Toggle SGML Header (+)


Section 1: 424B4 (424B4)

424B4
Table of Contents

Filed Pursuant to Rule 424(b)(4)
Registration No. 333-217446

 

PROSPECTUS

11,000,000 Shares

 

 

LOGO

 

Common Stock

 

 

This is the initial public offering of common stock of TPG RE Finance Trust, Inc. We are selling 11,000,000 shares of our common stock in this offering.

The initial public offering price is $20.00 per share. Currently, there is no public market for our common stock. Our common stock has been approved for listing, subject to official notice of issuance, on the New York Stock Exchange (the “NYSE”) under the symbol “TRTX.”

We conduct our operations as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. To assist us in qualifying as a REIT, stockholders generally will be restricted from owning more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. In addition, our charter contains various other restrictions on the ownership and transfer of our common stock. See “Description of Capital Stock—Restrictions on Ownership and Transfer.”

Investing in our common stock involves risks. See “Risk Factors” beginning on page 37 of this prospectus for a discussion of certain risk factors that you should consider before making a decision to invest in our common stock.

 

 

 

    

Per Share

      

Total

 

Public offering price

   $ 20.00        $ 220,000,000  

Underwriting discount(1)

   $ 1.20        $ 13,200,000  

Proceeds, before expenses, to us

   $ 18.80        $ 206,800,000  

 

  (1) See “Underwriting” for a description of the compensation payable to the underwriters.

The underwriters have the option to purchase up to an additional 1,650,000 shares of our common stock from us at the public offering price less the underwriting discount, exercisable at any time or from time to time within 30 days after the date of this prospectus.

Neither the Securities and Exchange Commission (the “SEC”) nor any state or non-U.S. securities commission or authority has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares against payment in New York, New York on or about July 25, 2017.

 

 

Joint Book-Running Managers

 

BofA Merrill Lynch   Citigroup   Goldman Sachs & Co. LLC   Wells Fargo Securities

 

      Deutsche Bank Securities   J. P. Morgan   Morgan Stanley   Barclays            

 

 

Co-Managers

 

TPG Capital BD, LLC                JMP Securities

 

 

The date of this prospectus is July 19, 2017.


Table of Contents

TABLE OF CONTENTS

 

    

Page

 

Prospectus Summary

     1  

Risk Factors

     37  

Cautionary Statement Regarding Forward-Looking Statements

     90  

Use of Proceeds

     92  

Distribution Policy

     93  

Capitalization

     95  

Dilution

     97  

Selected Financial Information

     99  

Recent Developments

     101  

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

     107  

Business

     139  

Management

     175  

Our Manager and Our Management Agreement

     187  

Certain Relationships and Related Person Transactions

     202  

Principal Stockholders

     207  

Description of Capital Stock

     211  

Certain Provisions of Maryland Law and of our Charter and Bylaws

     217  

Shares Eligible for Future Sale

     223  

U.S. Federal Income Tax Considerations

     225  

ERISA Considerations

     254  

Underwriting

     258  

Legal Matters

     265  

Experts

     265  

Where You Can Find More Information

     265  

Index to Financial Statements

     F-1  

 

 

You should rely only on the information contained in this prospectus or any free writing prospectus prepared by us. We have not, and the underwriters have not, authorized any other person to provide you with different or additional information. If anyone provides you with different or additional information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate only as of the date on the cover of this prospectus. Our business, financial condition, liquidity, results of operations and prospects may have changed since that date.

 

 

Except where the context suggests otherwise, the terms “our 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; the term “TPG” refers to TPG Global, LLC, a Delaware limited liability company, and its affiliates; the term “TPG Fund” refers to any partnership or other pooled investment vehicle, separate account, fund-of-one or any similar arrangement or investment program sponsored, advised or managed (including on a subadvisory basis) by TPG, whether currently in existence or subsequently established (in each case, including any related alternative investment vehicle, parallel or feeder investment vehicle, co-investment vehicle and any entity formed in connection therewith, including any entity formed for investments by TPG and its affiliates in any such vehicle, whether invested as a limited partner or through general partner investments); the terms “stock” and “shares” refer, unless the context requires otherwise, to the common stock, $0.001 par value per share, and the Class A common stock, $0.001 par value per share, of TPG RE Finance Trust, Inc.; and the term “stockholders” refers, unless the context requires otherwise, to the holders of shares of such common stock and Class A common stock.

 

i


Table of Contents

Market Data

We use market data and industry forecasts and projections throughout this prospectus, and in particular in the sections entitled “Prospectus Summary” and “Business.” Such market data and industry forecasts and projections have been taken from publicly available industry publications. These sources generally state that the information they provide has been obtained from sources they believe to be reliable, but we have not investigated or verified the accuracy and completeness of such information. Forecasts, projections and other forward-looking information obtained from these sources are subject to the same qualifications and additional uncertainties regarding our forward-looking statements in this prospectus. See “Cautionary Statement Regarding Forward-Looking Statements.”

 

ii


Table of Contents

GLOSSARY OF TERMS

This glossary highlights some of the terms that we use elsewhere in this prospectus and is not a complete list of all the defined terms used herein.

“A-Note” means a senior participation interest in a mortgage loan secured by commercial real estate. A-Notes have a senior right to receive interest and principal related to the mortgage loan.

“Asset-specific financing” means a financing that is collateralized by a specific loan investment.

“B-Note” means a subordinate participation interest in a mortgage loan secured by commercial real estate. B-Notes have a subordinate right to receive interest and principal related to the mortgage loan.

“bridge loan” means a transitional loan with limited deferred fundings, with the exception of deferred fundings conditioned on the borrower’s satisfaction of certain collateral performance tests, where the business plan for the underlying property involves little to no capital expenditures related to base building renovations (e.g., building mechanical systems, lobbies, elevators and other amenities or areas shared by tenants), and the primary focus is on maintenance or improvement of current operating cash flow, or addressing minimal lease expirations or existing tenant vacancies.

“CDO” means a collateralized debt obligation issued by a special purpose entity, typically a trust.

“CLO” means a collateralized loan obligation issued by a special purpose entity, typically a trust. A CLO is a type of CDO collateralized by loans.

“CMBS” means mortgage-backed securities issued by a REMIC trust that are backed by mortgage loans on commercial real estate.

“commercial mortgage loan” means a loan secured by a mortgage or deed of trust against commercial real estate with a right to receive the payment of principal of and interest on the loan.

“commercial real estate CDO” means a CDO whose underlying trust assets are comprised of loans secured by commercial real estate or commercial real estate debt securities.

“construction loan” means a loan made to a borrower to fund the ground up construction of a commercial real estate property.

“debt service coverage ratio” means the number derived by dividing a property’s net operating income by the debt service payable on the loan relating to such property.

“debt yield” means the number derived by dividing a property’s net operating income by the amount of the total outstanding principal balance of the debt secured by the property, multiplied by 100 to derive a percentage.

“EBITDA” means earnings before interest, tax, depreciation and amortization.

“Fannie Mae” means the Federal National Mortgage Association.

“first mortgage loan” means a mortgage that, through a first lien position, gives priority to the lender of the first mortgage over all other lenders in the event of a default.

“fixed rate CMBS” means CMBS with a fixed interest rate.

 

iii


Table of Contents

“floating rate CMBS” means CMBS with a variable interest rate.

“floating rate first mortgage loan” means a first mortgage loan with a variable interest rate.

“Freddie Mac” means the Federal Home Loan Mortgage Corporation.

“GSE” means a government sponsored entity such as Fannie Mae and Freddie Mac.

“LIBOR” or “L” means the one-month U.S. dollar-denominated London Interbank Offered Rate unless otherwise noted.

“light transitional loan” means a transitional loan that is substantially funded at closing, with limited deferred fundings primarily to support leasing or ramp-up of operations for a property, with little or no capital expenditures required for base building renovation, and for which most capital expenditures are to pay for leasing commissions and improvements within a tenant’s leased space.

“LTV” means the “as-is” loan-to-value ratio, which is calculated as the total outstanding principal balance of a loan or participation interest in a loan plus any financing that is pari passu with or senior to such loan or participation interest at the time of origination or acquisition, divided by the applicable as-is real estate value at the time of origination or acquisition of such loan or participation interest in a loan. The “as-is” real estate value reflects our Manager’s estimates, at the time of origination or acquisition of a 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.

“match-index” means the process by which we seek to minimize the difference between the interest rate index (e.g., LIBOR) on an investment with the interest rate index on the financing used to fund a portion of the loan investment.

“mezzanine loan” means a loan made to the owner of a borrower under a mortgage loan and secured by a pledge of the equity interest(s) in such borrower. Mezzanine loans are subordinate to a first mortgage loan but senior to the owner’s equity.

“moderate transitional loan” means a transitional loan involving moderate deferred fundings where significant capital expenditures are required, and substantial base building renovation work must be undertaken before lease-up is feasible, and where the property has significant existing or expected vacancy.

“non-consolidated senior interest” means, in connection with any origination or co-origination of a mezzanine loan by us, the senior mortgage loan that is contemporaneously issued by the borrower to a senior mortgage lender or that is transferred by us to the co-originating senior mortgage lender. In either case, the senior mortgage loan is not included on our balance sheet. We retain only the mezzanine loan on our balance sheet.

“non-recourse CLO financing” means a CLO that is secured by the assets underlying the CLO and not recourse to the owner of the CLO in the event of default.

“originate” means to source and fund a loan.

“permanent stabilized financing” means longer term, typically fixed rate, financing on a stabilized, performing commercial real estate property.

“REMIC” means a real estate mortgage investment conduit.

“securitization” means the process of pooling loans or other income producing financial assets and issuing new financial instruments that are repaid primarily from the cash flows, servicing, collection or other liquidation of the underlying pooled assets.

 

iv


Table of Contents

“transitional loan” means a loan to a borrower for the purpose of maximizing value through retenanting, refurbishment or otherwise repositioning a commercial real estate property to increase long-term operating cash flow, in many cases prior to refinancing the property with longer term, typically fixed rate, financing upon asset stabilization.

 

v


Table of Contents

PROSPECTUS SUMMARY

This summary highlights information contained elsewhere in this prospectus, but it does not contain all of the information that you may consider important in making your investment decision to purchase our common stock in this offering. Therefore, you should read this entire prospectus carefully, including, in particular, the “Risk Factors” section and our historical financial statements and management’s discussion and analysis thereof.

Unless the context otherwise requires, the information in this prospectus assumes that the underwriters’ option to purchase additional shares of our common stock is not exercised.

Our Company

We are a commercial real estate finance company sponsored by TPG. We directly originate, acquire and manage commercial mortgage loans and other commercial real estate-related debt instruments 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. As of March 31, 2017, approximately 73% of our loans (measured by commitment) were secured by properties located in the ten largest U.S. metropolitan areas, and approximately 88% of our loans (measured by commitment) were secured by properties located in the 25 largest U.S. metropolitan areas.

As of March 31, 2017, our portfolio consisted of 54 first mortgage loans (or interests therein) with an aggregate unpaid principal balance of $2.6 billion and four mezzanine loans with an aggregate unpaid principal balance of $58.5 million, and collectively having a weighted average credit spread of 5.2%, a weighted average all-in yield of 6.6%, a weighted average term to extended maturity (assuming all extension options have been exercised by borrowers) of 3.0 years and a weighted average LTV of 58.3%. As of March 31, 2017, 97.2% of the loan commitments in our portfolio consisted of floating rate loans, and 97.6% of the loan commitments in our portfolio consisted of first mortgage loans (or interests therein). We also had $577.5 million of unfunded loan commitments as of March 31, 2017, our funding of which is subject to satisfaction of borrower milestones. In addition, as of March 31, 2017, we held six commercial mortgage-backed securities (“CMBS”) investments, with an aggregate face amount of $97.9 million and a weighted average yield to final maturity of 4.4%.

We believe that favorable market conditions have provided attractive opportunities for non-bank lenders such as us to finance commercial real estate properties that exhibit strong fundamentals but require more customized financing structures and loan products than regulated financial institutions can provide in today’s market. We intend to continue our track record of capitalizing on these opportunities and growing the size of our portfolio.

We believe our relationship with our Manager, TPG RE Finance Trust Management, L.P., an affiliate of TPG, and its access to the full TPG platform, including TPG Real Estate, TPG’s real estate investment platform, will allow us to achieve our objective. TPG is a leading global private investment firm that has discrete investment platforms focused on a wide range of alternative investment products, including real estate. Founded in 1992, TPG had assets under management of over $72 billion as of December 31, 2016. TPG Real Estate and the other TPG platforms provide us with a breadth of resources, relationships and expertise.

We were incorporated in October 2014 and commenced operations in December 2014 with $713.5 million of equity commitments from seven third-party investors, many of which have significant

 



 

1


Table of Contents

investment relationships with funds sponsored by TPG, and $53.7 million from TPG affiliates. In December 2014, we acquired a controlling interest in an initial portfolio of commercial real estate loans representing $1.9 billion of unpaid principal balance and an additional $635.9 million of undrawn loan commitments. We funded the purchase with proceeds from an initial share issuance to our initial investors and match-indexed seller financing structured as a non-recourse collateralized loan obligation (“CLO”). We refer to these transactions collectively as our “Formation Transaction.”

From our inception through March 31, 2017, we have:

 

    Assembled a highly experienced team with substantial commercial real estate, credit underwriting, lending, asset management and public company management experience, with deep market knowledge and relationships to execute on our investment strategy;

 

    Directly originated 32 loans consistent with our investment strategy with total loan commitments of $2.2 billion and acquired six loans with total loan commitments of $433.1 million, in each case subsequent to the Formation Transaction;

 

    Raised an additional $433.3 million of equity commitments from new and existing institutional investors, including TPG affiliates;

 

    Grown and diversified our funding sources by arranging secured revolving repurchase facilities with six counterparties that have a weighted average term to maturity (assuming we have exercised all extension options and term out provisions) of 3.6 years with aggregate commitments of $1.9 billion, each as of March 31, 2017, and established a capital markets team to arrange financing for our loans and other investments;

 

    Realized $1.7 billion of principal repayments comprised of $1.5 billion related to 39 loans acquired in connection with the Formation Transaction and $182.1 million relating to our other loans; and

 

    Paid quarterly cash dividends to our stockholders every full calendar quarter since the first quarter of 2015.

We operate our business as one segment which directly originates and acquires commercial mortgage loans and other commercial real estate-related debt instruments. 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 have been organized and have operated in conformity with the requirements for qualification and taxation as a REIT under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”), and we believe that our current organization 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 of 1940, as amended (the “Investment Company Act”).

Our Relationship with our Manager, TPG Real Estate and TPG

Since our inception, we have been managed by TPG RE Finance Trust Management, L.P., an affiliate of TPG. Our Manager is an SEC-registered investment adviser. Our Manager’s senior leadership team is comprised of TPG employees and is led by Greta Guggenheim, our chief executive officer and president, a partner of TPG and the chair of our Manager’s investment committee, who has more than 30 years of experience in commercial real estate lending. Ms. Guggenheim was co-founder and chief investment officer of Ladder Capital Corp

 



 

2


Table of Contents

(NYSE: LADR) (“Ladder”), a prominent publicly-traded commercial real estate debt finance company. Additionally, our Manager’s senior leadership team includes: (1) Robert Foley, our chief financial and risk officer, a managing director of TPG and a member of our Manager’s investment committee, who has more than 30 years of experience in commercial real estate debt financing through his tenures as a co-founder, chief financial officer and chief operating officer at Gramercy Capital Corp. (NYSE: GPT) and senior commercial real estate lending roles at Goldman Sachs & Co. LLC and Bankers Trust Company (acquired by Deutsche Bank); (2) Peter Smith, our vice president, a managing director of TPG and a member of our Manager’s investment committee, who has more than 25 years of experience in commercial real estate debt financing and, prior to joining TPG, was a managing director at Ladder; and (3) Deborah Ginsberg, our vice president and secretary, a managing director of TPG and a member of our Manager’s investment committee, who has 15 years of commercial real estate debt financing and legal experience and, prior to joining TPG, was a principal with Blackstone Real Estate Debt Strategies, an affiliate of The Blackstone Group L.P. focused on real estate debt investments.

TPG Real Estate, TPG’s real estate platform, includes both TPG Real Estate Partners, TPG’s real estate equity investment platform, and us, currently TPG’s dedicated real estate debt investment platform. Collectively, TPG Real Estate managed more than $5.5 billion in assets at December 31, 2016, which included commercial real estate holdings in the United States consisting of 835 properties comprising approximately 65.6 million square feet. TPG Real Estate’s teams work across TPG’s New York, San Francisco and London offices and have 16 and 27 employees, respectively, between TPG’s real estate debt investment platform and TPG’s real estate equity platform.

TPG is a leading global alternative investment firm founded in 1992 with over $72 billion of assets under management as of December 31, 2016. TPG currently has over 500 investment and operating professionals based across 17 offices worldwide, including San Francisco, Fort Worth, New York, Boston, Dallas, Houston, Austin and London. TPG operates a global alternative investment platform that encompasses private equity, private credit and real estate. In addition to TPG Real Estate, TPG’s investment business includes:

 

    TPG Capital, TPG’s flagship private equity business, which invests in middle- and large- market companies globally, with a primary focus on North America;

 

    TPG Asia, which invests in middle- and large-market companies across Asia;

 

    TPG Growth, which invests globally in small- and middle-market growth equity;

 

    TPG Biotechnology Partners, which invests in early- and late-stage venture capital opportunities in the biotechnology and related life sciences industries;

 

    TPG ART, which invests in alternative and renewable technologies;

 

    TPG Sixth Street Partners, which invests in credit-oriented opportunities and other special situations globally across the credit cycle;

 

    TPG Public Equity Partners, which invests in the public markets globally; and

 

    TPG Funding, which supports TPG’s investment platforms with fundraising and capital markets expertise.

TPG Real Estate and the other TPG platforms provide us with a breadth of resources, relationships and expertise. We believe TPG’s investment experience, established infrastructure and long-standing strategic

 



 

3


Table of Contents

relationships will help us operate efficiently as a publicly-traded company and continue to generate an attractive pipeline of investment opportunities and access debt and equity capital to fund our operating and investing activity on favorable terms.

Our Manager consults regularly with TPG, including TPG Real Estate Partners, in connection with our investment activities. We believe we benefit from their market expertise, insights into sector and macroeconomic trends and intensive due diligence capabilities, which help us discern market conditions that vary across industries and credit cycles, identify favorable investment opportunities and manage our portfolio of investments. We believe that the vast knowledge gained from TPG Real Estate’s investment activities greatly enhances our decision making when evaluating lending opportunities.

Market Opportunities

Commercial real estate fundamentals in the U.S. have improved since the global financial crisis of 2008 with positive overall supply and demand dynamics. Steady economic growth, reflected in year-over-year increases in the global gross domestic product and continued low rates of unemployment and inflation, combined with continued offshore capital flows into the U.S., have boosted and sustained demand for commercial real estate properties. We believe these factors have combined to create a robust commercial real estate market with a large, continuing need for flexible debt capital to finance commercial real estate properties undergoing some form of transition (such as voluntary refurbishment or other form of repositioning).

We believe there is a significant opportunity for us to maintain and grow our market share of the commercial real estate debt market. This opportunity is predicated on systemic constraints on the supply of commercial real estate debt capital provided by regulated financial institutions, a drastically reduced new issuance market for CMBS, continued strong demand for secured financing from commercial property owners, limited additions to new supply of commercial property in comparison to long-term averages and the proven ability of our Manager’s senior investment professionals to successfully identify and execute a differentiated, credit-focused investment approach for transitional lending.

Reduction in Supply of Commercial Real Estate Debt Capital

The commercial real estate debt market has historically been funded by U.S. commercial banks, foreign banks, life insurance companies, government sponsored entities (“GSEs”), CMBS and other sources of capital, including private debt funds and commercial mortgage REITs. Regulatory demands on U.S. and foreign banks, including Basel III and the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), have increased the required capital charges that such lenders must hold against certain types of real estate debt instruments and have caused many traditional regulated financial institutions, including U.S. banks and foreign banks, to become less competitive in the transitional commercial real estate debt market. In response, non-regulated lenders such as us have been formed to fill the resulting financing shortfall. In 2016, according to Real Capital Analytics, non-traditional providers of capital, primarily non-bank lenders (including commercial mortgage REITs), comprised approximately 10% of the commercial real estate debt market, an increase of four percentage points, or 66%, since 2012.

 



 

4


Table of Contents

 

LOGO

Source: Real Capital Analytics, March 2017

Regulatory shifts in the U.S. and Europe, related especially to risk retention requirements and increased capital charges for certain forms of securitized assets, have caused the CMBS market to shrink by 67% between 2007 and 2016, according to Commercial Mortgage Alert. The CMBS new issuance market has re-emerged far narrower in scope and scale, with CMBS new issue volume in 2016 of $76.0 billion, virtually in-line with the CMBS market’s long-term average new issue volume of $78.1 billion, but dramatically less than the CMBS new issue volume in 2006 and 2007, according to Commercial Mortgage Alert.

Historical CRE CMBS Issuance (dollars in billions)

 

LOGO

Source: Commercial Mortgage Alert, December 2016

We believe the decline in new issuance volume of short-term (maturities of five years or less) CMBS will continue to benefit our transitional lending business model. Traditionally, short-term floating rate CMBS and fixed rate CMBS were a meaningful substitute for a transitional floating rate loan originated by a non-regulated lender such as us. Due primarily to the same regulatory pressures constraining the entire CMBS market, and a decline in the number and size of investment funds dedicated to investing in short-term floating rate securitized

 



 

5


Table of Contents

products, new issuance volume in the short-term CMBS market plummeted by 95% between 2006 and 2016 according to Commercial Mortgage Alert. We expect this trend to continue.

Historical CRE Short-Term CMBS Issuance

 

LOGO

Source: Commercial Mortgage Alert, December 2016

Similarly, issuances of commercial real estate CDOs have declined since the global financial crisis from approximately $42 billion in 2007 to approximately $3 billion in 2016 according to Commercial Mortgage Alert. These CDO issuances historically financed lenders who originated loans to owners of transitional properties seeking more flexible loan structures than offered by banks, life insurance companies and CMBS lenders. The sharp contraction in the CDO market has reduced funding capacity for certain of our competitors by approximately $39 billion.

We believe increased regulation, retrenchment by U.S. and foreign banks, sharply reduced new issuance volumes in the CMBS and CDO markets and significant upcoming maturities of commercial real estate debt will continue to contribute to a commercial real estate financing void. Consequently, we believe non-regulated lenders such as us will continue to capture an increasing share of the commercial real estate transitional lending market.

Continued Strong Demand for Commercial Real Estate Debt Capital

Increasing transaction volumes and strong property price appreciation over the past seven years have supported the growing need for debt capital in connection with refinancing and sales transactions. According to Real Capital Analytics, domestic commercial real estate transaction volumes grew by nearly eight times (a compounded annual growth rate of 34%) between 2009 and 2015, from $69 billion to $546 billion. Transaction volumes declined slightly in 2016, to $494 billion.

 



 

6


Table of Contents

CRE Transaction Volume

 

 

LOGO

Source: Real Capital Analytics, March 2017

In addition to increased sales volume, commercial property values have increased significantly since 2009 according to Real Capital Analytics, contributing to larger individual acquisition, sales and refinancing transactions that in turn require more debt capital.

Moody’s / Real Capital Analytics Commercial Property Price Index (dollars in billions)

 

LOGO

Source: Real Capital Analytics, January 2017

We believe healthy commercial real estate fundamentals persist primarily because new additions to supply have remained below the long-term average since the onset of the global financial crisis. New additions to inventory result primarily from new construction, financing for which has been sharply constrained by recent financial regulation.

 



 

7


Table of Contents

Supply: New Completions as a % of Existing Stock(1)

 

LOGO

 

(1) Supply growth is an equal-weighted average of five major property sectors: apartment, industrial, mall, office and strip center.

Sources: Reis, Inc. and AXIO Commercial Real Estate (apartment); CBRE Group, Inc. (industrial); The International Council of Shopping Centers (mall); Green Street Advisors, LLC (office); Reis, Inc. (strip center); March 2017.

Demand from borrowers for commercial real estate debt capital, particularly the flexible capital we can provide, remains at historically high levels. Many private institutional investors in commercial real estate employ strategies to acquire a property, create value and promptly exit through the sale of the repositioned or renovated property. We believe these investment strategies are most conducive to the short-term, floating rate transitional loan investments that we target.

We believe continued, significant upcoming maturities of commercial real estate debt held by a variety of institutional lenders, most notably banks, as well as CMBS, will sustain borrower demand for new loans, including the transitional first mortgage loans that we target. In addition, despite the recovery and stabilization of real estate fundamentals in recent years, current lending practices are more conservative than those prevailing prior to the global financial crisis. We believe this trend has created, and will continue to create, an opportunity for us to originate well-structured, attractively priced commercial real estate loan investments.

We believe sustained high levels of transaction volume, property values that have fully recovered from the impact of the global financial crisis and limited new additions to supply in comparison to long-term averages have and will continue to drive strong demand for debt capital by the institutional owners of transitional properties who are our target borrowers.

Differentiated, Credit-Focused Investment Approach

We focus on financing properties that are underserved by regulated financial institutions and other traditional commercial real estate lending firms. To do this, we employ a credit-focused investment approach, which is informed by several underwriting parameters and investment themes. Accordingly, we shift our target assets and modify our portfolio composition in response to, and in anticipation of, changing market trends,

 



 

8


Table of Contents

capital flows and real estate fundamentals. Our credit-focused investment approach focuses on the following attributes:

 

    Underwriting. We underwrite our loan exposure with a focus on value relative to replacement cost, discounting rents relative to market rents depending on the geographic market and considering the strategies that will provide an exit to us at our loan maturity, which are typically a sale or a refinancing with permanent stabilized financing.

 

    Market Demographics. We seek to identify markets that best represent opportunities to capitalize on changing societal demographics and those markets that we believe exhibit advantageous commercial real estate investment attributes, such as strong population growth, positive household income and employment trends and attractive real estate supply/demand dynamics. A significant portion of the workforce today, not just isolated to younger generations, is opting to live and work in urban environments close to work, transit and amenities, which are increasingly facilitating individuals’ ability to balance their careers and lifestyles. In these markets, we evaluate the sustainability of demand drivers and the ability to maintain absorption rates through moderate recessionary periods. We believe our underwriting and structuring of each loan in these types of markets take into account the changing ways in which office, retail and industrial tenants use their space while protecting us in a downside scenario based on particular market fundamentals.

 

    Changing Tenant Demand. We observe and react to changing tenant demands. For instance, over the last five years, office tenants have increasingly sought “creative” office space, which is characterized by open floor plans, natural light and high ceilings. With land often constrained in gateway cities, many existing, older office buildings are being redesigned and re-developed to provide flexibility and meet this changing tenant demand. These reuse projects require capital, flexible loan structures and time to re-lease the property to achieve stabilization. We seek to finance these adaptive reuse projects with capital that provides owners the ability to execute their business plans. In our underwriting, we consider the leasing trends that often accompany this changing tenant demand, specifically around densification and open floor plans. We believe a longer lease up period extends the duration of our cash flow.

Our Competitive Strengths

We believe that we distinguish ourselves from other commercial real estate finance companies in a number of ways, including through the following competitive strengths:

 

   

Experienced, Cycle-Tested Senior Management Team. TPG has handpicked a team of commercial real estate professionals with substantial commercial real estate, lending, asset management and public company management experience. This group of cycle-tested professionals is led by Greta Guggenheim, our chief executive officer and president and a partner of TPG, who has more than 30 years of experience in commercial real estate lending. During her tenure as co-founder and chief investment officer of Ladder, she was instrumental in founding and developing a publicly-traded commercial real estate debt investment platform. Additionally, our Manager’s senior leadership team includes Robert Foley, our chief financial and risk officer and a managing director of TPG, who has more than 30 years of experience in commercial real estate debt financing through his tenure as a co-founder, chief financial and chief operating officer at Gramercy Capital Corp., where he was instrumental in establishing and operating its investment, capital markets, asset management, financial reporting and compliance functions. Our Manager’s senior leadership team also includes Peter Smith, our vice president and a managing director of TPG, who has more than 25 years of experience in commercial real estate debt financing, and Deborah Ginsberg, our vice

 



 

9


Table of Contents
 

president and secretary and a managing director of TPG, who has 15 years of commercial real estate debt financing and legal experience. Each of the foregoing individuals has experience through multiple real estate cycles, including both lending and loan restructuring experience, which we believe provides valuable insight and perspective into the underwriting and structuring of new investments for our portfolio. We believe the relationships with borrowers and other counterparties that our Manager’s senior leadership team and other TPG senior investment professionals have built over the course of their careers are instrumental in creating attractive, off-market opportunities for us.

 

    Established, Scalable Platform with Operating History. We have established a direct loan origination platform, arranged financing to grow our asset base and developed an asset management function to oversee and protect our portfolio, all of which have enabled us to achieve consistent operating performance and to pay regular quarterly cash dividends to our stockholders in each full quarter since our inception. Our origination platform has achieved scale in transaction volume, with an emphasis on direct loan origination to property owners and limited reliance on Wall Street banks for loan product. Our financing sources are diversified and include asset-level financing on favorable terms to support our lending and other investment activities, which financing is primarily match-indexed to enable us to benefit from a rising interest rate environment through increases in our net interest margin. From loan origination through repayment, we actively manage each of the loans in our portfolio and have demonstrated a record of responsible capital stewardship having sustained no credit losses or impairments in our portfolio from inception to March 31, 2017.

 

    Relationship with TPG. We benefit significantly from our relationship with TPG generally through the firm’s extensive network of relationships, its deep capital markets experience, its demonstrated capital stewardship and its commitment of resources to our Manager. TPG’s broad based experience and reputation as an alternative asset management firm benefit us by providing access to off-market origination and acquisition opportunities, as well as our Manager’s and its affiliates’ market expertise, insights into macroeconomic trends and intensive due diligence capabilities, all of which help us more quickly discern broad market conditions that frequently vary across different markets and credit cycles.

 

    TPGs Alignment of Interest. TPG’s substantial equity investment in our company strongly aligns TPG’s interest with the interests of our stockholders. Upon completion of this offering, we expect that TPG and its affiliates will beneficially own approximately 12.3% of our outstanding stock (or approximately 11.9% of our outstanding stock if the underwriters exercise their option to purchase additional shares of our common stock in full). In addition, upon completion of this offering, three of our seven directors will be partners of TPG.

 

   

Relationship with TPG Real Estate. We also benefit significantly from our relationship with TPG Real Estate Partners, TPG’s real estate equity investment platform, which has more than $5.5 billion in assets under management and employs 27 professionals across TPG’s New York, San Francisco and London offices. TPG Real Estate Partners focuses primarily on investments in companies with substantial real estate holdings, property portfolios, and select single assets primarily located in North America and Europe. Employing a value-add approach to investing, TPG Real Estate Partners leverages the full resources of TPG’s global network to optimize property performance and enhance platform capabilities. Through its investments in various real estate operating platforms, including, without limitation, Parkway, Inc. (NYSE: PKY), Taylor Morrison Home Corporation (NYSE: TMHC), Evergreen Industrial Properties, Strategic Office Partners and Cushman & Wakefield, TPG Real Estate Partners provides direct insights to help inform our views on specific markets, economic and fundamental trends, sponsors, property types and underlying

 



 

10


Table of Contents
 

commercial real estate values. We believe this informational advantage enables us to identify and pursue favorable investment opportunities with differentiated insights.

