-issuer (the “FL4 Co-Issuer” and together with the FL4 Issuer, the “FL4 Issuers”). On the FL4 Closing Date, FL4 Issuer issued $1.25 billion principal amount of notes (the “FL4 Notes”). The FL4 Co-Issuer co-issued $1.04 billion principal amount of investment grade-rated notes which were purchased by third party investors. Concurrently with the issuance of the FL4 Notes, the FL4 Issuer also issued 112,500 preferred shares, par value $0.001 per share and with an aggregate liquidation preference and notional amount equal to $1,000 per share (the “FL4 Preferred Shares” and, together with the FL4 Notes, the “FL4 Securities”), to TRTX Master Retention Holder, LLC, a Delaware limited liability company and indirect wholly-owned subsidiary of the Company (“FL4 Retention Holder”).

21


 

Proceeds from the issuance of the FL4 Securities were used to (i) purchase 1 commercial real estate whole loan (the “FL4 Closing Date Whole Loan”) and 17 pari passu participations in 17 separate commercial real estate whole loans (the “FL4 Closing Date Pari Passu Participations” and, together with the FL4 Closing Date Whole Loan, the “FL4 Closing Date Collateral Interests”), (ii) fund an account (the “FL4 Ramp-Up Account”) in an amount of approximately $308.9 million to be used to purchase eligible collateral interests during a ramp-up period of approximately six months following the Closing Date (the “FL4 Ramp-Up Collateral Interests,” and, together with the FL4 Whole Loans, the “FL4 Initial Collateral Interests”) and (iii) to distribute to the Company $104.8 million of cash for investment or other corporate uses. The FL4 Closing Date Collateral Interests were purchased by the FL4 Issuer from the FL4 Seller, a wholly-owned subsidiary of the Company and an affiliate of the FL4 Issuers.

The FL4 Ramp-Up Account represents cash held at the trustee and is included in Collateralized Loan Obligation Proceeds Held at Trustee on the Company’s consolidated balance sheets. The FL4 Ramp-Up Account is available to purchase eligible collateral interests from the Company during the six-month ramp-up period. In the event the FL4 Ramp-Up Account is not fully utilized within six months of the FL4 Closing Date, amounts up to and including $5.0 million shall be deposited into the FL4 reinvestment account. Any amounts in excess of $5.0 million shall be applied to retire FL4 bonds payable on the first payment date after the ramp-up period in accordance with the priority of payments.

TRTX 2021-FL4 permits the Company, during the 24 months after closing, to contribute eligible new loans or participation interests (the “FL4 Additional Interests”) in loans to TRTX 2021-FL4 in exchange for cash, which provides additional liquidity to the Company to originate new loan investments as underlying loans repay. FL4 Closing Date Collateral Interests represented 20.5% of the aggregate unpaid principal balance of the Company’s loan investment portfolio and had an aggregate principal balance of approximately $0.9 billion as of March 31, 2021, and $308.9 million in the FL4 Ramp-Up Account to be used for purchase of certain other collateral interests during the ramp-up period.

In connection with TRTX 2021-FL4, the Company incurred $8.3 million of issuance costs which are amortized on an effective yield basis over the expected life of the investment-grade notes issued based upon the expected repayment behavior of the loans collateralizing the notes after giving effect to the reinvestment period, both as of the FL4 Closing Date. As of March 31, 2021, the Company’s unamortized issuance costs related to TRTX 2021-FL4 were $8.3 million.

Interest expense on the outstanding FL4 Notes is payable monthly. For the three months ended March 31, 2021, interest expense on the outstanding FL4 Notes (excluding amortization of deferred financing costs) of $0.04 million is included in the Company’s consolidated statements of income (loss) and comprehensive income (loss).

On October 25, 2019 (the “FL3 Closing Date”), Sub-REIT entered into a collateralized loan obligation (“TRTX 2019-FL3” or “FL3”). TRTX 2019-FL3 provides for reinvestment, during the 24 months after closing of FL3, whereby eligible new loans or participation interests (the “FL3 Additional Interests”) in loans may be contributed to TRTX 2019-FL3 in exchange for cash, which provides liquidity to the Company to originate new loan investments as underlying loans repay.

For the three months ended March 31, 2021, the Company did not utilize the reinvestment feature. For the three months ended March 31, 2020, the Company utilized the reinvestment feature four times, contributing $157.3 million of new loans or participating interests in loans, and receiving $47.3 million of cash, after the repayment of $110.0 million of existing borrowings, including accrued interest.

As of March 31, 2021 FL3 Mortgage Assets represented 26.8% of the aggregate unpaid principal balance of the Company’s loan investment portfolio and had an aggregate principal balance of approximately $1.2 billion.

At March 31, 2021, TRTX 2019-FL3 had $1.2 million of cash available to acquire eligible assets which is included in Collateralized Loan Obligation Proceeds Held at Trustee on the Company’s consolidated balance sheets.

In connection with TRTX 2019-FL3, the Company incurred $7.8 million of issuance costs which are amortized on an effective yield basis over the expected life of the investment-grade notes issued based upon the expected repayment behavior of the loans collateralizing the notes after giving effect to the reinvestment period, both as of the FL3 Closing Date. As of March 31, 2021, the Company’s unamortized issuance costs related to TRTX 2019-FL3 were $4.5 million.

Interest expense on the outstanding FL3 Notes is payable monthly. For the three months ended March 31, 2021, interest expense on the outstanding FL3 Notes (excluding amortization of deferred financing costs) of $3.8 million is included in the Company’s consolidated statements of income (loss) and comprehensive income (loss).

On November 29, 2018 (the “FL2 Closing Date”), Sub-REIT entered into a collateralized loan obligation (“TRTX 2018-FL2” or “FL2”). TRTX 2018-FL2 provides for reinvestment, during the 24 months after closing of FL2, whereby eligible new loans or

22


 

participation interests in loans may be contributed to TRTX 2018-FL2 in exchange for cash, which provided additional liquidity to the Company to originate new loan investments as underlying loans repay. The reinvestment period for TRTX 2018-FL2 ended on December 11, 2020. At March 31, 2021, TRTX 2018-FL2 had 0 cash available to acquire eligible assets. For the three months ended March 31, 2020, the Company utilized the reinvestment feature three times, contributing $74.3 million of new loans or participation interests in loans, and receiving net cash proceeds of $45.1 million, after the repayment of $29.2 million of existing borrowings, including accrued interest.

As of March 31, 2021, FL2 Mortgage Assets represented 21.7% of the aggregate unpaid principal balance of the Company’s loan investment portfolio and had an aggregate principal balance of approximately $1.0 billion.

 

In connection with TRTX 2018-FL2, the Company incurred $8.7 million of issuance costs which are amortized on an effective yield basis over the expected life of the investment-grade notes (the “FL2 Notes”) issued based upon the expected repayment behavior of the loans collateralizing the notes and the reinvestment period, both as of the FL2 Closing Date. As of March 31, 2021, the Company’s unamortized issuance costs related to TRTX 2018-FL2 were $3.2 million.

Interest expense on the outstanding FL2 Notes is payable monthly. For the three months ended March 31, 2021, interest expense on the outstanding FL2 Notes (excluding amortization of deferred financing costs) of $3.1 million is included in the Company’s consolidated statements of income (loss) and comprehensive income (loss).

In accordance with ASC 810, the Company evaluated the key attributes of the issuers of the FL4 Notes (the “FL4 Issuers”), FL3 Notes (the “FL3 Issuers”) and the issuers of the FL2 Notes (the “FL2 Issuers”) to determine if they were VIEs and, if so, whether the Company was the primary beneficiary of their operating activities. This analysis caused the Company to conclude that the FL4 Issuers, FL3 Issuers and the FL2 Issuers were VIEs and that the Company was the primary beneficiary. The Company is the primary beneficiary because it has the ability to control the most significant activities of the FL4 Issuers, FL3 Issuers and the FL2 Issuers, the obligation to absorb losses to the extent of its equity investments, and the right to receive benefits, that could potentially be significant to these entities. Accordingly, the Company consolidates the FL4 Issuers, FL3 Issuers and the FL2 Issuers.

The Company’s total assets and total liabilities as of March 31, 2021 and December 31, 2020 included the following VIE assets and liabilities of TRTX 2021-FL4, TRTX 2019-FL3 and TRTX 2018-FL2 (dollars in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

ASSETS

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

47,383

 

 

$

78,350

 

Collateralized Loan Obligation Proceeds Held at Trustee

 

 

310,070

 

 

 

174

 

Accounts Receivable from Servicer/Trustee

 

 

202

 

 

 

 

Accrued Interest Receivable

 

 

1,029

 

 

 

740

 

Loans Held for Investment

 

 

3,141,155

 

 

 

2,199,666

 

Total Assets

 

$

3,499,839

 

 

$

2,278,930

 

LIABILITIES

 

 

 

 

 

 

 

 

Accrued Interest Payable

 

$

1,395

 

 

$

1,311

 

Accrued Expenses

 

 

988

 

 

 

630

 

Collateralized Loan Obligations

 

 

2,851,709

 

 

 

1,825,569

 

Payable to Affiliates

 

 

13,986

 

 

 

14,016

 

Total Liabilities

 

$

2,868,078

 

 

$

1,841,526

 

 

The following tables outline TRTX 2021-FL4, TRTX 2019-FL3 and TRTX 2018-FL2 loan collateral and borrowings under the TRTX 2021-FL4, TRTX 2019-FL3 and TRTX 2018-FL2 collateralized loan obligations as of March 31, 2021 and December 31, 2020 (dollars in thousands):

 

March 31, 2021

 

Collateral (loan investments)

 

 

Debt (notes issued)

 

Outstanding Principal

 

 

Carrying Value

 

 

Face Value

 

 

Carrying Value

 

$

3,141,155

 

 

$

3,141,155

 

 

$

2,868,047

 

 

$

2,851,709

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

Collateral (loan investments)

 

 

Debt (notes issued)

 

Outstanding Principal

 

 

Carrying Value

 

 

Face Value

 

 

Carrying Value

 

$

2,230,276

 

 

$

2,230,276

 

 

$

1,834,760

 

 

$

1,825,568

 

 

23


 

 

Assets held by the FL4 Issuers, FL3 Issuers and the FL2 Issuers are restricted and can only be used to settle obligations of the related VIE. The liabilities of the FL4 Issuers, FL3 Issuers and the FL2 Issuers are non-recourse to the Company and can only be satisfied from the then-current assets of the related VIE.

The following table outlines the weighted average spreads and maturities for TRTX 2021-FL4, TRTX 2019-FL3 and TRTX 2018-FL2 loan collateral and borrowings under the TRTX 2021-FL4, TRTX 2019-FL3 and TRTX 2018-FL2 collateralized loan obligations as of March 31, 2021 and December 31, 2020 (dollars in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Weighted

Average

Spread (%)(1)

 

 

Weighted

Average

Maturity (Years)(2)

 

 

Weighted

Average

Spread (%)(1)

 

 

Weighted

Average

Maturity (Years)(2)

 

Collateral (loan investments)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TRTX 2018-FL2

 

 

3.34

%

 

 

2.6

 

 

 

3.33

%

 

 

4.9

 

TRTX 2019-FL3

 

 

3.20

%

 

 

2.7

 

 

 

3.20

%

 

 

4.1

 

TRTX 2021-FL4

 

 

3.04

%

 

 

2.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt (notes issued)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TRTX 2018-FL2

 

 

1.45

%

 

 

16.6

 

 

 

1.45

%

 

 

16.9

 

TRTX 2019-FL3

 

 

1.44

%

 

 

13.5

 

 

 

1.44

%

 

 

13.8

 

TRTX 2021-FL4

 

 

1.60

%

 

 

16.9

 

 

 

 

 

 

 

 

(1)

Yield on collateral is based on cash coupon.

(2)

Loan term represents weighted-average final maturity, assuming extension options are exercised by the borrower. Repayments of CLO notes are dependent on timing of related collateral loan asset repayments post-reinvestment period. The term of the CLO notes represents the rated final distribution date.

 

(7) Secured Credit Agreements and Mortgage Loan Payable

At March 31, 2021 and December 31, 2020, the Company had secured credit facilities and a mortgage loan payable, all of which were used to finance certain of the Company’s loan investments. These financing arrangements bear interest at rates equal to LIBOR plus a credit spread negotiated between the Company and each lender, often a separate credit spread for each pledge of collateral, which is primarily based on property type and advance rate against the unpaid principal balance of the pledged loan. Except for the mortgage loan payable, these borrowing arrangements contain defined mark-to-market provisions that permit our lenders to issue margin calls to the Company in the event that the collateral properties underlying the Company’s loans pledged to the Company’s lenders experience a non-temporary decline in value (“credit marks”) due to reasons other than capital markets events that result in changing credit spreads for similar borrowing obligations. In connection with one of these borrowing arrangements, the lender is also permitted to issue margin calls to the Company in the event the lender determines capital markets events have caused credit spreads to change for similar borrowing obligations (“spread marks”).

 

24


 

 

The following table presents certain information regarding the Company’s secured credit agreements as of March 31, 2021 and December 31, 2020. Except as otherwise noted, all agreements are on a partial recourse basis (dollars in thousands):

 

 

 

March 31, 2021

 

Secured Credit Agreements

and Mortgage Loan Payable:

 

Initial

Maturity

Date

 

Extended

Maturity

Date

 

Index

Rate

 

Weighted

Average

Credit

Spread

 

 

Interest

Rate

 

 

Commitment

Amount

 

 

Maximum

Current

Availability

 

 

Balance

Outstanding

 

 

Principal

Balance of

Collateral

 

 

Amortized

Cost of

Collateral

 

Secured Credit Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goldman Sachs(1)

 

08/19/21

 

08/19/22

 

1 Month

LIBOR

 

 

2.3

%

 

 

2.6

%

 

$

250,000

 

 

$

248,333

 

 

$

1,667

 

 

$

37,940

 

 

$

37,826

 

Wells Fargo(1)

 

04/18/22

 

04/18/22

 

1 Month

LIBOR

 

 

1.9

%

 

 

2.0

%

 

 

750,000

 

 

 

747,909

 

 

 

2,091

 

 

 

3,776

 

 

 

2,466

 

Barclays(1)

 

08/13/22

 

08/13/22

 

1 Month

LIBOR

 

 

1.5

%

 

 

1.7

%

 

 

750,000

 

 

 

502,718

 

 

 

247,282

 

 

 

350,488

 

 

 

349,635

 

Morgan Stanley(1)

 

05/04/22

 

05/04/22

 

1 Month

LIBOR

 

 

1.8

%

 

 

1.9

%

 

 

500,000

 

 

 

343,825

 

 

 

156,175

 

 

 

212,883

 

 

 

211,525

 

JP Morgan(1)

 

10/30/23

 

10/30/25

 

1 Month

LIBOR

 

 

1.7

%

 

 

1.8

%

 

 

400,000

 

 

 

275,542

 

 

 

124,458

 

 

 

207,618

 

 

 

205,047

 

US Bank(1)

 

07/09/22

 

07/09/24

 

1 Month

LIBOR

 

 

1.5

%

 

 

1.8

%

 

 

139,960

 

 

 

70,376

 

 

 

69,584

 

 

 

101,759

 

 

 

101,714

 

Bank of America(1)

 

09/29/21

 

09/29/22

 

1 Month

LIBOR

 

 

1.8

%

 

 

1.9

%

 

 

200,000

 

 

 

168,336

 

 

 

31,664

 

 

 

42,813

 

 

 

42,813

 

Institutional Financing(1)

 

10/30/23

 

10/30/25

 

1 Month

LIBOR

 

 

4.5

%

 

 

4.8

%

 

 

249,546

 

 

 

21,600

 

 

 

227,946

 

 

 

392,148

 

 

 

391,877

 

Subtotal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,239,506

 

 

$

2,378,639

 

 

$

860,867

 

 

$

1,349,425

 

 

$

1,342,903

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loan Payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional Lender

 

12/15/21

 

12/15/22

 

1 Month

LIBOR

 

 

4.5

%

 

 

5.0

%

 

 

50,000

 

 

 

 

 

 

50,000

 

 

 

99,200

 

(2)

 

 

Subtotal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

50,000

 

 

$

 

 

$

50,000

 

 

$

99,200

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,289,506

 

 

$

2,378,639

 

 

$

910,867

 

 

$

1,448,625

 

 

$

1,342,903

 

 

(1)

Borrowings under secured credit facilities with a guarantee for 25% recourse from Holdco.  