 

    Sourcing Capabilities. In addition to our Manager’s senior leadership team, TPG employs a team of experienced professionals with extensive experience directly originating loans and sourcing off-market investment opportunities and makes this team available to our Manager. The senior investment professionals on this team have an average of 17 years of commercial real estate investment experience. Collectively, the senior investment professionals provided by TPG to our Manager utilize broad, deep relationships in the real estate community, including owners, operators, developers and real estate brokers, as well as TPG’s extensive network of relationships. These relationships have generated, and we believe will continue to generate, an attractive pipeline of commercial real estate loan opportunities for us in markets that exhibit favorable long-term demographics and real estate fundamentals.

 

    Rigorous Credit Underwriting and Structuring Capacities. Our Manager has established and fosters a thorough and disciplined credit culture, reflected in the process through which each investment is evaluated, that takes a bottom-up, equity-oriented approach to property underwriting. As part of our underwriting process, our Manager performs detailed credit and legal reviews and borrower background checks and evaluates each property’s market, sponsorship, tenancy, occupancy and financial structure, and engages independent third-party appraisers, engineers and environmental experts to confirm our underwritten property values and assess the physical and environmental condition of our loan collateral. Prior to closing on a loan, our Manager’s deal team inspects each property and assesses competitive properties in the surrounding market. Our Manager’s process culminates with a comprehensive review of each potential investment by our Manager’s investment committee. We believe that this rigorous approach enables our Manager to structure our loans to provide innovative solutions for our borrowers with appropriate downside protection to us, while maintaining a portfolio of assets with strong credit metrics that generate attractive risk-adjusted returns.

 

    Proactive Asset Management. We proactively manage the assets in our portfolio from closing to final repayment. We are party to an agreement with Situs Asset Management, LLC (“Situs”), one of the largest commercial mortgage loan servicers, pursuant to which Situs provides us with dedicated asset management employees for performing asset management services pursuant to our proprietary guidelines. This dedicated asset management team maintains regular contact with borrowers, co-lenders and local market experts to monitor the performance of the underlying collateral, anticipate borrower, property and market issues and, to the extent necessary or appropriate, enforce our rights as the lender. In addition to anticipating performance issues, the asset management team seeks to identify loans that are likely to prepay and to proactively restructure these loans to preserve their duration, cash flow and investment earnings to us. Regular, proactive contact by the dedicated asset management team with our borrowers also provides our Manager with the opportunity to identify prospective origination opportunities for us before those opportunities are brought to the larger market. In addition, we also contract with a third-party servicer to service our loans pursuant to our proprietary guidelines.

Our Investment Strategy

The loans we target for origination and investment typically have the following characteristics:

 

    Unpaid principal balance greater than $50 million;

 

    Stabilized LTV of less than 70% with respect to individual properties;

 



 

11


Table of Contents
    Floating rate loans tied to LIBOR and spreads of 350 to 700 basis points over LIBOR;

 

    Secured by properties that are: (1) primarily in the office, mixed use, multifamily, industrial, retail and hospitality real estate sectors; (2) expected to reach stabilization within 24 months of the origination or acquisition date; and (3) located in primary and select secondary markets in the U.S. with multiple demand drivers, such as employment growth, medical infrastructure, universities, convention centers and attractive cultural and lifestyle amenities; and

 

    Well-capitalized sponsors with substantial experience in particular real estate sectors and geographic markets.

We believe that our current investment strategy provides significant opportunities to our stockholders for attractive risk-adjusted returns over time. However, to capitalize on the investment opportunities at different points in the economic and real estate investment cycle, we may modify or expand our investment strategy. We believe that the flexibility of our strategy supported by our Manager’s significant commercial real estate experience and the extensive resources of TPG and TPG Real Estate will allow us to take advantage of changing market conditions to maximize risk-adjusted returns to our stockholders.

Our Target Assets

We invest primarily in commercial mortgage loans and other commercial real estate-related debt instruments, focusing on loans secured by properties primarily in the office, mixed use, multifamily, industrial, retail and hospitality real estate sectors in primary and select secondary markets in the U.S., including, but not limited to, the following:

 

    Commercial Mortgage Loans. We intend to continue to focus on directly originating and selectively acquiring first mortgage loans. These loans are secured by a first mortgage lien on a commercial property, may vary in duration, predominantly bear interest at a floating rate, may provide for regularly scheduled principal amortization and typically require a balloon payment of principal at maturity. These investments may encompass a whole commercial mortgage loan or may include a pari passu participation within a commercial mortgage loan.

 

    Other Commercial Real Estate-Related Debt Instruments. Although we expect that originating and selectively acquiring commercial first mortgage loans will be our primary area of focus, we also expect to opportunistically originate and selectively acquire other commercial real estate-related debt instruments, subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and exclusion or exemption from regulation under the Investment Company Act, including, but not limited to, subordinate mortgage interests, mezzanine loans, secured real estate securities, note financing, preferred equity and miscellaneous debt instruments.

Our portfolio currently consists of predominantly floating rate first mortgage loans secured by multi-family, hotel, office, industrial, condominium, mixed use, retail and other assets. While our target assets include other forms of real estate debt, we expect that the majority of our assets following this offering will be consistent with our current portfolio, with the exception that we expect a reduction in our exposure to construction loans and loans secured by residential condominiums.

The allocation of our capital among our target assets will depend on prevailing market conditions at the time we invest and may change over time in response to different prevailing market conditions. We may structure our investments using one or more of our target assets in order to employ structural leverage onto our balance sheet. In addition, in the future, we may invest in assets other than our target assets or change our target assets, in each case subject to maintaining our qualification as a REIT for U.S. federal income tax purposes and our exclusion or exemption from regulation under the Investment Company Act.

 



 

12


Table of Contents

Our Portfolio

As of March 31, 2017, our portfolio consisted of 54 first mortgage loans (or interests therein) with an aggregate unpaid principal balance of $2.6 billion and four mezzanine loans with an aggregate unpaid principal balance of $58.5 million, and collectively having a weighted average credit spread of 5.2%, a weighted average all-in yield of 6.6%, a weighted average term to extended maturity (assuming all extension options have been exercised by borrowers) of 3.0 years and a weighted average LTV of 58.3%. As of March 31, 2017, 97.2% of the loan commitments in our portfolio consisted of floating rate loans, and 97.6% of the loan commitments in our portfolio consisted of first mortgage loans (or interests therein). We also had $577.5 million of unfunded loan commitments as of March 31, 2017, our funding of which is subject to satisfaction of borrower milestones. As of March 31, 2017, approximately 73% of our loans (measured by commitment) were secured by properties located in the ten largest U.S. metropolitan areas, and approximately 88% of our loans (measured by commitment) were secured by properties located in the 25 largest U.S. metropolitan areas. In addition, as of March 31, 2017, we held six CMBS investments, with an aggregate face amount of $97.9 million and a weighted average yield to final maturity of 4.4%.

From our inception through March 31, 2017, we have sustained no credit losses or impairments.

As of March 31, 2017, our portfolio, excluding our investments in CMBS, had the following diversification statistics based on loan commitments:

 

LOGO

 



 

13


Table of Contents

As of March 31, 2017, our investments in CMBS had the following diversification statistics based on unpaid principal balance:

 

LOGO

As of March 31, 2017, 97.2% of the loan commitments in our portfolio consisted of floating rate loans, and 97.6% of the loan commitments in our portfolio consisted of first mortgage loans (or interests therein):

 

 

LOGO

As of May 31, 2017, we held 13 loans secured by condominium units involving approximately $794.9 million of loan commitments, $514.4 million of carrying value and 1.0 million of remaining sellable square feet.

 



 

14


Table of Contents

Of this square footage, approximately 1.0 million square feet are comprised of residential condominium units and 8,800 square feet are comprised of a single retail condominium unit. Our credit and underwriting procedures generally seek to limit our economic exposure to risks due to failure to complete the condominium project, cost overruns, declines in selling prices or the pace of condominium unit sales. We typically employ various credit and structural protections in our condominium loan agreements, including pre-sale requirements with meaningful cash deposits, accelerated minimum release prices and completion guarantees. Consequently, our weighted average net loan exposure per square foot for unsold condominium units was $445, or approximately 53.7% of $829, which is the weighted average net sales price per square foot for condominium units subject to executed sales contracts as of May 31, 2017.

Financing Strategy and Financial Risk Management

As part of our leverage strategy, we have financed ourselves through a combination of secured revolving repurchase facilities, non-recourse CLO financing and asset-specific financing structures. In certain instances, we originate our mezzanine loans in connection with the contemporaneous issuance of a first mortgage loan to a third-party lender or the non-recourse transfer of a first mortgage loan originated by us. In either case, the senior mortgage loan is not included on our balance sheet, and we refer to such senior loan interest as a “non-consolidated senior interest.” When we originate a loan in connection with the contemporaneous issuance or the non-recourse transfer of a non-consolidated senior interest, we retain on our balance sheet a mezzanine loan. Over time, in addition to these types of financings, we may use other forms of leverage, including secured and unsecured warehouse facilities, structured financing, derivative instruments and public and private secured and unsecured debt issuances by us or our subsidiaries. We generally seek to match-fund and match-index our investments by minimizing the differences between the durations and indices of our investments and those of our liabilities, respectively, including in certain instances through the use of derivatives; however, under certain circumstances, we may determine not to do so or we may otherwise be unable to do so. We may also issue additional equity, equity-related and debt securities to fund our investment strategy.

Investment Guidelines

Upon completion of this offering, our board of directors will have approved the following investment guidelines:

 

    No investment will be made that would cause us to fail to maintain our qualification as a REIT under the Internal Revenue Code.

 

    No investment will be made that would cause us or any of our subsidiaries to be required to be registered as an investment company under the Investment Company Act.

 

    Our Manager will seek to invest our capital in our target assets.

 

    Prior to the deployment of our capital into our target assets, our Manager may cause our capital to be invested in any short-term investments in money market funds, bank accounts, overnight repurchase agreements with primary Federal Reserve Bank dealers collateralized by direct U.S. government obligations and other instruments or investments determined by our Manager to be of high quality.

 

   

Not more than 25% of our Equity (as defined in our Management Agreement (as defined below) with our Manager) may be invested in any individual investment without the approval of a majority of our independent directors (it being understood, however, that for purposes of the foregoing concentration limit, in the case of any investment that is comprised (whether through a structured

 



 

15


Table of Contents
 

investment vehicle or other arrangement) of securities, instruments or assets of multiple portfolio issuers, such investment for purposes of the foregoing limitation will be deemed to be multiple investments in such underlying securities, instruments and assets and not the particular vehicle, product or other arrangement in which they are aggregated).

 

    Any investment in excess of $300 million requires the approval of a majority of our independent directors.

These investment guidelines may be amended, supplemented or waived pursuant to the approval of our board of directors (which must include a majority of our independent directors) from time to time, but without the approval of our stockholders.

Recent Developments

The information in this section, and elsewhere in this prospectus, as of June 30, 2017 is preliminary and subject to change.

Our Portfolio

Closed Originations

During the three months ended March 31, 2017, we originated five first mortgage loans, including two non-consolidated senior interests, and two mezzanine loans with an aggregate commitment amount of $343.4 million, an aggregate initial funding amount of $194.8 million, an aggregate deferred funding commitment of $57.1 million, a weighted average credit spread of LIBOR plus 5.6%, a weighted average term to extended maturity of 4.9 years (assuming all extension options have been exercised by borrowers), and a weighted average LTV of 63.6%. These loans were funded with a combination of cash on hand, borrowings of approximately $129.0 million under our secured revolving repurchase facilities and note-on-note financing arrangements and the sale of non-consolidated senior interests of $91.5 million.

During the three months ended June 30, 2017, we originated three first mortgage loans with an aggregate commitment amount of $332.4 million, an aggregate initial funding amount of $283.1 million, an aggregate deferred funding commitment of $49.3 million, a weighted average credit spread of LIBOR plus 3.9%, a weighted average term to extended maturity of 4.3 years (assuming all extension options have been exercised by borrowers), and a weighted average LTV of 66.8%. These loans were funded with a combination of cash on hand and borrowings of approximately $154.5 million under our secured revolving repurchase facilities. With respect to one of these loans, we expect to borrow approximately $60.9 million under one of our secured revolving repurchase facilities, although there can be no assurance that this borrowing will occur in the size contemplated, or at all.

During the three months ended June 30, 2017, we purchased four CMBS investments with an aggregate face amount of $59.6 million and a weighted average yield to final maturity of 2.1%. Two of the CMBS investments with an aggregate face amount of $19.8 million had a rating of AAA/AAA. The remaining two CMBS investments with an aggregate face amount of $39.8 million are bonds supported by project loans that are backed by the full faith and credit of the U.S. Treasury. These investments were funded with a combination of cash on hand and borrowings of $18.4 million.

Repayments

During the three months ended June 30, 2017, we received principal repayments totaling $762.7 million with respect to ten first mortgage loans that were repaid in full. The weighted average credit spread of these

 



 

16


Table of Contents

loans, based on unpaid principal balance at the time of repayment in full, was 5.3%. Proceeds from these loan repayments were utilized to retire approximately $359.1 million of borrowings under our CLO and approximately $184.3 million of borrowings under our secured revolving repurchase facilities. Amounts so repaid under our secured revolving repurchase facilities create additional borrowing capacity for new loan originations, subject to approval rights reserved to our lenders. The difference between aggregate loan repayments in full and aggregate repayments under our borrowing arrangements of approximately $219.3 million represents cash available to us to fund new loan investments. Additionally, we received partial repayments of $39.7 million in connection with ten loans with a weighted average credit spread of 5.0%.

During the three months ended June 30, 2017, we received principal repayments totaling $28.0 million, consisting of $71,000 in partial repayments and $27.9 million in repayments in full, in connection with four CMBS investments. Proceeds from these repayments were utilized to retire $19.2 million of borrowings under our secured revolving repurchase facilities. The difference between aggregate CMBS repayments and repayments under our secured revolving repurchase facilities of approximately $8.8 million represents cash available to us to fund new investments.

Portfolio Composition

Our loan portfolio was broadly diversified by property type as of March 31, 2017 and May 31, 2017:

 

As of March 31, 2017

          

As of May 31, 2017

 

Property Type

   % of Commitments           

Property Type

   % of Commitments  

Office

     26.2     

Office

     26.8

Hotel

     25.8     

Condominium

     25.8

Condominium

     24.1     

Hotel

     19.8

Multifamily

     10.2     

Mixed-Use

     10.1

Retail

     6.1     

Multifamily

     7.6

Industrial

     3.7     

Retail

     6.6

Mixed-Use

     3.6     

Industrial

     2.9

Other

     0.3     

Other

     0.3
  

 

 

         

 

 

 

Total

     100.0 %(1)       Total      100.0 %(1) 
  

 

 

         

 

 

 

 

(1) Amounts may not sum to 100% due to rounding.

Our Loan Origination Pipeline

As of June 30, 2017, our loan origination pipeline consisted of 41 potential new commercial mortgage loan investments representing anticipated total loan commitments of approximately $3.8 billion. We are in various stages of our evaluation process with respect to these loans. We are reviewing but have not yet issued term sheets with respect to 29 of these potential loans. We have issued term sheets with respect to seven of these potential loans comprising $629.9 million of loan commitments which have not been executed by the potential borrowers. There can be no assurance that we will enter into definitive documentation with respect to any of these loans.

As of June 30, 2017, in connection with five loans representing $494.2 million of anticipated loan commitments, prospective borrowers have executed non-binding term sheets, entered into a period of exclusivity with us with respect to the proposed loans, and paid to us expense deposits to cover the direct costs of our due diligence and underwriting process. These five potential loan investments have the following attributes, in the aggregate: $494.2 million of loan commitments; $424.9 million of estimated initial funding amount; an estimated LTV of 71.0%; and an expected weighted average credit spread of LIBOR plus 4.2%. We are currently completing our underwriting and negotiating definitive loan documents for each of these five potential loan investments. These five potential loans remain subject to satisfactory completion of our underwriting and due

 



 

17


Table of Contents

diligence, definitive documentation and final approval by our Manager’s investment committee. As a result, no assurance can be given that any of these five potential loans will close on the anticipated terms or at all. We intend to fund these five potential loans using capacity under our existing secured revolving repurchase facilities, existing cash and, depending upon the timing of closing, uncalled capital commitments, net proceeds from loan repayments, or net proceeds from this offering.

Debt Financing Arrangements

On June 8, 2017, we closed an amendment to our existing secured revolving repurchase facility with Wells Fargo Bank, National Association, an affiliate of one of the underwriters in this offering, to increase the maximum facility amount to $750 million from $500 million. The current extended maturity of this facility is May 2021. Additionally, on June 12, 2017, we closed an amendment to our existing secured revolving repurchase facility with Goldman Sachs Bank USA, an affiliate of one of the underwriters in this offering, to increase the maximum facility amount to $750 million from $500 million. The current extended maturity of this facility is August 2019.

We are currently negotiating an amendment to our existing secured revolving repurchase facility with Morgan Stanley Bank, N.A., an affiliate of one of the underwriters in this offering, to increase the maximum facility amount to $500 million from $250 million. The initial maturity of this facility is May 2019 and can be extended by us for additional one year periods, subject to approval by the lender. The number of extension options is not limited by the terms of this facility. We have not received a commitment to amend this facility and there can be no assurance that we will receive any such commitment or enter into a definitive agreement to amend the facility upon the terms contemplated or other terms, or at all.

We have executed a term sheet and are completing documentation with Bank of America, N.A., an affiliate of one of the underwriters in this offering, to provide a secured revolving repurchase facility of up to $500 million, although we have not received a commitment with respect to this facility and there can be no assurance that we will receive any such commitment or enter into a definitive agreement for the facility upon the terms contemplated or other terms, or at all. We have negotiated a term sheet with Citibank, N.A., an affiliate of one of the underwriters in this offering, to provide a secured revolving repurchase facility of $250 million, although we have not received a commitment with respect to this facility and there can be no assurance that we will receive any such commitment or enter into a definitive agreement for the facility upon the terms contemplated or other terms, or at all.

Cash Dividends

On April 25, 2017, we paid a dividend of $21.3 million, or $0.5425 per share, to our Class A common and common stockholders of record as of March 31, 2017 (the declaration date) with respect to the first quarter of 2017.

On June 30, 2017, we declared a dividend for the second quarter of 2017 in the amount of $0.51 per share of common stock and Class A common stock, or $20.5 million in the aggregate, which dividend is payable on July 25, 2017 to holders of record of our common stock and Class A common stock as of June 30, 2017. Accordingly, investors in this offering will not be entitled to receive this dividend.

Drawdown of Equity Capital Commitments

On June 15, 2017, we completed a drawdown of $25 million of equity capital commitments from existing stockholders, resulting in the issuance of 992,166 shares of common stock and 14,711 shares of Class A common stock to existing stockholders at a price of $24.83 per share, which was the book value per share of our common stock and Class A common stock as of March 31, 2017. As of the date of this prospectus, we have drawn approximately $1.0 billion of capital commitments from our existing stockholders and have approximately

 



 

18


Table of Contents

$198.9 million of undrawn capital commitments. Our existing stockholders’ obligations to purchase additional shares of our stock using the undrawn portion of their capital commitments will terminate upon the completion of this offering.

Other Balance Sheet Information

As of June 30, 2017:

 

    the approximate aggregate unpaid principal balance of our loan portfolio was $2.2 billion and we had approximately $502.7 million of unfunded loan commitments;

 

    the approximate weighted average credit spread of our loan portfolio was 5.09%;

 

    the approximate weighted average LTV of our loan portfolio was 60.2%;

 

    we had cash and cash equivalents of approximately $201.0 million;

 

    there have been no loan impairments or loan loss reserves recorded since March 31, 2017, and there have been no material changes in our loan risk ratings since March 31, 2017; and

 

    the approximate unpaid principal balance of borrowings used to finance our loan portfolio was $1.6 billion, comprised of:

 

    CLO borrowings of approximately $167.3 million;

 

    borrowings under our secured revolving repurchase facilities of approximately $1.1 billion; and

 

    borrowings under note-on-note financing arrangements of approximately $238.4 million.

Stock Dividend

On July 3, 2017, we declared a stock dividend that will result in the issuance of 9,224,268 shares of our common stock and 230,814 shares of our Class A common stock. The stock dividend will be paid upon the completion of this offering to holders of record of our common stock and Class A common stock as of July 3, 2017. The payment of the stock dividend is contingent on the completion of this offering. Accordingly, investors in this offering will not be entitled to receive this stock dividend.

 

Preliminary Estimate of Book Value Per Share

As a result of our operating activities during the three months ended June 30, 2017, including our closed loan originations and repayments described above under “—Our Portfolio—Closed Originations” and “—Repayments,” and based on our management’s expectation that our operating results for the three months ended June 30, 2017 will be comparable to our operating results for the three months ended March 31, 2017, we anticipate the book value per share of our common stock and Class A common stock, which is computed in accordance with generally accepted accounting principles (“GAAP”), will be between approximately $24.85 and $24.93 per share as of June 30, 2017.

On June 15, 2017, we completed a drawdown of $25 million of equity capital commitments from our existing stockholders, resulting in the issuance of 992,166 shares of common stock and 14,711 shares of Class A common stock to existing stockholders at a price of $24.83 per share, which was the book value per share of our common stock and Class A common stock as of March 31, 2017. In addition, on June 30, 2017, we declared a cash dividend for the second quarter of 2017 in the amount of $0.51 per share of common stock and Class A common stock, or $20.5 million in the aggregate. See “—Drawdown of Equity Capital Commitments” and

 



 

19


Table of Contents

“—Cash Dividends” above. Our estimated range of book value per share does not give effect to the dilutive impact of the stock dividend we declared on July 3, 2017 to holders of record of our common stock and Class A common stock on that date. The stock dividend, which is discussed above under “—Stock Dividend,” will result in the issuance of an additional 9,224,268 shares of our common stock and an additional 230,814 shares of our Class A common stock upon the completion of this offering. In addition, our estimated range of book value per share as of June 30, 2017 does not give effect to the dilutive impact of this offering. For information relating to the dilutive impact of the cash dividend, the stock dividend and this offering, please see “Dilution” in this prospectus.

Our estimated range of book value per share is preliminary and subject to completion of our normal quarterly closing and review procedures for the quarter ended June 30, 2017, which we have commenced. Given the timing of our estimate, however, the actual book value per share of our common stock and Class A common stock as of June 30, 2017 may differ materially, including as a result of our quarter-end closing procedures, review adjustments and other developments that may arise between now and the time our financial results for the three months ended June 30, 2017 are finalized. Accordingly, you should not place undue reliance on our estimate. This estimated range has been prepared by, and is the responsibility of, our management and has not been reviewed or audited or subjected to any other procedures by our independent registered public accounting firm. Accordingly, our independent registered public accounting firm does not express an opinion or any other form of assurance with respect to this estimate.

Summary Risk Factors

An investment in our common stock involves risks. You should carefully consider the following risk factors, together with the information set forth under “Risk Factors” and all other information in this prospectus, before making a decision to invest in our common stock.

 

    We depend on our Manager and the personnel of TPG provided to our Manager for our success. We may not find a suitable replacement for our Manager if our Management Agreement is terminated, or if key personnel cease to be employed by TPG or otherwise become unavailable to us, which would materially and adversely affect us.

 

    Other than any dedicated or partially dedicated chief financial officer that our Manager may elect to provide to us, the TPG personnel provided to our Manager, as our external manager, are not required to dedicate a specific portion of their time to the management of our business.

 

    Our Manager manages our portfolio pursuant to very broad investment guidelines and is not required to seek the approval of our board of directors for each investment, financing, asset allocation or hedging decision made by it, which may result in our making riskier loans and other investments and which could materially and adversely affect us.

 

    Our Manager’s fee structure may not create proper incentives or may induce our Manager and its affiliates to make certain loans or other investments, including speculative investments, which increase the risk of our portfolio.

 

    We may compete with existing and future TPG Funds, which may present various conflicts of interest that restrict our ability to pursue certain investment opportunities or take other actions that are beneficial to our business and result in decisions that are not in the best interests of our stockholders.

 

    We do not own the TPG name, but we may use it as part of our corporate name pursuant to a trademark license agreement with an affiliate of TPG. Use of the name by other parties or the termination of our trademark license agreement may harm our business.

 



 

20


Table of Contents
    Commercial real estate debt instruments that are secured or otherwise supported, directly or indirectly, by commercial property are subject to delinquency, foreclosure and loss, which could materially and adversely affect us.

 

    We intend to originate or acquire transitional loans, which will involve greater risk of loss than stabilized commercial mortgage loans.

 

    We operate in a competitive market for the origination and acquisition of attractive investment opportunities and competition may limit our ability to originate or acquire attractive investments in our target assets, which could have a material adverse effect on us.

 

    Interest rate fluctuations could significantly decrease our ability to generate income on our investments, which could materially and adversely affect us.

 

    Prepayment rates may adversely affect our financial performance and cash flows and the value of certain of our investments.

 

    Our investment strategy and guidelines, asset allocation and financing strategy may be changed without stockholder consent.

 

    We have a significant amount of debt, which subjects us to increased risk of loss, and our charter and bylaws contain no limitation on the amount of debt we may incur or have outstanding.

 

    There can be no assurance that we will be able to obtain or utilize additional financing arrangements in the future on similar or more favorable terms, or at all.

 

    If we fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

 

    Complying with REIT requirements may cause us to forego otherwise attractive investment opportunities.

 

    Maintenance of our exemptions from registration as an investment company under the Investment Company Act imposes significant limits on our operations. Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.

 

    There has been no public market for our common stock prior to this offering and an active trading market may not develop or be sustained following this offering, which may negatively affect the liquidity and market price of our common stock and make it difficult for investors to sell their shares on favorable terms when desired.

Our Structure

To date, we have conducted private offerings of our stock to investors in reliance on exemptions from the registration requirements of the U.S. Securities Act of 1933, as amended (the “Securities Act”), and other applicable securities laws. At the closing of each private offering, investors made capital commitments to purchase our stock from time to time at our option at the book value per share prevailing at the end of the most recent quarter. As of the date of this prospectus, we have drawn approximately $1.0 billion of capital commitments from our existing stockholders and have approximately $198.9 million of undrawn capital

 



 

21


Table of Contents

commitments. Our existing stockholders’ obligations to purchase additional shares of stock using the undrawn portion of their capital commitments will terminate upon the completion of this offering. We have no obligation under the subscription agreements with our existing stockholders to sell shares to them in connection with this offering.

The following chart summarizes our organizational structure and equity ownership immediately after giving effect to our stock dividend described above under “—Recent Developments—Stock Dividend” and this offering. This chart is provided for illustrative purposes only and does not show all of our legal entities or ownership percentages of such entities (all percentages are calculated assuming no exercise of the underwriters’ option to purchase additional shares of our common stock).

 

LOGO

 

(1) Includes (a) 2,452 shares of Class A common stock that are held by our Manager and subject to vesting on August 17, 2017 (upon vesting the shares will be delivered to one of our executive officers) and (b) 197,991 shares of common stock that are held by TPG RE Finance Trust Equity, L.P. (certain of our executive officers and directors have the right to acquire voting and investment power over these shares). The shares in the immediately preceding sentence have been excluded from the shares held by TPG for purposes of calculating TPG’s beneficial ownership percentage.

 

(2) Represents aggregate holdings by TPG of 7,437,964 shares of our stock consisting of: (a) 1,811,251 shares of our common stock held by TPG Holdings III, L.P., (b) 4,693,915 shares of our common stock held by TPG/NJ (RE) Partnership, L.P., (c) 203,838 shares of our Class A common stock held by our Manager and (d) 728,960 shares of our Class A common stock held by TPG RE Finance Trust Equity, L.P.

 



 

22


Table of Contents

Management Agreement

On December 15, 2014, we entered into a management agreement with our Manager (the “pre-IPO Management Agreement”). Upon the completion of this offering, our pre-IPO Management Agreement will terminate, without payment of any termination fee to our Manager, and we will enter into a new management agreement with our Manager. We refer to the new management agreement between us and our Manager as our “Management Agreement.”

Pursuant to our Management Agreement, our Manager will manage 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 will be responsible for, among other matters: (1) the selection, origination or acquisition, asset management and sale of our portfolio investments; (2) our financing activities; and (3) providing us with investment advisory services. Our Manager will also be responsible for our day-to-day operations and will perform (or will cause to be performed) such services and activities relating to our investments and business and affairs as may be appropriate. Subject to compliance with our investment guidelines approved by our board of directors at such time, our Manager’s investment committee approves our investments, dispositions and financings and determines our investment strategy, portfolio holdings and financing and leverage strategies.

The initial term of our Management Agreement will end on the third anniversary of the completion of this offering and will be automatically renewed for a one-year term each anniversary thereafter unless previously terminated as described below. Our independent directors will review our Manager’s performance and the fees that may be payable to our Manager annually and, following the initial term, our Management Agreement may be terminated annually upon the affirmative vote of at least two-thirds of our independent directors, based upon: (1) unsatisfactory performance by our Manager that is materially detrimental to us and our subsidiaries taken as a whole; or (2) their determination that the base management fee and incentive compensation, taken as a whole, payable to our Manager is not fair, subject to our Manager’s right to prevent any termination due to unfair fees by accepting a reduction of fees agreed to by at least two-thirds of our independent directors. We must provide our Manager 180 days’ prior written notice of any such termination. Unless terminated for a cause event, as defined under the heading “Our Manager and Our Management Agreement—Management Agreement,” our Manager will be paid a termination fee as described below next to the caption “Termination Fee.”

We may also terminate our Management Agreement at any time, including during the initial term, without the payment of any termination fee, with at least 30 days’ prior written notice from us, upon the occurrence of a cause event. Our Manager may terminate our Management Agreement if we become required to register as an investment company under the Investment Company Act, with such termination deemed to occur immediately before such event, in which case we would not be required to pay a termination fee to our Manager. Our Manager may also decline to renew our Management Agreement by providing us with 180 days’ prior written notice, in which case we would not be required to pay a termination fee to our Manager. In addition, if we breach our Management Agreement in any material respect or are otherwise unable to perform our obligations thereunder and the breach continues for a period of 30 days after written notice to us, our Manager may terminate our Management Agreement upon 60 days’ written notice. If our Management Agreement is terminated by our Manager upon our material breach, we would be required to pay our Manager the termination fee described above.

The following table summarizes the fees and expense reimbursements that we will pay to our Manager:

 

Type

  

Description

Base Management Fee    The greater of $250,000 per annum ($62,500 per quarter) and 1.50% per annum (0.375% per quarter) of our “Equity.” The base management fee is payable in cash, quarterly in arrears. “Equity” means: (1) the sum of (a) the net proceeds received by us from all issuances of our stock (for purposes of calculating this amount, the net proceeds received by us from all issuances

 



 

23


Table of Contents

Type

  

Description

  

of our outstanding stock prior to the completion of this offering equals approximately $1.0 billion), plus (b) our cumulative “Core Earnings” (as defined below) for the period commencing on the completion of this offering to the end of the most recently completed calendar quarter, and (2) less (a) any distributions to our stockholders following the completion of this offering, (b) any amount that we or any of our subsidiaries have paid to repurchase for cash our stock following the completion of this offering and (c) any incentive compensation earned by our Manager following the completion of this offering. With respect to that portion of the period from and after the completion of this offering that is used in the calculation of incentive compensation, which is described below, or the base management fee, all items in the foregoing sentence (other than our cumulative Core Earnings) will be calculated on a daily weighted average basis.

 

Incentive Compensation   

Our Manager will be entitled to incentive compensation which will be calculated and payable in cash with respect to each calendar quarter following the completion of this offering (or part thereof that our Management Agreement is in effect) 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) our Core Earnings for the most recent 12-month period (or such lesser number of completed calendar quarters, if applicable), 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) our Equity in the most recent 12-month period (or such lesser number of completed calendar quarters, if applicable), including the applicable period, and (B) 7% per annum; and (2) the sum of any incentive compensation paid to our Manager with respect to the first three calendar quarters of the most recent 12-month period (or such lesser number of completed calendar quarters preceding the applicable period, if applicable). No incentive compensation will be payable to our Manager with respect to any calendar quarter unless Core Earnings for the 12 most recently completed calendar quarters (or such lesser number of completed calendar quarters following the completion of this offering) is greater than zero.

 

   As used herein, “Core Earnings” means the net income (loss) attributable to holders of our common stock and Class A common stock, computed in accordance with GAAP, including realized gains and losses not otherwise included in net income (loss), and excluding (1) non-cash equity compensation expense, (2) the incentive compensation earned by our Manager, (3) depreciation and amortization, (4) any unrealized gains or 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 (5) one-time events pursuant to changes in GAAP and certain material non-cash income or expense items, in each case after discussions between our Manager and our independent directors and approved by a majority of our independent directors. Pursuant to the terms of our Management Agreement, the exclusion of depreciation and amortization from the calculation of Core Earnings only applies to debt investments related to real estate to the extent that we foreclose upon the property or properties collateralizing such debt investments.

 



 

24


Table of Contents

Type

  

Description

  
Reimbursement of Expenses    We will be required to reimburse our Manager or its affiliates for documented costs and expenses incurred by it and its affiliates on our behalf except those specifically required to be borne by our Manager or its affiliates under our Management Agreement. Our reimbursement obligation will not be subject to any dollar limitation. Our Manager or its affiliates will be responsible for, and we will not reimburse our Manager or its affiliates for, the expenses related to the personnel of our Manager and its affiliates who provide services to us. However, we will reimburse our Manager for our allocable share of the compensation (including, without limitation, annual base salary, bonus, any related withholding taxes and employee benefits) paid to (1) our Manager’s personnel serving as our chief financial officer based on the percentage of his or her time spent managing our affairs and (2) other corporate finance, tax, accounting, internal audit, legal risk management, operations, compliance and other non-investment personnel of our Manager or its affiliates who spend all or a portion of their time managing our affairs,
  

based on the percentage of time devoted by such personnel to our and our subsidiaries’ affairs. We reimbursed our Manager and its affiliates for expenses of $297,000 from December 28, 2014 (commencement of operations) through December 31, 2016. Based on our current operating budget, we expect to reimburse our Manager and its affiliates for expenses of $940,000 (excluding deal-related costs) for the year ending December 31, 2017, although the actual amount reimbursed may vary materially from such estimate. As of March 31, 2017, we have not paid our Manager any reimbursements for 2017. For more information on the expenses we will be required to reimburse to our Manager and its affiliates, see “Our Manager and Our Management Agreement—Management Agreement—Base Management Fee, Incentive Compensation and Expense Reimbursements.”

 

Termination Fee   

Termination fee equal to three times the sum of (x) the average annual base management fee and (y) the average annual incentive compensation earned by our Manager, in each case during the 24-month period immediately preceding the most recently completed calendar quarter prior to the date of termination or, if such termination occurs within the next two years, and such termination fee is payable, the base management fees and the incentive compensation will be annualized for such two-year period based on such fees actually received by our Manager during such period.

 

   The termination fee will be payable to our Manager upon termination of our Management Agreement by us absent a cause event or by our Manager if we materially breach our Management Agreement.

We expect the base management fees payable to our Manager to increase under our Management Agreement as compared to under our pre-IPO Management Agreement because of an increase in the fee rate (to 1.50% from 1.25%), and a change in the method of calculating the amount of equity to which the fee rate is applied. As a result, we expect incentive compensation will decrease.

 



 

25


Table of Contents

To quantify the net impact on combined base management fees and incentive compensation paid, we calculated the estimated base management fees and incentive compensation that would have been paid by us to our Manager during 2016 if our Management Agreement went into effect on January 1, 2016, and compared it to the actual base management fees and incentive compensation earned by our Manager in 2016 under our pre-IPO Management Agreement. Set forth below is a table comparing the results (dollars in thousands):

 

     Management Agreement
(Hypothetical)
     Pre-IPO Management
Agreement (Actual)
     Increase/(Decrease)  

Base Management Fee

   $ 12,255      $ 8,816      $ 3,439  

Incentive Compensation

     2,816        3,687        (871
  

 

 

    

 

 

    

 

 

 

Total

   $ 15,073      $ 12,817      $ 2,568  
  

 

 

    

 

 

    

 

 

 

In addition to the fees and expense reimbursements we will pay to our Manager pursuant to our Management Agreement, our Manager acts as collateral manager for the CLO we issued in our Formation Transaction. For acting as the CLO’s collateral manager pursuant to a separate collateral management agreement, we pay our Manager a collateral management fee equal to 0.075% per annum of the aggregate par amount of the loans in the CLO. As of December 31, 2016 and 2015, the aggregate par amount of the loans in the CLO was approximately $712.4 million and $1.3 billion, respectively. As of March 31, 2017 and 2016, the aggregate par amount of the loans in the CLO was approximately $675.0 million and $1.3 billion, respectively. Pursuant to an arrangement we have had with our Manager prior to this offering, we have been entitled to reduce the base management fee payable to our Manager under our pre-IPO Management Agreement by an amount equal to the collateral management fee our Manager is entitled to receive for acting as the collateral manager for the CLO. Upon the completion of this offering, our Manager will be entitled to earn a collateral management fee for acting as the collateral manager for the CLO without any reduction or offset right to the base management fee payable to our Manager under our Management Agreement. The analysis presented in the table preceding this paragraph does not incorporate the reduction or offset right referenced herein.

Conflicts of Interest

Our Management Agreement expressly provides that it does not (1) prevent our Manager or any of its affiliates, officers, directors or employees from engaging in other businesses or from rendering services of any kind to any other person or entity, whether or not the investment objectives or policies of any such other person or entity are similar to those of ours, including, without limitation, the sponsoring, closing and/or managing of any TPG Fund that employs investment objectives or strategies that overlap, in whole or in part, with our investment guidelines, (2) in any way restrict or otherwise limit our Manager or any of its affiliates, officers, directors or employees from buying, selling or trading any securities or commodities for their own accounts or for the account of others for whom our Manager or any of its affiliates, officers, directors or employees may be acting, or (3) prevent our Manager or any of its affiliates from receiving fees or other compensation or profits from activities described in clause (1) or (2) above, which will be for our Manager’s (and/or its affiliates’) sole benefit. However, for so long as our Management Agreement is in effect and TPG controls our Manager, neither our Manager nor TPG Real Estate Management, LLC, which is the manager of TPG Real Estate Partners, will directly or indirectly form any other public vehicle in the U.S. whose strategy is to primarily originate, acquire and manage performing commercial mortgage loans.

TPG has not previously sponsored any other public or private funds that have investment objectives similar to ours, in that no such prior funds have focused primarily on originating, acquiring and managing performing commercial mortgage loans and CMBS. However, following development of its real estate strategy in 2009, TPG formed and sponsored TPG Real Estate Partners II, L.P. (together with its related investment vehicles, “TREP II”) in 2012. TREP II is a series of private funds that invests principally in real estate and real estate-related investments in North America and Europe. TREP II focuses primarily on investments in real estate-rich companies, property portfolios, private platforms, joint ventures, and real estate assets, which investments

 



 

26


Table of Contents

may be structured directly or indirectly through equity, debt or other interests. TREP II began operations in 2012, and its investment period is still open. In addition to its real estate-focused funds, certain private equity and alternative credit funds managed by TPG may also, from time to time, make real estate-related investments, including investments in real estate-related loans and debt securities, real estate-related equity securities and operating and platform companies. Of these private equity and alternative credit funds, there are currently two TPG Fund complexes that are making new investments that may include the origination, acquisition and management of mortgage-related loans and CMBS as a part of their primary investment strategy, which funds collectively had approximately $10.8 billion in aggregate capital commitments as of March 31, 2017.

Our Management Agreement expressly acknowledges that, while information and recommendations supplied to us will, in our Manager’s reasonable and good faith judgment, be appropriate under the circumstances and in light of our investment guidelines and investment objectives and policies, such information and recommendations may be different in certain material respects from the information and recommendations supplied by our Manager or any affiliate of our Manager to others (including, for greater certainty, the TPG Funds and their investors, as described below). In addition, as acknowledged in our Management Agreement, (1) affiliates of our Manager sponsor, advise and/or manage one or more TPG Funds and may in the future sponsor, advise and/or manage additional TPG Funds and (2) to the extent any TPG Funds have investment objectives or guidelines that overlap with ours, in whole or in part, then, pursuant to TPG’s allocation policy, investment opportunities that fall within such common objectives or guidelines will generally be allocated among our company and one or more of such TPG Funds on a basis that our Manager and applicable TPG affiliates determine to be fair and reasonable in their sole discretion, subject to the following considerations:

 

    our and the relevant TPG Funds’ investment focuses and objectives;

 

    the TPG professionals who sourced the investment opportunity;

 

    the TPG professionals who are expected to oversee and monitor the investment;

 

    the expected amount of capital required to make the investment, as well as our and the relevant TPG Funds’ current and projected capacity for investing (including for any potential follow-on investments);

 

    our and the relevant TPG Funds’ targeted rates of return and investment holding periods;

 

    the stage of development of the prospective portfolio company or borrower;

 

    our and the relevant TPG Funds’ respective existing portfolio of investments;

 

    the investment opportunity’s risk profile;

 

    our and the relevant TPG Funds’ respective expected life cycles;

 

    any investment targets or restrictions (e.g., industry, size, etc.) that apply to us and the relevant TPG Funds;

 

    our ability and the ability of the relevant TPG Funds to accommodate structural, timing and other aspects of the investment process; and

 

    legal, tax, contractual, regulatory or other considerations that our Manager and applicable TPG affiliates deem relevant.

 



 

27


Table of Contents

Pursuant to the terms of our Management Agreement, we acknowledged and agreed that (1) as part of TPG’s regular businesses, personnel of our Manager and its affiliates may from time to time work on other projects and matters (including with respect to one or more TPG Funds), and that conflicts may arise with respect to the allocation of personnel between us and one or more TPG Funds and/or our Manager and such other affiliates, (2) there may be circumstances where investments that are consistent with our investment guidelines may be shared with or allocated to (in lieu of us) one or more TPG Funds in accordance with TPG’s allocation policy (as described above), (3) TPG Funds may invest, from time to time, in investments in which we may also invest (including at different levels of an issuer’s or borrower’s capital structure (for example, an investment by a TPG Fund in an equity or mezzanine interest with respect to the same portfolio entity in which we own a debt interest or vice versa) or in a different tranche of debt or equity with respect to an entity in which we have an interest) and while TPG will seek to resolve any such conflicts in a fair and equitable manner in accordance with TPG’s allocation policy and its prevailing policies and procedures with respect to conflicts resolution among TPG Funds generally, such transactions are not required to be presented to our board of directors or any committee thereof for approval (unless otherwise required by our investment guidelines), and there can be no assurance that any such conflicts will be resolved in our favor, (4) our Manager and its affiliates may from time to time receive fees from portfolio entities or other issuers for the arranging, underwriting, syndication or refinancing of investments or other additional fees, including acquisition fees, loan servicing fees, special servicing fees, administrative fees or advisory or asset management fees, including with respect to TPG Funds and related portfolio entities, and while such fees may give rise to conflicts of interest we will not receive the benefit of any such fees, and (5) the terms and conditions of the governing agreements of such TPG Funds (including with respect to the economic, reporting and other rights afforded to investors in such TPG Funds) are materially different than the terms and conditions applicable to us and our stockholders, and neither we nor any of our stockholders (in such capacity) will have the right to receive the benefit of any such different terms and conditions applicable to investors in such TPG Funds as a result of an investment in us or otherwise. In addition, pursuant to the terms of our Management Agreement, our Manager is required to keep our board of directors reasonably informed on a periodic basis in connection with the foregoing. With regard to transactions that present conflicts contemplated by clause (3) above, our Manager is required to provide our board of directors with quarterly updates in respect of such transactions.

Pursuant to the terms of our Management Agreement, and subject to applicable law, our Manager is not permitted to consummate on our behalf any transaction that involves the sale of any investment to, or the acquisition of any investment or receipt of any financing from, TPG, any TPG Fund or any of their affiliates unless such transaction (1) is on terms no less favorable to us than could have been obtained on an arm’s-length basis from an unrelated third party and (2) has been approved in advance by a majority of our independent directors. In addition, pursuant to the terms of our Management Agreement, it is agreed that our Manager will seek to resolve any conflicts of interest in a fair and equitable manner in accordance with TPG’s allocation policy and its prevailing policies and procedures with respect to conflicts resolution among TPG Funds generally, but only those transactions referred to in this paragraph will be expressly required to be presented for approval to our independent directors or any committee thereof (unless otherwise required by our investment guidelines).

Our charter provides that, if any of our directors or officers who is also a partner, advisory board member, director, officer, manager, member, or shareholder of TPG (any such director or officer, a “TPG Director/Officer”) acquires knowledge of a potential business opportunity, we renounce, on our behalf and on behalf of our subsidiaries, any potential interest or expectation in, or right to be offered or to participate in, such business opportunity to the maximum extent permitted from time to time by Maryland law. Accordingly, to the maximum extent permitted from time to time by Maryland law, (1) no TPG Director/Officer is required to present, communicate or offer any business opportunity to us or any of our subsidiaries and (2) the TPG Director/Officer, on his or her own behalf or on behalf of TPG, will have the right to hold and exploit any business opportunity, or to direct, recommend, offer, sell, assign or otherwise transfer such business opportunity to any person or entity other than us.

 



 

28


Table of Contents

Distribution Policy

Following the completion of this offering, we intend to make regular quarterly distributions to our stockholders, consistent with our intention to continue to qualify as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income. As a result, in order to satisfy the requirements for us to continue to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to our stockholders out of assets legally available therefor. REIT taxable income as computed for purposes of the foregoing tax rules will not necessarily correspond to our net income as determined for financial reporting purposes.

Distributions to our stockholders, if any, will be authorized by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including our historical and projected results of operations, cash flows and financial condition, our financing covenants, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, our REIT taxable income, applicable provisions of the Maryland General Corporation Law (the “MGCL”) and such other factors as our board of directors deems relevant. Our results of operations, liquidity and financial condition will be affected by various factors, including the amount of our net interest income, our operating expenses and any other expenditures. The amount of the dividend declared per share of our common stock will determine the amount of the dividend declared per share of our Class A common stock.

To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Internal Revenue Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured. In addition, we may choose to make a portion of a required distribution in the form of a taxable stock dividend to preserve our cash balance.

Currently, we have no intention to use any net proceeds from this offering to make distributions to our stockholders or to make distributions to our stockholders using shares of our stock, other than our stock dividend to be paid upon the completion of this offering, as described above under “—Recent Developments—Stock Dividend.”

Distributions to our stockholders, if any, will be generally taxable to them as ordinary income, although a portion of our distributions may be designated by us as capital gain or qualified dividend income, or may constitute a return of capital. For a more complete discussion of the tax treatment of distributions to holders of shares of our common stock, see “U.S. Federal Income Tax Considerations—Taxation of Stockholders.”

Operating and Regulatory Structure

REIT Qualification

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. Our continued qualification as a REIT depends upon our ability to meet on a continuing basis, through actual investment and operating results, various complex requirements under the Internal Revenue Code relating to, among other things, the sources of our gross income, the composition and values of our assets, our distribution levels and the diversity of ownership of shares of our capital stock. We have been organized and have operated in conformity with the requirements for qualification

 



 

29


Table of Contents

and taxation as a REIT under the Internal Revenue Code, and we believe that our current organization 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. If we fail to qualify as a REIT in any taxable year and do not qualify for certain statutory relief provisions, we will be subject to U.S. federal income tax at regular corporate rates and generally will be precluded from qualifying as a REIT for the subsequent four taxable years following the year during which we lost our REIT qualification. Accordingly, our failure to remain qualified as a REIT could materially and adversely affect us, including our ability to make distributions to our stockholders in the future. Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income or property. See “U.S. Federal Income Tax Considerations—Taxation of TPG RE Finance Trust, Inc.”

Investment Company Act Exclusion or Exemption

We conduct, and intend to continue to conduct, our operations so that neither we nor any of our subsidiaries are required to register as an investment company under the Investment Company Act. Complying with provisions that allow us to avoid the consequences of registration under the Investment Company Act may at times require us to forego otherwise attractive opportunities and limit the manner in which we conduct our operations. We conduct our operations so that we are not an “investment company” as defined in Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. We believe we are not an investment company under Section 3(a)(1)(A) of the Investment Company Act because we do not engage primarily, or hold ourselves out as being engaged primarily, in the business of investing, reinvesting or trading in securities. Rather, through our wholly-owned or majority-owned subsidiaries, we are primarily engaged in non-investment company businesses related to real estate. In addition, we intend to conduct our operations so that we do not come within the definition of an investment company under Section 3(a)(1)(C) of the Investment Company Act because less than 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis will consist of “investment securities.” Excluded from the term “investment securities” (as that term is defined in the Investment Company Act) are securities issued by majority-owned subsidiaries that are themselves not investment companies and are not relying on the exclusions from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. Our interests in wholly-owned or majority-owned subsidiaries that qualify for the exclusion pursuant to Section 3(c)(5)(C), as described below, or another exclusion or exception under the Investment Company Act (other than Section 3(c)(1) or Section 3(c)(7) thereof), do not constitute “investment securities.”

We hold our assets primarily through direct or indirect wholly-owned or majority-owned subsidiaries, certain of which are excluded from the definition of investment company pursuant to Section 3(c)(5)(C) of the Investment Company Act. We will classify our assets for purposes of certain of our subsidiaries’ Section 3(c)(5)(C) exemption from the Investment Company Act based upon positions set forth by the SEC staff. Based on such positions, to qualify for the exclusion pursuant to Section 3(c)(5)(C), each such subsidiary generally is required to hold at least (i) 55% of its assets in “qualifying” real estate assets and (ii) at least 80% of its assets in “qualifying” real estate assets and real estate-related assets.

As a consequence of our seeking to avoid the need to register under the Investment Company Act on an ongoing basis, we and/or our subsidiaries may be restricted from making certain investments or may structure investments in a manner that would be less advantageous to us than would be the case in the absence of such requirements. In particular, a change in the value of any of our assets could negatively affect our ability to avoid the need to register under the Investment Company Act and cause the need for a restructuring of our investment portfolio. For example, these restrictions may limit our and our subsidiaries’ ability to invest directly in mortgage-

 



 

30


Table of Contents

backed securities that represent less than the entire ownership in a pool of senior mortgage loans, debt and equity tranches of securitizations and certain asset-backed securities, non-controlling equity interests in real estate companies or in assets not related to real estate; however, we and our subsidiaries may invest in such securities to a certain extent. In addition, seeking to avoid the need to register under the Investment Company Act may cause us and/or our subsidiaries to acquire or hold additional assets that we might not otherwise have acquired or held or dispose of investments that we and/or our subsidiaries might not have otherwise disposed of, which could result in higher costs or lower proceeds to us than we would have paid or received if we were not seeking to comply with such requirements. Thus, avoiding registration under the Investment Company Act may hinder our ability to operate solely on the basis of maximizing profits.

If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use borrowings), management, operations, transactions with affiliated persons (as defined in the Investment Company Act) and portfolio composition, including disclosure requirements and restrictions with respect to diversification and industry concentration and other matters. Compliance with the Investment Company Act would, accordingly, limit our ability to make certain investments and require us to significantly restructure our business plan, which could materially and adversely affect our ability to pay distributions to our stockholders.

See “Risk Factors—Risks Related to Our Company—Maintenance of our exemptions from registration as an investment company under the Investment Company Act imposes significant limits on our operations. Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act” and “Business—Operating and Regulatory Structure—Investment Company Act Exclusion or Exemption.”

Restrictions on Ownership and Transfer of Shares

Our charter, subject to certain exceptions and after the application of certain attribution rules, restricts ownership of more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our charter also prohibits any person from directly or indirectly owning shares of our capital stock of any class or series if such ownership would result in us being “closely held” under Section 856(h) of the Internal Revenue Code or otherwise cause us to fail to qualify as a REIT.

Our charter generally provides that any shares of our capital stock owned or transferred in violation of the foregoing restrictions will be transferred to a charitable trust for the benefit of a charitable beneficiary, and the prohibited owner or transferee will acquire no rights in such shares. If the foregoing transfer to a charitable trust is ineffective for any reason to prevent a violation of these restrictions, then the transfer of such shares will be void ab initio.

No person may transfer shares of our capital stock or any interest in shares of our capital stock if the transfer would result in shares of our capital stock being beneficially owned by fewer than 100 persons. Any attempt to transfer shares of our capital stock in violation of this restriction will be void ab initio.

Corporate Information

Our principal executive offices are located at 888 Seventh Avenue, 35th Floor, New York, New York 10106, and our telephone number is (212) 601-7400. Our web address is www.tpgrefinance.com. The information on, or otherwise accessible through, our website does not constitute a part of this prospectus.

 



 

31


Table of Contents

The Offering

 

Shares of common stock offered by us

11,000,000 shares (plus up to an additional 1,650,000 shares that we may issue and sell upon the exercise of the underwriters’ option to purchase additional shares of our common stock).

 

Stock dividend

9,224,268 shares of our common stock and 230,814 shares of our Class A common stock. On July 3, 2017, we declared a stock dividend that will result in the issuance of these additional shares upon the completion of this offering to holders of record of our common stock and Class A common stock as of July 3, 2017. The payment of the stock dividend is contingent on the completion of this offering. Accordingly, investors in this offering will not be entitled to receive this stock dividend.

 

Shares of common stock outstanding after our stock dividend and this offering

59,476,487 shares (or 61,126,487 shares if the underwriters exercise their option to purchase additional shares of our common stock in full).(1)

 

Shares of Class A common stock outstanding after our stock dividend and this offering

1,213,025 shares. 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 are identical to the common stock, except (1) the Class A common stock is 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 may not be listed on a national securities exchange or a national market system and (2) each share of Class A common stock is convertible at any time or from time to time, at the option of the holder, for one fully paid and nonassessable share of common stock. The Class A common stock votes together with the common stock as a single class.

 

Use of proceeds

We expect to receive net proceeds from this offering of approximately $199.9 million (or approximately $230.9 million if the

 

(1) Excludes (i) 1,213,025 shares of common stock issuable upon conversion of the outstanding shares of Class A common stock (each share of Class A common stock is convertible at any time and from time to time, at the option of the holder, for one share of common stock) and (ii) 4,551,713 shares of our common stock reserved for future issuance under our equity incentive plan (assuming no exercise of the underwriters’ option to purchase additional shares of our common stock). Our equity incentive plan provides for grants of equity-based awards up to an aggregate of 7.5% of the issued and outstanding shares of our stock upon the completion of our stock dividend and this offering (on a fully-diluted basis and including any shares of our common stock issued upon exercise of the underwriters’ option to purchase additional shares of our common stock). See “Management—Equity Incentive Plan.”

 



 

32


Table of Contents
 

underwriters exercise their option to purchase additional shares of our common stock in full) after deducting the underwriting discount and estimated offering expenses payable by us. We intend to use the net proceeds from this offering to originate and acquire our target assets in a manner consistent with our investment strategy and investment guidelines described in this prospectus.

Until appropriate investments can be identified, our Manager may invest the net proceeds from this offering in money market funds, bank accounts, overnight repurchase agreements with primary federal reserve bank dealers collateralized by direct U.S. government obligations and other instruments or investments reasonably determined by our Manager to be of high quality and that are consistent with our intention to qualify as a REIT and maintain our exclusion or exemption from regulation under the Investment Company Act. These investments are expected to provide a lower net return than we seek to achieve from our target assets. In addition, prior to the time we have fully invested the net proceeds from this offering to originate or acquire our target assets, we may temporarily reduce amounts outstanding under our secured revolving repurchase facilities with a portion of the net proceeds from this offering.

See “Use of Proceeds.”

 

Distribution policy

Following the completion of this offering, we intend to make regular quarterly distributions to our stockholders, consistent with our intention to continue to qualify as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income. As a result, in order to satisfy the requirements for us to continue to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to our stockholders out of assets legally available therefor.

 

Restrictions on ownership and transfer

To assist us in qualifying as a REIT, our charter generally restricts ownership of our stock to no more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our charter also prohibits any person from directly or indirectly owning shares of our capital stock of any class or series if such ownership would result in us being “closely held” under Section 856(h) of the Internal Revenue Code or otherwise cause us to fail to qualify as a REIT.

 

10b5-1 Purchase Plan

We have entered into an agreement (the “10b5-1 Purchase Plan”) with Goldman Sachs & Co. LLC, one of the underwriters in this

 



 

33


Table of Contents
 

offering. Pursuant to the 10b5-1 Purchase Plan, Goldman Sachs & Co. LLC, as our agent, will buy in the open market up to $35.0 million in shares of our common stock in the aggregate during the period beginning four full calendar weeks following the completion of this offering and ending 12 months thereafter or, if sooner, the date on which all the capital committed to the 10b5-1 Purchase Plan has been exhausted. The 10b5-1 Purchase Plan will require Goldman Sachs & Co. LLC to purchase for us shares of our common stock when the market price per share is below the book value. The purchase of shares of our common stock by Goldman Sachs & Co. LLC for us pursuant to the 10b5-1 Purchase Plan is intended to satisfy the conditions of Rules 10b5-1 and 10b-18 under the Exchange Act and will otherwise be subject to applicable law, including Regulation M under the Securities Act, which may prohibit purchases under certain circumstances. Under the 10b5-1 Purchase Plan, Goldman Sachs & Co. LLC will increase the volume of purchases made for us as the market price per share of our common stock declines below the book value, subject to volume restrictions imposed by the 10b5-1 Purchase Plan and Rule 10b-18 under the Exchange Act. For purposes of the 10b5-1 Purchase Plan, “book value” means, as of the date of any purchase, the book value per share of our common stock and Class A common stock as of the end of the most recent quarterly period for which financial statements are available, calculated in accordance with GAAP and adjusted to give effect to any subsequent cash distribution made to holders of our common stock and Class A common stock from and after the record date for such distribution. Purchases of shares of our common stock by Goldman Sachs & Co. LLC for us under the 10b5-1 Purchase Plan may result in the market price of our common stock being higher than the price that otherwise might exist in the open market. See “Risk Factors—Risks Related to our Common Stock and this Offering—Purchases of our common stock by Goldman Sachs & Co. LLC for us under the 10b5-1 Purchase Plan may result in the market price of our common stock being higher than the price that otherwise might exist in the open market.”

 

Listing

Currently there is no public market for our common stock. Our common stock has been approved for listing, subject to official notice of issuance, on the NYSE under the symbol “TRTX.”

 

Risk factors

Investing in our common stock involves risks. You should carefully read and consider the information set forth under “Risk Factors” beginning on page 37 of this prospectus and all other information in this prospectus before making a decision to invest in our common stock.

 



 

34


Table of Contents

Summary Financial Information

You should read the following summary financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited and audited consolidated financial statements and the notes thereto. The summary consolidated income statement information for the three months ended March 31, 2017 and 2016 and the summary consolidated balance sheet information as of March 31, 2017 have been derived from our unaudited consolidated financial statements, included elsewhere in this prospectus, which, in the opinion of our management, have been prepared on a basis consistent with our audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial condition for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any future period. The summary consolidated income statement information for the years ended December 31, 2016 and 2015 and for the period from December 18, 2014 (inception) to December 31, 2014 and the summary consolidated balance sheet information as of December 31, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements, included elsewhere in this prospectus.

 

     Three Months Ended March 31,     Year Ended December 31,     Period from
December 18,
2014 (inception)
to December 31,
2014
 
(Dollars in thousands, except per share
data)
   2017     2016     2016     2015    

OPERATING DATA:

      

INTEREST INCOME

          

Interest Income

   $ 47,941     $ 33,732     $ 153,631     $ 128,647     $ 1,847  

Interest Expense

     (17,800 )     (12,930     (61,649     (47,564     (1,518
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     30,141       20,802       91,982       81,083       329  

Other Income

     122       15       416       54       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OTHER EXPENSES

          

Professional Fees

     729       338       3,260       5,224       7,719  

General and Administrative

     469       256       2,199       784       764  

Servicing Fees

     1,136       862       3,625       4,011       22  

Management Fee

     2,588       1,984       8,816       6,902       61  

Collateral Management Fee

     131       274       849       1,257       11  

Incentive Management Fee

     1,581       808       3,687       1,992       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Expenses

     6,634       4,522       22,436       20,170       8,577  

Net Income (Loss) Before Taxes

     23,629       16,295       69,962       60,967       (8,248

Income Taxes

     (154     (46     5       (1,612     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

     23,475       16,249       69,967       59,355       (8,248

Preferred Stock Dividends

     —         —         (16     (15     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 23,475     $ 16,249     $ 69,951     $ 59,340     $ (8,248
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Information:

          

Basic Earnings per Share

   $ 0.60     $ 0.56     $ 2.09     $ 2.23     $ (0.35

Diluted Earnings per Share

   $ 0.60     $ 0.56     $ 2.09     $ 2.23     $ (0.35

Dividends Declared per Share

   $ 0.54     $ —   (2)    $ 1.99     $ 2.41     $ —    

Weighted Average Number of Shares Outstanding, Basic and Diluted:

          

Common Stock

     38,260,053       28,309,783       32,663,085       26,121,077       23,865,684  

Class A Common Stock

     967,500       783,158       864,062       492,663       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     39,227,553       29,092,941       33,527,147       26,613,740       23,865,684  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 



 

35


Table of Contents
     March 31,      December 31,  
(Dollars in thousands, except per share data)    2017      2016      2016      2015      2014  

BALANCE SHEET DATA (at period end):

              

Total Assets

   $ 2,863,902      $ 2,217,599      $ 2,665,583      $ 2,119,753      $ 1,952,147  

Total Liabilities

   $ 1,889,787      $ 1,484,772      $ 1,694,894      $ 1,403,403      $ 1,363,753  

Total Equity

   $ 974,115      $ 732,827      $ 970,689      $ 716,350      $ 588,394  

Preferred Stock

   $ 125      $ 125      $ 125      $ 125        —    

Stockholders’ Equity, Net of Preferred Stock

   $ 973,990      $ 732,702      $ 970,564      $ 716,225      $ 588,394  

Number of Shares Outstanding at Period End(3)

     39,227,553        29,092,941        39,227,553        29,092,941        23,865,684  

Book Value per Share

   $ 24.83      $ 25.18      $ 24.74      $ 24.62      $ 24.65  

 

(1) Represents net income attributable to holders of our common stock and Class A common stock.