(2)

Represents the fair value of the Property at the time of acquisition as described in Note 4.

25


 

 

 

 

 

December 31, 2020

 

Secured Credit Agreements

and Mortgage Loan Payable:

 

Initial

Maturity

Date

 

Extended

Maturity

Date

 

Index

Rate

 

Weighted

Average

Credit

Spread

 

 

Interest

Rate

 

 

Commitment

Amount

 

 

Maximum

Current

Availability

 

 

Balance

Outstanding

 

 

Principal

Balance of

Collateral

 

 

Amortized

Cost of

Collateral

 

Secured Credit Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goldman Sachs(1)

 

08/19/21

 

08/19/22

 

1 Month

LIBOR

 

 

2.7

%

 

 

2.9

%

 

$

250,000

 

 

$

199,113

 

 

$

50,887

 

 

$

96,381

 

 

$

94,971

 

Wells Fargo(1)

 

04/18/22

 

04/18/22

 

1 Month

LIBOR

 

 

1.7

%

 

 

1.9

%

 

 

750,000

 

 

 

533,601

 

 

 

216,399

 

 

 

290,237

 

 

 

288,696

 

Barclays(1)

 

08/13/22

 

08/13/22

 

1 Month

LIBOR

 

 

1.5

%

 

 

1.7

%

 

 

750,000

 

 

 

433,739

 

 

 

316,261

 

 

 

443,845

 

 

 

442,757

 

Morgan Stanley(1)(3)

 

05/04/21

 

05/04/22

 

1 Month

LIBOR

 

 

1.8

%

 

 

2.0

%

 

 

500,000

 

 

 

174,045

 

 

 

325,955

 

 

 

434,630

 

 

 

433,031

 

JP Morgan(1)

 

10/30/23

 

10/30/25

 

1 Month

LIBOR

 

 

1.6

%

 

 

1.8

%

 

 

400,000

 

 

 

192,906

 

 

 

207,094

 

 

 

351,123

 

 

 

347,852

 

US Bank(1)

 

07/09/22

 

07/09/24

 

1 Month

LIBOR

 

 

1.5

%

 

 

1.8

%

 

 

139,960

 

 

 

70,376

 

 

 

69,584

 

 

 

101,372

 

 

 

101,287

 

Bank of America(1)

 

09/29/21

 

09/29/22

 

1 Month

LIBOR

 

 

1.8

%

 

 

1.9

%

 

 

200,000

 

 

 

112,867

 

 

 

87,133

 

 

 

117,393

 

 

 

117,393

 

Institutional Financing(1)

 

10/30/23

 

10/30/25

 

1 Month

LIBOR

 

 

4.5

%

 

 

4.8

%

 

 

249,546

 

 

 

 

 

 

249,546

 

 

 

427,330

 

 

 

426,984

 

Subtotal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,239,506

 

 

$

1,716,647

 

 

$

1,522,859

 

 

$

2,262,311

 

 

$

2,252,971

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loan Payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Institutional Lender

 

12/15/21

 

12/15/22

 

1 Month

LIBOR

 

 

4.5

%

 

 

5.0

%

 

 

50,000

 

 

 

 

 

 

50,000

 

 

 

99,200

 

(2)

 

 

Subtotal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

50,000

 

 

$

 

 

$

50,000

 

 

$

99,200

 

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

3,289,506

 

 

$

1,716,647

 

 

$

1,572,859

 

 

$

2,361,511

 

 

$

2,252,971

 

 

 

 

(1)

Borrowings under secured credit facilities with a guarantee for 25% recourse from Holdco.

(2)

Represents the fair value of the Property at the time of acquisition as described in Note 4. 

(3)

The Company extended its existing secured facility with Morgan Stanley on May 3, 2021 to a new initial maturity date of May 4, 2022.

 

The Company’s secured credit facilities contain defined mark-to-market provisions that permit the lenders to issue margin calls in the event that the collateral properties underlying the Company’s loans pledged to its lenders experience a non-temporary decline in value or net cash flow (“credit marks”) due to reasons other than capital markets events that result in changing credit spreads for similar borrowing obligations. In connection with one of these borrowing arrangements, the lender is also permitted to issue margin calls to the Company in the event the lender determines capital markets events have caused credit spreads to change for similar borrowing obligations (“spread marks”). Furthermore, in connection with one of these borrowing arrangements, the lender has the right to re-margin the secured credit facility based solely on appraised loan-to-values in the third year of the facility. The following table presents the recourse and mark-to-market provisions for the Company’s secured credit agreements as of March 31, 2021:

 

Secured Credit Agreements

and Mortgage Loan Payable:

Secured Credit Facilities

 

Initial

Maturity

Date

 

Extended

Maturity

Date

 

Recourse

Percentage

 

 

Basis of

Margin Calls

Loan Investments

 

 

 

 

 

 

 

 

 

 

Goldman Sachs

 

08/19/21

 

08/19/22

 

 

25

%

 

Credit

Wells Fargo

 

04/18/22

 

04/18/22

 

 

25

%

 

Credit

Barclays

 

08/13/22

 

08/13/22

 

 

25

%

 

Credit

Morgan Stanley

 

05/04/22

 

05/04/22

 

 

25

%

 

Credit

JP Morgan

 

10/30/23

 

10/30/25

 

 

25

%

 

Credit and Spread

US Bank

 

07/09/22

 

07/09/24

 

 

25

%

 

Credit

Bank of America

 

09/29/21

 

09/29/22

 

 

25

%

 

Credit

Institutional Financing

 

10/30/23

 

10/30/25

 

 

25

%

 

Credit

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loan Payable

 

 

 

 

 

 

 

 

 

 

Institutional Lender

 

12/15/21

 

12/15/22

 

N/A

 

 

N/A

 

26


 

 

The following table presents the recourse and mark-to-market provisions for the Company’s secured credit agreements as of December 31, 2020:

 

Secured Credit Agreements

and Mortgage Loan Payable:

Secured Credit Facilities

 

Initial

Maturity

Date

 

Extended

Maturity

Date

 

Recourse

Percentage

 

 

Basis of

Margin Calls

Loan Investments

 

 

 

 

 

 

 

 

 

 

Goldman Sachs

 

08/19/21

 

08/19/22

 

 

25

%

 

Credit

Wells Fargo

 

04/18/22

 

04/18/22

 

 

25

%

 

Credit

Barclays

 

08/13/22

 

08/13/22

 

 

25

%

 

Credit

Morgan Stanley(1)

 

05/04/21

 

05/04/22

 

 

25

%

 

Credit

JP Morgan

 

10/30/23

 

10/30/25

 

 

25

%

 

Credit and Spread

US Bank

 

07/09/22

 

07/09/24

 

 

25

%

 

Credit

Bank of America

 

09/29/21

 

09/29/22

 

 

25

%

 

Credit

Institutional Financing

 

10/30/23

 

10/30/25

 

 

25

%

 

Credit

 

 

 

 

 

 

 

 

 

 

 

Mortgage Loan Payable

 

 

 

 

 

 

 

 

 

 

Institutional Lender

 

12/15/21

 

12/15/22

 

N/A

 

 

N/A

 

(1)

The Company extended its existing secured credit facility with Morgan Stanley on May 3, 2021 to a new initial maturity date of May 4, 2022.  

Secured Credit Facilities

At March 31, 2021 and December 31, 2020, the Company had 7 secured credit facilities to finance its loan investing activities. Credit spreads vary depending upon the collateral type, advance rate and other factors. Assets pledged at March 31, 2021 and December 31, 2020 consisted of 37 and 55 mortgage loans, or participation interests therein, respectively. Under these secured credit agreements, the Company transfers all of its rights, title and interest in the loans to the repurchase counterparty in exchange for cash, and simultaneously agrees to reacquire the asset at a future date for an amount equal to the cash exchanged plus an interest factor. The repurchase counterparty (lender) collects all principal and interest on related loans and remits to the Company the net amount after the lender collects its interest and other fees. For the seventh credit facility, which is a mortgage warehouse facility, the lender receives a security interest (pledge) in the loans financed under the arrangement. The secured credit facilities used to finance loan investments are 25% recourse to Holdco.

Under each of the Company’s secured credit facilities, including the mortgage warehouse facility, the Company is required to post margin for changes in conditions to specific loans that serve as collateral for those secured credit facilities. The lender’s margin amount is in all but one instance limited to collateral-specific credit marks based on other-than-temporary declines in the value of the properties securing the underlying loan collateral. Market value determinations and redeterminations may be made by the repurchase lender in its sole discretion subject to certain specified parameters. In the case of assets that serve as collateral under the Company’s secured credit facilities secured by loans, these considerations include credit-based factors (which are generally based on factors other than those related to the capital markets). In only one instance do the considerations include changes in observable credit spreads in the market for these assets. These factors are described in the immediately preceding table.

27


 

The following table summarizes certain characteristics of the Company’s secured credit agreements secured by commercial mortgage loans, including counterparty concentration risks, at March 31, 2021 (dollars in thousands):

 

 

 

March 31, 2021

 

Secured Credit Facilities

 

Commitment

Amount

 

 

UPB of

Collateral

 

 

Amortized

Cost of

Collateral(1)

 

 

Amount

Payable(2)

 

 

Net

Counterparty

Exposure(3)

 

 

Percent of

Stockholders'

Equity

 

 

Days to

Extended

Maturity

 

Goldman Sachs Bank

 

$

250,000

 

 

$

37,940

 

 

$

39,710

 

 

$

1,628

 

 

$

38,082

 

 

 

3.0

%

 

 

506

 

Wells Fargo

 

 

750,000

 

 

 

3,776

 

 

 

4,169

 

 

 

2,365

 

 

 

1,804

 

 

 

0.1

%

 

 

383

 

Barclays

 

 

750,000

 

 

 

350,488

 

 

 

350,497

 

 

 

247,484

 

 

 

103,013

 

 

 

8.1

%

 

 

500

 

Morgan Stanley Bank

 

 

500,000

 

 

 

212,883

 

 

 

212,469

 

 

 

156,256

 

 

 

56,213

 

 

 

4.4

%

 

 

399

 

JP Morgan Chase Bank

 

 

649,546

 

 

 

599,766

 

 

 

599,894

 

 

 

352,702

 

 

 

247,192

 

 

 

19.4

%

 

 

1,674

 

US Bank

 

 

139,960

 

 

 

101,759

 

 

 

102,029

 

 

 

69,649

 

 

 

32,380

 

 

 

2.5

%

 

 

1,196

 

Bank of America

 

 

200,000

 

 

 

42,813

 

 

 

43,050

 

 

 

31,646

 

 

 

11,404

 

 

 

0.9

%

 

 

547

 

Total / Weighted

   Average

 

$

3,239,506

 

 

$

1,349,425

 

 

$

1,351,818

 

 

$

861,730

 

 

$

490,088

 

 

 

 

 

 

 

1,020

 

 

(1)

Loan amounts shown in the table include interest receivable of $8.9 million and are net of premium, discount and origination fees of $6.5 million.

(2)

Loan amounts shown in the table include interest payable of $0.9 million and do not reflect unamortized deferred financing fees of $5.9 million.

(3)

Loan amounts represent the net carrying value of the commercial real estate assets sold under agreements to repurchase, including accrued interest plus any cash or assets on deposit to secure the repurchase obligation, less the amount of the repurchase liability, including accrued interest.

 

The following table summarizes certain characteristics of the Company’s secured credit agreements secured by commercial mortgage loans, including counterparty concentration risks, at December 31, 2020 (dollars in thousands):

 

 

 

December 31, 2020

 

Secured Credit Facilities

 

Commitment

Amount

 

 

UPB of

Collateral

 

 

Amortized

Cost of

Collateral(1)

 

 

Amount

Payable(2)

 

 

Net

Counterparty

Exposure(3)

 

 

Percent of

Stockholders'

Equity

 

 

Days to

Extended

Maturity

 

Goldman Sachs Bank(4)

 

$

250,000

 

 

$

96,381

 

 

$

96,843

 

 

$

50,909

 

 

$

45,934

 

 

 

3.6

%

 

 

596

 

Wells Fargo

 

 

750,000

 

 

 

290,237

 

 

 

290,403

 

 

 

216,734

 

 

 

73,669

 

 

 

5.8

%

 

 

473

 

Barclays

 

 

750,000

 

 

 

443,845

 

 

 

443,620

 

 

 

316,524

 

 

 

127,096

 

 

 

10.0

%

 

 

590

 

Morgan Stanley Bank

 

 

500,000

 

 

 

434,630

 

 

 

433,948

 

 

 

326,199

 

 

 

107,749

 

 

 

8.5

%

 

 

489

 

JP Morgan Chase Bank

 

 

649,546

 

 

 

778,453

 

 

 

777,862

 

 

 

457,041

 

 

 

320,821

 

 

 

25.3

%

 

 

1,764

 

US Bank

 

 

139,960

 

 

 

101,372

 

 

 

101,599

 

 

 

69,649

 

 

 

31,950

 

 

 

2.5

%

 

 

1,286

 

Bank of America(5)

 

 

200,000

 

 

 

117,393

 

 

 

117,637

 

 

 

87,119

 

 

 

30,518

 

 

 

2.4

%

 

 

637

 

Total / Weighted

   Average

 

$

3,239,506

 

 

$

2,262,311

 

 

$

2,261,912

 

 

$

1,524,175

 

 

$

737,737

 

 

 

 

 

 

 

938

 

 

(1)

Loan amounts shown in the table include interest receivable of $10.4 million and are net of premium, discount and origination fees of $11.8 million.

(2)

Loan amounts shown in the table include interest payable of $1.0 million and do not reflect unamortized deferred financing fees of $8.3 million.

(3)

Loan amounts represent the net carrying value of the commercial real estate assets sold under agreements to repurchase, including accrued interest plus any cash or assets on deposit to secure the repurchase obligation, less the amount of the repurchase liability, including accrued interest.

(4)

Maximum commitment amount was reduced from $750.0 million to $250.0 million at the Company’s election as part of an as-of-right extension executed in June 2020. The secured credit agreement has an accordion feature that permits the Company to increase the commitment amount in increments of $50.0 million up to a maximum of $500.0 million.

(5)

Maximum commitment amount was reduced from $500.0 million to $200.0 million at the Company’s election as part of an as-of-right extension executed in June 2020. The secured credit agreement has an accordion feature that permits the Company to increase the commitment amount in increments of $50.0 million up to a maximum of $500.0 million.

28


 

Financial Covenants

The Company’s financial covenants and guarantees for outstanding borrowings related to our secured credit agreements and secured revolving credit agreements require Holdco to maintain compliance with the following financial covenants (among others), which were revised on May 28, 2020 as follows:

 

Financial Covenant

 

Current

 

Prior to May 28, 2020

Cash Liquidity

 

Minimum cash liquidity of no less than the greater of: $10.0 million; and 5.0% of Holdco’s recourse indebtedness

 

Minimum cash liquidity of no less than the greater of: $10.0 million; and 5.0% of Holdco’s recourse indebtedness

Tangible Net Worth

 

$1.1 billion as of April 1, 2020, plus 75% of future equity issuances thereafter

 

Minimum tangible net worth of at least 75% of the net cash proceeds of all prior equity issuances made by Holdco or the Company, plus 75% of the net cash proceeds of all subsequent equity issuances made by Holdco or the Company

Debt-to-Equity

 

Debt-to-Equity ratio not to exceed 3.5 to 1.0 with "equity" and "equity adjustment" as defined below

 

Debt-to-Equity ratio not to exceed 3.5 to 1.0

Interest Coverage

 

Minimum interest coverage ratio of no less than 1.5 to 1.0

 

Minimum interest coverage ratio of no less than 1.5 to 1.0

 

The amendments as of May 28, 2020 revised the definition of tangible net worth such that the baseline amount for testing was reset as of April 1, 2020 to $1.1 billion plus 75% of future equity issuances after April 1, 2020. The definition of equity for purposes of calculating the debt-to-equity covenant was revised to include: common equity; preferred equity; and an adjustment equal to the sum of the Current Expected Credit Loss reserve, write-downs, impairments or realized losses recorded against the value of any assets of Holdco or its subsidiaries from and after April 1, 2020; provided, however, that the equity adjustment may not exceed the amount of (a) Holdco’s total equity less (b) the product of Holdco’s total indebtedness multiplied by 25%.

Financial Covenant relating to the Series B Preferred Stock

For long as the Series B Preferred Stock is outstanding, the Company is required to maintain a debt-to-equity ratio not greater than 3.0 to 1.0. For the purpose of determining this ratio, the aggregate liquidation preference of the outstanding shares of Series B Preferred Stock is excluded from the calculation of total indebtedness of the Company and its subsidiaries, and is included in the calculation of total equity.