 

(2) We declared a dividend associated with the first quarter of 2016 of $0.53 per share. This dividend was declared on April 8, 2016 and paid on April 25, 2016.

 

(3) Includes shares of common stock and Class A common stock.

 



 

36


Table of Contents

RISK FACTORS

An investment in our common stock involves risks. Before making an investment decision, you should carefully consider the following risk factors, which address the material risks known to us concerning our business and an investment in our common stock, together with the other information contained in this prospectus. If any of the risks discussed in this prospectus were to occur, our business, financial condition, liquidity, results of operations and prospects and our ability to service our debt and make distributions to our stockholders could be materially and adversely affected (which we refer to collectively as “materially and adversely affecting us” or having “a material adverse effect on us,” and comparable phrases), the market price of our common stock could decline significantly and you could lose all or part of your investment in our common stock.

Some statements in this prospectus, including statements in the following risk factors, constitute forward-looking statements. Please refer to the section entitled “Cautionary Statement Regarding Forward-Looking Statements.”

Risks Related to Our Relationship with Our Manager and its Affiliates

We depend on our Manager and the personnel of TPG provided to our Manager for our success. We may not find a suitable replacement for our Manager if our Management Agreement is terminated, or if key personnel cease to be employed by TPG or otherwise become unavailable to us, which would materially and adversely affect us.

We are externally managed and advised by our Manager, an affiliate of TPG. We currently have no employees and all of our executive officers are employees of TPG. We are completely reliant on our Manager, which has significant discretion as to the implementation of our investment and operating policies and strategies.

Our success depends entirely upon the ongoing efforts, experience, diligence, skill, and network of business contacts of our executive officers and the other key personnel of TPG provided to our Manager and its affiliates. These individuals evaluate, negotiate, execute and monitor our loans and other investments and advise us regarding maintenance of our REIT status and exclusion or exemption from regulation under the Investment Company Act.

In addition, we can offer no assurance that our Manager will remain our investment manager or that we will continue to have access to our executive officers and the other key personnel of TPG who provide services to us. The initial term of our Management Agreement will extend to the third anniversary of the completion of this offering and will be automatically renewed for a one-year term each anniversary thereafter unless previously terminated as described herein. If we terminate our Management Agreement other than upon the occurrence of a cause event or if our Manager terminates our Management Agreement upon our material breach, we would be required to pay a very substantial termination fee to our Manager. See “—Termination of our Management Agreement would be costly.” Furthermore, if our Management Agreement is terminated and no suitable replacement is found to manage us, we may not be able to execute our business plan, which would materially and adversely affect us.

Other than any dedicated or partially dedicated chief financial officer that our Manager may elect to provide to us, the TPG personnel provided to our Manager, as our external manager, are not required to dedicate a specific portion of their time to the management of our business.

Other than with respect to any dedicated or partially dedicated chief financial officer that our Manager may elect to provide to us, neither our Manager nor any other TPG affiliate is obligated to dedicate any specific personnel exclusively to us nor are they or their personnel obligated to dedicate any specific portion of their time to the management of our business. Although our Manager has informed us that Robert Foley will serve as our

 

37


Table of Contents

chief financial and risk officer and that he will spend a substantial portion of his time on our affairs, key personnel, including Mr. Foley, provided to us by our Manager may become unavailable to us as a result of their departure from TPG or for any other reason. As a result, we cannot provide any assurances regarding the amount of time our Manager or its affiliates will dedicate to the management of our business and our Manager and its affiliates may have conflicts in allocating their time, resources and services among our business and any TPG Funds they may manage, and such conflicts may not be resolved in our favor. Each of our executive officers is also an employee of TPG, who has now or may be expected to have significant responsibilities for TPG Funds managed by TPG now or in the future. Consequently, we may not receive the level of support and assistance that we otherwise might receive if we were internally managed. Our Manager and its affiliates are not restricted from entering into other investment advisory relationships or from engaging in other business activities.

Our Manager manages our portfolio pursuant to very broad investment guidelines and is not required to seek the approval of our board of directors for each investment, financing, asset allocation or hedging decision made by it, which may result in our making riskier loans and other investments and which could materially and adversely affect us.

Our Manager is authorized to follow very broad investment guidelines that provide it with substantial discretion in investment, financing, asset allocation and hedging decisions. Our board of directors will periodically review our investment guidelines and our portfolio but will not, and will not be required to, review and approve in advance all of our proposed loans and other investments or our Manager’s financing, asset allocation or hedging decisions. In addition, in conducting periodic reviews, our directors may rely primarily on information provided, or recommendations made, to them by our Manager or its affiliates. Subject to maintaining our REIT qualification and our exclusion or exemption from regulation under the Investment Company Act, our Manager has significant latitude within the broad investment guidelines in determining the types of loans and other investments it makes for us, and how such loans and other investments are financed or hedged, which could result in investment returns that are substantially below expectations or losses, which could materially and adversely affect us.

Our Manager’s fee structure may not create proper incentives or may induce our Manager and its affiliates to make certain loans or other investments, including speculative investments, which increase the risk of our portfolio.

We pay our Manager base management fees regardless of the performance of our portfolio. Our Manager’s entitlement to base management fees, which are not based solely upon performance metrics or goals, might reduce its incentive to devote its time and effort to seeking loans or other investments that provide attractive risk-adjusted returns for our stockholders. Because the base management fees are also based in part on our outstanding equity, our Manager may also be incentivized to advance strategies that increase our equity, and there may be circumstances where increasing our equity will not optimize the returns for our stockholders. Consequently, we are required to pay our Manager base management fees in a particular period despite experiencing a net loss or a decline in the value of our portfolio during that period.

In addition, our Manager has the ability to earn incentive compensation each quarter based on our Core Earnings, as calculated in accordance with our Management Agreement, which may create an incentive for our Manager to invest in assets with higher yield potential, which are generally riskier or more speculative, or sell an asset prematurely for a gain, in an effort to increase our short-term net income and thereby increase the incentive compensation to which it is entitled. This could result in increased risk to our investment portfolio. If our interests and those of our Manager are not aligned, the execution of our business plan could be adversely affected, which could materially and adversely affect us.

 

38


Table of Contents

We may compete with existing and future TPG Funds, which may present various conflicts of interest that restrict our ability to pursue certain investment opportunities or take other actions that are beneficial to our business and result in decisions that are not in the best interests of our stockholders.

We are subject to conflicts of interest arising out of our relationship with TPG, including our Manager and its affiliates. Upon the completion of this offering, three of our seven directors will be employees of TPG. In addition, our chief financial and risk officer and our other executive officers are also employees of TPG, and we are managed by our Manager, a TPG affiliate. There is no guarantee that the policies and procedures adopted by us, the terms and conditions of our Management Agreement or the policies and procedures adopted by our Manager, TPG and their affiliates, as the case may be, will enable us to identify, adequately address or mitigate these conflicts of interest.

Some examples of conflicts of interest that may arise by virtue of our relationship with our Manager and TPG include:

 

    TPGs Policies and Procedures. Specified policies and procedures implemented by TPG, including our Manager, to mitigate potential conflicts of interest and address certain regulatory requirements and contractual restrictions may reduce the advantages across TPG’s various businesses that TPG expects to draw on for purposes of pursuing attractive investment opportunities. Because TPG has many different asset management, advisory and other businesses, it is subject to a number of actual and potential conflicts of interest, greater regulatory oversight and more legal and contractual restrictions than that to which it would otherwise be subject if it had just one line of business. In addressing these conflicts and regulatory, legal and contractual requirements across its various businesses, TPG has implemented certain policies and procedures (for example, information walls) that may reduce the benefits that TPG expects to utilize for our Manager for purposes of identifying and managing our investments. For example, TPG may come into possession of material non-public information with respect to companies that are TPG’s advisory clients in which our Manager may be considering making an investment on our behalf. As a consequence, that information, which could be of benefit to our Manager or us, might become restricted to those other businesses and otherwise be unavailable to our Manager, and could also restrict our Manager’s activities. Additionally, the terms of confidentiality or other agreements with or related to companies in which any TPG Fund has or has considered making an investment or which is otherwise an advisory client of TPG may restrict or otherwise limit the ability of TPG or our Manager to engage in businesses or activities competitive with such companies.

 

   

Allocation of Investment Opportunities. Certain inherent conflicts of interest arise from the fact that TPG and our Manager will provide investment management and other services both to us and to other persons or entities, whether or not the investment objectives or policies of any such other person or entity are similar to those of ours, including, without limitation, the sponsoring, closing and/or managing of any TPG Fund. However, for so long as our Management Agreement is in effect and TPG controls our Manager, neither our Manager nor TPG Real Estate Management, LLC, which is the manager of TPG Real Estate Partners, will directly or indirectly form any other public vehicle in the U.S. whose strategy is to primarily originate, acquire and manage performing commercial mortgage loans. The respective investment guidelines and policies of our business and the TPG Funds may or may not overlap, in whole or in part, and if there is any such overlap, investment opportunities will be allocated between us and the TPG Funds in a manner that may result in fewer investment opportunities being allocated to us than would have otherwise been the case in the absence of such TPG Funds. The methodology applied between us and one or more of the TPG Funds under TPG’s allocation policy (see “Our Manager and Our Management Agreement—Additional Activities of Our Manager; Allocation of Investment Opportunities; Conflicts of Interest”) may result in us not participating (and/or not participating to the same extent) in certain investment opportunities in which we would have otherwise participated had the related

 

39


Table of Contents
 

allocations been determined without regard to such allocation policy and/or based only on the circumstances of those particular investments. TPG and our Manager may also give advice to TPG Funds that may differ from advice given to us even though such TPG Funds’ investment objectives may be the same or similar to ours.

There are currently two TPG Fund complexes that are making new investments that may include the origination, acquisition and management of mortgage-related loans and CMBS as a part of their primary investment strategy, which funds collectively had approximately $10.8 billion in aggregate capital commitments as of March 31, 2017.

As a result, we may invest in commercial mortgage loans or other commercial real estate-related debt instruments alongside certain TPG Funds focusing on commercial mortgage loans or other commercial real estate-related debt instruments. To the extent any TPG Funds otherwise have investment objectives or guidelines that overlap with ours, in whole or in part, then, pursuant to TPG’s allocation policy, investment opportunities that fall within such common objectives or guidelines will generally be allocated among our company and one or more of such TPG Funds on a basis that our Manager and applicable TPG affiliates determine to be fair and reasonable in their sole discretion, subject to the following considerations:

 

    our and the relevant TPG Funds’ investment focuses and objectives;

 

    the TPG professionals who sourced the investment opportunity;

 

    the TPG professionals who are expected to oversee and monitor the investment;

 

    the expected amount of capital required to make the investment, as well as our and the relevant TPG Funds’ current and projected capacity for investing (including for any potential follow-on investments);

 

    our and the relevant TPG Funds’ targeted rates of return and investment holding periods;

 

    the stage of development of the prospective portfolio company or borrower;

 

    our and the relevant TPG Funds’ respective existing portfolio of investments;

 

    the investment opportunity’s risk profile;

 

    our and the relevant TPG Funds’ respective expected life cycles;

 

    any investment targets or restrictions (e.g., industry, size, etc.) that apply to us and the relevant TPG Funds;

 

    our ability and the ability of the relevant TPG Funds to accommodate structural, timing and other aspects of the investment process; and

 

    legal, tax, contractual, regulatory or other considerations that our Manager and applicable TPG affiliates deem relevant.

There is no assurance that any such conflicts arising out of the foregoing will be resolved in our favor. Our Manager and TPG affiliates are entitled to amend their investment objectives or guidelines at any time without prior notice to us or our consent.

 

   

Investments in Different Levels or Classes of an Issuer’s Securities. We and the TPG Funds may make investments at different levels of an issuer’s or borrower’s capital structure (for example, an

 

40


Table of Contents
 

investment by a TPG Fund in an equity or mezzanine interest with respect to the same portfolio entity in which we own a debt interest or vice versa) or in a different tranche of debt or equity with respect to an entity in which we have an interest. We may make investments that are senior or junior to, or have rights and interests different from or adverse to, the investments made by the TPG Funds. Such investments may conflict with the interests of such TPG Funds in related investments, and the potential for any such conflicts of interests may be heightened in the event of a default or restructuring of any such investments. Actions may be taken for the TPG Funds that are adverse to us, including with respect to the timing and manner of sale and actions taken in circumstances of financial distress. In addition, in connection with such investments, TPG will generally seek to implement certain procedures to mitigate conflicts of interest which typically involve maintaining a non-controlling interest in any such investment and a forbearance of rights, including certain non-economic rights, relating to the TPG Funds, such as where TPG may cause us to decline to exercise certain control- and/or foreclosure-related rights with respect to a portfolio entity (including following the vote of other third-party lenders generally or otherwise recusing itself with respect to decisions), including with respect to defaults, foreclosures, workouts, restructurings and/or exit opportunities, subject to certain limitations. Our Management Agreement requires our Manager to keep our board of directors reasonably informed on a periodic basis in connection with the foregoing, including with respect to transactions that involve investments at different levels of an issuer’s or borrower’s capital structure, as to which our Manager has agreed to provide our board of directors with quarterly updates. While TPG will seek to resolve any conflicts in a fair and equitable manner with respect to conflicts resolution among us and the TPG Funds generally, such transactions are not required to be presented to our board of directors for approval, and there can be no assurance that any such conflicts will be resolved in our favor.

 

    Assignment and Sharing or Limitation of Rights. We may invest alongside TPG Funds and in connection therewith may, for legal, tax, regulatory or other reasons which may be unrelated to us, share with or assign to such TPG Funds certain of our rights, in whole or in part, or agree to limit our rights, including in certain instances certain control- and/or foreclosure-related rights with respect to such shared investments and/or otherwise agree to implement certain procedures to ameliorate conflicts of interest which may in certain circumstances involve a forbearance of our rights. Such sharing or assignment of rights could make it more difficult for us to protect our interests and could give rise to a conflict (which may be exacerbated in the case of financial distress) and could result in a TPG Fund exercising such rights in a way adverse to us.

 

    Providing Debt Financings in connection with Acquisitions by Third Parties of Assets Owned by TPG Funds. We may provide financing (1) as part of the bid or acquisition by a third party to acquire interests in (or otherwise make an investment in the underlying assets of) a portfolio entity owned by one or more TPG Funds or their affiliates of assets and/or (2) with respect to one or more portfolio entities or borrowers in connection with a proposed acquisition or investment by one or more TPG Funds or their affiliates relating to such portfolio entities and/or their underlying assets. This may include making commitments to provide financing at, prior to or around the time that any such purchaser commits to or makes such investments. We may also make investments and provide debt financing with respect to portfolio entities in which TPG Funds and/or their affiliates hold or propose to acquire an interest. While the terms and conditions of any such debt commitments and related arrangements will generally be on market terms, the involvement of us and/or such TPG Funds or their affiliates in such transactions may affect the terms of such transactions or arrangements and/or may otherwise influence our Manager’s decisions with respect to the management of us and/or TPG’s Management of such TPG Funds and/or the relevant portfolio entity, which will give rise to potential or actual conflicts of interests and which may adversely impact us.

 

41


Table of Contents
    Pursuit of Differing Strategies. TPG and our Manager may determine that an investment opportunity may not be appropriate for us, but may be appropriate for one or more of the TPG Funds, or may decide that our company and certain of the TPG Funds should take differing positions with respect to a particular investment. In these cases, TPG and our Manager may pursue separate transactions for us and one or more TPG Funds. This may affect the market price or the terms of the particular investment or the execution of the transaction, or both, to the detriment or benefit of us and one or more TPG Funds. For example, a TPG investment manager may determine that it would be in the interest of a TPG Fund to sell a security that we hold long, potentially resulting in a decrease in the market price of the security held by us.

 

    Variation in Financial and Other Benefits. A conflict of interest arises where the financial or other benefits available to our Manager or its affiliates differ among us and the TPG Funds that it manages. If the amount or structure of the base management fees, incentive compensation and/or our Manager’s or its affiliates’ compensation differs among us and the TPG Funds (such as where certain TPG Funds pay higher base management fees, incentive compensation, performance-based management fees or other fees), our Manager or its affiliates might be motivated to help such TPG Funds over us. Similarly, the desire to maintain assets under management or to enhance our Manager’s or its affiliates’ performance records or to derive other rewards, financial or otherwise, could influence our Manager or its affiliates in affording preferential treatment to TPG Funds over us. Our Manager may, for example, have an incentive to allocate favorable or limited opportunity investments or structure the timing of investments to favor such TPG Funds. Additionally, our Manager might be motivated to favor TPG Funds in which it has an ownership interest or in which TPG has ownership interests. Conversely, if an investment professional at our Manager or its affiliates does not personally hold an investment in us but holds investments in TPG Funds, such investment professional’s conflicts of interest with respect to us may be more acute.

 

    Underwriting, Advisory and Other Relationships. As part of its regular business, TPG provides a broad range of underwriting, investment banking, placement agent and other services. In connection with selling investments by way of a public offering, a TPG broker-dealer may act as the managing underwriter or a member of the underwriting syndicate on a firm commitment basis and purchase securities on that basis. TPG may retain any commissions, remuneration, or other profits and receive compensation from such underwriting activities, which have the potential to create conflicts of interest. TPG may also participate in underwriting syndicates from time to time with respect to us or portfolio companies of TPG Funds, or may otherwise be involved in the private placement of debt or equity securities issued by us or such portfolio companies, or otherwise in arranging financings with respect thereto. Subject to applicable law, TPG may receive underwriting fees, placement commissions or other compensation with respect to such activities, which will not be shared with us or our stockholders. Where TPG serves as underwriter with respect to a portfolio company’s securities, we or the applicable TPG Fund holding such securities may be subject to a “lock-up” period following the offering under applicable regulations during which time our ability to sell any securities that we continue to hold is restricted. This may prejudice our ability to dispose of such securities at an opportune time.

In the regular course of its investment banking business, TPG represents potential purchasers, sellers and other involved parties, including corporations, financial buyers, management, shareholders and institutions, with respect to assets that are suitable for investment by us. In such case, TPG’s client would typically require TPG to act exclusively on its behalf, thereby precluding us from acquiring such assets. TPG will be under no obligation to decline any such engagement to make the investment opportunity available to us.

TPG has long-term relationships with a significant number of corporations and their senior management. In determining whether to invest in a particular transaction on our behalf, our

 

42


Table of Contents

Manager may consider those relationships (subject to its obligations under our Management Agreement), which may result in certain transactions that our Manager would not otherwise undertake or refrain from undertaking on our behalf in view of such relationships.

 

    Service Providers. Certain of our service providers or their affiliates (including administrators, lenders, brokers, attorneys, consultants and investment banking or commercial banking firms) also provide goods or services to, or have business, personal or other relationships with, TPG. Such service providers may be sources of investment opportunities, co-investors or commercial counterparties or portfolio companies of TPG Funds. Such relationships may influence our Manager in deciding whether to select such service providers. In certain circumstances, service providers or their affiliates may charge different rates or have different arrangements for services provided to TPG or TPG Funds as compared to services provided to us, which in certain circumstances may result in more favorable rates or arrangements than those payable by, or made with, us. In addition, in instances where multiple TPG businesses may be exploring a potential individual investment, certain of these service providers may choose to be engaged by TPG rather than us.

 

    Material, Non-Public Information. We, directly or through TPG, our Manager or certain of their respective affiliates, may come into possession of material non-public information with respect to an issuer or borrower in which we have invested or may invest. Should this occur, our Manager may be restricted from buying or selling securities, derivatives or loans of the issuer or borrower on our behalf until such time as the information becomes public or is no longer deemed material. Disclosure of such information to the personnel responsible for management of our business may be on a need-to-know basis only, and we may not be free to act upon any such information. Therefore, we and/or our Manager may not have access to material non-public information in the possession of TPG which might be relevant to an investment decision to be made by our Manager on our behalf, and our Manager may initiate a transaction or purchase or sell an investment which, if such information had been known to it, may not have been undertaken. Due to these restrictions, our Manager may not be able to initiate a transaction on our behalf that it otherwise might have initiated and may not be able to purchase or sell an investment that it otherwise might have purchased or sold, which could negatively affect us.

 

    Possible Future Activities. Our Manager and its affiliates may expand the range of services that they provide over time. Except as and to the extent expressly provided in our Management Agreement, our Manager and its affiliates will not be restricted in the scope of their businesses or in the performance of any such services (whether now offered or undertaken in the future) even if such activities could give rise to conflicts of interest, and whether or not such conflicts are described herein. Our Manager, TPG and their affiliates continue to develop relationships with a significant number of companies, financial sponsors and their senior managers, including relationships with clients who may hold or may have held investments similar to those intended to be made by us. These clients may themselves represent appropriate investment opportunities for us or may compete with us for investment opportunities.

 

    Transactions with TPG Funds. From time to time, we may enter into purchase and sale transactions with TPG Funds. Such transactions will be conducted in accordance with, and subject to, the terms and conditions of our Management Agreement (including the requirement that sales to, or acquisitions of investments or receipt of financing from, TPG, any TPG Fund or any of their affiliates be approved in advance by a majority of our independent directors) and our code of business conduct and ethics and applicable laws and regulations.

 

    Loan Refinancings. We may from time to time seek to participate in investments relating to the refinancing of loans held by TPG Funds. While it is expected that our participation in connection with such refinancing transactions will be at arms’ length and on market/contract terms, such transactions may give rise to potential or actual conflicts of interest.

 

43


Table of Contents

TPG may enter into one or more strategic relationships in certain geographical regions or with respect to certain types of investments that, although intended to provide greater opportunities for us, may require us to share such opportunities or otherwise limit the amount of an opportunity we can otherwise take.

Further conflicts could arise once we and TPG have made our and their respective investments. For example, if a company goes into bankruptcy or reorganization, becomes insolvent or otherwise experiences financial distress or is unable to meet its payment obligations or comply with covenants relating to securities held by us or by TPG, TPG may have an interest that conflicts with our interests or TPG may have information regarding the company that we do not have access to. If additional financing is necessary as a result of financial or other difficulties, it may not be in our best interests to provide such additional financing. If TPG were to lose investments as a result of such difficulties, the ability of our Manager to recommend actions in our best interests might be impaired.

Termination of our Management Agreement would be costly.

Termination of our Management Agreement without cause would be difficult and costly. Our independent directors will review our Manager’s performance and the fees that may be payable to our Manager annually and, following the initial term of three years, our Management Agreement may be terminated each year upon the affirmative vote of at least two-thirds of our independent directors, based upon their determination that (1) our Manager’s performance is unsatisfactory and materially detrimental to us and our subsidiaries taken as a whole or (2) the base management fee and incentive compensation, taken as a whole, payable to our Manager is not fair, subject to our Manager’s right to prevent any termination due to unfair fees by accepting a reduction of fees agreed to by at least two-thirds of our independent directors. We are required to provide our Manager with 180 days’ prior written notice of any such termination. Additionally, upon such a termination unrelated to a cause event, or if we materially breach our Management Agreement and our Manager terminates our Management Agreement, our Management Agreement provides that we will pay our Manager a termination fee equal to three times the sum of (x) the average annual base management fee and (y) the average annual incentive compensation earned by our Manager, in each case during the 24-month period immediately preceding the most recently completed calendar quarter prior to the date of termination or, if such termination occurs within the next two years, the base management fees and the incentive compensation will be annualized for such two-year period based on such fees actually received by our Manager during such period. These provisions increase the cost to us of terminating our Management Agreement and adversely affect our ability to terminate our Manager in the absence of a cause event.

Our Manager maintains a contractual as opposed to a fiduciary relationship with us. Our Manager’s liability is limited under our Management Agreement, and we have agreed to indemnify our Manager against certain liabilities.

Pursuant to our Management Agreement, our Manager assumes no responsibility to us other than to render the services called for thereunder in good faith and will not be responsible for any action of our board of directors in following or declining to follow its advice or recommendations, including as set forth in our investment guidelines. Our Manager maintains a contractual as opposed to a fiduciary relationship with us. Under the terms of our Management Agreement, our Manager and its affiliates, and their respective directors, officers, employees, members, partners and stockholders, will not be liable to us, any subsidiary of ours, our board of directors, our stockholders or any of our subsidiaries’ stockholders, members or partners for acts or omissions performed in accordance with and pursuant to our Management Agreement, except by reason of acts or omissions constituting bad faith, willful misconduct, gross negligence or reckless disregard of their duties under our Management Agreement. We have agreed to indemnify our Manager, its affiliates and the directors, officers, employees, members, partners and stockholders of our Manager and its affiliates from any and all expenses, losses, damages, liabilities, demands, charges and claims of any nature whatsoever (including reasonable attorneys’ fees) in respect of or arising from any acts or omissions of such party performed in good faith under our Management Agreement and not constituting bad faith, willful misconduct, gross negligence or

 

44


Table of Contents

reckless disregard of duties of such party under our Management Agreement. As a result, we could experience poor performance or losses for which our Manager would not be liable.

We do not own the TPG name, but we may use it as part of our corporate name pursuant to a trademark license agreement with an affiliate of TPG. Use of the name by other parties or the termination of our trademark license agreement may harm our business.

In connection with this offering, we have entered into a trademark license agreement (the “trademark license agreement”) with an affiliate of TPG (the “licensor”), pursuant to which it has granted us a fully paid-up, royalty-free, non-exclusive, non-transferable, non-sublicensable license to use the name “TPG RE Finance Trust, Inc.” and the ticker symbol “TRTX.” Under this agreement, we have a right to use this name for so long as our Manager (or another TPG affiliate that serves as our manager) remains an affiliate of the licensor under the trademark license agreement. The trademark license agreement may be terminated by either party as a result of certain breaches or upon 90 days’ prior written notice; provided that upon notification of such termination by us, the licensor may elect to effect termination of the trademark license agreement immediately at any time after 30 days from the date of such notification. The licensor will retain the right to continue using the “TPG” name. The trademark license agreement does not permit us to preclude the licensor from licensing or transferring the ownership of the “TPG” name to third parties, some of whom may compete with us. Consequently, we may be unable to prevent any damage to goodwill that may occur as a result of the activities of the licensor, TPG or others. Furthermore, in the event that the trademark license agreement is terminated, we will be required to, among other things, change our name and NYSE ticker symbol. Any of these events could disrupt our recognition in the market place, damage any goodwill we may have generated and otherwise have a material adverse effect on us.

Risks Related to Our Lending and Investment Activities

Our success depends on the availability of attractive investment opportunities and our Manager’s ability to identify, structure, consummate, leverage, manage and realize returns on our investments.

Our operating results are dependent upon the availability of, as well as our Manager’s ability to identify, structure, consummate, leverage, manage and realize returns on our loans and other investments. In general, the availability of attractive investment opportunities and, consequently, our operating results, will be affected by the level and volatility of interest rates, conditions in the financial markets, general economic conditions, the demand for investment opportunities in our target assets and the supply of capital for such investment opportunities. We cannot make any assurances that our Manager will be successful in identifying and consummating attractive investments or that such investments, once made, will perform as anticipated.

Our commercial mortgage loans and other commercial real estate-related debt instruments expose us to risks associated with real estate investments generally.

We seek to originate and selectively acquire commercial mortgage loans and other commercial real estate-related debt instruments. Any deterioration of real estate fundamentals generally, and in the United States in particular, could negatively impact our performance by making it more difficult for borrowers to satisfy their debt payment obligations, increasing the default risk applicable to borrowers and making it relatively more difficult for us to generate attractive risk-adjusted returns. Real estate investments will be subject to various risks, including:

 

    economic and market fluctuations;

 

    political instability or changes;

 

    changes in environmental, zoning and other laws;

 

45


Table of Contents
    casualty or condemnation losses;

 

    regulatory limitations on rents;

 

    decreases in property values;

 

    changes in the appeal of properties to tenants;

 

    changes in supply (resulting from the recent growth in commercial real estate debt funds or otherwise) and demand;

 

    energy supply shortages;

 

    various uninsured or uninsurable risks;

 

    natural disasters;

 

    changes in government regulations (such as rent control);

 

    changes in the availability of debt financing and/or mortgage funds which may render the sale or refinancing of properties difficult or impracticable;

 

    increased mortgage defaults;

 

    increases in borrowing rates; and

 

    negative developments in the economy and/or adverse changes in real estate values generally and other risk factors that are beyond our control.

We cannot predict the degree to which economic conditions generally, and the conditions for commercial real estate debt investing in particular, will improve or decline. Any declines in the performance of the U.S. and global economies or in the real estate debt markets could have a material adverse effect on us. Market conditions relating to real estate debt investments have evolved since the global financial crisis, which has resulted in a modification to certain loan structures and/or market terms. Any such changes in loan structures and/or market terms may make it relatively more difficult for us to monitor and evaluate our loans and other investments.

Commercial real estate debt instruments that are secured or otherwise supported, directly or indirectly, by commercial property are subject to delinquency, foreclosure and loss, which could materially and adversely affect us.

Commercial real estate debt instruments, such as mortgage loans, that are secured or, in the case of certain assets (including participation interests, mezzanine loans and preferred equity), supported by commercial property are subject to risks of delinquency and foreclosure and risks of loss that are greater than similar risks associated with loans made on the security of single-family residential property. The ability of a borrower to pay the principal of and interest on a loan secured by an income-producing property typically is dependent primarily upon the successful operation of such property rather than upon the existence of independent income or assets of the borrower. If the net operating income of the property is reduced, the borrower’s ability to pay the principal of and interest on the loan in a timely manner, or at all, may be impaired and therefore could reduce our return from an affected property or investment, which could materially and adversely affect us. Net operating income of an income-producing property may be adversely affected by the risks particular to real property described above, as well as, among other things:

 

    tenant mix and tenant bankruptcies;

 

46


Table of Contents
    success of tenant businesses;

 

    property management decisions, including with respect to capital improvements, particularly in older building structures;

 

    property location and condition, including, without limitation, any need to address environmental contamination at a property;

 

    competition from comparable types of properties;

 

    changes in global, national, regional or local economic conditions or changes in specific industry segments;

 

    declines in regional or local real estate values or rental or occupancy rates; and

 

    increases in interest rates, real estate tax rates and other operating expenses.

In the event of any default under a mortgage loan held directly by us, we will bear a risk of loss to the extent of any deficiency between the value of the collateral and the principal of and accrued interest on the mortgage loan. In the event of the bankruptcy of a mortgage loan borrower, the mortgage loan to that borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the mortgage loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law. Foreclosure of a mortgage loan can be an expensive and lengthy process that could have a substantial negative effect on any anticipated return on the foreclosed mortgage loan.

We intend to originate or acquire transitional loans, which will involve greater risk of loss than stabilized commercial mortgage loans.

We originate and acquire transitional loans secured by first lien mortgages on commercial real estate. These loans provide interim financing to borrowers seeking short-term capital for the acquisition or transition (for example, lease up and/or rehabilitation) of commercial real estate and generally have a maturity of three years or less. Such a borrower under a transitional loan has usually identified an asset that has been under-managed and/or is located in a recovering market. If the market in which the asset is located fails to recover according to the borrower’s projections, or if the borrower fails to improve the quality of the asset’s management and/or the value of the asset, the borrower may not receive a sufficient return on the asset to satisfy the transitional loan, and we will bear the risk that we may not recover some or all of our investment.

In addition, borrowers usually use the proceeds of a conventional mortgage loan to repay a transitional loan. We may therefore be dependent on a borrower’s ability to obtain permanent financing to repay a transitional loan, which could depend on market conditions and other factors. In the event of any failure to repay under a transitional loan held by us, we will bear the risk of loss of principal and non-payment of interest and fees to the extent of any deficiency between the value of the mortgage collateral and the principal amount and unpaid interest of the transitional loan.

There can be no assurances that the U.S. or global financial systems will remain stable, and the occurrence of another significant credit market disruption may negatively impact our ability to execute our investment strategy, which would materially and adversely affect us.

The U.S. and global financial markets experienced significant disruptions in the past, during which times global credit markets collapsed, borrowers defaulted on their loans at historically high levels, banks and other lending institutions suffered heavy losses and the value of real estate declined. During such periods, a significant number of borrowers became unable to pay principal and interest on outstanding loans as the value of their real

 

47


Table of Contents

estate declined. Declining real estate values also reduced the level of new mortgage and other real estate-related loan originations. Instability in the U.S. and global financial markets in the future could be caused by any number of factors beyond our control, including, without limitation, terrorist attacks or other acts of war and adverse changes in national or international economic, market and political conditions. Any future sustained period of increased payment delinquencies, foreclosures or losses could adversely affect both our net interest income from loans in our portfolio as well as our ability to originate and acquire loans, which would materially and adversely affect us.

Difficulty in redeploying the proceeds from repayments of our existing loans and other investments could materially and adversely affect us.

As of March 31, 2017, our portfolio, excluding CMBS investments, had a weighted average term to extended maturity (assuming all extension options have been exercised by borrowers) of 3.0 years. As our loans and other investments are repaid, we will have to redeploy the proceeds we receive into new loans and investments and repay borrowings under our secured revolving repurchase facilities and other financing arrangements. It is possible that we will fail to identify reinvestment options that would provide a yield and/or a risk profile that is comparable to the asset that was repaid. If we fail to redeploy the proceeds we receive in repayment of a loan or other investment in equivalent or better alternatives we could be materially and adversely affected.

We operate in a competitive market for the origination and acquisition of attractive investment opportunities and competition may limit our ability to originate or acquire attractive investments in our target assets, which could have a material adverse effect on us.

We operate in a competitive market for the origination and acquisition of attractive investment opportunities. We compete with a variety of institutional investors, including other REITs, debt funds, specialty finance companies, savings and loan associations, banks, mortgage bankers, insurance companies, mutual funds, institutional investors, investment banking firms, financial institutions, private equity and hedge funds, governmental bodies and other entities and may compete with TPG Funds. Many of our competitors are substantially larger and have considerably greater financial, technical and marketing resources than we do. Several of our competitors, including other REITs, have recently raised, or are expected to raise, significant amounts of capital, and may have investment objectives that overlap with our investment objectives, which may create additional competition for lending and other investment opportunities. Some of our competitors may have a lower cost of funds and access to funding sources that may not be available to us or are only available to us on substantially less attractive terms. Many of our competitors are not subject to the operating constraints associated with REIT tax compliance or maintenance of an exclusion or exemption from the Investment Company Act. In addition, some of our competitors may have higher risk tolerances or different risk assessments, which could allow them to consider a wider variety of investments and establish more lending relationships than we do. Competition may result in realizing fewer investments, higher prices, acceptance of greater risk, greater defaults, lower yields or a narrower spread of yields over our borrowing costs. In addition, competition for attractive investments could delay the investment of our capital. Furthermore, changes in the financial regulatory regime following the 2016 U.S. Presidential election could decrease the current restrictions on banks and other financial institutions and allow them to compete with us for investment opportunities that were previously not available to, or otherwise pursued by, them. See “—Risks Related to Our Company—Changes in laws or regulations governing our operations, changes in the interpretation thereof or newly enacted laws or regulations and any failure by us to comply with these laws or regulations could materially and adversely affect us.”

As a result, competition may limit our ability to originate or acquire attractive investments in our target assets and could result in reduced returns. We can provide no assurance that we will be able to identify and originate or acquire attractive investments that are consistent with our investment strategy.

Interest rate fluctuations could significantly decrease our ability to generate income on our investments, which could materially and adversely affect us.

Our primary interest rate exposure relates to the yield on our investments and the financing cost of our debt, as well as any interest rate swaps that we may utilize for hedging purposes. Changes in interest rates affect our net

 

48


Table of Contents

interest income, which is the difference between the interest income we earn on our interest-earning investments and the interest expense we incur in financing these investments. Interest rate fluctuations resulting in our interest expense exceeding our interest income would result in operating losses for us. Changes in the level of interest rates also may affect our ability to originate or acquire investments and may impair the value of our investments and our ability to realize gains from the disposition of assets. Changes in interest rates may also affect borrower default rates.

Our operating results depend, in part, on differences between the income earned on our investments, net of credit losses, and our financing costs. For any period during which our investments are not match-funded, the income earned on such investments may respond more slowly to interest rate fluctuations than the cost of our borrowings. Consequently, changes in interest rates, particularly short-term interest rates, could materially and adversely affect us.

Prepayment rates may adversely affect our financial performance and cash flows and the value of certain of our investments.

Our business is currently focused on originating floating rate mortgage loans secured by commercial real estate assets. Generally, our mortgage loan borrowers may repay their loans prior to their stated maturities. In periods of declining interest rates and/or credit spreads, prepayment rates on loans generally increase. If general interest rates or credit spreads decline at the same time, the proceeds of such prepayments received during such periods may not be reinvested for some period of time and may be reinvested by us in comparable assets yielding less than the yields on the assets that were prepaid.

Because our mortgage loans are generally not originated or acquired at a premium to par, prepayment rates do not materially affect the value of such loan assets. However, the value of certain other assets may be affected by prepayment rates. For example, if we acquire fixed rate CMBS or other fixed rate mortgage-related securities, or a pool of such mortgage securities in the future, we would anticipate that the underlying mortgages would prepay at a projected rate generating an expected yield. If we were to purchase such assets at a premium to par value, if borrowers prepay their loans faster than expected, the corresponding prepayments on any such mortgage-related securities would likely reduce the expected yield. Conversely, if we were to purchase such assets at a discount to par value, when borrowers prepay their loans slower than expected, the decrease in corresponding prepayments on the mortgage-related securities would likely reduce the expected yield. In addition, if we were to purchase such assets at a discount to par value, when borrowers prepay their loans faster than expected, the increase in corresponding prepayments on the mortgage-related securities would likely increase the expected yield.

Prepayment rates on floating rate and fixed rate loans may differ in different interest rate environments, and may be affected by a number of factors, including, but not limited to, economic, social, geographic, demographic and legal factors, all of which are beyond our control, and structural factors such as call protection. Consequently, such prepayment rates cannot be predicted with certainty and no strategy can completely insulate us from prepayment risk. See “Prospectus Summary—Recent Developments—Repayments.”

Our investments may be concentrated and could be subject to risk of default.

We are not required to observe specific diversification criteria, except as may be set forth in the investment guidelines adopted by our board of directors. Therefore, our investments in our target assets may at times be concentrated in certain property types that are subject to higher risk of foreclosure, or secured by properties concentrated in a limited number of geographic locations. For example, as of March 31, 2017, approximately 24.1% and 18.7% of the loans in our portfolio, based on total loan commitments and carrying value, respectively, consisted of condominium loans. Although we attempt to mitigate our risk through various credit and structural protections, including completion guarantees and requiring significant pre-sales pursuant to executed contracts with meaningful cash deposits, we cannot assure you that these efforts will be successful. To the extent that our portfolio is concentrated in any one region or type of asset, downturns relating generally to such region or type of asset may result in defaults on a number of our investments within a short time period,

 

49


Table of Contents

which may reduce our net income and the market price of our common stock and, accordingly, have a material adverse effect on us.

The illiquidity of certain of our investments may materially and adversely affect us.

The illiquidity of certain of our investments may make it difficult for us to sell such loans and other investments if the need or desire arises. In addition, certain of our loans and other investments may become less liquid after we originate or acquire them as a result of periods of delinquencies or defaults or turbulent market conditions, which may make it more difficult for us to dispose of such loans and other investments at advantageous times or in a timely manner. Moreover, we expect that many of our investments will not be registered under the relevant securities laws, resulting in prohibitions against their transfer, sale, pledge or their disposition except in transactions that are exempt from registration requirements or are otherwise in accordance with such laws. As a result, many of our loans and other investments are or will be illiquid, and if we are required to liquidate all or a portion of our portfolio quickly, for example as a result of margin calls, we may realize significantly less than the value at which we have previously recorded our investments. Further, we may face other restrictions on our ability to liquidate a loan or other investment to the extent that we or our Manager (and/or its affiliates) has or could be attributed as having material, non-public information regarding such business entity. As a result, our ability to vary our portfolio in response to changes in economic and other conditions may be relatively limited, which could materially and adversely affect us.

Most of the commercial mortgage loans that we originate or acquire are nonrecourse loans and the assets securing these loans may not be sufficient to protect us from a partial or complete loss if the borrower defaults on the loan, which could materially and adversely affect us.

Except for customary nonrecourse carve-outs for certain actions and environmental liability, most commercial mortgage loans are effectively nonrecourse obligations of the sponsor and borrower, meaning that there is no recourse against the assets of the borrower or sponsor other than the underlying collateral. In the event of any default under a commercial mortgage loan held directly by us, we will bear a risk of loss to the extent of any deficiency between the value of the collateral and the principal of and accrued interest on the mortgage loan, which could materially and adversely affect us. Even if a commercial mortgage loan is recourse to the borrower (or if a nonrecourse carve-out to the borrower applies), in most cases, the borrower’s assets are limited primarily to its interest in the related mortgaged property. Further, although a commercial mortgage loan may provide for limited recourse to a principal or affiliate of the related borrower, there is no assurance that any recovery from such principal or affiliate will be made or that such principal’s or affiliate’s assets would be sufficient to pay any otherwise recoverable claim. In the event of the bankruptcy of a borrower, the loan to such borrower will be deemed to be secured only to the extent of the value of the underlying collateral at the time of bankruptcy (as determined by the bankruptcy court), and the lien securing the loan will be subject to the avoidance powers of the bankruptcy trustee or debtor-in-possession to the extent the lien is unenforceable under state law.

We may not have control over certain of our investments.

Our ability to manage our portfolio may be limited by the form in which our investments are made. In certain situations, we may:

 

    acquire loans or investments subject to rights of senior classes and servicers under intercreditor or servicing agreements;

 

    acquire only a minority and/or a non-controlling participation in an underlying loan or investment;

 

    co-invest with others through partnerships, joint ventures or other entities, thereby acquiring non-controlling interests; or

 

    rely on independent third-party management or servicing with respect to the management of an asset.

 

50


Table of Contents

Therefore, we may not be able to exercise control over all aspects of our loans and investments. Such financial assets may involve risks not present in investments where senior creditors, junior creditors, servicers or third parties controlling investors are not involved. Our rights to control the process following a borrower default may be subject to the rights of senior or junior creditors or servicers whose interests may not be aligned with ours. A partner or co-venturer may have financial difficulties resulting in a negative impact on such asset, may have economic or business interests or goals that are inconsistent with ours, or may be in a position to take action contrary to our investment objectives. In addition, we may, in certain circumstances, be liable for the actions of our partners or co-venturers.

Future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance on joint venture partners’ financial condition and liquidity and disputes between us and our joint venture partners.

We may in the future make investments through joint ventures. Such joint venture investments may involve risks not otherwise present when we originate or acquire investments without partners, including the following:

 

    we may not have exclusive control over the investment or the joint venture, which may prevent us from taking actions that are in our best interest;

 

    joint venture agreements often restrict the transfer of a partner’s interest or may otherwise restrict our ability to sell the interest when we desire and/or on advantageous terms;

 

    any future joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate procedures requiring the other partner to choose between buying the other partner’s interest or selling its interest to that partner;

 

    we may not be in a position to exercise sole decision-making authority regarding the investment or joint venture, which could create the potential risk of creating impasses on decisions, such as with respect to acquisitions or dispositions;

 

    a partner may, at any time, have economic or business interests or goals that are, or that may become, inconsistent with our business interests or goals;

 

    a partner may be in a position to take action contrary to our instructions, requests, policies or objectives, including our policy with respect to maintaining our qualification as a REIT and our exclusion or exemption from registration under the Investment Company Act;

 

    a partner may fail to fund its share of required capital contributions or may become bankrupt, which may mean that we and any other remaining partners generally would remain liable for the joint venture’s liabilities;

 

    our relationships with our partners are contractual in nature and may be terminated or dissolved under the terms of the applicable joint venture agreements and, in such event, we may not continue to own or operate the interests or investments underlying such relationship or may need to purchase such interests or investments at a premium to the market price to continue ownership;

 

    disputes between us and a partner may result in litigation or arbitration that could increase our expenses and prevent our Manager and our officers and directors from focusing their time and efforts on our business and could result in subjecting the investments owned by the joint venture to additional risk; or

 

   

we may, in certain circumstances, be liable for the actions of a partner, and the activities of a partner could adversely affect our ability to maintain our qualification as a REIT or our exclusion or

 

51


Table of Contents
 

exemption from registration under the Investment Company Act, even though we do not control the joint venture.

Any of the above may subject us to liabilities in excess of those contemplated and adversely affect the value of our future joint venture investments.

We are subject to additional risks associated with investments in the form of loan participation interests.

We have in the past invested, and may in the future invest, in loan participation interests in which another lender or lenders share with us the rights, obligations and benefits of a commercial mortgage loan made by an originating lender to a borrower. Accordingly, we will not be in privity of contract with a borrower because the other lender or participant is the record holder of the loan and, therefore, we will not have any direct right to any underlying collateral for the loan. These loan participations may be senior, pari passu or junior to the interests of the other lender or lenders in respect of distributions from the commercial mortgage loan. Furthermore, we may not be able to control the pursuit of any rights or remedies under the commercial mortgage loan, including enforcement proceedings in the event of default thereunder. In certain cases, the original lender or another participant may be able to take actions in respect of the commercial mortgage loan that are not in our best interests. In addition, in the event that (1) the owner of the loan participation interest does not have the benefit of a perfected security interest in the lender’s rights to payments from the borrower under the commercial mortgage loan or (2) there are substantial differences between the terms of the commercial mortgage loan and those of the applicable loan participation interest, such loan participation interest could be recharacterized as an unsecured loan to a lender that is the record holder of the loan in such lender’s bankruptcy, and the assets of such lender may not be sufficient to satisfy the terms of such loan participation interest. Accordingly, we may face greater risks from loan participation interests than if we had made first mortgage loans directly to the owners of real estate collateral.

Mezzanine loans, B-Notes and other investments that are subordinated or otherwise junior in an issuer’s capital structure, such as preferred equity, and that involve privately negotiated structures will expose us to greater risk of loss.

We have in the past originated and acquired, and may in the future originate and acquire, mezzanine loans, B-Notes and other investments that are subordinated or otherwise junior in an issuer’s capital structure, such as preferred equity, and that involve privately negotiated structures. To the extent we invest in subordinated debt or mezzanine tranches of an entity’s capital structure or preferred equity, such investments and our remedies with respect thereto, including the ability to foreclose on any collateral securing such investments, will be subject to the rights of holders of more senior tranches in the issuer’s capital structure and, to the extent applicable, contractual intercreditor and/or participation agreement provisions, which will expose us to greater risk of loss.

As the terms of such loans and investments are subject to contractual relationships among lenders, co-lending agents and others, they can vary significantly in their structural characteristics and other risks. For example, the rights of holders of B-Notes to control the process following a borrower default may vary from transaction to transaction. Further, B-Notes typically are secured by a single property and accordingly reflect the risks associated with significant concentration. Like B-Notes, mezzanine loans are by their nature structurally subordinated to more senior property-level financings. If a borrower defaults on our mezzanine loan or on debt senior to our loan, or if the borrower is in bankruptcy, our mezzanine loan will be satisfied only after the property-level debt and other senior debt is paid in full. As a result, a partial loss in the value of the underlying collateral can result in a total loss of the value of the mezzanine loan. In addition, even if we are able to foreclose on the underlying collateral following a default on a mezzanine loan, we would be substituted for the defaulting borrower and, to the extent income generated on the underlying property is insufficient to meet outstanding debt obligations on the property, we may need to commit substantial additional capital and/or deliver a replacement guarantee by a creditworthy entity, which could include us, to stabilize the property and prevent additional defaults to lenders with existing liens on the property.

 

52


Table of Contents

Our origination or acquisition of construction loans exposes us to an increased risk of loss.

We have in the past originated or acquired construction loans and expect to continue to do so in the future. If we fail to fund our entire commitment on a construction loan or if a borrower otherwise fails to complete the construction of a project, there could be adverse consequences associated with the loan, including, but not limited to: a loss of the value of the property securing the loan, especially if the borrower is unable to raise funds to complete construction from other sources; a borrower claim against us for failure to perform under the loan documents; increased costs to the borrower that the borrower is unable to pay; a bankruptcy filing by the borrower; and abandonment by the borrower of the collateral for the loan. As described below, the process of foreclosing on a property is time-consuming, and we may incur significant expense if we foreclose on a property securing a loan under these or other circumstances.

Risks of cost overruns and non-completion of the construction or renovation of the properties underlying loans we originate or acquire could materially and adversely affect us.

The renovation, refurbishment or expansion by a borrower of a mortgaged property involves risks of cost overruns and non-completion. Costs of construction or renovation to bring a property up to standards established for the market intended for that property may exceed original estimates, possibly making a project uneconomical. Other risks may include: environmental risks, permitting risks, other construction risks and subsequent leasing of the property not being completed on schedule or at projected rental rates. If such construction or renovation is not completed in a timely manner, or if it costs more than expected, the borrower may experience a prolonged impairment of net operating income and may not be able to make payments of interest or principal to us, which could materially and adversely affect us.

Investments that we make in CMBS, CLOs, CDOs and other similar structured finance investments pose additional risks.

We have in the past invested, and may in the future invest, in CMBS. In addition, we may invest in subordinate classes of CLOs, CDOs and other similar structured finance investments in a structure of securities secured by a pool of mortgages or loans. Such securities are the first or among the first to bear the loss upon a restructuring or liquidation of the underlying collateral and the last to receive payment of interest and principal. Thus, there is generally only a nominal amount of equity or other debt securities junior to such positions, if any, issued in such structures. The estimated fair values of such subordinated interests tend to be much more sensitive to adverse economic downturns and underlying borrower developments than more senior securities. A projection of an economic downturn, for example, could cause a decline in the price of lower credit quality CMBS, CLOs or CDOs because the ability of borrowers to make principal and interest payments on the mortgages or loans underlying such securities may be impaired, as had occurred throughout the global financial crisis.

Subordinate interests such as CLOs, CDOs and similar structured finance investments generally are not actively traded and are relatively illiquid investments and volatility in CLO and CDO trading markets may cause the value of these investments to decline. In addition, if the underlying mortgage portfolio has been overvalued by the originator, or if the values subsequently decline and, as a result, less collateral value is available to satisfy interest and principal payments and any other fees in connection with the trust or other conduit arrangement for such securities, we may incur significant losses.

With respect to the CMBS, CLOs and CDOs in which we may invest, control over the related underlying loans will be exercised through a special servicer or collateral manager designated by a “directing certificate holder” or a “controlling class representative,” or otherwise pursuant to the related securitization documents. We may acquire classes of CMBS, CLOs or CDOs, for which we may not have the right to appoint the directing certificate holder or otherwise direct the special servicing or collateral management. With respect to the management and servicing of those loans, the related special servicer or collateral manager may take actions that could materially and adversely affect our interests.

 

53


Table of Contents

We may finance first mortgage loans, which may present greater risks than if we had made first mortgages directly to owners of real estate collateral.

Our portfolio may include first mortgage loan-on-loan financings, which are loans made to holders of mortgage loans that are secured by commercial real estate. While we will have certain rights with respect to the real estate collateral underlying a first mortgage loan, the holder of the commercial real estate first mortgage loans may fail to exercise its rights with respect to a default or other adverse action relating to the underlying real estate collateral or fail to promptly notify us of such an event, which would adversely affect our ability to enforce our rights. In addition, in the event of the bankruptcy of the borrower under the first mortgage loan, we may not have full recourse to the assets of the holder of the commercial real estate loan, or the assets of the holder of the commercial real estate loan may not be sufficient to satisfy our first mortgage loan financing. Accordingly, we may face greater risks from our first mortgage loan financings than if we had made first mortgage loans directly to owners of real estate collateral.

Investments in non-conforming and non-investment grade rated investments involve an increased risk of default and loss.

Many of our investments may not conform to conventional loan standards applied by traditional lenders and either will not be rated (as is often the case for private loans) or will be rated as non-investment grade by the rating agencies. As a result, these investments should be expected to have an increased risk of default and loss than investment-grade rated assets. Any loss we incur may be significant and may materially and adversely affect us. Our investment guidelines do not limit the percentage of unrated or non-investment grade rated assets we may hold in our portfolio.

Any credit ratings assigned to our investments will be subject to ongoing evaluations and revisions and we cannot assure you that those ratings will not be downgraded.

Some of our investments may be rated by rating agencies. Any credit ratings on our investments are subject to ongoing evaluation by credit rating agencies, and we cannot assure you that any such ratings will not be downgraded or withdrawn by a rating agency in the future if, in its judgment, circumstances warrant. If rating agencies assign a lower-than-expected rating or reduce or withdraw, or indicate that they may reduce or withdraw, their ratings of our investments in the future, the value and liquidity of our investments could significantly decline, which would adversely affect the value of our investment portfolio and could result in losses upon disposition or the failure of borrowers to satisfy their debt service obligations to us.

We may invest in derivative instruments, which would subject us to increased risk of loss.

Subject to maintaining our qualification as a REIT, we may invest in derivative instruments. Derivative instruments, especially when purchased in large amounts, may not be liquid in all circumstances, so that in volatile markets we may not be able to close out a position without incurring a loss. The prices of derivative instruments, including swaps, futures, forwards and options, are highly volatile and such instruments may subject us to significant losses. The value of such derivatives also depends upon the price of the underlying instrument or commodity. Such derivatives and other customized instruments also are subject to the risk of non-performance by the relevant counterparty. In addition, actual or implied daily limits on price fluctuations and speculative position limits on the exchanges or over-the-counter markets in which we may conduct our transactions in derivative instruments may prevent prompt liquidation of positions, subjecting us to the potential of greater losses. Derivative instruments that may be purchased or sold by us may include instruments not traded on an exchange. The risk of non-performance by the obligor on such an instrument may be greater and the ease with which we can dispose of or enter into closing transactions with respect to such an instrument may be less than in the case of an exchange-traded instrument. In addition, significant disparities may exist between “bid” and “asked” prices for derivative instruments that are traded over-the-counter and not on an exchange. Such over-the-counter derivatives are also typically not subject to the same type of investor protections or governmental regulation as exchange-traded instruments.

 

54


Table of Contents

In addition, we may invest in derivative instruments that are neither presently contemplated nor currently available, but which may be developed in the future, to the extent such opportunities are both consistent with our investment objectives and legally permissible. Any such investments may expose us to unique and presently indeterminate risks, the impact of which may not be capable of determination until such instruments are developed and/or we determine to make such an investment.

We may originate or acquire commercial mortgage loans and other commercial real estate-related debt instruments secured or supported by assets located outside the United States and, as a result, we will be subject to additional risks.

While we currently intend to originate or acquire commercial mortgage loans and other commercial real estate-related debt instruments secured or, in the case of certain assets (including mezzanine loans and preferred equity), supported primarily by U.S. collateral, we may originate and acquire investments secured or supported by assets located outside the U.S. in the future, subject to market conditions. As a result, it is possible that we may own non-U.S. real estate directly in the future upon a default of a commercial mortgage loan or other commercial real estate-related debt instrument. Non-U.S. real estate investments are subject to various additional risks, including:

 

    currency exchange matters, including fluctuations in currency exchange rates and costs associated with conversion of investment principal and income from one currency into another;

 

    financing to purchase assets located outside the United States may be unavailable on favorable terms or at all, or may be subject to non-customary covenants that hinder our operations;

 

    less developed, stable or efficient financial markets than in the United States, which may lead to potential price volatility and relative illiquidity;

 

    the burdens of complying with international regulatory requirements and prohibitions that differ between jurisdictions;

 

    the existence of tariffs and other trade barriers or restrictions;

 

    changes in laws or clarifications to existing laws that could impact our tax treaty positions, which could adversely impact the returns on our investments;

 

    the potential for a less developed legal or regulatory environment, differences in the legal and regulatory environment or enhanced legal and regulatory compliance;

 

    political hostility to investments by foreign investors;

 

    higher rates of inflation;

 

    higher transaction costs;

 

    difficulty enforcing contractual obligations;

 

    fewer investor protections;

 

    certain economic and political risks, including potential exchange control regulations and restrictions on our non-U.S. investments and repatriation of profits on investments or of capital invested, the risks of political, economic or social instability, the possibility of expropriation or confiscatory taxation and adverse economic and political developments; and

 

    potentially adverse tax consequences.

If any of the foregoing risks were to materialize, they could materially and adversely affect us.

 

55


Table of Contents

Concerns regarding the stability of the sovereign debt of certain European countries and other geopolitical issues and market perceptions concerning the instability of the Euro, the potential re-introduction of individual currencies within the Eurozone, or the potential dissolution of the Euro entirely, could materially and adversely affect us.

We may originate and acquire investments secured or supported by assets located in Europe. Concerns persist with respect to the sovereign debt situation of several countries, including Greece, Ireland, Italy, Spain and Portugal, which together with the risk of contagion to other more financially stable countries, has also raised a number of uncertainties regarding the stability and overall standing of the European Monetary Union. Concern over such uncertainties has been exacerbated by other geopolitical issues that may affect the Eurozone, including the vote by the United Kingdom (U.K.) to exit the European Union (E.U.). Any further deterioration in the global or Eurozone economy could have a significant adverse effect on our activities and the value of any European collateral.

In addition, we may acquire assets that are denominated in British pounds sterling or in Euros. Further deterioration in the Eurozone economy could have a material adverse effect on the value of our investment in such assets and amplify the currency risks faced by us.

If any country were to leave the Eurozone, or if the Eurozone were to break up entirely, the treatment of debt obligations previously denominated in Euros is uncertain. A number of issues would be raised, such as whether obligations that are expressed to be payable in Euros would be re-denominated into a new currency. The answer to this and other questions is uncertain and would depend on: the way in which the break-up occurred and also on the nature of the transaction; the law governing it; which courts have jurisdiction in relation to it; the place of payment; and the place of incorporation of the payor. If we were to hold any investments in Euros at the time of any Eurozone exits or break-up, this uncertainty and potential re-denomination could have a material adverse effect on us.

The vote by the U.K. to exit the E.U. could materially and adversely affect us.

On June 23, 2016, the U.K. held a referendum in which a majority of voters approved an exit from the E.U., commonly referred to as “Brexit.” The referendum was voluntary and not mandatory and, as a result of the referendum, it is expected that the British government will begin negotiating the terms of the U.K.’s withdrawal from the E.U. The announcement of Brexit caused significant volatility in global stock markets and currency exchange fluctuations, including a sharp decline in the value of the British pound sterling as compared to the U.S. dollar and other currencies. Consequently, any loans or other investments that we may originate or acquire in the future that are denominated in British pounds sterling will be subject to increased risks related to these currency rate fluctuations and our net assets in U.S. dollar terms may decline. In addition, the announcement of Brexit and the expected withdrawal of the U.K. from the E.U. may also adversely affect commercial real estate fundamentals in the U.K. and E.U., including greater uncertainty for leasing prospects for properties with transitional loans, which could negatively impact the ability of U.K and E.U.-based borrowers to satisfy their debt payment obligations, increasing default risk and/or making it more difficult for us to generate attractive risk-adjusted returns for any operations we may have in the U.K. in the future.

The long-term effects of Brexit are expected to depend on, among other things, any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently. Brexit could adversely affect European or worldwide economic or market conditions and could contribute to instability in global financial and real estate markets. In addition, Brexit could lead to legal uncertainty and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Until the terms and timing of the U.K’s exit from the E.U. become clearer, it is not possible to determine the impact that the referendum, the U.K.’s departure from the E.U. and/or any related matters may have on us; however, any of these effects of Brexit, and others we cannot anticipate, could materially and adversely affect us.

 

56


Table of Contents

Any distressed loans or other investments we make, or investments that later become non-performing, may subject us to losses and other risks relating to bankruptcy proceedings, which could materially and adversely affect us.

While our loans and other investments focus primarily on performing real estate-related interests, they may also include distressed investments (for example, investments in defaulted, out-of-favor or distressed bank loans and debt securities) or certain of our investments may become non-performing following our acquisition thereof. Certain of our investments may include properties that typically are highly leveraged, with significant burdens on cash flow and, therefore, involve a high degree of financial risk. During an economic downturn or recession, loans or securities of financially or operationally troubled borrowers or issuers are more likely to go into default than loans or securities of other borrowers or issuers. Loans or securities of financially or operationally troubled issuers are less liquid and more volatile than loans or securities of borrowers or issuers not experiencing such difficulties. The market prices of such securities are subject to erratic and abrupt market movements and the spread between bid and asked prices may be greater than normally expected. Investment in the loans or securities of financially or operationally troubled borrowers or issuers involves a high degree of credit and market risk.

In certain limited cases (for example, in connection with a workout, restructuring or foreclosure proceeding involving one or more of our investments), the success of our investment strategy will depend, in part, on our ability to effectuate loan modifications and/or restructure and improve the operations of our borrowers. The activity of identifying and implementing successful restructuring programs and operating improvements entails a high degree of uncertainty. There can be no assurance that we will be able to identify and implement successful restructuring programs and improvements with respect to any distressed loans or other investments we may have from time to time.

These financial difficulties may never be overcome and may cause borrowers to become subject to bankruptcy or other similar administrative proceedings. There is a possibility that we may incur substantial or total losses on our loans or other investments and, in certain circumstances, become subject to certain additional potential liabilities that may exceed the value of our original investment therein. For example, under certain circumstances, a lender that has inappropriately exercised control over the management and policies of a debtor may have its claims subordinated or disallowed or may be found liable for damages suffered by parties as a result of such actions. In any reorganization or liquidation proceeding relating to our loans or other investments, we may lose our entire investment, may be required to accept cash or securities with a value less than our original investment and/or may be required to accept different terms, including payment over an extended period of time. In addition, under certain circumstances, payments to us may be reclaimed if any such payment or distribution is later determined to have been a fraudulent conveyance, preferential payment or similar transaction under applicable bankruptcy and insolvency laws. Furthermore, bankruptcy laws and similar laws applicable to administrative proceedings may delay our ability to realize on collateral for loan positions held by us, may adversely affect the economic terms and priority of such loans through doctrines such as equitable subordination or may result in a restructuring of the debt through principles such as the “cramdown” provisions of the bankruptcy laws. Any of the foregoing results could materially and adversely affect us.