Covenant Compliance

The Company was in compliance with all financial covenants to the extent that balances were outstanding as of March 31, 2021 and December 31, 2020.

Negative impacts on the Company’s business caused by COVID-19 have and may continue to make it more difficult to meet or satisfy these covenants, and there can be no assurance that the Company will remain in compliance with these covenants in the future.

Mortgage Loan Payable

The Company through a special purpose entity subsidiary is a borrower under a $50.0 million mortgage loan secured by a first deed of trust against the Property. Refer to Note 4 for additional information. The first mortgage loan was provided by an institutional lender, has an initial maturity date of December 15, 2021, and includes an option to extend the maturity for 12 months subject to the satisfaction of customary extension conditions, including (i) the purchase of a new interest rate cap for the extension term, (ii) replenishment of the interest reserve with an amount equal to 12 months of debt service, (iii) payment of a 0.25% extension fee on the outstanding principal balance, and (iv) no event of default. The first mortgage loan permits partial releases of collateral in exchange for payment of a minimum release price equal to the greater of 100% of net sales proceeds (after reasonable transaction expenses) or 115% of the allocated loan amount. The loan bears interest at a rate of LIBOR plus 4.50% subject to a LIBOR interest rate floor of 0.50% and a rate cap of 0.50%. The Company has posted cash of $2.4 million to pre-fund interest payments due under the note during its initial term. At March 31, 2021, the remaining reserve balance was $2.0 million.

29


 

(8) Schedule of Maturities

The future principal payments for the five years subsequent to March 31, 2021 and thereafter are as follows (in thousands):

 

 

 

Collateralized

loan

obligations(1)

 

 

Secured

credit

facilities(2)

 

 

Mortgage

Loan Payable(3)

 

2021

 

$

48,566

 

 

$

1,667

 

 

$

 

2022

 

 

344,814

 

 

 

506,796

 

 

 

50,000

 

2023

 

 

657,140

 

 

 

352,404

 

 

 

 

2024

 

 

1,470,523

 

 

 

 

 

 

 

2025

 

 

347,004

 

 

 

 

 

 

 

Thereafter

 

 

 

 

 

 

 

 

 

Total

 

$

2,868,047

 

 

$

860,867

 

 

$

50,000

 

 

(1)

The scheduled maturities for the investment grade bonds issued by TRTX 2018-FL2, TRTX-2019 FL3 and TRTX-2021 FL4 are based upon the fully extended maturity of mortgage loan collateral, considering the reinvestment window of the collateralized loan obligation.

(2)

The allocation of secured financing liabilities is based on the extended maturity date for those credit facilities where extension options are at the company’s option, subject to no default, or the current maturity date of those facilities where extension options are subject to counterparty approval.

(3)

The allocation of mortgage loan payable is based on the extended maturity date for the facility.

 

(9) Fair Value Measurements

The Company’s consolidated balance sheet includes Level I fair value measurements related to cash equivalents, restricted cash, accounts receivable, and accrued liabilities. At March 31, 2021, the Company had $291.8 million invested in money market funds with original maturities of less than 90 days. The carrying values of these financial assets and liabilities are reasonable estimates of fair value because of the short-term maturities of these instruments. The consolidated balance sheet also includes loans held for investment, the assets and liabilities of TRTX 2018-FL2, TRTX 2019-FL3 and TRTX 2021-FL4 (as of March 31, 2021), and secured debt agreements that are considered Level III fair value measurements that are not measured at fair value on a recurring basis but are subject to fair value adjustments utilizing the fair value of the underlying collateral when there is evidence of impairment and when the loan is dependent solely on the collateral for payment of principal and interest.

The following tables provide information about the fair value of the Company’s financial assets and liabilities on the Company’s consolidated balance sheets as of March 31, 2021 and December 31, 2020 (dollars in thousands):

 

 

 

March 31, 2021

 

 

 

 

 

 

 

Fair Value

 

 

 

Carrying Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Held for Investment

 

$

4,523,538

 

 

$

 

 

$

 

 

$

4,571,875

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized Loan Obligations

 

 

2,851,709

 

 

 

 

 

 

 

 

 

2,855,190

 

Secured Financing Agreements

 

 

854,998

 

 

 

 

 

 

 

 

 

848,765

 

Mortgage Loan Payable

 

 

49,217

 

 

 

 

 

 

 

 

 

49,217

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

Fair Value

 

 

 

Carrying Value

 

 

Level I

 

 

Level II

 

 

Level III

 

Financial Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans Held for Investment

 

$

4,456,460

 

 

$

 

 

$

 

 

$

4,472,984

 

Financial Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized Loan Obligations

 

 

1,825,568

 

 

 

 

 

 

 

 

 

1,834,760

 

Secured Financing Agreements

 

 

1,514,028

 

 

 

 

 

 

 

 

 

1,532,910

 

Mortgage Loan Payable

 

 

49,147

 

 

 

 

 

 

 

 

 

49,147

 

 

At March 31, 2021 and December 31, 2020, the estimated fair value of Loans Held for Investment was $4.6 billion and $4.5 billion, respectively, which approximated carrying value. The weighted average gross credit spread at March 31, 2021 and December 31, 2020 was 3.19% and 3.18%, respectively. The weighted average years to maturity at March 31, 2021 and December 31, 2020 was 2.9 years and 3.1 years, respectively, assuming full extension of all loans.

30


 

At March 31, 2021 and December 31, 2020, the estimated fair value of the secured credit agreements approximated fair value as current borrowing spreads reflect market terms. At March 31, 2021 and December 31, 2020, the estimated fair value of the Collateralized Loan Obligation liabilities approximated carrying value as current borrowing spreads reflect market terms.

Changes in assets and liabilities with Level III fair values for the three months ended March 31, 2021 are as follows:

 

 

 

Loans Held

for Investment

 

 

Collateralized

Loan Obligations

 

 

Secured

Financing

Arrangements

 

 

Mortgage Loan Payable

 

 

Total

 

Balance at December 31, 2020

 

$

4,472,984

 

 

$

1,834,760

 

 

$

1,532,910

 

 

$

49,147

 

 

$

7,889,801

 

Additions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value

 

 

98,891

 

 

 

1,020,430

 

 

 

(684,145

)

 

 

70

 

 

 

435,246

 

Transfers into Level III

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Transfers out of Level III

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Disposals

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2021

 

$

4,571,875

 

 

$

2,855,190

 

 

$

848,765

 

 

$

49,217

 

 

$

8,325,047

 

 

There were 0 transfers of financial assets or liabilities within the levels of the fair value hierarchy during the three months ended March 31, 2021.

(10) Income Taxes

The Company indirectly owns 100% of the equity of multiple taxable REIT subsidiaries (collectively “TRSs”). TRSs are subject to applicable U.S. federal, state, local and foreign income tax on their taxable income. In addition, as a REIT, the Company also may be subject to a 100% excise tax on certain transactions between it and its TRSs that are not conducted on an arm’s-length basis. The Company files income tax returns in the United States federal jurisdiction as well as various state and local jurisdictions. The filings are subject to normal reviews by tax authorities until the related statute of limitations expires. The years open to examination generally range from 2017 to present.

ASC 740 also prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company has analyzed its various federal and state filing positions and believes that its income tax filing positions and deductions are well documented and supported. As of March 31, 2021 and December 31, 2020, based on the Company’s evaluation, the Company did 0t have any material uncertain income tax positions.

The Company’s policy is to classify interest and penalties associated with underpayment of U.S. federal and state income taxes, if any, as a component of general and administrative expense on its consolidated statements of income (loss) and comprehensive income (loss). For the three months ended March 31, 2021, the Company did 0t have interest or penalties associated with the underpayment of any income taxes.

The Company owns, through a tax partnership (“Parent LLC”), 100% of the common equity in Sub-REIT, which qualifies as a REIT for U.S. federal income tax purposes and is a separate taxpayer from both the Company and Parent LLC. Parent LLC is owned by the Company both directly and through a TRS. The Company, through Sub-REIT, issues CRE CLO liabilities (“CLOs”) to finance on a non-recourse, non-mark-to-market basis a large proportion of its loan investment portfolio. Due to unusually low LIBOR rates beginning in March 2020 coupled with the benefit of LIBOR floors relating to the various loans and participation interests pledged to Sub-REIT’s CLOs, certain of Sub-REIT‘s CLOs currently generate excess inclusion income (“EII”), which is treated as unrelated business taxable income (“UBTI”). Published IRS guidance requires that Sub-REIT allocate its EII in accordance with its dividends paid. Accordingly, EII generated by Sub-REIT‘s CLOs is allocated to Parent LLC. Pursuant to the Parent LLC operating agreement, any EII allocated from Sub-REIT to Parent LLC is allocated further to the TRS. Consequently, no EII is allocated to the Company and, as a result, the Company’s shareholders will not be allocated any EII or UBTI by the Company. The tax liability borne by the TRS on the EII is at the highest U.S. federal corporate tax rate (currently 21%). This tax liability is included in the consolidated statements of income (loss) and comprehensive income (loss) and balance sheets of the Company.

31


 

For the three months ended March 31, 2021 and 2020, the Company incurred 0 federal, state or local tax relating to its TRSs. For the three months ended March 31, 2021 and 2020, the Company recognized $0.9 million and $0.1 million, respectively, of federal, state and local tax expense. At March 31, 2021 and 2020, the Company’s effective tax rate was 2.8% and 0.5%, respectively.

As of December 31, 2020, 0 deferred income tax assets or liabilities were recorded for the operating activities of the Company’s TRSs.

From March 23, 2020 through April 2020, the Company sold all its CRE debt securities with an aggregate face value of $969.8 million, generating gross sales proceeds of $766.4 million. The Company recorded losses from these sales of $203.4 million recognized as expense in Securities Impairments on the consolidated statements of income (loss) and comprehensive income (loss), which are expected to be available to offset any capital gains of the Company in 2020 and, to the extent those capital losses exceed the Company’s capital gains for 2020, such losses would be available to be carried forward to offset capital gains in future years. The Company does not expect these losses to reduce the amount that the Company will be required to distribute under the requirement that the Company distribute to the Company’s stockholders at least 90% of the Company’s REIT taxable income (computed without regard to the deduction for dividends paid and excluding net capital gain) each year in order to continue to qualify as a REIT.

(11) Related Party Transactions

Management Agreement

The Company is externally managed and advised by the Manager pursuant to the terms of a management agreement between the Company and the Manager (as amended, the “Management Agreement”). Pursuant to the Management Agreement, the Company pays the Manager a base management fee equal to the greater of $250,000 per annum ($62,500 per quarter) or 1.50% per annum (0.375% per quarter) of the Company’s “Equity” as defined in the Management Agreement. Proceeds from the issuance of Series B Preferred Stock is included in the Company’s Equity for purposes of determining the base management fee. The base management fee is payable in cash, quarterly in arrears. The Manager is also entitled to incentive compensation which is calculated and payable in cash with respect to each calendar quarter in arrears in an amount, not less than zero, equal to the difference between: (1) the product of (a) 20% and (b) the difference between (i) the Company’s Core Earnings for the most recent 12-month period, including the calendar quarter (or part thereof) for which the calculation of incentive compensation is being made (the “applicable period”), and (ii) the product of (A) the Company’s Equity in the most recent 12-month period, including the applicable period, and (B) 7% per annum; and (2) the sum of any incentive compensation paid to the Manager with respect to the first three calendar quarters of the most recent 12-month period. No incentive compensation is payable to the Manager with respect to any calendar quarter unless Core Earnings for the 12 most recently completed calendar quarters is greater than zero. For purposes of calculating the Manager’s incentive compensation, the Management Agreement, as amended, specifies that equity securities of the Company or any of the Company’s subsidiaries that are entitled to a specified periodic distribution or have other debt characteristics will not constitute equity securities and will not be included in “Equity” for the purpose of calculating incentive compensation. Instead, the aggregate distribution amount that accrues to such equity securities during the calendar quarter of such calculation will be subtracted from Core Earnings, before incentive compensation for purposes of calculating incentive compensation, unless such distribution is otherwise excluded from Core Earnings.

Core Earnings, as defined in the Management Agreement, means the net income (loss) attributable to the holders of the Company’s common stock and Class A common stock and, without duplication, the holders of the Company’s subsidiaries’ equity securities (other than the Company or any of the Company’s subsidiaries), computed in accordance with GAAP, including realized gains and losses not otherwise included in net income (loss), and excluding (i) non-cash equity compensation expense, (ii) the incentive compensation, (iii) depreciation and amortization, (iv) any unrealized gains or losses, including an allowance for credit losses, or other similar non-cash items that are included in net income for the applicable period, regardless of whether such items are included in other comprehensive income or loss or in net income and (v) one-time events pursuant to changes in GAAP and certain material non-cash income or expense items, in each case after discussions between the Manager and the Company’s independent directors and approved by a majority of the Company’s independent directors.

For long as any shares of Series B Preferred Stock remain issued and outstanding, the Manager has agreed to reduce by 50% the base management fee attributable to the inclusion of the Series B Preferred Stock in the Company’s Equity, such that the base management fee rate applicable to the Series B Preferred Stock included in the equity base will equal 0.75% per annum, instead of 1.50% per annum as provided in the Management Agreement.

32


 

Management Fees Incurred and Paid for the three months ended March 31, 2021 and 2020

For the three months ended March 31, 2021 and 2020, the Company incurred and paid the following management fees and incentive management fees pursuant to the Management Agreement (dollars in thousands):

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Incurred

 

 

 

 

 

 

 

 

Management Agreement fees

 

$

5,094

 

 

$

5,000

 

Incentive Management Fee

 

 

 

 

 

 

Total Fees Incurred

 

$

5,094

 

 

$

5,000

 

 

 

 

 

 

 

 

 

 

Paid

 

 

 

 

 

 

 

 

Management Fee

 

$

5,358

 

 

$

5,623

 

Incentive Management Fee

 

 

 

 

 

1,629

 

Total Fees Paid

 

$

5,358

 

 

$

7,252

 

 

Management fees and incentive management fees included in payable to affiliates on the consolidated balance sheets at March 31, 2021 and December 31, 2020 are $5.1 million and $5.4 million, respectively. NaN incentive management fee was earned during the three months ended March 31, 2021.

Termination Fee

A termination fee would be due to the Manager upon termination of the Management Agreement by the Company absent a cause event. The termination fee would also be payable to the Manager upon termination of the Management Agreement by the Manager if the Company materially breaches the Management Agreement. The termination fee is equal to three times the sum of (x) the average annual base management fee and (y) the average annual incentive compensation earned by the Manager, in each case during the 24-month period immediately preceding the most recently completed calendar quarter prior to the date of termination.

Other Related Party Transactions

The Manager or its affiliates is responsible for the expenses related to the personnel of the Manager and its affiliates who provide services to the Company. However, the Company does reimburse the Manager for agreed-upon amounts based upon the Company’s allocable share of the compensation (including, without limitation, annual base salary, bonus, any related withholding taxes and employee benefits) paid to (1) the Manager’s personnel serving as the Company’s chief financial officer based on the percentage of his or her time spent managing the Company’s affairs and (2) other corporate finance, tax, accounting, internal audit, legal risk management, operations, compliance and other non-investment personnel of the Manager or its affiliates who spend all or a portion of their time managing the Company’s affairs, based on the percentage of time devoted by such personnel to the Company’s and the Company’s subsidiaries’ affairs. For the three months ended March 31, 2021 and March 31, 2020, the Manager incurred $0.3 million and $0.3 million, respectively, of expenses that were subject to reimbursement by the Company for services rendered on its behalf by the Manager and its affiliates.

For as long as any shares of Series B Preferred Stock (hereafter defined) remain issued and outstanding, the Manager has agreed that it will not seek reimbursement for reimbursable expenses in excess of the greater of (x) $1.0 million per fiscal year and (y) twenty percent (20%) of the Company’s allocable share of such reimbursable expenses pursuant to the Management Agreement per fiscal year. For the quarter ended March 31, 2021, the Company reimbursed to the Manager $250,000 of reimbursable expenses, and the Manager elected not to seek reimbursement for reimbursable amounts in excess thereof. There can be no assurance that the Manager will not seek reimbursement of such expenses in future quarters. If the product of 20% multiplied by eligible reimbursable expenses is expected to exceed $1.0 million annually, the Manager is obligated to inform and review with the Company’s board of directors, the methodology and rationale for such an increase in advance of the delivery to the Company of a written request for reimbursement reflecting such increase. No such notice has been received by the Company as of March 31, 2021.