We may need to foreclose on certain of the loans we originate or acquire, which could result in losses that materially and adversely affect us.

We may find it necessary or desirable to foreclose on certain of the loans we originate or acquire, and the foreclosure process may be lengthy and expensive. Whether or not we have participated in the negotiation of the terms of any such loans, we cannot assure you as to the adequacy of the protection of the terms of the applicable loan, including the validity or enforceability of the loan and the maintenance of the anticipated priority and perfection of the applicable security interests. Furthermore, claims may be asserted by lenders or borrowers that might interfere with enforcement of our rights. Borrowers may resist foreclosure actions by asserting numerous claims, counterclaims and defenses against us, including, without limitation, lender liability claims and

 

57


Table of Contents

defenses, even when the assertions may have no basis in fact, in an effort to prolong the foreclosure action and seek to force the lender into a modification of the loan or a favorable buy-out of the borrower’s position in the loan. In some states, foreclosure actions can take several years or more to litigate. At any time prior to or during the foreclosure proceedings, the borrower may file for bankruptcy, which would have the effect of staying the foreclosure actions and further delaying the foreclosure process and potentially resulting in a reduction or discharge of a borrower’s debt. Foreclosure may create a negative public perception of the related property, resulting in a diminution of its value. Even if we are successful in foreclosing on a loan, the liquidation proceeds upon sale of the underlying real estate may not be sufficient to recover our cost basis in the loan, resulting in a loss to us. Furthermore, any costs or delays involved in the foreclosure of the loan or a liquidation of the underlying property will further reduce the net proceeds and, thus, increase the loss. The incurrence of any such losses could materially and adversely affect us.

Real estate valuation is inherently subjective and uncertain.

The valuation of the commercial real estate that secures or otherwise supports our investments is inherently subjective and uncertain due to, among other factors, the individual nature of each property, its location, the expected future rental revenues from that particular property and the valuation methodology adopted. In addition, where we invest in construction loans, initial valuations will assume completion of the project. As a result, the valuations of the commercial real estate that secures or otherwise supports investments are made on the basis of assumptions and methodologies that may not prove to be accurate, particularly in periods of volatility, low transaction flow or restricted debt availability in the commercial real estate markets.

Our reserves for loan losses may prove inadequate, which could have a material adverse effect on us.

We evaluate our loans and the adequacy of our loan loss reserves on a quarterly basis, and may maintain varying levels of loan loss reserves. Our determination of asset-specific loan loss reserves relies on material estimates regarding the fair value of any loan collateral. The estimation of ultimate loan losses, provision expenses and loss reserves is a complex and subjective process. As such, there can be no assurance that our judgment will prove to be correct and that reserves will be adequate over time to protect against losses inherent in our portfolio at any given time. Such losses could be caused by various factors, including, but not limited to, unanticipated adverse changes in the economy or events adversely affecting specific assets, borrowers, industries in which our borrowers operate or markets in which our borrowers or their properties are located. If our reserves for loan losses prove inadequate, we may suffer losses, which could have a material adverse effect on us.

We may experience a decline in the fair value of investments we may make in securities, which could materially and adversely affect us.

A decline in the fair value of investments we may make in securities, such as CMBS, may require us to recognize an other-than-temporary (“OTTI”) impairment against such assets under GAAP if we were to determine that, with respect to any assets in unrealized loss positions, we do not have the ability and intent to hold such assets to maturity or for a period of time sufficient to allow for recovery to the original acquisition cost of such assets. If such a determination were to be made, we would recognize unrealized losses through earnings and write down the amortized cost of such assets to a new cost basis, based on the fair value of such assets on the date they are considered to be other-than-temporarily impaired. Such impairment charges reflect non-cash losses at the time of recognition. The subsequent disposition or sale of such assets could further affect our future losses or gains, as they are based on the difference between the sale price received and adjusted amortized cost of such assets at the time of sale. If we experience a decline in the fair value of our investments, it could materially and adversely affect us.

Some of our portfolio investments may be recorded at fair value and, as a result, there will be uncertainty as to the value of these investments.

Our portfolio investments are not publicly-traded but some of our portfolio investments may be publicly-traded in the future. The fair value of securities and other investments that are not publicly-traded may

 

58


Table of Contents

not be readily determinable. We will value these investments quarterly at fair value, which may include unobservable inputs. Because such valuations are subjective, the fair value of certain of our investments may fluctuate over short periods of time and our determinations of fair value may differ materially from the values that would have been used if a ready market for these investments existed. The value of our common stock could be adversely affected if our determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon their disposal.

Additionally, our results of operations for a given period could be adversely affected if our determinations regarding the fair value of these investments were materially higher than the values that we ultimately realize upon their disposal. The valuation process has been particularly challenging recently, as market events have made valuations of certain assets more difficult, unpredictable and volatile.

In addition to other analytical tools, our Manager will utilize financial models to evaluate commercial mortgage loans and commercial real estate-related debt instruments, the accuracy and effectiveness of which cannot be guaranteed.

In addition to other analytical tools, our Manager utilizes financial models to evaluate commercial mortgage loans and commercial real estate-related debt instruments, the accuracy and effectiveness of which cannot be guaranteed. In all cases, financial models are only estimates of future results which are based upon assumptions made at the time that the projections are developed. There can be no assurance that our Manager’s projected results will be attained and actual results may vary significantly from the projections. General economic and industry-specific conditions, which are not predictable, can have an adverse impact on the reliability of projections.

Insurance proceeds on a property may not cover all losses, which could result in the corresponding non-performance of or loss on our investment related to such property.

There are certain types of losses, generally of a catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts of war, which may be uninsurable or not economically insurable. Inflation, changes in building codes and ordinances, environmental considerations and other factors, including terrorism or acts of war, also might result in insurance proceeds that are insufficient to repair or replace a property if it is damaged or destroyed. Under these circumstances, the insurance proceeds received with respect to a property relating to one of our investments might not be adequate to restore our economic position with respect to our investment. Any uninsured loss could result in the corresponding non-performance of or loss on our investment related to such property.

The impact of any future terrorist attacks and the availability of affordable terrorism insurance expose us to certain risks.

Terrorist attacks, the anticipation of any such attacks, the consequences of any military or other response by the U.S. and its allies, and other armed conflicts could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. and worldwide financial markets and economy. The economic impact of these events could also adversely affect the credit quality of some of our investments and the properties underlying our interests.

We may suffer losses as a result of the adverse impact of any future attacks and these losses may adversely impact our performance and may cause the market price of our common stock to decline or be more volatile. A prolonged economic slowdown, a recession or declining real estate values could impair the performance of our investments, increase our funding costs, limit our access to the capital markets or result in a decision by lenders not to extend credit to us, any of which could materially and adversely affect us. Losses resulting from these types of events may not be fully insurable.

 

59


Table of Contents

In addition, with the enactment of the Terrorism Risk Insurance Act of 2002 (“TRIA”) and the subsequent enactment of the Terrorism Risk Insurance Program Reauthorization Act of 2015, which extended TRIA through the end of 2020, insurers are required to make terrorism insurance available under their property and casualty insurance policies, but this legislation does not regulate the pricing of such insurance, and there is no assurance this legislation will be extended beyond 2020. The absence of affordable insurance coverage may adversely affect the general real estate finance market, lending volume and the market’s overall liquidity and may reduce the number of suitable investment opportunities available to us and the pace at which we are able to make investments. If the properties underlying our investments are unable to obtain affordable insurance coverage, the value of those investments could decline, and in the event of an uninsured loss, we could lose all or a portion of our investment.

Liability relating to environmental matters may impact the value of properties that we may acquire upon foreclosure of the properties underlying our loans.

To the extent we foreclose on properties underlying our loans, we may be subject to environmental liabilities arising from such foreclosed properties. Under various U.S. federal, state and local laws, an owner or operator of real property may become liable for the costs of removal of certain hazardous substances released on its property. These laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the release of such hazardous substances. If we foreclose on any properties underlying our loans, the presence of hazardous substances on a property may adversely affect our ability to sell the property and we may incur substantial remediation costs. As a result, the discovery of material environmental liabilities attached to such properties could materially and adversely affect us.

We may be subject to lender liability claims, and if we are held liable under such claims, we could be subject to losses.

In recent years, a number of judicial decisions have upheld the right of borrowers to sue lending institutions on the basis of various evolving legal theories, collectively termed “lender liability.” Generally, lender liability is founded on the premise that a lender has either violated a duty, whether implied or contractual, of good faith and fair dealing owed to the borrower or has assumed a degree of control over the borrower resulting in the creation of a fiduciary duty owed to the borrower or its other creditors or stockholders. We cannot assure prospective investors that such claims will not arise or that we will not be subject to significant liability and losses if a claim of this type were to arise.

If the loans that we originate or acquire do not comply with applicable laws, we may be subject to penalties, which could materially and adversely affect us.

Loans that we originate or acquire may be directly or indirectly subject to U.S. federal, state or local governmental laws. Real estate lenders and borrowers may be responsible for compliance with a wide range of laws intended to protect the public interest, including, without limitation, the Truth in Lending, Equal Credit Opportunity, Fair Housing and Americans with Disabilities Acts and local zoning laws (including, but not limited to, zoning laws that allow permitted non-conforming uses). If we or any other person fails to comply with such laws in relation to a loan that we have originated or acquired, legal penalties may be imposed, which could materially and adversely affect us. Additionally, jurisdictions with “one action,” “security first” and/or “antideficiency rules” may limit our ability to foreclose on a real property or to realize on obligations secured by a real property. In the future, new laws may be enacted or imposed by U.S. federal, state or local governmental entities, and such laws could have a material adverse effect on us.

If we originate or acquire commercial mortgage loans or commercial real estate-related debt instruments secured by liens on facilities that are subject to a ground lease and such ground lease is terminated unexpectedly, our interests in such loans could be materially and adversely affected.

A ground lease is a lease of land, usually on a long-term basis, that does not include buildings or other improvements on the land. Normally, any real property improvements made by the lessee during the term of the

 

60


Table of Contents

lease will revert to the owner at the end of the lease term. We may originate or acquire commercial mortgage loans or commercial real estate-related debt instruments secured by liens on facilities that are subject to a ground lease, and, if the ground lease were to expire or terminate unexpectedly, due to the borrower’s default on such ground lease, our interests in such loans could be materially and adversely affected.

Risks Related to Our Company

Our investment strategy and guidelines, asset allocation and financing strategy may be changed without stockholder consent.

Our Manager is authorized to follow broad investment guidelines that have been approved by our board of directors. Those investment guidelines, as well as our target assets, investment strategy, financing strategy and hedging policies with respect to investments, originations, acquisitions, growth, operations, indebtedness, capitalization and distributions, may be changed at any time without notice to, or the consent of, our stockholders. This could result in an investment portfolio with a different risk profile. A change in our investment strategy may increase our exposure to interest rate risk, default risk and real estate market fluctuations. Furthermore, a change in our asset allocation could result in our making investments in asset categories different from those described in this prospectus. These changes could materially and adversely affect us.

We may not be able to operate our business successfully or implement our operating policies and investment strategy.

We cannot assure you that our past experience will be sufficient to enable us to operate our business successfully or implement our operating policies and investment strategy as described in this prospectus. Furthermore, we may not be able to generate sufficient operating cash flows to pay our operating expenses or service our indebtedness. Our operating cash flows will depend on many factors, including the performance of our existing portfolio, the availability of attractive investment opportunities for the origination and selective acquisition of additional assets, the level and volatility of interest rates, readily accessible short-term and long-term financing, conditions in the financial markets, the real estate market and the economy, and our ability to successfully operate our business and execute our investment strategy. We will face substantial competition in originating and acquiring attractive loans and other investments, which could adversely impact the returns from new loans and other investments.

TPG and our Manager may not be able to hire and retain qualified loan originators or grow and maintain our relationships with key loan brokers, and if they are unable to do so, we could be materially and adversely affected.

We depend on TPG and our Manager to generate borrower clients by, among other things, developing relationships with property owners, developers, mortgage brokers and investors and others, which we believe leads to repeat and referral business. Accordingly, TPG and our Manager must be able to attract, motivate and retain skilled loan originators. The market for loan originators is highly competitive and may lead to increased costs to hire and retain them. We cannot guarantee that TPG and our Manager will be able to attract or retain qualified loan originators. If TPG and our Manager cannot attract, motivate or retain a sufficient number of skilled loan originators, or even if they can motivate or retain them but at higher costs, we could be materially and adversely affected. We also depend on TPG and our Manager for a network of loan brokers, which we anticipate may generate a significant portion of our loan originations. While TPG and our Manager will strive to continue to cultivate long-standing relationships that generate repeat business for us, brokers are free to transact business with other lenders and have done so in the past and will do so in the future. Our competitors also have relationships with some of our brokers and actively compete with us in bidding on loans marketed by these brokers, which could impair our loan origination volume and reduce our returns. There can be no assurance that TPG and our Manager will be able to maintain or develop new relationships with additional brokers.

 

61


Table of Contents

Maintenance of our exemptions from registration as an investment company under the Investment Company Act imposes significant limits on our operations. Your investment return may be reduced if we are required to register as an investment company under the Investment Company Act.

We conduct, and intend to continue to conduct, our operations so that we are not required to register as an “investment company” as defined in Section 3(a)(1)(A) or Section 3(a)(1)(C) of the Investment Company Act. We believe we are not an investment company under Section 3(a)(1)(A) of the Investment Company Act because we do not engage primarily, or hold ourselves out as being engaged primarily, in the business of investing, reinvesting or trading in securities. Rather, through our wholly-owned or majority-owned subsidiaries, we are primarily engaged in non-investment company businesses related to real estate. In addition, we intend to conduct our operations so that we do not come within the definition of an investment company under Section 3(a)(1)(C) of the Investment Company Act because less than 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis will consist of “investment securities” (the “40% test”). Excluded from the term “investment securities” (as that term is defined in the Investment Company Act) are securities issued by majority-owned subsidiaries that are themselves not investment companies and are not relying on the exclusions from the definition of investment company set forth in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act. Our interests in wholly-owned or majority-owned subsidiaries that qualify for the exclusion pursuant to Section 3(c)(5)(C), as described below, or another exclusion or exception under the Investment Company Act (other than Section 3(c)(1) or Section 3(c)(7) thereof), do not constitute “investment securities.”

To maintain our status as a non-investment company, the securities issued to us by any wholly-owned or majority-owned subsidiaries that we may form in the future that are excluded from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, together with any other investment securities we may own, may not have a value in excess of 40% of the value of our total assets on an unconsolidated basis. We will monitor our holdings to ensure ongoing compliance with this test, but there can be no assurance that we will be able to maintain an exclusion or exemption from registration. The 40% test limits the types of businesses in which we may engage through our subsidiaries. In addition, the assets we and our subsidiaries may originate or acquire are limited by the provisions of the Investment Company Act and the rules and regulations promulgated under the Investment Company Act, which may materially and adversely affect us.

We hold our assets primarily through direct or indirect wholly-owned or majority-owned subsidiaries, certain of which are excluded from the definition of investment company pursuant to Section 3(c)(5)(C) of the Investment Company Act. We will classify our assets for purposes of certain of our subsidiaries’ Section 3(c)(5)(C) exemption from the Investment Company Act based upon positions set forth by the SEC staff. Based on such positions, to qualify for the exclusion pursuant to Section 3(c)(5)(C), each such subsidiary generally is required to hold at least (i) 55% of its assets in “qualifying” real estate assets, which we refer to as “Qualifying Interests,” and (ii) at least 80% of its assets in Qualifying Interests and real estate-related assets. Qualifying Interests for this purpose include senior mortgage loans, certain B-Notes and certain mezzanine loans that satisfy various conditions as set forth in SEC staff no-action letters and other guidance, and other assets that the SEC staff in various no-action letters and other guidance has determined are Qualifying Interests for the purposes of the Investment Company Act. We treat as real estate-related assets B-Notes, CMBS and mezzanine loans that do not satisfy the conditions set forth in the relevant SEC staff no-action letters and other guidance, and debt and equity securities of companies primarily engaged in real estate businesses. The SEC has not published guidance with respect to the treatment of the pari passu participation interests in senior mortgage loans held by TPG RE Finance Trust CLO Issuer, L.P. (“CLO Issuer”) and certain of its subsidiaries for purposes of the Section 3(c)(5)(C) exclusion. Unless the SEC or its staff issues guidance applicable to the participation interests held by CLO Issuer and its subsidiaries, we intend to treat the participation interests as real estate-related assets. Because of the composition of the assets of CLO Issuer and its subsidiaries, we currently treat CLO Issuer and its subsidiaries as excluded from the definition of investment company under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act, and treat the securities issued by them to us as “investment securities” for purposes of the 40% test.

 

62


Table of Contents

SEC no-action positions are based on specific factual situations that differ in some regards from the factual situations we and our subsidiaries may face, and as a result, we may have to apply SEC staff guidance that relates to other factual situations by analogy. A number of these no-action positions were issued more than twenty years ago. There may be no guidance from the SEC staff that applies directly to our factual situations, and the SEC may disagree with our conclusion that the published guidance applies in the manner we have concluded. No assurance can be given that the SEC or its staff will concur with our classification of our assets. In addition, the SEC or its staff may, in the future, issue further guidance that may require us to re-classify our assets for purposes of the Investment Company Act, including for purposes of our subsidiaries’ compliance with the exclusion provided in Section 3(c)(5)(C) of the Investment Company Act. There is no guarantee that we will be able to adjust our assets in the manner required to maintain our exclusion or exemption from the Investment Company Act and any adjustment in our strategy or assets could have a material adverse effect on us.

To the extent that the SEC or its staff provides more specific guidance regarding any of the matters bearing upon the definition of investment company and the exemptions to that definition, we may be required to adjust our strategy accordingly. On August 31, 2011, the SEC issued a concept release and request for comments regarding the Section 3(c)(5)(C) exclusion (Release No. IC-29778) in which it contemplated the possibility of issuing new rules or providing new interpretations of the exemption that might, among other things, define the phrase “liens on and other interests in real estate” or consider sources of income in determining a company’s “primary business.” Any additional guidance from the SEC or its staff could further inhibit our ability to pursue the strategies we have chosen.

Because registration as an investment company would significantly affect our (or our subsidiaries’) ability to engage in certain transactions or be structured in the manner we currently are, we intend to conduct our business so that we and our wholly-owned subsidiaries and majority-owned subsidiaries will continue to satisfy the requirements to avoid regulation as an investment company. However, there can be no assurance that we or our subsidiaries will be able to satisfy these requirements and maintain our and their exclusion or exemption from such registration. If we or our wholly-owned subsidiaries or our majority-owned subsidiaries do not meet these requirements, we could be forced to alter our investment portfolio by selling or otherwise disposing of a substantial portion of the assets that do not satisfy the applicable requirements or by acquiring a significant position in assets that are Qualifying Interests. Such investments may not represent an optimum use of capital when compared to the available investments we and our subsidiaries target pursuant to our investment strategy. These investments may present additional risks to us, and these risks may be compounded by our inexperience with such investments. Altering our investment portfolio in this manner may materially and adverse affect us if we are forced to dispose of or acquire assets in an unfavorable market.

There can be no assurance that we and our subsidiaries will be able to successfully avoid operating as an unregistered investment company. If it were established that we were an unregistered investment company, there would be a risk that we would be subject to monetary penalties and injunctive relief in an action brought by the SEC, that we would be unable to enforce contracts with third parties, that third parties could seek to obtain rescission of transactions undertaken during the period for which it was established that we were an unregistered investment company, and that we would be subject to limitations on corporate leverage that would have an adverse impact on our investment returns.

If we were required to register as an investment company under the Investment Company Act, we would become subject to substantial regulation with respect to our capital structure (including our ability to use borrowings), management, operations, transactions with affiliated persons (as defined in the Investment Company Act) and portfolio composition, including disclosure requirements and restrictions with respect to diversification and industry concentration and other matters. Compliance with the Investment Company Act would, accordingly, limit our ability to make certain investments and require us to significantly restructure our business plan, which could materially and adversely affect our ability to pay distributions to our stockholders. Because affiliate transactions generally are prohibited under the Investment Company Act, we would not be able to enter into transactions with any of our affiliates if we fail to maintain our exclusion or exemption, and our

 

63


Table of Contents

Manager may terminate our Management Agreement if we become required to register as an investment company, with such termination deemed to occur immediately before such event. If our Management Agreement is terminated, it could constitute an event of default under our financing arrangements and financial institutions may then have the right to accelerate their outstanding loans to us and terminate their arrangements and their obligation to advance funds to us in the future. In addition, we may not be able to secure a replacement manager on favorable terms, if at all. Thus, compliance with the requirements of the Investment Company Act imposes significant limits on our operations, and our failure to comply with those requirements would likely have a material adverse effect on us.

Rapid changes in the market value or income potential of our assets may make it more difficult for us to maintain our qualification as a REIT or our exclusion or exemption from regulation under the Investment Company Act.

If the market value or income potential of our assets declines as a result of increased interest rates, prepayment rates or other factors, we may need to acquire additional assets and/or liquidate certain types of assets in order to maintain our REIT qualification or our exclusion or exemption from the Investment Company Act. If the decline in the market value and/or income of our assets occurs quickly, this may be especially difficult to accomplish. This difficulty may be exacerbated by the illiquid nature of the assets that we may own. We may have to make investment decisions that we otherwise would not make absent the REIT and Investment Company Act considerations, which could materially and adversely affect us.

The due diligence process undertaken by our Manager in regard to our investment opportunities may not reveal all facts relevant to an investment and, as a result, we may experience losses, which could materially and adversely affect us.

Before originating a loan to a borrower or making other investments for us, our Manager conducts due diligence that it deems reasonable and appropriate based on the facts and circumstances relevant to each potential investment. When conducting due diligence, our Manager may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process in varying degrees depending on the type of potential investment. Relying on the resources available to it, our Manager evaluates our potential investments based on criteria it deems appropriate for the relevant investment. Our Manager’s loss estimates may not prove accurate, as actual results may vary from estimates. If our Manager underestimates the asset-level losses relative to the price we pay for a particular investment, we may experience losses with respect to such investment. Additionally, during the mortgage loan underwriting process, appraisals will generally be obtained by our Manager on the collateral underlying each prospective mortgage. Inaccurate or inflated appraisals may result in an increase in the severity of losses on the mortgage loans. Any such losses could materially and adversely affect us.

Failure to obtain, maintain or renew required licenses and authorizations necessary to operate our mortgage-related activities may materially and adversely affect us.

We and our Manager are required to obtain, maintain or renew certain licenses and authorizations (including “doing business” authorizations and licenses to act as a commercial mortgage lender) from U.S. federal or state governmental authorities, government sponsored entities or similar bodies in connection with some or all of our mortgage-related activities. There is no assurance that we or our Manager will be able to obtain, maintain or renew any or all of the licenses and authorizations that we require or that we or our Manager will avoid experiencing significant delays in connection therewith. The failure of our company or our Manager to obtain, maintain or renew licenses will restrict our options and ability to engage in desired activities, and could subject us to fines, suspensions, terminations and various other adverse actions if it is determined that we or our Manager have engaged without the requisite licenses or authorizations in activities that required a license or authorization, which could have a material adverse effect on us.

 

64


Table of Contents

Changes in laws or regulations governing our operations, changes in the interpretation thereof or newly enacted laws or regulations and any failure by us to comply with these laws or regulations could materially and adversely affect us.

The laws and regulations governing our operations, as well as their interpretation, may change from time to time, and new laws and regulations may be enacted. Accordingly, any change in these laws or regulations, changes in their interpretation or newly enacted laws or regulations and any failure by us to comply with these laws or regulations could require changes to certain of our business practices or impose additional costs on us, which could materially and adversely affect us. Furthermore, if regulatory capital requirements, whether under the Dodd-Frank Act, Basel III or other regulatory action, are imposed on private lenders that provide us with funds, or were to be imposed on us, they or we may be required to limit, or increase the cost of, financing they provide to us or that we provide to others. Among other things, this could potentially increase our financing costs, reduce our ability to originate or acquire loans and other investments and reduce our liquidity or require us to sell assets at an inopportune time or price.

In addition, various laws and regulations currently exist that restrict the investment activities of banks and certain other financial institutions but do not apply to us, which we believe creates opportunities for us to originate loans and participate in certain other investments that are not available to these more regulated institutions. However, following the U.S. Presidential election in November 2016, there are several indications that the new administration will seek to deregulate the financial industry, including by altering the Dodd-Frank Act, which may decrease the restrictions on banks and other financial institutions and allow them to compete with us for investment opportunities that were previously not available to, or otherwise pursued by, them. See “—Risks Related to Our Lending and Investment Activities—We operate in a competitive market for the origination and acquisition of attractive investment opportunities and competition may limit our ability to originate or acquire attractive investments in our target assets, which could have a material adverse effect on us.”

Over the last several years, there also has been an increase in regulatory attention to the extension of credit outside the traditional banking sector, raising the possibility that some portion of the non-bank financial sector will be subject to new regulation. While it cannot be known at this time whether any regulation will be implemented or what form it will take, increased regulation of non-bank credit extension could materially and adversely affect us, impose additional costs on us, intensify the regulatory supervision of us or otherwise materially and adversely affect us.

In addition, the Iran Threat Reduction and Syria Human Rights Act of 2012 (the “ITRA”) expands the scope of U.S. sanctions against Iran and Syria. In particular, Section 219 of the ITRA amended the Exchange Act to require companies subject to SEC reporting obligations under Section 13 of the Exchange Act to disclose in their periodic reports specified dealings or transactions involving Iran or other individuals and entities targeted by certain sanctions promulgated by the Office of Foreign Assets Control of the U.S. Treasury Department engaged in by the reporting company or any of its affiliates during the period covered by the relevant periodic report. These companies are required to separately file with the SEC a notice that such activities have been disclosed in the relevant periodic reports, and the SEC is required to post this notice of disclosure on its website and send the report to the U.S. President and certain U.S. Congressional committees. The U.S. President thereafter is required to initiate an investigation and, within 180 days of initiating such an investigation with respect to certain disclosed activities, to determine whether sanctions should be imposed. Disclosure of such activity, even if such activity is not subject to sanctions under applicable law, and any sanctions actually imposed on us or our affiliates as a result of these activities, could harm our reputation and have a negative impact on our business.

 

65


Table of Contents

Actions of the U.S. government, including the U.S. Congress, Federal Reserve Board, U.S. Treasury Department and other governmental and regulatory bodies, to stabilize or reform the financial markets, or market response to those actions, may not achieve the intended effect and could materially and adversely affect us.

In July 2010, the Dodd-Frank Act was signed into law, which imposes significant investment restrictions and capital requirements on banking entities and other organizations that are significant to U.S. financial stability. For instance, the so-called “Volcker Rule” provisions of the Dodd-Frank Act impose significant restrictions on the proprietary trading activities of banking entities (and certain affiliates thereof) and on their ability to sponsor or invest in private equity and hedge funds. It also subjects nonbank financial companies that have been designated as “systemically important” by the Financial Stability Oversight Council to increased capital requirements and quantitative limits for engaging in such activities, as well as consolidated supervision by the Federal Reserve Board. The Dodd-Frank Act also seeks to reform the asset-backed securitization market (including the mortgage-backed securities market) by requiring the retention of a portion of the credit risk inherent in the pool of securitized assets and by imposing additional registration and disclosure requirements. In October 2014, five U.S. federal banking and housing agencies and the SEC issued final credit risk retention rules, which generally require sponsors of asset-backed securities to retain at least 5% of the credit risk relating to the assets that underlie such asset-backed securities. These rules, which have become generally effective with respect to new securitization transactions backed by mortgage loans, could restrict credit availability and could negatively affect the terms and availability of credit to fund our investments. While the full impact of the Dodd-Frank Act cannot be fully assessed, the Dodd-Frank Act’s extensive requirements may have a significant effect on the financial markets and may affect the availability or terms of financing from our lender counterparties and the availability or terms of mortgage-backed securities, which may, in turn, have a material adverse effect on us.

On December 16, 2015, the Commodity Futures Trading Commission (the “CFTC”) published a final rule governing margin requirements for uncleared swaps entered into by registered swap dealers and major swap participants who are not supervised by the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Farm Credit Administration and the Federal Housing Finance Agency (collectively, the “Prudential Regulators”), referred to as “covered swap entities”. The final rule generally requires covered swap entities, subject to certain thresholds and exemptions, to collect and post margin in respect of uncleared swap transactions with other covered swap entities and financial end-users. In particular, the final rule requires covered swap entities and financial end-users having “material swaps exposure,” defined as an average aggregate daily notional amount of uncleared swaps exceeding a certain specified amount, to collect and/or post (as applicable) a minimum amount of “initial margin” in respect of each uncleared swap; the specified amounts for material swaps exposure differ subject to a phase-in schedule until September 1, 2020, when the average aggregate daily notional amount will thenceforth be $8 billion as calculated from June, July and August of the previous calendar year. In addition, the final rule requires covered swap entities entering into uncleared swaps with other covered swap entities or financial-end users, regardless of swaps exposure, to post and/or collect (as applicable) “variation margin” in reflection of changes in the mark-to-market value of an uncleared swap since the swap was executed or the last time such margin was exchanged. The CFTC final rule is broadly consistent with a similar rule requiring the exchange of initial and variation margin adopted by the Prudential Regulators in October 2015, which apply to registered swap dealers, major swap participants, security-based swap dealers and major security-based swap participants that are supervised by one or more of the Prudential Regulators. These newly adopted rules on margin requirements for uncleared swaps could adversely affect our business, including our ability to enter such swaps or our available liquidity.

The current regulatory environment may be impacted by future legislative developments, such as amendments to key provisions of the Dodd-Frank Act, including provisions setting forth capital and risk retention requirements. On November 8, 2016, the U.S. elected a new President and the Republican Party maintained control of both the U.S. House of Representatives and the U.S. Senate. The new administration’s short-term legislative agenda is not yet fully known, but it may include certain deregulatory measures for the

 

66


Table of Contents

U.S. banking and financial industry, including to the Dodd-Frank Act. No assurance can be given that any such deregulatory measures will not increase our competition and have a material adverse effect on us. In addition, one pending bill, called the Financial CHOICE Act, would specifically remove risk retention requirements for non-residential mortgage securitizations.

The obligations associated with being a public company will require significant resources and attention from our Manager’s senior leadership team.

As a public company with listed equity securities, we will need to comply with new laws, regulations and requirements, including the requirements of the Exchange Act, certain corporate governance provisions of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), related regulations of the SEC and requirements of the NYSE, with which we were not required to comply as a private company. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business, financial condition, cash flows and results of operations. The Sarbanes-Oxley Act requires, among other things, that we establish and maintain effective internal controls and procedures for financial reporting and that our management and independent registered public accounting firm report annually on the effectiveness of our internal control over financial reporting, beginning with the filing of our annual report on Form 10-K for the year ending December 31, 2018.

These reporting and other obligations will place significant demands on our Manager’s senior leadership team, administrative, operational and accounting resources and will cause us to incur significant expenses. We may need to upgrade our systems or create new systems, implement additional financial and other controls, reporting systems and procedures, and create or outsource an internal audit function. If we are unable to accomplish these objectives in a timely and effective fashion, our ability to comply with the financial reporting requirements and other rules that apply to reporting companies could be impaired.

If we fail to implement and maintain an effective system of internal control, we may not be able to accurately determine our financial results or prevent fraud. As a result, our stockholders could lose confidence in our financial results, which could materially and adversely affect us.

Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. We may in the future discover areas of our internal controls that need improvement. We cannot be certain that we will be successful in maintaining an effective system of internal control over our financial reporting and financial processes. Furthermore, as we grow our business, our internal controls will become more complex, and we will require significantly more resources to ensure our internal controls remain effective. Additionally, the existence of any material weakness or significant deficiency would require our Manager to devote significant time and us to incur significant expense to remediate any such material weaknesses or significant deficiencies and our Manager may not be able to remediate any such material weaknesses or significant deficiencies in a timely manner. The existence of any material weakness in our internal control over financial reporting could also result in errors in our financial statements that could require us to restate our financial statements, cause us to fail to meet our reporting obligations and cause stockholders to lose confidence in our financial results, which could materially and adversely affect us.

Operational risks may disrupt our businesses, result in losses or limit our growth.

We rely heavily on our and TPG’s financial, accounting, communications and other data processing systems. Such systems may fail to operate properly or become disabled as a result of tampering or a breach of the network security systems or otherwise. In addition, such systems are from time to time subject to cyberattacks, which may continue to increase in frequency in the future. Breaches of our network security systems could involve attacks that are intended to obtain unauthorized access to our proprietary information, destroy data or disable, degrade or sabotage our systems, often through the introduction of computer viruses and other malicious code, cyberattacks and other means and could originate from a wide variety of sources, including unknown third parties outside the firm. Although TPG takes various measures to ensure the integrity of such systems, there can

 

67


Table of Contents

be no assurance that these measures will provide protection. If such systems are compromised, do not operate properly or are disabled, we could suffer financial loss, a disruption of our businesses, liability to investors, regulatory intervention or reputational damage.

In addition, we are highly dependent on information systems and technology. Our information systems and technology may not continue to be able to accommodate our growth, and the cost of maintaining such systems may increase from its current level. Such a failure to accommodate growth, or an increase in costs related to such information systems, could have a material adverse effect on us.

Furthermore, most of the personnel of TPG provided to our Manager are located in TPG’s New York City office, and we depend on continued access to this office for the continued operation of our business. A disaster or a disruption in the infrastructure that supports our business, including a disruption involving electronic communications or other services used by us or third parties with whom we conduct business, or directly affecting our headquarters, could have a material adverse impact on our ability to continue to operate our business without interruption. TPG’s disaster recovery program may not be sufficient to mitigate the harm that may result from such a disaster or disruption. In addition, insurance and other safeguards might only partially reimburse us for our losses, if at all.

Finally, we rely on third-party service providers for certain aspects of our business, including for certain information systems, technology and administration. Any interruption or deterioration in the performance of these third parties or failures of their information systems and technology could impair the quality of our operations and could affect our reputation and hence materially and adversely affect us.

We depend on Situs Asset Management, LLC for asset management services. We may not find a suitable replacement for Situs if our agreement with Situs is terminated, or if key personnel cease to be employed by Situs or otherwise become unavailable to us.

We are party to an agreement with Situs pursuant to which Situs provides us with dedicated asset management employees for performing asset management services pursuant to our proprietary guidelines. Our ability to monitor the performance of our investments will depend to a significant extent upon the efforts, experience, diligence and skill of Situs and its employees.

In addition, we can offer no assurance that Situs will continue to be able to provide us with dedicated asset management employees for performing asset management services for us. Any interruption or deterioration in the performance of Situs or failures of Situs’s information systems and technology could impair the quality of our operations and could affect our reputation and hence materially and adversely affect us. If our agreement with Situs is terminated and no suitable replacement is found to manage our portfolio, we may not be able to monitor the performance of our investments. Furthermore, we may incur certain costs in connection with a termination of our agreement with Situs.

Accounting rules for certain of our transactions are highly complex and involve significant judgment and assumptions. Changes in accounting interpretations or assumptions could impact our ability to timely prepare consolidated historical financial statements, which could materially and adversely affect us.

Accounting rules for transfers of financial assets, consolidation of variable interest entities and other aspects of our operations are highly complex and involve significant judgment and assumptions. These complexities could lead to a delay in preparation of financial information and the delivery of this information to our stockholders. Changes in accounting interpretations or assumptions could impact our consolidated historical financial statements and our ability to timely prepare our consolidated historical financial statements. Our inability to timely prepare our consolidated historical financial statements in the future could materially and adversely affect us.

 

68


Table of Contents

Risks Related to Our Financing and Hedging

We have a significant amount of debt, which subjects us to increased risk of loss, and our charter and bylaws contain no limitation on the amount of debt we may incur or have outstanding.

As of March 31, 2017, we had $1.9 billion of debt outstanding. In the future, subject to market conditions and availability, we may incur significant additional debt through secured revolving repurchase facilities, asset-specific financings, warehouse facilities, structured financing and derivative instruments, in addition to transaction or asset-specific funding arrangements. We may also rely on short-term financing that would especially expose us to changes in availability. We may also issue additional equity, equity-related and debt securities to fund our investment strategy. As of March 31, 2017, we were a party to secured revolving repurchase facilities with each of Goldman Sachs Bank USA, JP Morgan Chase Bank, National Association, Morgan Stanley Bank, N.A. and Wells Fargo Bank, National Association, affiliates of certain of the underwriters in this offering, as well as with Royal Bank of Canada and U.S. Bank National Association, with an aggregate maximum size of approximately $1.7 billion for loans and $1.9 billion for loans and CMBS combined.

On June 8, 2017, we closed an amendment to our existing secured revolving repurchase facility with Wells Fargo Bank, National Association, an affiliate of one of the underwriters in this offering, to increase the maximum facility amount to $750 million from $500 million. The current extended maturity of this facility is May 2021. Additionally, on June 12, 2017, we closed an amendment to our existing secured revolving repurchase facility with Goldman Sachs Bank USA, an affiliate of one of the underwriters in this offering, to increase the maximum facility amount to $750 million from $500 million. The current extended maturity of this facility is August 2019.

We are currently negotiating an amendment to our existing secured revolving repurchase facility with Morgan Stanley Bank, N.A., an affiliate of one of the underwriters in this offering, to increase the maximum facility amount to $500 million from $250 million. The initial maturity of this facility is May 2019 and can be extended by us for additional one year periods, subject to approval by the lender. The number of extension options is not limited by the terms of this facility. We have not received a commitment to amend this facility and there can be no assurance that we will receive any such commitment or enter into a definitive agreement to amend the facility upon the terms contemplated or other terms, or at all.

We have executed a term sheet and are completing documentation with Bank of America, N.A., an affiliate of one of the underwriters in this offering, to provide a secured revolving repurchase facility of up to $500 million, although we have not received a commitment with respect to this facility and there can be no assurance that we will receive any such commitment or enter into a definitive agreement for the facility upon the terms contemplated or other terms, or at all. We have negotiated a term sheet with Citibank, N.A., an affiliate of one of the underwriters in this offering, to provide a secured revolving repurchase facility of $250 million, although we have not received a commitment with respect to this facility and there can be no assurance that we will receive any such commitment or enter into a definitive agreement for the facility upon the terms contemplated or other terms, or at all.

Subject to compliance with the leverage covenants contained in our secured revolving repurchase facilities and other financing documents, we expect that the amount of leverage that we will incur in the future will take into account a variety of factors, which may include our Manager’s assessment of credit, liquidity, price volatility and other risks of our investments and the financing counterparties, the potential for losses and extension risk in our portfolio and availability of particular types of financing at the then-current rate. Given current market conditions, we expect that our overall leverage will not exceed, on a debt-to-equity basis, a ratio of 3:1, although we may employ more or less leverage on individual loan investments after consideration of the impact on expected risk and return of the specific situation and future changes in value of underlying properties may result in debt-to-equity ratios in excess of 3:1. To the extent we believe market conditions are favorable, we

 

69


Table of Contents

may revise our leverage policy in the future. Incurring substantial debt could subject us to many risks that, if realized, would materially and adversely affect us, including the risk that:

 

    our cash flow from operations may be insufficient to make required payments of principal of and interest on our debt, which is likely to result in (a) acceleration of such debt (and any other debt containing a cross-default or cross-acceleration provision), which we then may be unable to repay from internal funds or to refinance on favorable terms, or at all, (b) our inability to borrow undrawn amounts under our financing arrangements, even if we are current in payments on borrowings under those arrangements, which would result in a decrease in our liquidity, and/or (c) the loss of some or all of our collateral assets to foreclosure or sale;

 

    our debt may increase our vulnerability to adverse economic and industry conditions with no assurance that investment yields will increase in an amount sufficient to offset the higher financing costs;

 

    we may be required to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing funds available for operations, future business opportunities, stockholder distributions or other purposes; and

 

    we may not be able to refinance any debt that matures prior to the maturity (or realization) of an underlying investment it was used to finance on favorable terms or at all.

There can be no assurance that our leverage strategy will be successful, and our leverage strategy may cause us to incur significant losses, which could materially and adversely affect us.

There can be no assurance that we will be able to obtain or utilize additional financing arrangements in the future on similar or more favorable terms, or at all.

Our ability to fund our investments and refinance our existing indebtedness will be impacted by our ability to secure additional financing through various arrangements, including secured revolving repurchase facilities, non-recourse CLO financing and asset-specific financing structures, on favorable terms. In certain instances, we originate our mezzanine loans in connection with the contemporaneous issuance of a first mortgage loan to a third-party lender or the non-recourse transfer of a first mortgage loan originated by us. In either case, the senior mortgage loan is not included on our balance sheet, and we refer to such senior loan interest as a “non-consolidated senior interest.” When we originate a loan in connection with the contemporaneous issuance or the non-recourse transfer of a non-consolidated senior interest, we retain on our balance sheet a mezzanine loan. Over time, in addition to these types of financings, we may use other forms of leverage, including secured and unsecured warehouse facilities, structured financing, derivative instruments and public and private secured and unsecured debt issuances by us or our subsidiaries. Our access to additional sources of financing will depend upon a number of factors, over which we have little or no control, including:

 

    general economic or market conditions;

 

    the market’s view of the quality of our investments;

 

    the market’s perception of our growth potential;

 

    our current and potential future earnings and cash distributions; and

 

    the market price of our common stock.

We also expect to periodically access the capital markets to raise cash to fund new investments. Unfavorable economic or capital market conditions may increase our funding costs, limit our access to the capital markets or could result in a decision by our potential lenders not to extend credit. An inability to successfully

 

70


Table of Contents

access the capital markets could limit our ability to grow our business and fully execute our investment strategy and could decrease our earnings and liquidity. In addition, any dislocation or weakness in the capital and credit markets could adversely affect one or more lenders and could cause one or more of our lenders to be unwilling or unable to provide us with financing or to increase the costs of that financing. In addition, as regulatory capital requirements imposed on our lenders are increased, they may be required to limit, or increase the cost of, financing they provide to us. In general, this could potentially increase our financing costs and reduce our liquidity or require us to sell assets at an inopportune time or price. Accordingly, there can be no assurance that we will be able to obtain or utilize any financing arrangements in the future on similar or more favorable terms, or at all. In addition, even if we are able to access the capital markets, significant balances may be held in cash or cash equivalents pending future investment as we may be unable to invest proceeds on the timeline anticipated.

Our current financing arrangements contain, and our future financing arrangements likely will contain, various financial and operational covenants, and a default of any such covenants could materially and adversely affect us.

Our current financing arrangements contain, and our future financing arrangements likely will contain, various financial and operational covenants affecting our ability and, in certain cases, our subsidiaries’ ability, to incur additional debt, make certain investments, reduce liquidity below certain levels, make distributions to our stockholders and otherwise affect our operating policies. For a description of certain of the covenants, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Portfolio Financing.” If we fail to meet or satisfy any of these covenants in our financing arrangements, 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 limit significantly 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. As a result, a default on any of our debt agreements, and in particular our secured revolving repurchase facilities (since a significant portion of our assets are or will be, as the case may be, financed thereunder), could materially and adversely affect us.

Our financing arrangements may require us to provide additional collateral or pay down debt.

Our current and future financing arrangements involve the risk that the market value of the assets pledged or sold by us to the provider of the financing may decline in value, in which case the lender or counterparty may require us to provide additional collateral or lead to margin calls that may require us to repay all or a portion of the funds advanced. We may not have the funds available to repay our debt at that time, which would likely result in defaults unless we are able to raise the funds from alternative sources, including by selling assets at a time when we might not otherwise choose to do so, which we may not be able to achieve on favorable terms or at all. See “—Our current financing arrangements contain, and our future financing arrangements likely will contain, various financial and operational covenants, and a default of any such covenants could materially and adversely affect us.” Posting additional margin would reduce our cash available to make other, higher yielding investments (thereby decreasing our return on equity). If we cannot meet these requirements, the lender or counterparty could accelerate our indebtedness, increase the interest rate on advanced funds and terminate our ability to borrow funds from it, which could materially and adversely affect us. In the case of repurchase transactions, if the value of the underlying security has declined as of the end of that term, or if we default on our obligations under the secured revolving repurchase facility, we will likely incur a loss on our repurchase transactions. In addition, if a lender or counterparty files for bankruptcy or becomes insolvent, our loans may become subject to bankruptcy or insolvency proceedings, thus depriving us, at least temporarily, of the benefit of these assets. Such an event could restrict our access to financing and increase our cost of capital.

 

71


Table of Contents

Interest rate fluctuations could increase our financing costs, which could materially and adversely affect us.

Our primary interest rate exposures relate to the yield on our loans and the financing cost of our debt, as well as any interest rate swaps utilized for hedging purposes. Changes in interest rates affect our net interest income, which is the difference between the interest income we earn on our interest-earning assets and the interest expense we incur in financing these assets. In a period of rising interest rates, our interest expense on floating rate debt would increase, while any additional interest income we earn on floating rate assets may not compensate for such increase in interest expense and the interest income we earn on fixed rate assets would not change. Similarly, in a period of declining interest rates, our interest income on floating rate assets would decrease, while any decrease in the interest we are charged on our floating rate debt may not compensate for such decrease in interest income and the interest expense we incur on our fixed rate debt would not change. Consequently, changes in interest rates may significantly influence our net interest income. Interest rate fluctuations resulting in our interest expense exceeding interest income would result in operating losses, which could materially and adversely affect us. Changes in the level of interest rates also may affect our ability to originate or acquire loans or other investments, the value of our investments and our ability to realize gains from the disposition of assets. Moreover, changes in interest rates may affect borrower default rates.

Our investments may be subject to fluctuations in interest rates that may not be adequately protected, or protected at all, by our hedging strategies.

Our investments currently include loans primarily with floating interest rates and, in the future, may include loans with fixed interest rates. Floating rate investments earn interest at rates that adjust from time to time (typically, in our case, monthly) based upon an index (in our case, LIBOR). These floating rate loans are insulated from changes in value specifically due to changes in interest rates; however, the interest they earn fluctuates based upon interest rates (for example, LIBOR) and, in a declining and/or low interest rate environment, these loans will earn lower rates of interest and this will impact our operating performance. Fixed interest rate investments, however, do not have adjusting interest rates and the relative value of the fixed cash flows from these investments will decrease as prevailing interest rates rise or increase as prevailing interest rates fall, causing potentially significant changes in value. Our Manager may employ various hedging strategies on our behalf to limit the effects of changes in interest rates (and in some cases credit spreads), including engaging in interest rate swaps, caps, floors and other interest rate derivative products. We believe that no strategy can completely insulate us from the risks associated with interest rate changes and there is a risk that they may provide no protection at all and potentially compound the impact of changes in interest rates. Hedging transactions involve certain additional risks such as counterparty risk, leverage risk, the legal enforceability of hedging contracts, the early repayment of hedged transactions and the risk that unanticipated and significant changes in interest rates may cause a significant loss of basis in the contract and a change in current period expense. We cannot make assurances that we will be able to enter into hedging transactions or that such hedging transactions will adequately protect us against the foregoing risks.

Our use of leverage may create a mismatch with the duration and index of the investments that we are financing.

We generally seek to structure our leverage such that we minimize the differences between the term of our investments and the leverage we use to finance such an investment. However, under certain circumstances, we may determine not to do so or we may otherwise be unable to do so. In addition, we finance each loan or other investment on an individual basis. Accordingly, the extended term of the financed loan or other investment may not correspond to the term to extended maturity of the financing for such loan or other investment. In the event that our leverage is for a shorter term than the financed loan or other investment, we may not be able to extend or find appropriate replacement leverage and that would have an adverse impact on our liquidity and our returns. In the event that our leverage is for a longer term than the financed loan or other investment, we may not be able to repay such leverage or replace the financed loan or other investment with an optimal substitute or at all, which would negatively impact our desired leveraged returns.

 

72


Table of Contents

We generally attempt to structure our leverage such that we minimize the differences between the index of our investments and the index of our leverage (for example, financing floating rate investments with floating rate leverage and fixed rate investments with fixed rate leverage). If such a product is not available to us from our lenders on reasonable terms, we may use hedging instruments to effectively create such a match. For example, in the case of future fixed rate investments, we may finance such an investment with floating rate leverage, but effectively convert all or a portion of the attendant leverage to fixed rate using hedging strategies.

Our attempts to mitigate such risk are subject to factors outside our control, such as the availability to us of favorable financing and hedging options, which is subject to a variety of factors, of which duration and term matching are only two. The risks of a duration mismatch are magnified by the potential for the extension of loans in order to maximize the likelihood and magnitude of their recovery value in the event the loans experience credit or performance challenges. Employment of this asset management practice would effectively extend the duration of our investments, while our liabilities have set maturity dates.

Any warehouse facilities that we may obtain in the future may limit our ability to originate or acquire assets, and we may incur losses if the collateral is liquidated.

We may utilize, if available, warehouse facilities pursuant to which we would accumulate loans in anticipation of a securitization or other financing, which assets would be pledged as collateral for such facilities until the securitization or other transaction is consummated. In order to borrow funds to originate or acquire assets under any future warehouse facilities, we expect that our lenders thereunder would have the right to review the potential assets for which we are seeking financing. We may be unable to obtain the consent of a lender to originate or acquire assets that we believe would be beneficial to us and we may be unable to obtain alternate financing for such assets. In addition, no assurance can be given that a securitization or other financing would be consummated with respect to the assets being warehoused. If the securitization or other financing is not consummated, the lender could demand repayment of the facility, and in the event that we were unable to timely repay, could liquidate the warehoused collateral and we would then have to pay any amount by which the original purchase price of the collateral assets exceeds its sale price, subject to negotiated caps, if any, on our exposure. In addition, regardless of whether the securitization or other financing is consummated, if any of the warehoused collateral is sold before the completion, we would have to bear any resulting loss on the sale.

We may use securitizations to finance our investments, which may expose us to risks that could result in losses.

We may, to the extent consistent with the REIT requirements, seek to securitize certain of our portfolio investments to generate cash for funding new investments. Such financing would involve creating a special purpose vehicle, contributing a pool of our investments to the entity, and selling interests in the entity on a non-recourse basis to purchasers (whom we would expect to be willing to accept a lower interest rate to invest in investment-grade loan pools). We would expect to retain all or a portion of the equity in the securitized pool of portfolio investments. We may use short-term facilities to finance the acquisition of securities until a sufficient quantity of securities had been accumulated, at which time we would refinance these facilities through a securitization, such as a CMBS, or issuance of CLOs, or the private placement of loan participations or other long-term financing. If we were to employ this strategy, we would be subject to the risk that we would not be able to acquire, during the period that our short-term facilities are available, a sufficient amount of eligible securities or loans to maximize the efficiency of a CMBS, CLO or private placement issuance. We also would be subject to the risk that we would not be able to obtain short-term credit facilities or would not be able to renew any short-term credit facilities after they expire should we find it necessary to extend our short-term credit facilities to allow more time to seek and acquire the necessary eligible securities for a long-term financing. The inability to consummate securitizations of our portfolio to finance our investments on a long-term basis could require us to seek other forms of potentially less attractive financing or to liquidate assets at an inopportune time or price, which could adversely affect our performance and our ability to grow our business. Additionally, the securitization of our portfolio might magnify our exposure to losses because any equity interest we retain in the

 

73


Table of Contents

issuing entity would be subordinate to the notes issued to investors and we would, therefore, absorb all of the losses sustained with respect to a securitized pool of assets before the owners of the notes experience any losses. The inability to securitize our portfolio may hurt our performance and our ability to grow our business. At the same time, the securitization of our portfolio investments might expose us to losses, as the residual portfolio investments in which we do not sell interests will tend to be riskier and more likely to generate losses.

We may be subject to losses arising from guarantees of debt and contingent obligations of our subsidiaries or joint venture or co-investment partners.

We conduct substantially all of our operations and own substantially all of our assets through our holding company subsidiary, TPG RE Finance Trust Holdco, LLC (“Holdco”). Holdco has guaranteed repayment of 25% of the principal amount borrowed and other payment obligations under each of our secured revolving repurchase facilities secured by loans and 100% of the principal amount borrowed and other payment obligations under each of our secured revolving repurchase facilities secured by CMBS. In connection with certain of our asset-specific financings, Holdco has provided funding guarantees under which Holdco guarantees the funding obligations of the special purpose lending entity in limited circumstances. Our secured revolving repurchase facilities provide for significant aggregate borrowings. Holdco may in the future guarantee the performance of additional subsidiaries’ obligations. The guarantee agreements contain financial covenants covering liquid assets and net worth requirements. Holdco’s failure to satisfy these covenants and other requirements could result in defaults under each of our secured revolving repurchase facilities and acceleration of the amount borrowed thereunder. Such defaults could have a material adverse effect on us. We may also agree to guarantee indebtedness incurred by a joint venture or co-investment partner. Such a guarantee may be on a joint and several basis with such joint venture or co-investment partner, in which case we may be liable in the event such partner defaults on its guarantee obligation. The non-performance of such obligations may cause losses to us in excess of the capital we initially may have invested or committed under such obligations and there is no assurance that we will have sufficient capital to cover any such losses.

Hedging may adversely affect our earnings, which could materially and adversely affect us.

Subject to maintaining our qualification as a REIT, we may pursue various hedging strategies to seek to reduce our exposure to adverse changes in interest rates and fluctuations in currencies. Our hedging activity will vary in scope based on the level and volatility of interest rates, the type of assets held and other changing market conditions. Interest rate and currency hedging may fail to protect or could adversely affect our earnings because, among other things:

 

    interest, currency and/or credit hedging can be expensive and may result in us receiving less interest income;

 

    available interest or currency rate hedges may not correspond directly with the interest rate or currency risk for which protection is sought;

 

    due to a credit loss, prepayment or asset sale, the duration of the hedge may not match the duration of the related asset or liability;

 

    the amount of income that a REIT may earn from hedging transactions (other than hedging transactions that satisfy certain requirements of the Internal Revenue Code or that are done through a taxable REIT subsidiary (“TRS”)) to offset interest rate losses is limited by U.S. federal income tax provisions governing REITs;

 

    the credit quality of the hedging counterparty owing money on the hedge may be downgraded to such an extent that it impairs our ability to sell or assign our side of the hedging transaction;

 

    the hedging counterparty owing money in the hedging transaction may default on its obligation to pay;

 

74


Table of Contents
    we may fail to recalculate, readjust and execute hedges in an efficient manner; and

 

    legal, tax and regulatory changes could occur and may adversely affect our ability to pursue our hedging strategies and/or increase the costs of implementing such strategies.

Accordingly, any hedging activity in which we engage may materially and adversely affect us. While we may enter into such transactions seeking to reduce risks, unanticipated changes in interest rates, credit spreads or currencies may result in poorer overall investment performance than if we had not engaged in any such hedging transactions. In addition, the degree of correlation between price movements of the instruments used in a hedging strategy and price movements in the portfolio positions or liabilities being hedged may vary materially. Moreover, for a variety of reasons, we may not seek to establish a perfect correlation between such hedging instruments and the portfolio positions or liabilities being hedged. Any such imperfect correlation may prevent us from achieving the intended hedge and expose us to risk of loss.

In addition, some hedging instruments involve risk because they often are not traded on regulated exchanges, guaranteed by an exchange or its clearing house, or regulated by any U.S. or foreign governmental authorities. Consequently, we cannot assure you that a liquid secondary market will exist for hedging instruments purchased or sold, and we may be required to maintain a position until exercise or expiration, which could result in significant losses. In addition, there are no requirements with respect to record keeping, financial responsibility or segregation of customer funds and positions, and the business failure of a hedging counterparty with whom we enter into a hedging transaction will most likely result in its default, which may result in the loss of unrealized profits and force us to cover our commitments, if any, at the then-current market price.

We may be subject to counterparty risk associated with hedging activities.

We may be subject to credit risk with respect to counterparties to derivative contracts (whether a clearing corporation in the case of exchange-traded instruments or another third party in the case of over-the-counter instruments). If a counterparty becomes bankrupt or otherwise fails to perform its obligations under a derivative contract due to financial difficulties, we may experience significant delays in obtaining any recovery under the derivative contract in a dissolution, assignment for the benefit of creditors, liquidation, winding-up, bankruptcy, or other analogous proceeding. In addition, in the event of the insolvency of a counterparty to a derivative transaction, the derivative transaction would typically be terminated at its fair market value. If we are owed this fair market value in the termination of the derivative transaction and its claim is unsecured, we will be treated as a general creditor of such counterparty, and will not have any claim with respect to the underlying security. We may obtain only a limited recovery or may obtain no recovery in such circumstances. Counterparty risk with respect to certain exchange-traded and over-the-counter derivatives may be further complicated by recently enacted U.S. financial reform legislation.

We may enter into hedging transactions that could expose us to contingent liabilities in the future.

Subject to maintaining our qualification as a REIT, part of our investment strategy may involve entering into hedging transactions that could require us to fund cash payments in certain circumstances (such as the early termination of the hedging instrument caused by an event of default or other early termination event, or the decision by a counterparty to request margin securities it is contractually owed under the terms of the hedging instrument). The amount due would be equal to the unrealized loss of the open swap positions with the respective counterparty and could also include other fees and charges. These economic losses will be reflected in our results of operations, and our ability to fund these obligations will depend on the liquidity of our assets and access to capital at the time, and the need to fund these obligations could materially and adversely affect us.

 

75


Table of Contents

We may enter into certain hedging transactions or otherwise invest in certain derivative instruments coming within the regulatory jurisdiction of the CFTC. Maintaining relief from regulation as a commodity pool operator requires us to limit our exposure to such derivative instruments and may thus limit our ability to engage in certain transactions, even if doing so would otherwise be prudent and beneficial and if not doing so could have a material adverse effect on us.

Mortgage real estate investment trusts (“mortgage REITs”) that trade in commodity interest positions (including swaps) are considered commodity pools and the operators of such mortgage REITs, absent relief from the CFTC, would be required to register as commodity pool operators (“CPOs”) and to become members of the National Futures Association (the “NFA”). Registration with the CFTC and membership in the NFA require compliance with the NFA’s rules and renders such CPO subject to regulation by the CFTC, including with respect to disclosure, reporting, recordkeeping and business conduct.

The CFTC has provided relief from CPO registration to operators of mortgage REITS, subject to certain conditions. Among the conditions of the relief are that REITs claiming the relief limit the initial margin and premiums required to establish commodity interest positions to no more than five percent of the fair market value of their total assets and limit the net income derived annually from their commodity interest positions that are not qualifying hedging transactions to less than five percent of their gross income. We may from time to time, directly or indirectly, invest in commodity interests for hedging or investment purposes. We intend to comply with the conditions of the CFTC relief, even if breaching the five percent thresholds, in particular with respect to initial margin and premiums required to establish commodity interest positions, would otherwise be prudent and beneficial to us and even if not breaching such thresholds could have a material adverse effect on us. Additionally, because we are not required to register as a CPO, we are not required to comply with CFTC regulations related to disclosure, recordkeeping and reporting or with the NFA business conduct rules.

Risks Related to our REIT Status and Certain Other Tax Items

If we fail to remain qualified as a REIT, we will be subject to tax as a regular corporation and could face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.

We currently intend to operate in a manner that will allow us to continue to qualify as a REIT for U.S. federal income tax purposes. We have not requested nor obtained a ruling from the Internal Revenue Service (the “IRS”) as to our REIT qualification. Our continued qualification as a REIT depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair values of our investments, some of which are not susceptible to a precise determination, and for which we will not obtain independent appraisals. Our compliance with the REIT income and quarterly asset requirements also depends upon our ability to successfully manage the composition of our income and assets on an ongoing basis. Moreover, the proper classification of an instrument as debt or equity for U.S. federal income tax purposes may be uncertain in some circumstances, which could affect the application of the REIT qualification requirements as described below. Accordingly, there can be no assurance that the IRS will not contend that our interests in subsidiaries or in securities of other issuers will not cause a violation of the REIT requirements.

If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax, including any applicable alternative minimum tax and applicable state and local taxes, on our taxable income at regular corporate rates, and distributions made to our stockholders would not be deductible by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of cash available for distribution to our stockholders, which in turn could materially and adversely affect us and the value of our common stock. Unless we were entitled to relief under certain Internal Revenue Code provisions, we also would be disqualified from taxation as a REIT for the four taxable years following the year in which we failed to qualify as a REIT.

 

76


Table of Contents

Dividends payable by REITs do not qualify for the reduced tax rates available for some dividends.

The maximum tax rate applicable to income from “qualified dividends” payable to domestic stockholders that are individuals, trusts and estates is currently 20%. Dividends payable by REITs, however, generally are taxed at the higher tax rates applicable to ordinary income. The preferential rates applicable to regular corporate qualified dividends could cause investors who are individuals, trusts and estates to perceive investments in REITs to be relatively less attractive than investments in the stocks of non-REIT corporations that pay dividends, which could adversely affect the value of the stock of REITs, including our common stock.

Compliance with the REIT requirements may hinder our ability to grow, which could materially and adversely affect us.

We generally must distribute annually at least 90% of our REIT taxable income, subject to certain adjustments and excluding any net capital gain, in order for U.S. federal corporate income tax not to apply to earnings that we distribute. To the extent that we satisfy this distribution requirement, but distribute less than 100% of our REIT taxable income, we will be subject to U.S. federal corporate income tax on our undistributed taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual amount that we pay out to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax laws. We intend to continue to make distributions to our stockholders to comply with the REIT requirements of the Internal Revenue Code.