The Company is required to pay the Manager or its affiliates for documented costs and expenses incurred with third parties by the Manager or its affiliates on behalf of the Company, subject to the Company’s review and approval of such costs and expenses. The Company’s obligation to pay for costs and expenses incurred on its behalf is not subject to a dollar limitation.

33


 

As of March 31, 2021 and December 31, 2020, $0.0 million and $0.2 million, respectively, remained outstanding and payable to the Manager or its affiliates for third party expenses that were incurred on behalf of the Company.

All expenses due and payable to the Manager are reflected in the respective expense category of the consolidated statements of income (loss) and comprehensive income (loss) or consolidated balance sheets based on the nature of the item.

(12) Earnings per Share

The Company calculates its basic and diluted earnings (loss) per share using the two-class method for all periods presented, since the unvested restricted shares of its common stock granted to certain current and former employees and affiliates of the Manager qualify as participating securities. These restricted shares have the same rights as the Company’s other shares of common stock and Class A common stock (which Class A shares were converted to common shares in February 2020), including participating in any dividends, and therefore are included in the Company’s basic and diluted earnings per share calculation. For the three months ended March 31, 2021 and 2020, $0.1 million and $0.3 million, respectively, of common stock dividends declared and undistributed net income attributable to common stockholders were allocated to unvested shares of our common stock pursuant to stock grants made under the Company’s Incentive Plan. See Note 14 for details.

In connection with the issuance of Series B Preferred Stock and the Warrants described in Note 13, the Company elected the accreted redemption value method whereby the discount created based on the relative fair value of the Warrants to the fair value of the Series B Preferred Stock and the related issuance costs will be accreted as a non-cash dividend on preferred stock over four years using the effective interest method. Such adjustments are included in Accretion of Discount on Series B Cumulative Redeemable Preferred Stock on our Consolidated Statements of Changes in Equity and treated similarly to a dividend on preferred stock for GAAP purposes. For the three months ended March 31, 2021, this adjustment totaled $1.5 million.

The computation of diluted earnings per share is based on the weighted average number of participating securities outstanding plus the incremental shares that would be outstanding assuming exercise of warrants issued pursuant to the Company’s issuance of Series B Preferred Stock. The number of incremental shares is calculated utilizing the treasury stock method. For the three months ended March 31, 2021, the Warrants are included in the calculation of diluted earnings per share because the average market price of the Company’s common stock during the three months ended March 31, 2021 was $10.95, which exceeds the strike price of $7.50 per common share for warrants currently outstanding.

The following table sets forth the calculation of basic and diluted earnings per common share based on the weighted-average number of shares of common stock outstanding for the three months ended March 31, 2021 (in thousands, except share and per share data):

 

 

 

Three Months Ended March 31,

 

 

 

2021

 

 

2020

 

Net Income (Loss) Attributable to TPG RE Finance Trust, Inc.

 

$

25,831

 

 

$

(232,793

)

Participating Securities' Share in Earnings (Loss)

 

 

(146

)

 

 

(268

)

Accretion of Discount on Series B Preferred Stock

 

 

(1,452

)

 

 

 

Net Income (Loss) Attributable to Common Stockholders

 

$

24,233

 

 

$

(233,061

)

Weighted Average Common Shares Outstanding, Basic

 

 

76,895,615

 

 

 

76,465,322

 

Incremental units from assumed exercise of warrants

 

 

3,777,621

 

 

 

 

Weighted Average Common Shares Outstanding, Diluted

 

 

80,673,236

 

 

 

76,465,322

 

Earnings (Loss) Per Common Share, Basic

 

$

0.32

 

 

$

(3.05

)

Earnings (Loss) Per Common Share, Diluted

 

$

0.30

 

 

$

(3.05

)

 

(13) Stockholders’ Equity

Series B Preferred Stock and Warrants to Purchase Shares of Common Stock

On May 28, 2020, the Company entered into an Investment Agreement (the “Investment Agreement”) with PE Holder L.L.C., a Delaware limited liability company (the “Purchaser”), an affiliate of Starwood Capital Group Global II, L.P., under which the Company agreed to issue and sell to the Purchaser up to 13,000,000 shares of 11.0% Series B Preferred Stock, par value $0.001 per share (plus any additional such shares paid as dividends pursuant to the Articles Supplementary, the “Series B Preferred Stock”), and Warrants to purchase, in the aggregate, up to 15,000,000 shares (subject to adjustment) of the Company’s Common Stock, for an aggregate cash purchase price of up to $325,000,000. Such purchases may occur in up to three tranches. The Investment Agreement contains market standard provisions regarding board representation, voting agreements, rights to information, and a standstill agreement and registration rights agreement regarding common stock acquired via exercise of Warrants.

34


 

On May 28, 2020, the Purchaser acquired the initial tranche, consisting of 9,000,000 shares of Series B Preferred Stock and Warrants to purchase up to 12,000,000 shares of Common Stock, for an aggregate price of $225.0 million. The Company retained an option to sell to the Purchaser the second and third tranches on or prior to December 31, 2020, provided notice of intent to sell is delivered to the Purchaser not later than December 11, 2020. Each of the second and third tranches consisted of 2,000,000 shares of Series B Preferred Stock and Warrants to purchase up to 1,500,000 shares of Common Stock, for an aggregate purchase price of $50.0 million per tranche. The Company allowed the option to issue additional shares of Series B Preferred Stock to expire unused.

Series B Preferred Stock

The Company’s Series B Preferred Stock has a liquidation preference over all other classes of the Company’s equity other than Series A Preferred Stock, which has liquidation preference over the Series B Preferred Stock.

Series B Preferred Stock bears a dividend at 11% per annum, accrued daily and compounded semi-annually, which is payable quarterly in cash; provided that up to 2.0% per annum of the liquidation preference may be paid, at the option of the Company, in the form of additional shares of Series B Preferred Stock.

Warrants to Purchase Common Stock

The Warrants have an initial exercise price of $7.50 per share. The exercise price of the Warrants and shares of Common Stock issuable upon exercise of the Warrants are subject to customary adjustments. The Warrants are exercisable on a net settlement basis and expire on May 28, 2025. The Warrants are classified as equity and were initially recorded at their estimated fair value of $14.4 million with no subsequent remeasurement. NaN of the Warrants have been exercised as of March 31, 2021.

On the issuance date, the Company retained third party valuation experts to assist with estimating the fair value of the Series B Preferred Stock and the Warrants using the binomial lattice model. Based on the Warrants’ relative fair value to the fair value of the Series B Preferred Stock, approximately $14.4 million of the $225.0 million proceeds was allocated to the Warrants, creating a corresponding preferred stock discount in the same amount. The Company elected the accreted redemption value method whereby this discount will be accreted over four years using the effective interest method, resulting in an increase in the carrying value of the Series B Preferred Stock. Additionally, $14.2 million of costs directly related to the issuance will be accreted using the effective interest method. Such adjustments are included in Accretion of Discount on Series B Cumulative Redeemable Preferred Stock on our Consolidated Statements of Changes in Equity and treated similarly to a dividend on preferred stock for GAAP purposes.

Conversion of Class A Shares

Between January 22, 2020 and January 24, 2020, the Company received requests to convert all of the outstanding shares of the Company’s Class A common stock into shares of the Company’s common stock. Accordingly, all of the outstanding shares of the Company’s Class A common stock were retired and returned to the authorized but unissued shares of Class A common stock of the Company, and the holders of shares of the Class A common stock were issued an aggregate of 1,136,665 shares of the Company’s common stock. On February 14, 2020, the Company filed Articles Supplementary with the State Department of Assessments and Taxation of Maryland to reclassify and designate all 2,500,000 authorized but unissued shares of the Company’s Class A common stock as additional shares of undesignated common stock of the Company. The Articles Supplementary became effective upon filing on February 14, 2020. As a result, as of March 31, 2021, there are 0 shares of the Company’s Class A common stock authorized or outstanding.

Equity Distribution Agreement

On March 7, 2019, the Company and the Manager entered into an equity distribution agreement with each of Citigroup Global Markets Inc., J.P. Morgan Securities LLC, JMP Securities LLC, Wells Fargo Securities, LLC and TPG Capital BD, LLC (each a “Sales Agent” and, collectively, the “Sales Agents”) relating to the issuance and sale by the Company of shares of its common stock pursuant to a continuous offering program. In accordance with the terms of the equity distribution agreement, the Company may, at its discretion and from time to time, offer and sell shares of its common stock having an aggregate gross sales price of up to $125.0 million through the Sales Agents, each acting as the Company’s agent. The offering of shares of the Company’s common stock pursuant to the equity distribution agreement will terminate upon the earlier of (1) the sale of shares of the Company’s common stock subject to the equity distribution agreement having an aggregate gross sales price of $125.0 million and (2) the termination of the equity distribution agreement by the Sales Agents or the Company at any time as set forth in the equity distribution agreement. At March 31, 2021, cumulative gross proceeds issued under the equity distribution agreement totaled $50.9 million, leaving $74.1 million available for future issuance subject to the direction of management, and market conditions.

35


 

Each Sales Agent will be entitled to commissions in an amount not to exceed 1.75% of the gross sales prices of shares of the Company’s common stock sold through it, as the Company’s agent. For the three months ended March 31, 2021, the Company sold 0 shares of common stock under this arrangement. For the three months ended March 31, 2020, the Company sold $0.6 million shares of common stock at a weighted average price per share of $20.53 and gross proceeds of $12.9 million, and paid commissions totaling $0.2 million. The Company used the proceeds from the offering to originate commercial real estate loans, acquire CRE debt securities and for general corporate purposes.

Dividends

Upon the approval of the Company’s Board of Directors, the Company accrues dividends. Dividends are paid first to the holders of the Company’s Series A preferred stock at the rate of 12.5% of the total $0.001 million liquidation preference per annum plus all accumulated and unpaid dividends thereon, then to holders of the Company’s Series B Preferred Stock at the rate of 11.0% per annum of the $25.00 per share liquidation preference, and then to the holders of the Company’s common stock. The Company intends to distribute each year substantially all of its taxable income to its stockholders to comply with the REIT provisions of the Internal Revenue Code of 1986, as amended. The Board of Directors will determine whether to pay future dividends, entirely in cash, or in a combination of stock and cash based on facts and circumstances at the time such decisions are made.    

On March 15, 2021, the Company’s Board of Directors declared and approved a cash dividend for the first quarter of 2021 in the amount of $0.20 per share of common stock, or $15.5 million in the aggregate, which was paid on April 23, 2021 to holders of record of the Company’s common stock as of March 26, 2021.  

On March 15, 2021, the Company’s Board of Directors declared a cash dividend for the first quarter of 2021 in the amount of $0.68 per share of Series B Preferred Stock, or $6.1 million in the aggregate, which dividend was paid on March 31, 2021 to the holder of record of our Series B Preferred Stock as of March 15, 2021.

 

On March 17, 2020, the Company’s Board of Directors declared a dividend for the first quarter of 2020 in the amount of $0.43 per share of common stock, or $33.2 million in the aggregate, which was payable on April 24, 2020 to holders of record of the Company’s common stock as of March 27, 2020. On March 23, 2020, the Company announced the deferral until July 14, 2020 of the payment of its declared first quarter dividend to stockholders of record as of June 15, 2020. This dividend was paid on July 14, 2020.

As of March 31, 2021 and December 31, 2020, $15.5 million and $29.5 million, respectively, remain unpaid and are reflected in dividends payable on the Company’s consolidated balance sheets.   

(14) Share-Based Incentive Plan

The Company does not have any employees. As of March 31, 2021, certain individuals employed by an affiliate of the Manager and certain members of the Company’s Board of Directors were compensated, in part, through the issuance of share-based instruments.

The Company’s Board of Directors has adopted, and the Company’s stockholders have approved, the TPG RE Finance Trust, Inc. 2017 Equity Incentive Plan (the “Incentive Plan”). The Incentive Plan provides for the grant of equity-based awards to the Company’s, and its affiliates’, directors, officers, employees (if any) and consultants, and the members, officers, directors, employees and consultants of our Manager or its affiliates, as well as to our Manager and other entities that provide services to us and our affiliates and the employees of such entities. The total number of shares of common stock or long-term incentive plan (“LTIP”) units that may be awarded under the Incentive Plan is 4,600,463. The Incentive Plan will automatically expire on the tenth anniversary of its effective date, unless terminated earlier by the Company’s Board of Directors.             

36


 

Generally, the shares vest in installments over a four-year period, pursuant to the terms of the award and the Incentive Plan. The following table presents the number of shares associated with outstanding awards that will vest over the next four years. Shares presented for the current year, 2021, includes 108,503 shares which have vested during the period from January 1, 2021 to March 31, 2021.

 

Vesting Year

 

Shares of

Common Stock

 

2021

 

 

418,345

 

2022

 

 

183,030

 

2023

 

 

145,873

 

2024

 

 

89,548

 

Total

 

 

836,796

 

 

As of March 31, 2021, total unrecognized compensation cost relating to unvested share-based compensation arrangements was $8.6 million. This cost is expected to be recognized over a weighted average period of 1.1 years from March 31, 2021. For the three months ended March 31, 2021 and 2020, the Company recognized $1.5 million and $1.4 million, respectively, of share-based compensation expense.

 

(15) Commitments and Contingencies

Impact of COVID-19

Due to the current COVID-19 pandemic in the United States and globally, the Company’s borrowers and their tenants, the properties securing the Company’s investments, and the economy as a whole have been, and will continue to be, adversely impacted. The magnitude and duration of COVID-19 and its impact on the Company’s borrowers and their tenants, cash flows and future results of operations could be significant and will largely depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity and mutated strains of COVID-19, the availability of a treatment or effectiveness of vaccines approved for COVID-19, and reactions by consumers, companies, governmental entities and capital markets. The prolonged duration and impact of COVID-19 has and could further materially disrupt the Company’s business operations and impact its financial performance.

Unfunded Commitments

As part of its lending activities, the Company commits to certain funding obligations which are not advanced at closing and that have not been recognized in the Company’s consolidated financial statements. These commitments to extend credit are made as part of the Company’s portfolio of loans held for investment. The aggregate amount of unrecognized unfunded loan commitments existing at March 31, 2021 and December 31, 2020 was $401.7 million and $423.5 million, respectively.

The Company recorded an allowance for credit losses on loan commitments that are not unconditionally cancellable by the Company of $2.1 million and $2.9 million at March 31, 2021 and December 31, 2020 which is included in accrued expenses and other liabilities on the Company’s consolidated balance sheets.

Litigation

From time to time, the Company may be involved in various claims and legal actions arising in the ordinary course of business. The Company establishes an accrued liability for loss contingencies when a settlement arising from a legal proceeding is both probable and reasonably estimable. If a legal matter is not probable and reasonably estimable, no such liability is recorded. Examples of this include (i) early stages of a legal proceeding, (ii) damages that are unspecified or cannot be determined, (iii) discovery has not started or is incomplete or (iv) there is uncertainty as to the outcome of pending appeals or motions. If these items exist, an estimated range of potential loss cannot be determined and as such the Company does not record an accrued liability.

As of March 31, 2021 and December 31, 2020, the Company was not involved in any material legal proceedings and has not recorded an accrued liability for loss contingencies.

37


 

(16) Concentration of Credit Risk

Property Type

A summary of the loan portfolio by property type as of March 31, 2021 and December 31, 2020 based on total loan commitment and current unpaid principal balance (“UPB”) is as follows (dollars in thousands):

 

 

 

March 31, 2021

 

Property Type

 

Loan

Commitment

 

 

Unfunded

Commitment

 

 

% of Loan

Commitment

 

 

Loan UPB

 

 

% of Loan

UPB

 

Office

 

$

2,755,294

 

 

$

332,468

 

 

 

55.2

%

 

$

2,422,826

 

 

 

52.8

%

Multifamily

 

 

850,188

 

 

 

28,883

 

 

 

17.1

 

 

 

821,604

 

 

 

17.9

 

Hotel

 

 

733,221

 

 

 

8,847

 

 

 

14.7

 

 

 

729,071

 

 

 

15.9

 

Mixed-Use

 

 

586,993

 

 

 

29,385

 

 

 

11.8

 

 

 

557,608

 

 

 

12.2

 

Condominium

 

 

25,049

 

 

 

 

 

 

0.5

 

 

 

25,049

 

 

 

0.5

 

Retail

 

 

33,000

 

 

 

2,143

 

 

 

0.7

 

 

 

31,200

 

 

 

0.7

 

Total

 

$

4,983,745

 

 

$

401,726

 

 

 

100.0

%

 

$

4,587,358

 

 

 

100.0

%

 

 

 

December 31, 2020

 

Property Type

 

Loan

Commitment

 

 

Unfunded

Commitment

 

 

% of Loan

Commitment

 

 

Loan UPB

 

 

% of Loan

UPB

 

Office

 

$

2,756,338

 

 

$

356,034

 

 

 

55.7

%

 

$

2,400,304

 

 

 

53.0

%

Multifamily

 

 

804,838

 

 

 

24,001

 

 

 

16.3

 

 

 

781,137

 

 

 

17.3

 

Hotel

 

 

737,293

 

 

 

9,864

 

 

 

14.9

 

 

 

731,487

 

 

 

16.2

 

Mixed-Use

 

 

586,993

 

 

 

31,398

 

 

 

11.9

 

 

 

555,595

 

 

 

12.3

 

Condominium

 

 

25,049

 

 

 

 

 

 

0.5

 

 

 

25,049

 

 

 

0.6

 

Retail

 

 

33,000

 

 

 

2,190

 

 

 

0.7

 

 

 

31,153

 

 

 

0.7

 

Total

 

$

4,943,511

 

 

$

423,487

 

 

 

100.0

%

 

$

4,524,725

 

 

 

100.0

%

 

Loan commitments represent principal commitments made by the Company, and do not include capitalized interest resulting from certain loan modifications of $5.5 million and $4.7 million at March 31, 2021 and December 31, 2020, respectively.

Geography

All of the Company’s loans held for investment are secured by properties within the United States. The geographic composition of loans held for investment based on total loan commitment and current UPB as of March 31, 2021 and December 31, 2020 is as follows (dollars in thousands):

 

 

 

March 31, 2021

 

Geographic Region

 

Loan

Commitment

 

 

Unfunded

Commitment

 

 

% of Loan

Commitment

 

 

Loan UPB

 

 

% of Loan

UPB

 

East

 

$

2,009,200

 

 

$

143,155

 

 

 

40.3

%

 

$

1,866,243

 

 

 

40.6

%

South

 

 

1,284,891

 

 

 

90,675

 

 

 

25.8

 

 

 

1,195,331

 

 

 

26.1

 

West

 

 

1,127,853

 

 

 

109,478

 

 

 

22.6

 

 

 

1,020,800

 

 

 

22.3

 

Midwest

 

 

473,701

 

 

 

56,039

 

 

 

9.5

 

 

 

417,962

 

 

 

9.1

 

Various

 

 

88,100

 

 

 

2,379

 

 

 

1.8

 

 

 

87,022

 

 

 

1.9

 

Total

 

$

4,983,745

 

 

$

401,726

 

 

 

100.0

%

 

$

4,587,358

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

Geographic Region

 

Loan

Commitment

 

 

Unfunded

Commitment

 

 

% of Loan

Commitment

 

 

Loan UPB

 

 

% of Loan

UPB

 

East

 

$

2,009,022

 

 

$

152,487

 

 

 

40.6

%

 

$

1,856,535

 

 

 

41.0

%

South

 

 

1,289,141

 

 

 

97,405

 

 

 

26.1

 

 

 

1,192,852

 

 

 

26.4

 

West

 

 

1,128,897

 

 

 

121,738

 

 

 

22.8

 

 

 

1,009,589

 

 

 

22.3

 

Midwest

 

 

428,351

 

 

 

49,478

 

 

 

8.7

 

 

 

379,173

 

 

 

8.4

 

Various

 

 

88,100

 

 

 

2,379

 

 

 

1.8

 

 

 

86,576

 

 

 

1.9

 

Total

 

$

4,943,511

 

 

$

423,487

 

 

 

100.0

%

 

$

4,524,725

 

 

 

100.0

%

 

Loan commitments represent principal commitments made by the Company, and do not include capitalized interest resulting from certain loan modifications of $5.5 million and $4.7 million at March 31, 2021 and December 31, 2020, respectively.

38


 

Category

A summary of the loan portfolio by category as of March 31, 2021 and December 31, 2020 based on total loan commitment and current UPB is as follows (dollars in thousands):

 

 

 

March 31, 2021

 

Loan Category

 

Loan

Commitment

 

 

Unfunded

Commitment

 

 

% of Loan

Commitment

 

 

Loan UPB

 

 

% of Loan

UPB

 

Light Transitional

 

$

1,932,437

 

 

$

160,166

 

 

 

38.8

%

 

$

1,772,271

 

 

 

38.7

%

Moderate Transitional

 

 

1,678,660

 

 

 

218,112

 

 

 

33.7

 

 

 

1,462,737

 

 

 

31.9

 

Bridge

 

 

1,337,648

 

 

 

21,980

 

 

 

26.8

 

 

 

1,318,818

 

 

 

28.7

 

Construction

 

 

35,000

 

 

 

1,468

 

 

 

0.7

 

 

 

33,532

 

 

 

0.7

 

Total

 

$

4,983,745

 

 

$

401,726

 

 

 

100.0

%

 

$

4,587,358

 

 

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

Loan Category

 

Loan

Commitment

 

 

Unfunded

Commitment

 

 

% of Loan

Commitment

 

 

Loan UPB

 

 

% of Loan

UPB

 

Light Transitional

 

$

1,937,644

 

 

$

173,518

 

 

 

39.2

%

 

$

1,764,126

 

 

 

39.0

%

Moderate Transitional

 

 

1,633,131

 

 

 

224,532

 

 

 

33.0

 

 

 

1,410,145

 

 

 

31.2

 

Bridge

 

 

1,337,736

 

 

 

22,953

 

 

 

27.1

 

 

 

1,317,938

 

 

 

29.1

 

Construction

 

 

35,000

 

 

 

2,484

 

 

 

0.7

 

 

 

32,516

 

 

 

0.7

 

Total

 

$

4,943,511

 

 

$

423,487

 

 

 

100.0

%

 

$

4,524,725

 

 

 

100.0

%

 

Loan commitments represent principal commitments made by the Company, and do not include capitalized interest resulting from certain loan modifications of $5.5 million and $4.7 million at March 31, 2021 and December 31, 2020, respectively.

Impact of COVID-19 on Concentration of Credit Risk

The potential negative impacts on the Company’s business caused by COVID-19 may be heightened by the fact that the Company is not required to observe specific diversification criteria, which means that the Company’s investments may be concentrated in certain property types, geographical areas or loan categories that are more adversely affected by COVID-19 than other property types, geographical areas or loan categories. For example, certain of the loans in the Company’s loan portfolio are secured by office buildings, hotels and retail properties. Federal and state mandates implemented to control the spread of COVID-19, including restrictions on freedom of movement and business operations such as travel bans, border closings, business closures, quarantines and shelter-in-place orders, have and are likely to continue to negatively impact the hotel and retail industries, which could adversely affect the Company’s investments in assets secured by properties that operate in these industries. Also, changes in how certain types of commercial properties are used while maintaining social distancing and other techniques intended to control the impact of COVID-19 (for example, office buildings may be adversely impacted by a possible reversal in the recent trend toward increased densification of office space, or a preference by office users for suburban properties less reliant on public transportation to safely deliver their employees to and from the workplace) have and are likely to impact our investments secured by these properties. Additional regional surges in infection rates due to COVID-19 variants, reversed re-openings, uncertainty regarding the effectiveness of vaccines approved for COVID-19, or high proportions of vaccine hesitancy in certain regions, could adversely affect the Company’s loan investments secured by properties in these regions so impacted.

(17) Subsequent Events

The following events occurred subsequent to March 31, 2021:

 

The Company closed 1 first mortgage loan with a total loan commitment amount of $47.0 million and initial funding of $45.9 million. This loan was financed in TRTX 2021-FL4, and together with the contribution in April 2021 of a $37.5 million loan, the Company has utilized $83.4 million of the FL4 Ramp-Up Account.

 

The Company is in the process of closing 7 first mortgage loans with a total loan commitment amount of $588.7 million and initial fundings of $464.5 million. The majority of these loans, measured by commitment amount, are expected to be financed in TRTX 2021-FL4.

 

 

 

39


 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited and audited consolidated financial statements and the accompanying notes included elsewhere in this Form 10-Q and in our Form 10-K filed with the SEC on February 24, 2021. In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, and financial condition based on current expectations that involve risks, uncertainties and assumptions. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results may differ materially from those in this discussion as a result of various factors, including but not limited to those discussed under the heading “Risk Factors” in this Form 10-Q and in our Form 10-K filed with the SEC on February 24, 2021.

Overview

We are a commercial real estate finance company externally managed by TPG RE Finance Trust Management, L.P. and sponsored by TPG. We directly originate, acquire and manage commercial mortgage loans and other commercial real estate-related debt instruments in North America for our balance sheet. Our objective is to provide attractive risk-adjusted returns to our stockholders over time through cash distributions and capital appreciation. To meet our objective, we focus primarily on directly originating and selectively acquiring floating rate first mortgage loans that are secured by high quality commercial real estate properties undergoing some form of transition and value creation, such as retenanting, refurbishment or other form of repositioning. The collateral underlying our loans is located in primary and select secondary markets in the U.S. that we believe have attractive economic conditions and commercial real estate fundamentals. We operate our business as one segment.

As of March 31, 2021, our loan investment portfolio consisted of 57 first mortgage loans (or interests therein) and one mezzanine loan with total loan commitments of $5.0 billion, an aggregate unpaid principal balance of $4.6 billion, a weighted average credit spread of 3.2%, a weighted average all-in yield of 5.2%, a weighted average term to extended maturity (assuming all extension options have been exercised by borrowers) of 2.9 years, and a weighted average LTV of 65.9%. As of March 31, 2021, 100% of the loan commitments in our portfolio consisted of floating rate loans, of which 99.3% were first mortgage loans or, in one instance a first mortgage loan and contiguous mezzanine loan both owned by us, and 0.7% was a mezzanine loan. As of March 31, 2021, we had $401.7 million of unfunded loan commitments, our funding of which is subject to borrower satisfaction of certain milestones.

As of March 31, 2021, we had $99.2 million of real estate owned comprising 27 acres across two undeveloped commercially-zoned land parcels on the Las Vegas Strip (the “Property”) acquired pursuant to a negotiated deed-in-lieu of foreclosure. This Property is held for investment and reflected on our consolidated balance sheets at its estimate of fair value at the time of acquisition.

We have made an election to be taxed as a REIT for U.S. federal income tax purposes, commencing with our initial taxable year ended December 31, 2014. We believe we have been organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code and we believe that our organization and current and intended manner of operation will enable us to continue to meet the requirements for qualification and taxation as a REIT. As a REIT, we generally are not subject to U.S. federal income tax on our REIT taxable income that we distribute currently to our stockholders. We operate our business in a manner that permits us to maintain an exclusion or exemption from registration under the Investment Company Act.

During 2020, the COVID-19 pandemic caused significant disruptions to the U.S. and global economies. These disruptions contributed to significant and ongoing volatility, widening credit spreads and sharp declines in liquidity in the real estate securities and whole loan financing markets at points during 2020. The pace of recovery following this disruption remains uncertain, as do the longer-term economic effects and shifts in behavior. As a result of the impact of COVID-19, many commercial real estate finance and financial services industry participants, including us, reduced new investment activity until the capital markets became more stable, the macroeconomic outlook became clearer, market liquidity improved, and transaction volumes increased. For most of 2020, we focused on actively managing portfolio credit, generating and recycling liquidity from existing assets, extending the maturities and further reducing the mark-to-market exposure of our liabilities and controlling corporate overhead as a percentage of our total assets and total revenues. Although market conditions remain uncertain due to COVID-19, the credit performance of our portfolio, loan repayments that have allowed us to retire certain borrowings and increase our liquidity, extended maturity dates for many of our secured credit agreements, the introduction of a new secured credit agreement limiting mark-to-market risk relating to hotel loans in our portfolio, and the increase in non-mark-to-market liabilities to 84% of total borrowings have positioned us to resume the origination of first mortgage transitional loans in the first quarter of 2021. For more information regarding the impact that COVID-19 has had and may have on our business, see risk factors set forth in our Form 10-K filed with the SEC on February 24, 2021.

Our Manager

We are externally managed by our Manager, TPG RE Finance Trust Management, L.P., an affiliate of TPG. TPG manages investments across multiple asset classes, including private equity, real estate, energy, infrastructure, and hedge funds. Our Manager

40


 

manages our investments and our day-to-day business and affairs in conformity with our investment guidelines and other policies that are approved and monitored by our board of directors. Our Manager is responsible for, among other matters, the selection, origination or purchase and sale of our portfolio investments, our financing activities and providing us with investment advisory services. Our Manager is also responsible for our day-to-day operations and performs (or causes to be performed) such services and activities relating to our investments and business and affairs as may be appropriate. Our investment decisions are approved by an investment committee of our Manager that is comprised of senior investment professionals of TPG, including senior investment professionals of TPG's real estate equity group and TPG’s executive committee. For a summary of certain terms of the management agreement between us and our Manager (the “Management Agreement”), see Note 11 to our Consolidated Financial Statements included in this Form 10-Q.

First Quarter 2021 Activity

Operating Results:

 

Generated GAAP net income of $32.0 million, or $0.30 per weighted average diluted common share, an increase of $17.4 million, compared to the three months ended December 31, 2020.

 

Produced Distributable Earnings of $21.7 million, or $0.27 per weighted average diluted common share, an increase of $10.0 million, compared to the three months ended December 31, 2020.

 

Generated interest income of $58.1 million and incurred interest expense of $20.2 million, resulting in net interest income of $37.9 million.

 

Recorded a decrease in our allowance for credit loss of $4.0 million for a total allowance for credit losses of $58.8 million.

 

Declared dividends on our common stock of $15.5 million, or $0.20 per common share.

Investment Portfolio Activity:

 

Originated one first mortgage loan with a commitment of $45.4 million, an initial unpaid principal balance of $37.5 million, an unfunded commitment of $7.9 million, and an interest rate of LIBOR plus 3.3%.

 

Funded $30.4 million in future funding obligations associated with existing loans.

 

Received partial loan repayments of $5.3 million on four loans, and no repayments in full.

Financing Activity:

 

Closed TRTX 2021-FL4, a $1.25 billion collateralized loan obligation to finance 18 first mortgage loan investments comprised of 17 pari passu participation interests and purchase of one commercial real estate loan, and providing $308.9 million of cash capacity to finance new eligible loans, with a weighted average spread of 1.60% and an advance rate of 83.0%.

 

Increased non-mark-to-market, non-recourse financing to 83.6% of our total loan financing outstanding balances.

 

Repaid $615.0 million in secured financing in association with the closing of TRTX 2021-FL4.

Liquidity:

Available liquidity at March 31, 2021 of $632.9 million was comprised of:

 

Cash-on-hand of $301.6 million, of which $290.8 million was available for investment, net of $10.8 million held to satisfy a cash liquidity covenant under our secured credit agreements.

 

$308.9 million of cash in the TRTX 2021-FL4 Ramp-Up Account, and $1.2 million of cash in TRTX 2019-FL3, all available for investment dependent upon our ability to contribute eligible collateral.

 

Undrawn capacity (liquidity available to us without the need to pledge additional collateral to our lenders) of $21.2 million under secured agreements with seven lenders.  

41


 

Financing capacity for our secured credit agreements at March 31, 2021 was comprised of $3.2 billion of loan financing capacity under secured credit agreements provided by seven lenders. Our ability to draw on this capacity is dependent upon our lenders’ willingness to accept as collateral loan investments we pledge to them to secure additional borrowings. These financing arrangements have credit spreads based upon the LTV and other risk characteristics of collateral pledged, and provide stable financing with mark-to-market provisions generally limited to collateral-specific events and, in only one instance, to capital markets-specific events. As of March 31, 2021, borrowings under these financing arrangements had a weighted average credit spread of 2.4% and a weighted average term to extended maturity (assuming we have exercised all extension options and term-out provisions) of 2.8 years. These financing arrangements are generally 25% recourse to Holdco.

Key Financial Measures and Indicators

As a commercial real estate finance company, we believe the key financial measures and indicators for our business are earnings per share, dividends declared per common share, Distributable Earnings, and book value per share. For the three months ended March 31, 2021, we recorded earnings per diluted common share of $0.30, an increase of $0.21 per diluted common share from the three months ended December 31, 2020, primarily due to a reduction in credit loss expense of $4.0 million during the three months ended March 31, 2021, compared to a $16.3 million credit loss expense during the preceding quarter. Distributable Earnings per diluted common share was $0.27 for the three months ended March 31, 2021, an increase of $0.12 from the three months ended December 31, 2020, mainly due to an increase in our net income.

For the three months ended March 31, 2021, we declared a cash dividend of $0.20 per common share, which was paid on April 23, 2021.

Our book value per common share as of March 31, 2021 was $16.61, a $0.11 increase from our book value per common share as of December 31, 2020, primarily due to retained earnings in excess of the dividends declared on our Series A and Series B preferred stock and our common stock. As further described below, Distributable Earnings is a measure that is not prepared in accordance with GAAP. We use Distributable Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments that we believe are not necessarily indicative of our current loan activity and operations.

Earnings Per Common Share and Dividends Declared Per Common Share

The computation of diluted earnings per share is based on the weighted average number of participating securities outstanding plus the incremental shares that would be outstanding assuming exercise of warrants, which are exercisable on a net-settlement basis. The number of incremental shares is calculated by applying the treasury stock method. We exclude participating securities and warrants from the calculation of basic earnings (loss) per share in periods of net losses since their effect would be anti-dilutive. For the three months ended March 31, 2021, we present diluted earnings per share because the average market price of the Company’s common stock during the three months ended March 31, 2021 was $10.95, which exceeds the strike price of $7.50 per common share for warrants currently outstanding.

The following table sets forth the calculation of basic and diluted net income per share and dividends declared per share (in thousands, except share and per share data):

 

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Net Income (Loss) Attributable to TPG RE Finance Trust, Inc.(1)

 

$

25,831

 

 

$

8,375

 

Participating Securities' Share in Earnings

 

 

(146

)

 

 

(338

)

Deemed Dividends on Series B Preferred Shares

 

 

(1,452

)

 

 

(1,399

)

Net Income (Loss) Attributable to Common Stockholders

 

$

24,233

 

 

$

6,638

 

Weighted Average Number of Common Shares Outstanding, Basic(2)

 

 

76,895,615

 

 

 

76,759,033

 

Weighted Average Number of Common Shares Outstanding, Diluted(2)

 

 

80,673,236

 

 

 

79,257,062

 

Earnings (Loss) per Common Share, Basic(2)

 

$

0.32

 

 

$

0.09

 

Earnings (Loss) per Common Share, Diluted(2)

 

$

0.30

 

 

$

0.09

 

Dividends Declared per Common Share(2)

 

$

0.20

 

 

$

0.38

 

 

(1)

Represents net income (loss) attributable to holders of our common stock after deducting Series A and Series B Preferred Stock dividends.

(2)

Weighted average number of common shares outstanding, earnings per common share and dividends declared per common share includes common stock.

42


 

Distributable Earnings

We use Distributable Earnings to evaluate our performance excluding the effects of certain transactions and GAAP adjustments we believe are not necessarily indicative of our current loan activity and operations. Distributable Earnings is a non-GAAP measure, which we define as GAAP net income (loss) attributable to our stockholders, including realized gains and losses not otherwise included in GAAP net income (loss), and excluding (i) non-cash equity compensation expense, (ii) depreciation and amortization, (iii) unrealized gains (losses), and (iv) certain non-cash items. Distributable Earnings may also be adjusted from time to time to exclude one-time events pursuant to changes in GAAP and certain other non-cash charges as determined by our Manager, subject to approval by a majority of our independent directors. The exclusion of depreciation and amortization from the calculation of Distributable Earnings only applies to debt investments related to real estate to the extent we foreclose upon the property or properties underlying such debt investments. Distributable Earnings is substantially the same as Core Earnings, as defined in our Management Agreement, for the three months ended March 31, 2021.

We believe that Distributable Earnings provides meaningful information for our investors to consider in addition to our net income and cash flow from operating activities determined in accordance with GAAP. We made an election to be taxed as a REIT for U.S. federal income tax purposes, commencing with our initial taxable year ended December 31, 2014. We generally must distribute annually at least 90% of our net taxable income, subject to certain adjustments and excluding any net capital gain, in order for us to qualify as a REIT for U.S. federal income tax purposes. To the extent that we satisfy this distribution requirement but distribute less than 100% of our net taxable income, we will be subject to U.S. federal income tax on our undistributed taxable income. Dividends are one of the principal reasons investors invest in our common stock and over time Distributable Earnings has been a useful indicator of our dividends per share. As such, Distributable Earnings is a measure considered by us in determining dividends.

In assessing the impact of the new credit loss accounting guidance on our Distributable Earnings, we determined that, consistent with our policy on credit loss measurement and our stakeholders’ view of realized loan losses, the credit loss provision or reversal as computed under Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses, should be included within unrealized gains, losses or other non-cash items as referenced above, but only to the extent that it exceeds any realized credit losses during the period. See Note 2 to our Consolidated Financial Statements included in this Form 10-Q for details related to our accounting policy on credit loss measurement. Consistent with Accounting Standards Codification (“ASC”) 326, a loan will be charged off as a realized loss when it is deemed non-recoverable upon a realization event. This is generally at the time the loan receivable is settled, transferred or exchanged, or in the case of foreclosure, when the underlying property is sold, but non-recoverability may also be concluded by us if, in our determination, it is nearly certain that all amounts due will not be collected. The realized loss shall equal the difference between the cash received, or expected to be received, and the book value of the asset. This policy is reflective of our economics as it relates to the ultimate realization of the loan.

Distributable Earnings does not represent net income or cash generated from operating activities and should not be considered as an alternative to GAAP net income, or an indication of our GAAP cash flows from operations, a measure of our liquidity, or an indication of funds available for our cash needs. In addition, our methodology for calculating Distributable Earnings may differ from the methodologies employed by other companies to calculate the same or similar supplemental performance measures, and accordingly, our reported Distributable Earnings may not be comparable to the Distributable Earnings reported by other companies.

The following tables provide a reconciliation of GAAP net income attributable to common stockholders to Distributable Earnings (in thousands, except share and per share data):

 

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Net Income (Loss) Attributable to TPG RE Finance Trust, Inc

 

$

25,831

 

 

$

8,375

 

Participating Securities' Share in Earnings

 

 

(146

)

 

 

(338

)

Deemed Dividends on Series B Preferred Shares

 

 

(1,452

)

 

 

(1,399

)

Net Income (Loss) Attributable to Common Stockholders(1)

 

$

24,233

 

 

$

6,638

 

Non-Cash Stock Compensation Expense

 

 

1,456

 

 

 

1,534

 

Credit Loss (Benefit) Expense (2)

 

 

(4,038

)

 

 

3,498

 

Distributable Earnings

 

$

21,651

 

 

$

11,670

 

Weighted-Average Common Shares Outstanding, Basic

 

 

76,895,615

 

 

 

76,759,033

 

Weighted-Average Common Shares Outstanding, Diluted

 

 

80,673,236

 

 

 

79,257,062

 

Distributable Earnings per Common Share, Basic

 

$

0.28

 

 

$

0.15

 

Distributable Earnings per Common Share, Diluted

 

$

0.27

 

 

$

0.15

 

 

(1)

Represents GAAP net income (loss) attributable to our common stockholders after deducting dividends attributable to participating securities. For more information regarding the calculation of earnings per share using the two-class method, see Note 12 to our Consolidated Financial Statements included in this Form 10-Q.

43


 

(2)

Credit Loss Expense for the three months ended December 31, 2020 excludes a realized loss $12.8 million on an extinguishment of a first mortgage loan that experienced a maturity default. See Notes 3 and 4 to our Consolidated Financial Statements included in this Form 10-Q for details.

Book Value Per Common Share

The following table sets forth the calculation of our book value per share (in thousands, except share and per share data):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Total Stockholders’ Equity and Temporary Equity

 

$

1,478,231

 

 

$

1,466,451

 

Series B Preferred Stock

 

 

(201,003

)

 

 

(199,551

)

Series A Preferred Stock

 

 

(125

)

 

 

(125

)

Stockholders’ Equity, Net of Preferred Stock

 

$

1,277,103

 

 

$

1,266,775

 

Number of Common Shares Outstanding at Period End

 

 

76,897,102

 

 

 

76,787,006

 

Book Value per Common Share

 

$

16.61

 

 

$

16.50

 

Portfolio Overview

The Company’s interest-earning assets include its portfolio of floating rate mortgage loans. At March 31, 2021, our loan portfolio was comprised of 58 loans totaling $5.0 billion of commitments with an unpaid principal balance of $4.6 billion, as compared to 57 loans with $4.9 billion of commitments and an unpaid principal balance of $4.5 billion at December 31, 2020.

At March 31, 2021, we owned real estate with a carrying value of $99.2 million comprising 27 acres across two undeveloped commercially-zoned land parcels on the Las Vegas Strip acquired pursuant to a negotiated deed-in-lieu of foreclosure. This Property is held for investment and reflected on our consolidated balance sheets at its estimate of fair value at the time of acquisition.

Loan Portfolio

During the three months ended March 31, 2021, we originated one loan, with a total loan commitment amount of $45.4 million, of which $37.5 million was funded at origination. Loan fundings included $30.4 million of deferred fundings related to previously originated loan commitments. Proceeds from loan repayments totaled $5.3 million, representing partial repayments from four loans. We generated interest income of $58.1 million and incurred interest expense of $20.2 million, which resulted in net interest income of $37.9 million.

The following table details our loan activity by unpaid principal balance for the three months ended March 31, 2021 and December 31, 2020 (dollars in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Loan originations and acquisitions — initial funding

 

$

37,545

 

 

$

 

Other loan fundings(1)

 

 

30,382

 

 

 

62,451

 

Loan repayments

 

 

(5,294

)

 

 

(365,096

)

Loan extinguishment on conversion to REO(2)

 

 

 

 

 

(112,000

)

Total loan activity, net

 

$

62,633

 

 

$

(414,645

)

 

(1)

Additional fundings made under existing loan commitments.

(2)

Includes extinguishment of a first mortgage loan with an unpaid principal balance of $112.0 million as of December 31, 2020. On December 31, 2020, we took title to the Property pursuant to a negotiated deed-in-lieu of foreclosure. Fair value of the Property at the time of acquisition was $99.2 million resulting in a realized loss of $12.8 million, equal to the previously recorded CECL reserve included in our results of operations for the three months ended December 31, 2020. See Notes 3 and 4 to our Consolidated Financial Statements included in this Form 10-Q for details.

44


 

The following table details overall statistics for our loan portfolio as of March 31, 2021 (dollars in thousands):

 

 

 

Balance Sheet

Portfolio

 

 

Total Loan

Portfolio

 

Number of loans

 

 

58

 

 

 

59

 

Floating rate loans (by unpaid principal balance)

 

 

100.0

%

 

 

100.0

%

Total loan commitments(1)

 

$

4,983,745

 

 

$

5,115,745

 

Unpaid principal balance(2)

 

$

4,587,358

 

 

$

4,587,358

 

Unfunded loan commitments(3)

 

$

401,726

 

 

$

401,726

 

Amortized cost

 

$

4,580,179

 

 

$

4,580,179

 

Weighted average credit spread(4)

 

 

3.2

%

 

 

3.2

%

Weighted average all-in yield(4)

 

 

5.2

%

 

 

5.2

%

Weighted average term to extended maturity (in years)(5)

 

 

2.9

 

 

 

2.9

 

Weighted average LTV(6)

 

 

65.9

%

 

 

65.9

%

 

(1)

In certain instances, we create structural leverage through the co-origination or non-recourse syndication of a senior loan interest to a third-party. In either case, the senior mortgage loan (i.e., the non-consolidated senior interest) is not included on our balance sheet. When we create structural leverage through the co-origination or non-recourse syndication of a senior loan interest to a third-party, we retain on our balance sheet a mezzanine loan. Total loan commitment encompasses the entire loan portfolio we originated, acquired and financed. At March 31, 2021, we had one non-consolidated senior interest outstanding of $132.0 million.

(2)

Unpaid principal balance includes PIK interest of $5.5 million as of March 31, 2021.

(3)

Unfunded loan commitments may be funded over the term of each loan, subject in certain cases to an expiration date or a force-funding date, primarily to finance property improvements or lease-related expenditures by our borrowers, to finance operating deficits during renovation and lease-up, and in limited instances to finance construction.

(4)

As of March 31, 2021, our floating rate loans were indexed to LIBOR. In addition to credit spread, all-in yield includes the amortization of deferred origination fees, purchase price premium and discount, loan origination costs and accrual of both extension and exit fees. Credit spread and all-in yield for the total portfolio assumes the applicable floating benchmark rate as of March 31, 2021 for weighted average calculations.

(5)

Extended maturity assumes all extension options are exercised by the borrower; provided, however, that our loans may be repaid prior to such date. As of March 31, 2021, based on the unpaid principal balance of our total loan exposure, 23.0% of our loans were subject to yield maintenance or other prepayment restrictions and 77.0% were open to repayment by the borrower without penalty.

(6)

Except for construction loans, LTV is calculated for loan originations and existing loans as the total outstanding principal balance of the loan or participation interest in a loan (plus any financing that is pari passu with or senior to such loan or participation interest) as of March 31, 2021, divided by the as-is appraised value of our collateral at the time of origination or acquisition of such loan or participation interest. For construction loans only, LTV is calculated as the total commitment amount of the loan divided by the as-stabilized value of the real estate securing the loan. The as-is or as-stabilized (as applicable) value reflects our Manager’s estimates, at the time of origination or acquisition of the loan or participation interest in a loan, of the real estate value underlying such loan or participation interest determined in accordance with our Manager’s underwriting standards and consistent with third-party appraisals obtained by our Manager.

For information regarding the financing of our loan portfolio, see the section entitled “Investment Portfolio Financing.”

Real Estate Owned

In December 2020, we acquired the Property pursuant to a negotiated deed-in-lieu of foreclosure. At September 30, 2020, this property served as collateral for a first mortgage loan receivable held for investment with an unpaid principal balance of $112.0 million, an independently-assessed credit loss reserve of $12.8 million, and a net carrying value of $99.2 million. On October 9, 2020, the first mortgage loan reached final maturity without repayment or satisfaction of extension conditions, which triggered a maturity default. On December 31, 2020, we took ownership of the Property, extinguished the first mortgage loan receivable, and realized a loss of $12.8 million, equal to the previously recorded specific CECL reserve on the first mortgage loan. At March 31, 2021, we continued to hold the Property at its estimated fair value at the time of acquisition, net of estimated selling costs, of $99.2 million. Our estimate of the Property’s fair value was determined using a discounted cash flow model and Level 3 inputs, which include estimates of parcel-specific cash flows over a specific holding period, at a discount rate that ranges between 8.0% - 17.5% based on the risk profile of estimated cash flows associated with each respective parcel, and an estimated capitalization rate of 6.25%, where applicable. These inputs are based on the highest and best use for each parcel, estimated future values for the parcels based on extensive discussions with local brokers, investors and other market participants, the estimated holding period for the parcels, and discount rates that reflect estimated investor return requirements for the risks associated with the expected use of each sub-parcel. We obtained from a third party a $50.0 million non-recourse first mortgage loan secured by the Property, which is classified as Mortgage Loan Payable on our consolidated balance sheets. See Note 7 to our Consolidated Financial Statements included in this Form 10-Q for details of the Mortgage Loan Payable.

45


 

Asset Management

We actively manage the assets in our portfolio from closing to final repayment. We are party to an agreement with Situs Asset Management, LLC (“SitusAMC”), one of the largest commercial mortgage loan servicers, pursuant to which SitusAMC provides us with dedicated asset management employees for performing asset management services pursuant to our proprietary guidelines. Following the closing of an investment, this dedicated asset management team rigorously monitors the investment under our Manager’s oversight, with an emphasis on ongoing financial, legal and quantitative analyses. Through the final repayment of an investment, the asset management team maintains regular contact with borrowers, servicers and local market experts monitoring performance of the collateral, anticipating borrower, property and market issues, and enforcing our rights and remedies when appropriate.

Our Manager reviews our entire loan portfolio quarterly, undertakes an assessment of the performance of each loan, and assigns it a risk rating between “1” and “5,” from least risk to greatest risk, respectively. See Note 2 to our Consolidated Financial Statements included in this Form 10-Q for a discussion regarding the risk rating system that we use in connection with our portfolio. The following table allocates among risk categories the amortized cost of our loan portfolio as of March 31, 2021 and December 31, 2020 based on our internal risk ratings (dollars in thousands):

 

 

 

March 31, 2021

 

 

December 31, 2020

 

Risk Rating

 

Amortized

Cost

 

 

Number of

Loans

 

 

Amortized

Cost

 

 

Number of

Loans

 

1

 

$

 

 

 

 

 

$

 

 

 

 

2

 

 

369,245

 

 

 

5

 

 

 

337,738

 

 

 

4

 

3

 

 

3,376,123

 

 

 

37

 

 

 

3,340,663

 

 

 

37

 

4

 

 

803,632

 

 

 

15

 

 

 

806,893

 

 

 

15

 

5

 

 

31,179

 

 

 

1

 

 

 

31,106

 

 

 

1

 

Unpaid principal balance

 

$

4,580,179

 

 

 

58

 

 

$

4,516,400

 

 

 

57

 

 

The weighted average risk rating of our total loan exposure based on amortized cost remains unchanged at 3.1 for the periods ended March 31, 2021 and December 31, 2020. During the three months ended March 31, 2021, we upgraded one loan from risk category “3” to “2” because the collateral property achieved lease occupancy at rents in excess of underwriting.

Allowance for Credit Losses

During the three months ended March 31, 2021, we recorded a decrease of $4.0 million in the allowance for credit losses thus reducing the CECL reserve to $58.8 million as of March 31, 2021. This decline was due primarily to expectations of improving macroeconomic conditions, and actual improvements in operating results for many collateral properties adversely affected by COVID-19. The average risk ratings of our loans remain unchanged at 3.1 for the periods ended March 31, 2021 and December 31, 2020. The ongoing economic slowdown due to the COVID-19 pandemic has caused reduced investment sales and financing activity in most sectors of the commercial real estate capital markets, which may moderate the pace of loan repayments and will likely impact commercial property values and valuation inputs. While the ultimate impact of these trends remains uncertain, we have made certain forward-looking adjustments to the inputs of our calculation of the allowance for credit losses to reflect uncertainty regarding the timing, strength, and distribution of the economic recovery, and the post-COVID levels of economic activity that may result.

The economic and market disruptions caused by COVID-19 have adversely impacted the financial condition of many of our borrowers. These impacts have and may differ in timing, duration and magnitude depending on factors such as property type and geography. We have experienced a small number of delinquencies and defaults, but we cannot be certain delinquencies and defaults will not increase in the future. Since March 31, 2020, we have entered into approximately 24 loan modification agreements that typically temporarily reduce the amount of cash interest collected, permit the accrual of a portion (typically not more than 50%) of the interest due to be repaid at a later date by the borrower, permit the use of existing reserves to pay interest and other property-level expenses, as well as providing accommodations on conditions for extension, such as waiving debt yield tests, and/or modifying the conditions upon which the underlying borrower may extend the maturity date. In exchange, borrowers and sponsors have made partial principal repayments and/or provided to us additional cash for payment of interest, operating expenses, and replenishment of interest reserves or capital reserves in amounts and combinations acceptable to us. At March 31, 2021, we had 11 loan modifications outstanding with an unpaid principal balance of $943.5 million.

During the three months ended March 31, 2021, we executed five loan modifications with borrowers. As of March 31, 2021, these loans had an aggregate commitment amount of $397.7 million and an aggregate unpaid principal balance of $393.5 million. None of these loan modifications trigger the requirements for accounting as TDRs. In connection with these modifications, borrowers made aggregate principal reduction payments of approximately $4.3 million and infused approximately $5.9 million to replenish reserves. All of the modified loans are performing as of March 31, 2021. Total PIK interest of $0.8 million on two loans was deferred and added to

46


 

the outstanding loan principal during the three months ended March 31, 2021. At March 31, 2021, the total amount of PIK interest in the portfolio was $5.5 million with respect to nine loans.

Loan modification activity from April 1, 2020 through March 31, 2021 is summarized in the following table (dollars in thousands):

 

 

At March 31, 2021

 

Executed loan modifications

 

 

24

 

Expired loan modifications(1)

 

 

(13

)

Outstanding loan modifications

 

 

11

 

 

 

 

 

 

Unpaid principal balance of outstanding loan modifications

 

$

943,544

 

 

 

 

 

 

Total PIK accrued

 

$

5,644

 

PIK Repaid

 

 

(127

)

PIK Outstanding

 

$

5,517

 

(1)

Includes: (a) an amendment and simultaneous assignment of an existing first mortgage loan by a third-party purchaser of the property securing the loan. This transaction was treated as an extinguishment of the existing loan and origination of a new loan under GAAP; and (b) the sale, at no gain or loss, of a mezzanine loan related to a contiguous first mortgage loan held by the Company.

We continue to work with our borrowers to address the circumstances caused by COVID-19 while seeking to protect the credit attributes of our loans. However, we cannot assure you that these efforts will be successful, and we may experience payment delinquencies, defaults, foreclosures, or losses.

Investment Portfolio Financing

Our portfolio financing arrangements during the period ended March 31, 2021 and December 31, 2020 included collateralized loan obligations, secured credit agreements, and a mortgage loan payable. We had one outstanding non-consolidated senior interest outstanding at both March 31, 2021 and December 31, 2020, with a total loan commitment of $132.0 million.

The following table details our portfolio financing arrangements at March 31, 2021 and December 31, 2020 (dollars in thousands):

 

 

 

Portfolio Financing

Outstanding Principal Balance

 

 

 

March 31, 2021

 

 

December 31, 2020

 

CLO financing(1)

 

$

2,868,047

 

 

$

1,834,760

 

Secured credit facilities - loans

 

 

860,867

 

 

 

1,522,859

 

Mortgage loan payable

 

 

50,000

 

 

 

50,000

 

Total indebtedness(2)

 

$

3,778,914

 

 

$

3,407,619

 

 

(1)

Increase in the balance as of March 31, 2021 is due to the issuance of $1.04 billion principal amount of investment grade-rated notes in connection with TRTX 2021-FL4. See Note 6 to our Consolidated Financial Statements included in this Form 10-Q for details.

(2)

Excludes deferred financing costs of $23.0 million and $18.9 million as of March 31, 2021 and December 31, 2020, respectively.

47


 

Non-mark-to-market financing sources accounted for 83.6% of our total loan portfolio financing arrangements at March 31, 2021. The remaining 16.4% of our loan portfolio financing arrangements, which are comprised primarily of our secured credit facilities, are subject, in only one instance, to credit and spread marks. The following table summarizes our loan portfolio financing as of March 31, 2021 (dollars in thousands):

Loan Portfolio Financing Arrangements

 

Initial

Maturity

Date

 

Extended

Maturity

Date

Recourse

Percentage

 

 

Basis of

Margin Calls

 

Non-Mark-to-Market

 

 

Mark-to-Market

 

Secured Credit Facilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goldman Sachs

 

08/19/21

 

08/19/22

 

25

%

 

Credit

 

$

 

 

$

1,667

 

Wells Fargo

 

04/18/22

 

04/18/22

 

25

%

 

Credit

 

 

 

 

 

2,091

 

Barclays

 

08/13/22

 

08/13/22

 

25

%

 

Credit

 

 

 

 

 

247,282

 

Morgan Stanley

 

05/04/22

 

05/04/22

 

25

%

 

Credit

 

 

 

 

 

156,175

 

JP Morgan

 

10/30/23

 

10/30/25

 

25

%

 

Credit and Spread

 

 

 

 

 

124,458

 

US Bank

 

07/09/22

 

07/09/24

 

25

%

 

Credit

 

 

 

 

 

69,584

 

Bank of America

 

09/29/21

 

09/29/22

 

25

%

 

Credit

 

 

 

 

 

31,664

 

Institutional Financing

 

10/30/23

 

10/30/25

 

25

%

 

Credit

 

 

227,946

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

227,946

 

 

 

632,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized Loan Agreements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

TRTX 2018-FL2

 

10/01/34

 

10/01/34

 

0

%

 

None

 

 

1,039,627

 

 

 

 

TRTX 2019-FL3

 

11/29/37

 

11/29/37

 

0

%

 

None

 

 

790,920

 

 

 

 

TRTX 2021-FL4

 

03/31/38

 

03/31/38

 

0

%

 

None

 

 

1,037,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Consolidated Senior Interests

 

 

 

 

 

 

 

 

None

 

 

132,000

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

$

3,227,493

 

 

$

632,921

 

Percentage of Total

 

 

 

 

 

 

 

 

 

 

 

83.6

%

 

 

16.4

%

Secured Credit Facilities

As of March 31, 2021, aggregate borrowings outstanding under our secured credit facilities totaled $0.9 billion, which was entirely related to our mortgage loan investments. As of March 31, 2021, the weighted average interest rate was LIBOR plus 2.4% per annum, and the weighted average advance rate was 67.9%. As of March 31, 2021, outstanding borrowings under these facilities had a weighted average term to extended maturity of 2.8 years (assuming we have exercised all extension options and term out provisions). These secured credit agreements are 25% recourse to Holdco.

The following table details our secured credit agreements as of March 31, 2021 (dollars in thousands):

 

Lender

 

Commitment

Amount(1)

 

 

UPB of

Collateral

 

 

Advance

Rate

 

 

Approved

Borrowings

 

 

Outstanding

Balance

 

 

Undrawn

Capacity(3)

 

 

Available

Capacity(2)

 

 

Interest

Rate

 

 

Extended

Maturity(4)

 

Goldman Sachs

 

$

250,000

 

 

$

37,940

 

 

 

66.0

%

 

$

3,751

 

 

$

1,667

 

 

$

2,084

 

 

$

246,249

 

 

 

L+ 2.35

%

 

08/19/22

 

Wells Fargo

 

 

750,000

 

 

 

3,776

 

 

 

77.0

%

 

 

2,798

 

 

 

2,091

 

 

 

707

 

 

 

747,202

 

 

 

L+ 1.87

%

 

04/18/22

 

Barclays

 

 

750,000

 

 

 

350,488

 

 

 

70.5

%

 

 

247,733

 

 

 

247,282

 

 

 

451

 

 

 

502,267

 

 

 

L+ 1.54

%

 

08/13/22

 

Morgan Stanley

 

 

500,000

 

 

 

212,883

 

 

 

78.2

%

 

 

166,229

 

 

 

156,175

 

 

 

10,054

 

 

 

333,771

 

 

 

L+ 1.82

%

 

05/04/22

 

JP Morgan

 

 

400,000

 

 

 

207,618

 

 

 

62.5

%

 

 

130,238

 

 

 

124,458

 

 

 

5,780

 

 

 

269,762

 

 

 

L+ 1.69

%

 

10/30/25

 

US Bank

 

 

139,960

 

 

 

101,759

 

 

 

70.0

%

 

 

71,231

 

 

 

69,584

 

 

 

1,647

 

 

 

68,729

 

 

 

L+ 1.53

%

 

07/09/24

 

Bank of America

 

 

200,000

 

 

 

42,813

 

 

 

75.0

%

 

 

32,110

 

 

 

31,664

 

 

 

446

 

 

 

167,890

 

 

 

L+ 1.75

%

 

09/29/22

 

Institutional Financing

 

 

249,546

 

 

 

392,148

 

 

 

58.7

%

 

 

227,946

 

 

 

227,946

 

 

 

 

 

 

21,600

 

 

 

L+ 4.50

%

 

10/30/25

 

Subtotal/Weighted

   Average—Loans

 

$

3,239,506

 

 

$

1,349,425

 

 

 

67.9

%

 

$

882,036

 

 

$

860,867

 

 

$

21,169

 

 

$

2,357,470

 

 

 

L+ 2.41

%

 

 

 

 

(1)

Commitment amount represents the largest amount of borrowings available under a given agreement once sufficient collateral assets have been approved by the lender and pledged by us.

(2)

Represents the commitment amount less the approved borrowings, which amount is available to be borrowed provided we pledge, and the lender approves, additional collateral assets.

(3)

Undrawn capacity represents the positive difference between the borrowing amount approved by the lender against collateral assets pledged by us and the amount actually drawn against those collateral assets. The funding of such amounts is generally subject to the sole and absolute discretion of each lender.

(4)

Our ability to extend our secured credit facilities to the dates shown above is subject to satisfaction of certain conditions. Even if extended, our lenders retain sole discretion to determine whether to accept pledged collateral, and the advance rate and credit spread applicable to each borrowing thereunder.

48


 

 

Once we identify an asset and the asset is approved by the secured credit facility lender to serve as collateral (which lender’s approval is in its sole discretion), we and the lender may enter into a transaction whereby the lender advances to us a percentage of the value of the asset, which is referred to as the “advance rate.” In the case of borrowings under our repurchase facilities, this advance serves as the purchase price at which the lender acquires the loan asset from us with an obligation of ours to repurchase the asset from the lender for an amount equal to the purchase price for the transaction plus a price differential, which is calculated based on an interest rate. Advance rates are subject to negotiation between us and our secured credit facility lenders.

For each transaction, we and the lender agree to a trade confirmation which sets forth, among other things, the purchase price if a repurchase facility, the maximum advance rate, the interest rate and the market value of the asset. For transactions under our secured credit agreements secured by our loan assets, the trade confirmation may also set forth any future funding obligations which are contemplated with respect to the specific transaction and/or the underlying loan asset. For loan assets which involve future funding obligations of ours, the transaction may provide for the lender to fund portions (for example, pro rata per the maximum advance rate of the related transaction) of such future funding obligations. The trade confirmation can also set forth loan-specific margin maintenance provisions, described below.

Generally, our secured credit facilities allow for revolving balances, which allow us to voluntarily repay balances and draw again on existing available credit. The primary obligor on each secured credit facility is a separate special purpose subsidiary of ours which is restricted from conducting activity other than activity related to the utilization of its secured credit facility and the loans or loan interests that are originated or acquired by such subsidiary. As additional credit support, our holding company subsidiary, Holdco, provides certain guarantees of the obligations of its subsidiaries. Holdco’s liability is generally capped at 25% of the outstanding obligations of the special purpose subsidiary which is the primary obligor under the related agreement. However, this liability cap does not apply in the event of certain “bad boy” defaults which can trigger recourse to Holdco for losses or the entire outstanding obligations of the borrower depending on the nature of the “bad boy” default in question. Examples of such “bad boy” defaults include, without limitation, fraud, intentional misrepresentation, willful misconduct, incurrence of additional debt in violation of financing documents, and the filing of a voluntary or collusive involuntary bankruptcy or insolvency proceeding of the special purpose entity subsidiary or the guarantor entity.

Each of the secured credit facilities has “margin maintenance” provisions, which are designed to allow the lender to maintain a certain margin of credit enhancement and/or against the assets which serve as collateral. The lender’s margin amount is typically based on a percentage of the market value of the asset and/or mortgaged property collateral; however, certain secured credit agreements may also involve margin maintenance based on maintenance of a minimum debt yield with respect to the cash flow from the underlying real estate collateral. In certain cases, margin maintenance provisions can relate to minimum debt yields for pledged collateral considered as a whole, or limits on concentration of loan exposure measured by property type or loan type.

Our secured credit facilities contain defined mark-to-market provisions that permit the lenders to issue margin calls to us in the event that the collateral properties underlying our loans pledged to our lenders experience a non-temporary decline in value or net cash flow (“credit marks”) due to reasons other than capital markets events that result in changing credit spreads for similar borrowing obligations. In connection with one of these borrowing arrangements, the lender is also permitted to issue margin calls to us in the event the lender determines capital markets events have caused credit spreads to change for similar borrowing obligations (“spread marks”). Furthermore, in connection with one of these borrowing arrangements, the lender has the right to re-margin the secured credit facility based solely on appraised loan-to-values in the third year of the facility. On May 28, 2020, we made voluntary deleveraging payments totaling $157.7 million to our seven secured credit facility lenders in exchange for their agreement to suspend margin calls for defined periods, subject to certain conditions. When these payments were made, no margin deficits existed, and no margin calls have been issued to us since. The margin holiday agreements expired in December 2020. If market turbulence returns, we may be exposed to margin calls in connection with our secured credit agreements secured by our mortgage loan investments.

The maturity dates for each of our secured credit agreements are set forth in tables that appear earlier in this section. Our secured credit agreements generally have terms of between one and three years, but may be extended if we satisfy certain performance-based conditions. In the normal course of business, we maintain discussions with our lenders to extend or amend any financing facilities related to our loans.

At March 31, 2021, the weighted average haircut (which is equal to one minus the advance rate percentage against collateral for our secured credit facilities taken as a whole) was 32.1% as compared to 30.7% at December 31, 2020 and 19.5% at March 31, 2020. The year-over-year increase in our weighted average haircut was due to the repayment in full and subsequent termination by the Company of all of its secured credit agreements for CRE debt securities, which generally had lower haircuts than our secured credit agreements for whole loans.

49


 

The secured credit facilities also include cash management features which generally require that income from collateral loan assets be deposited in a lender-controlled account for distribution in accordance with a specified waterfall of payments designed to keep facility-related obligations current before such income is disbursed for our own account. The cash management features generally require the trapping of cash in such controlled account if an uncured default under our borrowing arrangement remains outstanding. Furthermore, some secured credit agreements may require an accelerated principal amortization schedule if the secured credit agreement is in its final extended term.

Notwithstanding that a loan asset may be subject to a financing arrangement and serve as collateral under a secured credit facility, we retain the right to administer and service the loan and interact directly with the underlying obligors and sponsors of our loan assets so long as there is no default under the secured credit agreement, and so long as we do not engage in certain material modifications (including amendments, waivers, exercises of remedies, or releases of obligors and collateral, among other things) of the loan assets without the lender’s prior consent.

Collateralized Loan Obligations

At March 31, 2021, we had three collateralized loan obligations, TRTX 2021-FL4, TRTX 2019-FL3 and TRTX 2018-FL2, totaling $2.9 billion, financing 39 existing first mortgage loan investments totaling $3.2 billion, and holding $310.1 million of cash for investment in eligible loan collateral. Our CLOs provide low cost, non-mark-to-market, non-recourse financing for 74.3% of our loan portfolio borrowings. The collateralized loan obligations bear a weighted average interest rate of LIBOR plus 1.5%, have a weighted average advance rate of 82.6%, and include a reinvestment feature that allows us to contribute existing or newly originated loan investments in exchange for proceeds from loan repayments held in the collateralized loan obligations. At March 31, 2021, we had approximately $308.9 million in the FL4 Ramp-Up Account available to purchase eligible collateral interests during a ramp-up period of approximately six months following the FL4 Closing Date. See Note 6 to our Consolidated Financial Statements included in this Form 10-Q for details. The reinvestment period for TRTX 2018-FL2 ended on December 11, 2020. During the three months ended March 31, 2021, we did not utilize the reinvestment feature in TRTX 2019-FL3.

Mortgage Loan Payable

We are, through a special purpose entity subsidiary, a borrower under a $50.0 million mortgage loan secured by the Property. Refer to Note 4 to our Consolidated Financial Statements included in this Form 10-Q for additional information. The first mortgage loan was provided by an institutional lender, has an initial maturity date of December 15, 2021, and an option to extend the maturity for 12 months subject to the satisfaction of customary extension conditions, including (i) the purchase of a new interest rate cap for the extension term, (ii) replenishment of the interest reserve with an amount equal to 12 months of debt service, (iii) payment of a 0.25% extension fee on the outstanding principal balance, and (iv) no event of default. The first mortgage loan permits partial releases of collateral in exchange for payment of a minimum release price equal to the greater of 100% of net sales proceeds (after reasonable transaction expenses) or 115% of the allocated loan amount. The loan bears interest at a rate of LIBOR plus 4.50% subject to a LIBOR interest rate floor and cap of 0.50%. We posted cash of $2.4 million to pre-fund interest payments due under the note during its initial term. The remaining reserve balance at March 31,2021 was $2.0 million.

Non-Consolidated Senior Interests

In certain instances, we create structural leverage through the co-origination or non-recourse syndication of a senior loan interest to a third party. In either case, the senior mortgage loan (i.e., the non-consolidated senior interest) is not included on our balance sheet. When we create structural leverage through the co-origination or non-recourse syndication of a senior loan interest to a third party, we retain on our balance sheet a mezzanine loan. As of March 31, 2021, the Company retained a mezzanine loan investment with a total commitment of $35.0 million, an unpaid principal balance of $33.5 million and an interest rate of LIBOR plus 10.3%.

The following table presents our non-consolidated senior interests outstanding as of March 31, 2021 (dollars in thousands):

 

Non-Consolidated Senior Interests

 

Count

 

 

Loan

Commitment

 

 

Principal

Balance

 

 

Amortized

Cost

 

 

Weighted

Average

Credit

Spread(1)

 

 

Guarantee

 

 

Weighted

Average

Term to

Extended

Maturity

Senior loan sold or co-originated

 

 

1

 

 

$

132,000

 

 

$

132,000

 

 

 

N/A

 

 

 

L+ 4.3

%

 

 

N/A

 

 

6/28/2025

Retained mezzanine loan

 

 

1

 

 

 

35,000

 

 

 

33,532

 

 

 

33,399

 

 

 

L+ 10.3

%

 

 

N/A

 

 

6/28/2025

Total loan

 

 

2

 

 

$

167,000

 

 

$

165,532

 

 

 

 

 

 

 

L+ 5.5

%

 

 

 

 

 

6/28/2025

 

 

(1)

Loan commitment used as a basis for computation of weighted average credit spread.

50


 

Financial Covenants for Outstanding Borrowings

Our financial covenants and guarantees for outstanding borrowings related to our secured credit agreements require Holdco to maintain compliance with the following financial covenants (among others), which were revised on May 28, 2020 as follows:

 

Financial Covenant

 

Current

 

 

Cash Liquidity

 

Minimum cash liquidity of no less than the greater of: $10.0 million; and 5.0% of Holdco’s recourse indebtedness

 

 

Tangible Net Worth

 

$1.1 billion as of April 1, 2020, plus 75% of future equity issuances thereafter

 

 

Debt-to-Equity

 

Debt-to-Equity ratio not to exceed 3.5 to 1.0 with "equity" and "equity adjustment" as defined below

 

 

Interest Coverage

 

Minimum interest coverage ratio of no less than 1.5 to 1.0

 

 

 

The amendments as of May 28, 2020 revised the definition of tangible net worth such that the baseline amount for testing was reset as of April 1, 2020 to $1.1 billion plus 75% of future equity issuances after April 1, 2020. The definition of equity for purposes of calculating the debt-to-equity covenant was revised to include: common equity; preferred equity; and an adjustment equal to the sum of the Current Expected Credit Loss reserve, write-downs, impairments or realized losses recorded against the value of any assets of Holdco or its subsidiaries from and after April 1, 2020; provided, however, that the equity adjustment may not exceed the amount of (a) Holdco’s total equity less (b) the product of Holdco’s total indebtedness multiplied by 25%.

For so long as the Series B Preferred Stock is outstanding, we are required to maintain a debt-to-equity ratio not greater than 3.0 to 1.0. For the purpose of determining this ratio, the aggregate liquidation preference of the outstanding shares of Series B Preferred Stock is excluded from the calculation of total indebtedness of the Company and its subsidiaries, and is included in the calculation of total equity.

We were in compliance with all financial covenants for our secured credit agreements and mortgage loan payable to the extent of outstanding balances as of March 31, 2021 and December 31, 2020, respectively, and were in compliance with the financial covenant relating to the Series B Preferred Stock as of March 31, 2021 and December 31, 2020.

If we fail to meet or satisfy any of the covenants in our financing arrangements and are unable to obtain a waiver or other suitable relief from the lenders, we would be in default under these agreements, which could result in a cross-default or cross-acceleration under other financing arrangements, and our lenders could elect to declare outstanding amounts due and payable (or such amounts may automatically become due and payable), terminate their commitments, require the posting of additional collateral and enforce their respective interests against existing collateral. A default also could significantly limit our financing alternatives, which could cause us to curtail our investment activities or dispose of assets when we otherwise would not choose to do so. Further, this could make it difficult for us to satisfy the requirements necessary to maintain our qualification as a REIT for U.S. federal income tax purposes. There can be no assurance that we will remain in compliance with these covenants in the future. For more information regarding the impact that COVID-19 may have on our ability to comply with these covenants, see risk factors set forth in our Form 10-K filed with the SEC on February 24, 2021.

Debt-to-Equity Ratio and Total Leverage Ratio

The following table presents the Company’s Debt-to-Equity ratio and Total Leverage ratio as of March 31, 2021 and December 31, 2020:

 

 

 

March 31, 2021

 

December 31, 2020

Debt-to-equity ratio(1)

 

2.72x

 

2.44x

Total leverage ratio(2)

 

2.83x

 

2.54x

 

(1)

Represents (i) total outstanding borrowings under financing arrangements, net, including collateralized loan obligations, secured credit agreements, and mortgage loan payable, less cash, to (ii) total stockholders’ equity, at period end.

(2)

Represents (i) total outstanding borrowings under financing arrangements, net, including collateralized loan obligations, secured credit agreements, and mortgage loan payable, plus non-consolidated senior interests sold or co-originated (if any), less cash, to (ii) total stockholders’ equity, at period end.

51


 

Floating Rate Portfolio

Our business model seeks to minimize our exposure to changing interest rates by match-indexing our assets using the same, or similar, benchmark indices, typically LIBOR. Accordingly, rising interest rates will generally increase our net interest income, while declining interest rates will generally decrease our net interest income, subject to the beneficial impact of LIBOR floors in our mortgage loan investment portfolio. As of March 31, 2021, 100.0% of our loans by unpaid principal balance earned a floating rate of interest and were financed with liabilities that require interest payments based on floating rates, which resulted in approximately $0.9 billion of net floating rate exposure subject to the impact of interest rate floors on all our floating rate loans and 8.0% of our liabilities. We had no fixed rate loans outstanding as of March 31, 2021.

Our liabilities are generally index-matched to each loan investment asset, resulting in a net exposure to movements in benchmark rates that vary based on the relative proportion of floating rate assets and liabilities. The following table details our loan portfolio’s net floating rate exposure as of March 31, 2021 (dollars in thousands):

 

 

 

Net Exposure

 

Floating rate assets(1)

 

$

4,587,358

 

Floating rate debt(1)(2)

 

 

(3,728,914

)

Net floating rate exposure

 

$

858,444

 

 

(1)

Floating rate mortgage loan assets and liabilities are indexed to LIBOR. The net exposure to the underlying benchmark interest rate is directly correlated to our assets indexed to the same rate.

(2)

Floating rate liabilities include secured credit facilities and collateralized loan obligations.

With the cessation of LIBOR expected to occur effective January 1, 2022, we continue to evaluate the documentation and control processes associated with our assets and liabilities to manage the transition away from LIBOR to an alternative rate endorsed by the Alternative Reference Rates Committee of the Federal Reserve System. Although recent statements from regulators indicate the possibility of a longer period of transition, perhaps through June 2023, we continue to utilize required resources to revise our control and risk management systems to ensure there is no disruption to our day-to-day operations from the transition, when it does occur. We will continue to employ prudent risk management as it relates to the potential financial, operational and legal risks associated with the expected cessation of LIBOR, and to ensure that our assets and liabilities generally remain match-indexed following this event.  

52


 

Interest-Earning Assets and Interest-Bearing Liabilities

The following table presents the average balance of interest-earning assets and related interest-bearing liabilities, associated interest income and interest expense, and financing costs and the corresponding weighted average yields for the three months ended March 31, 2021 and December 31, 2020 (dollars in thousands):

 

 

 

Three months ended,

 

 

 

March 31, 2021

 

 

December 31, 2020

 

 

 

Average

Amortized

Cost /

Carrying

Value(1)

 

 

Interest

Income/

Expense

 

 

Wtd. Avg.

Yield/

Financing

Cost(2)

 

 

Average

Amortized

Cost /

Carrying

Value(1)

 

 

Interest

Income/

Expense

 

 

Wtd. Avg.

Yield/

Financing

Cost(2)

 

Core Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage loans

 

$

4,509,896

 

 

$

57,067

 

 

 

5.1

%

 

$

4,556,855

 

 

$

60,643

 

 

 

5.3

%

Retained mezzanine loans

 

 

33,070

 

 

 

1,081

 

 

 

13.1

%

 

 

32,011

 

 

 

1,074

 

 

 

13.4

%

CRE debt securities

 

 

 

 

 

 

 

 

0.0

%

 

 

 

 

 

301

 

 

 

0.0

%

Core interest-earning assets

 

$

4,542,966

 

 

$

58,148

 

 

 

5.1

%

 

$

4,588,866

 

 

$

62,018

 

 

 

5.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized loan obligations

 

$

1,833,303

 

 

$

8,382

 

 

 

1.8

%

 

$

1,834,760

 

 

$

8,684

 

 

 

1.9

%

Secured credit

   agreements

 

 

1,286,517

 

 

 

11,454

 

 

 

3.6

%

 

 

1,587,709

 

 

 

11,548

 

 

 

2.9

%

Mortgage loan payable

 

 

50,000

 

 

 

454

 

 

 

0.0

%

 

 

16,667

 

 

 

 

 

 

0.0

%

Asset-specific financings

 

 

 

 

 

 

 

 

0.0

%

 

 

51,039

 

 

 

1,233

 

 

 

9.7

%

Total interest-bearing liabilities

 

$

3,169,820

 

 

$

20,290

 

 

 

2.6

%

 

$

3,490,175

 

 

$

21,465

 

 

 

2.5

%

Net interest income(3)

 

 

 

 

 

$

37,858

 

 

 

 

 

 

 

 

 

 

$

40,553

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash equivalents

 

$

281,831

 

 

$

7

 

 

 

0.0

%

 

$

307,638

 

 

$

10

 

 

 

0.0

%

Accounts receivable from

   servicer/trustee

 

 

105,479

 

 

 

 

 

 

0.0

%

 

 

95,080

 

 

 

 

 

 

0.0

%

Total interest-earning assets

 

$

4,930,276

 

 

$

58,155

 

 

 

4.7

%

 

$

4,991,584

 

 

$

62,028

 

 

 

5.0

%

 

(1)

Based on carrying value for loans, amortized cost for CRE debt securities and carrying value for interest-bearing liabilities. Calculated balances as the month-end averages.

(2)

Weighted average yield or financing cost calculated based on annualized interest income or expense divided by calculated month-end average outstanding balance.

(3)

Represents interest income on core interest-earning assets less interest expense on total interest-bearing liabilities. Interest income on Other Interest-earning assets is included in Other Income, net on the consolidated statements of income (loss) and comprehensive income (loss).

 

53


 

 

The following table presents the average balance of interest-earning assets and related interest-bearing liabilities, associated interest income and interest expense, and financing costs and the corresponding weighted average yields for the three months ended March 31, 2021 and 2020 (dollars in thousands):

 

 

 

Three Months Ended

 

 

 

March 31, 2021

 

 

March 31, 2020

 

 

 

Average

Amortized

Cost /

Carrying

Value(1)

 

 

Interest

Income/

Expense

 

 

Wtd. Avg.

Yield/

Financing

Cost(2)

 

 

Average

Carrying

Value(1)

 

 

Interest

Income/

Expense

 

 

Wtd. Avg.

Yield/

Financing

Cost(2)

 

Core Interest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

First mortgage loans

 

$

4,509,896

 

 

$

57,067

 

 

 

5.1

%

 

$

5,077,118

 

 

$

73,417

 

 

 

5.8

%

Retained mezzanine loans

 

 

33,070

 

 

 

1,081

 

 

 

13.1

%

 

 

19,734

 

 

 

682

 

 

 

13.8

%

CRE debt securities(3)

 

 

 

 

 

 

 

 

0.0

%

 

 

788,988

 

 

 

7,650

 

 

 

3.9

%

Core interest-earning assets

 

$

4,542,966

 

 

$

58,148

 

 

 

5.1

%

 

$

5,885,840

 

 

$

81,749

 

 

 

5.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Collateralized loan obligations

 

$

1,833,303

 

 

$

8,382

 

 

 

1.8

%

 

$

1,820,061

 

 

$

14,922

 

 

 

3.3

%

Secured credit

   agreements

 

 

1,286,517

 

 

 

11,454

 

 

 

3.6

%

 

 

2,531,367

 

 

 

20,561

 

 

 

3.2

%

Mortgage loan payable

 

 

50,000

 

 

 

454

 

 

 

0.0

%

 

 

 

 

 

 

 

 

0.0

%

Asset-specific financings

 

 

 

 

 

 

 

 

0.0

%

 

 

77,000

 

 

 

1,436

 

 

 

7.5

%

Secured revolving credit

    agreement

 

 

 

 

 

 

 

 

0.0

%

 

 

145,637

 

 

 

1,538

 

 

 

4.2

%

Total interest-bearing liabilities

 

$

3,169,820

 

 

$

20,290

 

 

 

2.6

%

 

$

4,574,065

 

 

$

38,457

 

 

 

3.4

%

Net interest income(4)