From time to time, we may generate taxable income greater than our income for financial reporting purposes prepared in accordance with GAAP, or differences in timing between the recognition of taxable income and the actual receipt of cash may occur. For example, we may be required to accrue income from mortgage loans, CMBS and other types of debt investments or interests in debt investments before we receive any payments of interest or principal on such assets. We may also acquire distressed debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are “significant modifications” under the applicable U.S. Treasury Regulations, the modified debt may be considered to have been reissued to us at a gain in a debt-for-debt exchange with the borrower, with gain recognized by us to the extent that the principal amount of the modified debt exceeds our cost of purchasing it prior to modification.

We may also be required under the terms of indebtedness that we incur to use cash received from interest payments to make principal payments on that indebtedness, with the effect of recognizing income but not having a corresponding amount of cash available for distribution to our stockholders.

As a result, we may find it difficult or impossible to meet distribution requirements from our ordinary operations in certain circumstances. In particular, where we experience differences in timing between the recognition of taxable income and the actual receipt of cash, the requirement to distribute a substantial portion of our taxable income could cause us to do any of the following in order to comply with the REIT requirements: (i) sell assets in adverse market conditions, (ii) raise funds on unfavorable terms, (iii) distribute amounts that would otherwise be invested in future acquisitions, capital expenditures or repayment of debt or (iv) make a taxable distribution of shares of our common stock, as part of a distribution in which stockholders may elect to receive shares (subject to a limit measured as a percentage of the total distribution). These alternatives could increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could materially and adversely affect us.

We may choose to make distributions to our stockholders in our own common stock, in which case our stockholders could be required to pay income taxes in excess of the cash dividends they receive.

We may in the future distribute taxable dividends that are payable in cash and shares of our common stock at the election of each stockholder. Taxable stockholders receiving such distributions will be required to include the full amount of the distribution as ordinary income to the extent of our current and accumulated

 

77


Table of Contents

earnings and profits for U.S. federal income tax purposes. As a result, stockholders may be required to pay income taxes with respect to such dividends in excess of the cash dividends received. If a U.S. stockholder sells the stock that it receives as a dividend in order to pay this tax, the sale proceeds may be less than the amount included in income with respect to the dividend, depending on the market price of our common stock at the time of the sale. Furthermore, with respect to certain non-U.S. stockholders, we or the applicable withholding agent may be required to withhold U.S. tax with respect to such dividends, including in respect of all or a portion of such dividend that is payable in common stock. In addition, if a significant number of our stockholders determine to sell shares of our common stock in order to pay taxes owed on dividends, it may put downward pressure on the trading price of our common stock.

Pursuant to Revenue Procedure 2010-12, the IRS created a temporary safe harbor authorizing publicly-traded REITs to make elective cash/stock dividends. That safe harbor has expired. However, the IRS has issued private letter rulings to other REITs granting similar treatment to elective cash/stock dividends. Those rulings may only be relied upon by the taxpayers to whom they were issued, but we could request a similar ruling from the IRS. No assurance can be given that the IRS will not impose additional requirements in the future with respect to taxable cash/stock dividends, including on a retroactive basis, or assert that the requirements for such taxable cash/stock dividends have not been met. Accordingly, it is unclear whether and to what extent we will be able to pay taxable dividends payable in cash and stock in later years.

Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow, which could materially and adversely affect us.

Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income, property and transfer taxes, such as mortgage recording taxes. In addition, in order to continue to meet the REIT qualification requirements, prevent the recognition of certain types of non-cash income or to avert the imposition of a 100% tax that applies to certain gains derived by a REIT from dealer property or inventory, we may hold a significant amount of our investments through TRSs or other subsidiary corporations that will be subject to corporate-level income tax at regular rates. In addition, if we lend money to a TRS, the TRS may be unable to deduct all or a portion of the interest paid to us, which could result in an even higher corporate-level tax liability. Any of these taxes would reduce our cash flow, which could materially and adversely affect us.

Complying with REIT requirements may cause us to forego otherwise attractive investment opportunities.

To continue to qualify as a REIT for U.S. federal income tax purposes, we must satisfy ongoing tests concerning, among other things, the sources of our income, the nature and diversification of our assets, the amounts that we distribute to our stockholders and the ownership of our stock. We may be required to make distributions to stockholders at disadvantageous times or when we do not have funds readily available for distribution, and may be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-diversification requirements for qualifying as a REIT. In addition, in certain cases, the modification of a debt instrument could result in the conversion of the instrument from a qualifying real estate asset to a wholly or partially non-qualifying asset that must be contributed to a TRS or disposed of in order for us to maintain our REIT status. Compliance with the source-of-income requirements may also limit our ability to acquire debt instruments at a discount from their face amount. Thus, compliance with the REIT requirements may cause us to forego or, in certain cases, to maintain ownership of, otherwise attractive investment opportunities.

Complying with REIT requirements may force us to liquidate or restructure otherwise attractive investments.

To continue to qualify as a REIT, we must ensure that at the end of each calendar quarter, at least 75% of the value of our assets consists of cash, cash items, government securities and qualified REIT real estate assets, including certain mortgage loans and certain kinds of CMBS. The remainder of our investments in

 

78


Table of Contents

securities (other than government securities and qualified real estate assets) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our assets (other than government securities and qualified real estate assets) can consist of the securities of any one issuer, and no more than 25% (for taxable years beginning after December 31, 2017, no more than 20%) of the value of our total securities can be represented by securities of one or more TRSs. If we fail to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse tax consequences. As a result, we may be required to liquidate or restructure otherwise attractive investments. These actions could have the effect of reducing our income and amounts available for distribution to our stockholders.

We may be required to report taxable income from certain investments in excess of the economic income we ultimately realize from them.

We may acquire debt instruments in the secondary market for less than their face amount. The discount at which such debt instruments are acquired may reflect doubts about their ultimate collectability rather than current market interest rates. The amount of such discount will nevertheless generally be treated as “market discount” for U.S. federal income tax purposes. Accrued market discount is generally reported as income when, and to the extent that, any payment of principal of the debt instrument is made. Payments on commercial mortgage loans are ordinarily made monthly, and consequently accrued market discount may have to be included in income each month as if the debt instrument were assured of ultimately being collected in full. If we collect less on the debt instrument than our purchase price plus the market discount we had previously reported as income, we may not be able to benefit from any offsetting loss deductions. In addition, we may acquire distressed debt investments that are subsequently modified by agreement with the borrower. If the amendments to the outstanding debt are “significant modifications” under applicable U.S. Treasury Regulations, the modified debt may be considered to have been reissued to us at a gain in a debt-for-debt exchange with the borrower. In that event, we may be required to recognize taxable gain to the extent the principal amount of the modified debt exceeds our adjusted tax basis in the unmodified debt, even if the value of the debt or the payment expectations have not changed.

Moreover, some of the CMBS that we acquire may have been issued with original issue discount. We will be required to report such original issue discount based on a constant yield method and will be taxed based on the assumption that all future projected payments due on such CMBS will be made. If such CMBS turns out not to be fully collectible, an offsetting loss deduction will become available only in the later year that uncollectibility is provable.

Finally, in the event that any debt instruments or CMBS acquired by us are delinquent as to mandatory principal and interest payments, or in the event payments with respect to a particular debt instrument are not made when due, we may nonetheless be required to continue to recognize the unpaid interest as taxable income as it accrues, despite doubt as to its ultimate collectability. In each case, while we would in general ultimately have an offsetting loss deduction available to us when such interest was determined to be uncollectible, the utility of that deduction could depend on our having taxable income in that later year or thereafter.

The “taxable mortgage pool” rules may increase the taxes that we or our stockholders may incur, and may limit the manner in which we effect future securitizations.

Securitizations could result in the creation of taxable mortgage pools (“TMPs”), for U.S. federal income tax purposes. As a REIT, so long as we own 100% of the equity interests in a TMP, we generally would not be adversely affected by the characterization of the securitization as a TMP. Certain categories of stockholders, however, such as foreign stockholders eligible for treaty or other benefits, stockholders with net operating losses, and certain tax-exempt stockholders that are subject to unrelated business income tax, could be subject to increased taxes on a portion of their dividend income from us that is attributable to the TMP. In addition, to the extent that our

 

79


Table of Contents

common stock is owned by tax-exempt “disqualified organizations,” such as certain government-related entities and charitable remainder trusts that are not subject to tax on unrelated business income, we may incur a corporate level tax on a portion of our income from the TMP. In that case, we may reduce the amount of our distributions to any disqualified organization whose stock ownership gave rise to the tax. Moreover, we would be precluded from selling equity interests in these securitizations to outside investors, or selling any debt securities issued in connection with these securitizations that might be considered to be equity interests for tax purposes. These limitations may prevent us from using certain techniques to maximize our returns from securitization transactions.

The tax on prohibited transactions limits our ability to engage in transactions, including certain methods of securitizing mortgage loans, which would be treated as sales for U.S. federal income tax purposes.

A REIT’s net income from prohibited transactions is subject to a 100% tax. In general, prohibited transactions are sales or other dispositions of property, other than foreclosure property, but including mortgage loans, held primarily for sale to customers in the ordinary course of business. We might be subject to this tax if we were to dispose of or securitize loans in a manner that was treated as a sale of the loans for U.S. federal income tax purposes. Therefore, in order to avoid the prohibited transactions tax, we may choose not to engage in certain sales of loans at the REIT level, and may limit the structures we utilize for our securitization transactions, even though the sales or structures might otherwise be beneficial to us.

Our investments in construction loans will require us to make estimates about the fair value of land improvements that may be challenged by the IRS.

We have invested and will continue to invest in construction loans, the interest from which will be qualifying income for purposes of the REIT income tests, provided that the loan value of the real property securing the construction loan is equal to or greater than the highest outstanding principal amount of the construction loan during any taxable year. For purposes of construction loans, the loan value of the real property is the fair value of the land plus the reasonably estimated cost of the improvements or developments (other than personal property) that will secure the loan and that are to be constructed from the proceeds of the loan. There can be no assurance that the IRS would not challenge our estimate of the loan value of the real property.

The failure of a mezzanine loan to qualify as a real estate asset could adversely affect our ability to continue to qualify as a REIT.

We have invested and will continue to invest in mezzanine loans, for which the IRS has provided a safe harbor but not rules of substantive law. Pursuant to the safe harbor, if a mezzanine loan meets certain requirements, it will be treated by the IRS as a real estate asset for purposes of the REIT asset tests, and interest derived from the mezzanine loan will be treated as qualifying mortgage interest for purposes of the REIT 75% income test. Certain of our mezzanine loans may not meet all of the requirements of this safe harbor. In the event we own a mezzanine loan that does not meet the safe harbor, the IRS could challenge such loan’s treatment as a real estate asset for purposes of the REIT asset and income tests and, if such a challenge were sustained, we could fail to qualify as a REIT.

The failure of assets subject to secured revolving repurchase facilities to qualify as real estate assets could adversely affect our ability to continue to qualify as a REIT.

We have entered into secured revolving repurchase facilities and may in the future enter into additional secured revolving repurchase facilities pursuant to which we would agree, from time to time, to nominally sell certain of our assets to a counterparty and repurchase these assets at a later date in exchange for a purchase price. Economically, repurchase transactions are financings which are secured by the assets sold pursuant thereto. We believe that we would be treated for REIT asset and income test purposes as the owner of the assets that are the subject of any such repurchase transaction notwithstanding that such agreement may transfer record ownership of the assets to the counterparty during the term of the agreement. It is possible, however, that the IRS could assert

 

80


Table of Contents

that we did not own the assets during the term of the repurchase transaction, in which case we could fail to continue to qualify as a REIT.

Liquidation of assets may jeopardize our REIT qualification or create additional tax liability for us.

To continue to qualify as a REIT, we must comply with requirements regarding our assets and our sources of income. If we are compelled to liquidate our investments to repay obligations to our lenders, we may be unable to comply with these requirements, ultimately jeopardizing our qualification as a REIT, or we may be subject to a 100% tax on any resultant gain if we sell assets that are treated as dealer property or inventory.

Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.

The REIT provisions of the Internal Revenue Code substantially limit our ability to hedge our assets and liabilities. Any income from a properly identified hedging transaction we enter into either (i) to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or carry real estate assets, (ii) to manage risk of currency fluctuations with respect to items of income that qualify for purposes of the REIT 75% or 95% gross income tests or assets that generate such income, or (iii) to hedge another instrument that hedges risks described in clause (i) or (ii) for a period following the extinguishment of the liability or the disposition of the asset that was previously hedged by the instrument, and, in each case, such instrument is properly identified under applicable U.S. Treasury Regulations, does not constitute “gross income” for purposes of the 75% or 95% gross income tests. To the extent that we enter into other types of hedging transactions, the income from those transactions is likely to be treated as non-qualifying income for purposes of both of the gross income tests. As a result of these rules, we intend to limit our use of advantageous hedging techniques or implement those hedges through a domestic TRS. This could increase the cost of our hedging activities because our TRS would be subject to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In addition, losses in a TRS will generally not provide any tax benefit, except for being carried forward against future taxable income in such TRS.

Qualifying as a REIT involves highly technical and complex provisions of the Internal Revenue Code.

Qualification as a REIT involves the application of highly technical and complex provisions of the Internal Revenue Code for which only limited judicial and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our continued qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to continue to qualify as a REIT depends in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.

New legislation or administrative or judicial action, in each instance potentially with retroactive effect, could make it more difficult or impossible for us to remain qualified as a REIT or have other adverse effects on us.

The present U.S. federal income tax treatment of REITs may be modified, possibly with retroactive effect, by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment in us. The U.S. federal income tax rules dealing with REITs are constantly under review by persons involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent revisions to regulations and interpretations. According to publicly released statements, a top legislative priority of the new Congress and administration may be to enact significant reform of the Internal Revenue Code, including significant changes to taxation of business entities and the deductibility of interest expense and capital investment. There is a substantial lack of clarity around the likelihood, timing and details of any such tax reform and the impact of any potential tax reform on us or an investment in our common

 

81


Table of Contents

stock. Any such changes to the tax laws or interpretations thereof, with or without retroactive application, could materially and adversely affect our stockholders or us. We cannot predict how changes in the tax laws might affect our stockholders or us. New legislation, U.S. Treasury Regulations, administrative interpretations or court decisions could significantly and negatively affect our ability to continue to qualify as a REIT, or the U.S. federal income tax consequences to our stockholders and us of such qualification, or could have other adverse consequences including with respect to ownership of our common stock. For example, lower revised tax rates for corporations, or for individuals, trusts and estates, might cause current or potential stockholders to perceive investments in REITs to be relatively less attractive than is the case under current law.

Risks Related to Our Organization and Structure

Certain provisions of Maryland law could inhibit changes in control.

Certain provisions of the MGCL may have the effect of deterring a third party from making a proposal to acquire us or of inhibiting a change in control under circumstances that otherwise could provide the holders of our common stock with the opportunity to realize a premium over the then-prevailing market price of our common stock. Under the MGCL, certain “business combinations” (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and an interested stockholder (as defined in the statute) or an affiliate of such an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (1) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (2) two-thirds of the votes entitled to be cast by holders of shares of voting stock of the corporation other than shares held by the interested stockholder with whom (or with whose affiliate) the business combination is to be effected or held by an affiliate or associate of the interested stockholder, unless, among other conditions, the corporation’s common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the interested stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by a board of directors prior to the time that the interested stockholder becomes an interested stockholder. Pursuant to the statute, our board of directors has by resolution exempted any business combination between us and any other person, provided that such business combination is first approved by our board of directors.

The MGCL provides that holders of “control shares” of our company (defined as shares of voting stock that, if aggregated with all other shares of capital stock owned or controlled by the acquirer, would entitle the acquirer to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of issued and outstanding “control shares”) have no voting rights except to the extent approved at a special meeting of stockholders by the affirmative vote of at least two-thirds of all of the votes entitled to be cast on the matter, excluding all interested shares. Our bylaws currently contain a provision exempting any and all acquisitions by any person of shares of our stock from this statute.

The “unsolicited takeover” provisions of the MGCL permit our board of directors, without stockholder approval and regardless of what is currently provided in our charter or bylaws, to implement takeover defenses if we have a class of equity securities registered under the Exchange Act and at least three independent directors (which we will have upon the completion of this offering). These provisions may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or preventing a change in control of our company under the circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-current market price. Our charter contains a provision whereby we have elected to be subject to the provisions of Title 3, Subtitle 8 of the MGCL relating to the filling of vacancies on our board of directors. See “Certain Provisions of Maryland Law and of our Charter and Bylaws—Business Combinations” and “Certain Provisions of Maryland Law and of our Charter and Bylaws—Control Share Acquisitions.”

 

82


Table of Contents

The authorized but unissued shares of our stock and preferred stock may prevent a change in our control.

Our charter authorizes us to issue additional authorized but unissued shares of our stock and preferred stock. In addition, a majority of our entire board of directors may, without stockholder approval, amend our charter to increase or decrease the aggregate number of shares of our capital stock or the number of shares of our capital stock of any class or series that we have authority to issue and classify or reclassify any unissued shares of our stock or preferred stock and set the preferences, rights and other terms of the classified or reclassified shares. As a result, our board of directors may establish a class or series of common stock or preferred stock that could delay, defer or prevent a transaction or a change in control that might involve a premium price for shares of our common stock or otherwise be in the best interest of our stockholders.

Ownership limitations may delay, defer or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders.

In order for us to maintain our qualification as a REIT under the Internal Revenue Code, not more than 50% of the value of the outstanding shares of our capital stock may be owned, directly or indirectly, by five or fewer individuals (as defined in the Internal Revenue Code to include certain entities) during the last half of a taxable year. Our charter, with certain exceptions, authorizes our board of directors to take the actions that are necessary or appropriate to preserve our qualification as a REIT. Unless exempted by our board of directors, no person may own more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares of any class or series of our capital stock. Our board may grant an exemption prospectively or retroactively in its sole discretion, subject to such conditions, representations and undertakings as it may deem appropriate. These ownership limitations in our charter are standard in REIT charters and are intended to provide added assurance of compliance with the tax law requirements, and to reduce administrative burdens. However, these ownership limits might also delay, defer or prevent a transaction or a change in our control that might involve a premium price for our common stock or otherwise be in the best interest of our stockholders or result in the transfer of shares acquired in excess of the ownership limits to a trust for the benefit of a charitable beneficiary and, as a result, the forfeiture by the acquirer of the benefits of owning the additional shares.

Our charter contains provisions that make removal of our directors difficult, which makes it more difficult for our stockholders to effect changes to our management and may prevent a change in control of our company that is in the best interests of our stockholders.

Our charter provides that a director may be removed only for cause and only by the affirmative vote of at least two-thirds of all the votes of stockholders entitled to be cast generally in the election of directors. Vacancies on our board of directors may be filled only by a majority of the remaining directors, even if the remaining directors do not constitute a quorum, and any individual elected to fill such a vacancy will serve for the remainder of the full term of the directorship in which the vacancy occurred and until his or her successor is duly elected and qualifies. These requirements make it more difficult for our stockholders to effect changes to our management by removing and replacing directors and may prevent a change in control of our company that is otherwise in the best interests of our stockholders.

Our charter contains provisions that limit the responsibilities of our directors and officers with respect to certain business opportunities.

Our charter provides that, if any TPG Director/Officer acquires knowledge of a potential business opportunity, we renounce, on our behalf and on behalf of our subsidiaries, any potential interest or expectation in, or right to be offered or to participate in, such business opportunity to the maximum extent permitted from time to time by Maryland law. Accordingly, to the maximum extent permitted from time to time by Maryland law, (1) no TPG Director/Officer is required to present, communicate or offer any business opportunity to us or any of our subsidiaries and (2) the TPG Director/Officer, on his or her own behalf or on behalf of TPG, will have the right to hold and exploit any business opportunity, or to direct, recommend, offer, sell, assign or otherwise transfer such business opportunity to any person or entity other than us.

 

83


Table of Contents

Accordingly, any TPG Director/Officer may hold and make use of any business opportunity or direct such opportunity to any person or entity other than us and, as a result, those business opportunities may not be available to us.

Our rights and the rights of our stockholders to take action against our directors and officers are limited, which could limit your recourse in the event of actions not in your best interests.

Our charter limits the liability of our directors and officers to us and our stockholders for money damages to the maximum extent permitted under Maryland law. Under current Maryland law, our present and former directors and officers will not have any liability to us or our stockholders for money damages except for liability resulting from:

 

    actual receipt of an improper personal benefit or profit in money, property or services; or

 

    active and deliberate dishonesty by the director or executive officer that was established by a final judgment and was material to the cause of action adjudicated.

Our charter and bylaws obligate us, to the maximum extent permitted by Maryland law in effect from time to time, to indemnify and, without requiring a preliminary determination of the ultimate entitlement to indemnification, pay or reimburse reasonable expenses in advance of final disposition of a proceeding to:

 

    any individual who is a present or former director or executive officer of our company and who is made, or threatened to be made, a party to, or witness in, the proceeding by reason of his or her service in that capacity; or

 

    any individual who, while a director or officer of our company and at our request, serves or has served as a director, officer, trustee, member, manager or partner of another corporation, real estate investment trust, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made, or threatened to be made, a party to, or witness in, the proceeding by reason of his or her service in that capacity.

Our charter and bylaws also permit us to indemnify and advance expenses to any person who served a predecessor of ours in any of the capacities described above and to any employee or agent of our company or a predecessor of our company.

As a result, we and our stockholders may have more limited rights against our directors and officers than might otherwise exist absent the current provisions in our charter and bylaws or that might exist with other companies, which could limit your recourse in the event of actions not in your best interests.

We are a holding company with no direct operations and, as such, we rely on funds received from Holdco to pay liabilities and distributions to our stockholders, and the interests of our stockholders are structurally subordinated to all liabilities and any preferred equity of Holdco and its subsidiaries.

We are a holding company and conduct substantially all of our operations through Holdco. We do not have, apart from an interest in Holdco, any independent operations. As a result, we rely on distributions from Holdco to pay any dividends that we may declare on shares of our stock. We also rely on distributions from Holdco to meet any of our obligations, including any tax liability on taxable income allocated to us from Holdco. In addition, because we are a holding company, your claims as stockholders are structurally subordinated to all existing and future liabilities (whether or not for borrowed money) and any preferred equity of Holdco and its subsidiaries. Therefore, in the event of our bankruptcy, liquidation or reorganization, our assets and those of Holdco and its subsidiaries will be available to satisfy the claims of our stockholders only after all of Holdco’s and its subsidiaries’ liabilities and any preferred equity have been paid in full.

 

84


Table of Contents

Risks Related to Our Common Stock and this Offering

There has been no public market for our common stock prior to this offering and an active trading market may not develop or be sustained following this offering, which may negatively affect the liquidity and market price of our common stock and make it difficult for investors to sell their shares on favorable terms when desired.

There is no established trading market for the shares of our common stock. Our common stock has been approved for listing, subject to official notice of issuance, on the NYSE under the symbol “TRTX.” However, there can be no assurance that an active trading market for our common stock will develop, or if one develops, be maintained. Accordingly, no assurance can be given as to the ability of our stockholders to sell their common stock or the price that our stockholders may obtain for their common stock.

Some of the factors that could negatively affect the market price of our common stock include:

 

    our actual or projected operating results, financial condition, cash flows and liquidity, or changes in investment strategy or prospects;

 

    changes in the value of our portfolio;

 

    actual or perceived conflicts of interest with TPG, including our Manager, and the personnel of TPG provided to our Manager, including our executive officers, and TPG Funds;

 

    equity issuances by us, or share resales by our stockholders, or the perception that such issuances or resales may occur;

 

    loss of a major funding source or inability to obtain new favorable funding sources in the future;

 

    our financing strategy and leverage;

 

    actual or anticipated accounting problems;

 

    publication of research reports about us or the commercial real estate industry;

 

    adverse market reaction to additional indebtedness we incur or securities we may issue in the future;

 

    additions to or departures of key personnel of TPG, including our Manager;

 

    changes in market valuations or operating performance of companies comparable to us;

 

    price and volume fluctuations in the overall stock market from time to time;

 

    short-selling pressure with respect to shares of our common stock or REITs generally;

 

    speculation in the press or investment community;

 

    any shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;

 

    increases in market interest rates, which may lead investors to demand a higher distribution yield for our common stock and Class A common stock, if we have begun to make distributions to our stockholders, and would result in increased interest expense on our debt;

 

85


Table of Contents
    failure to maintain our REIT qualification or exclusion or exemption from Investment Company Act regulation or listing on the NYSE;

 

    changes in law, regulatory policies or tax guidelines, or interpretations thereof, particularly with respect to REITs;

 

    general market and economic conditions and trends, including inflationary concerns and the current state of the credit and capital markets; and

 

    the other factors described under “Risk Factors.”

As noted above, market factors unrelated to our performance could also negatively impact the market price of our common stock. One of the factors that investors may consider in deciding whether to buy or sell our common stock is our distribution rate, if any, as a percentage of our stock price relative to market interest rates. If market interest rates increase, prospective investors may demand a higher distribution rate or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations and conditions in the capital markets can affect the market price of our common stock.

The initial public offering price per share of our common stock offered under this prospectus may not accurately reflect the value of your investment.

Prior to this offering, there has been no market for our common stock. The initial public offering price per share of our common stock offered by this prospectus was negotiated among us and the underwriters, and therefore may not accurately reflect the value of your investment. Factors considered in determining the price of our common stock include:

 

    the valuation multiples of publicly-traded companies that the representatives for the underwriters believe to be comparable to us;

 

    our financial information;

 

    the history of, and the prospects for, our company and the industry in which we compete;

 

    an assessment of our Manager, its past and present operations, and the prospects for, and timing of, our future revenues;

 

    the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours; and

 

    other factors deemed relevant by the underwriters and us.

You will experience immediate and substantial dilution from the purchase of our common stock in this offering.

If you purchase common stock in this offering, you will experience immediate dilution of approximately $0.58 per share of our common stock, assuming no exercise by the underwriters of their option to purchase additional shares of our common stock. This means that investors that purchase shares of our common stock in this offering will pay a price per share that exceeds our net tangible book value per share of our common stock and Class A common stock after giving effect to the payment of our cash dividend with respect to the second quarter of 2017, the issuance of additional shares of our common stock and Class A common stock upon the completion of this offering in connection with a stock dividend payable to holders of record of our common stock and Class A common stock as of July 3, 2017 and the completion of this offering. See “Dilution.”

 

86


Table of Contents

Common stock eligible for future sale may have adverse effects on the market price of our common stock.

We are offering 11,000,000 shares of our common stock as described in this prospectus (excluding the underwriters’ option to purchase up to an additional 1,650,000 shares of our common stock). We and substantially all of our existing stockholders (other than those referenced in the next sentence) have agreed with the underwriters in this offering not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock (including our Class A common stock), for 180 days after the date of this prospectus without first obtaining the written consent of each of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., subject to certain limited exceptions. In addition, our executive officers and directors, our Manager, TPG Holdings III, L.P. and TPG RE Finance Trust Equity, L.P. have agreed not to sell or transfer any common stock or securities convertible into, exchangeable for, exercisable for, or repayable with common stock (including our Class A common stock), for 365 days after the date of this prospectus without first obtaining the written consent of each of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., subject to certain limited exceptions.

In connection with our Formation Transaction, we entered into a registration rights agreement with TPG Holdings III, L.P. and certain of our existing stockholders. Our Manager and TPG RE Finance Trust Equity, L.P. are not parties to the registration rights agreement. The registration rights agreement provides these stockholders with certain demand and shelf registration rights, which will be subject to lock-up agreements with the underwriters in this offering, and piggyback registration rights, which have been waived in connection with this offering. In addition, we intend to file a registration statement on Form S-8 to register the issuance of the total number of shares of our common stock that may be issued under our equity incentive plan. See “Shares Eligible for Future Sale—Registration Rights” and “Shares Eligible for Future Sale—Our Equity Incentive Plan.”

Assuming no exercise of the underwriters’ option to purchase additional shares of our common stock, approximately 81.8% of our common stock and Class A common stock outstanding upon the completion of this offering and the stock dividend payable to holders of our common stock and Class A common stock as of July 3, 2017 will be subject to lock-up agreements. When these lock-up periods expire, these shares of stock will become eligible for resale, in some cases subject to the requirements of Rule 144 under the Securities Act, which are described under “Shares Eligible for Future Sale.”

We cannot predict the effect, if any, of future issuances or sales of our stock, or the availability of shares for future issuances or sales, on the market price of our common stock. The market price of our common stock may decline significantly when the restrictions on resale by certain of our stockholders lapse. Issuances or sales of substantial amounts of stock or the perception that such issuances or sales could occur may adversely affect the prevailing market price for our common stock.

After the completion of this offering, we may issue shares of restricted stock and other equity-based awards under our equity incentive plan. Also, we may issue additional shares of our stock in subsequent public offerings or private placements to make new investments or for other purposes. We are not required to offer any such shares to existing stockholders on a preemptive basis. Therefore, it may not be possible for existing stockholders to participate in such future stock issuances, which may dilute the then existing stockholders’ interests in us.

We have not established a minimum distribution payment level and we cannot assure you of our ability to pay distributions in the future.

We are generally required to distribute to our stockholders at least 90% of our REIT taxable income each year for us to qualify as a REIT under the Internal Revenue Code, which requirement we currently intend to satisfy through quarterly distributions of all or substantially all of our REIT taxable income in such year, subject to certain adjustments. We have not established a minimum distribution payment level and our ability to make distributions may be adversely affected by a number of factors, including the risk factors described in this

 

87


Table of Contents

prospectus. Distributions to our stockholders, if any, will be authorized by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including our historical and projected results of operations, cash flows and financial condition, our financing covenants, maintenance of our REIT qualification, applicable provisions of the MGCL and such other factors as our board of directors deems relevant.

We believe that a change in any one of the following factors could adversely affect our results of operations and cash flows and impair our ability to make distributions to our stockholders:

 

    the profitability of the investment of the net proceeds from this offering;

 

    our ability to make attractive investments;

 

    margin calls or other expenses that reduce our cash flows;

 

    defaults or prepayments in our investment portfolio or decreases in the value of our investment portfolio; and

 

    the fact that anticipated operating expense levels may not prove accurate, as actual results may vary from estimates.

As a result, no assurance can be given that we will be able to make distributions to our stockholders at any time in the future or that the level of any distributions we do make to our stockholders will achieve a market yield or increase or even be maintained over time, any of which could materially and adversely affect us.

In addition, distributions that we make to our stockholders will generally be taxable to our stockholders as ordinary income. However, a portion of our distributions may be designated by us as long-term capital gains to the extent that they are attributable to capital gain income recognized by us or may constitute a return of capital to the extent that they exceed our earnings and profits as determined for U.S. federal income tax purposes. A return of capital is not taxable, but has the effect of reducing the basis of a stockholder’s investment in our common stock.

Future offerings of debt or equity securities, which would rank senior to our common stock, may reduce the market price of our common stock.

If we decide to issue debt or equity securities in the future, which would rank senior to our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. Additionally, any convertible or exchangeable securities that we issue in the future may have rights, preferences and privileges more favorable than those of our common stock and may result in dilution to owners of our common stock. We and, indirectly, our stockholders, will bear the cost of issuing and servicing such securities. Because our decision to issue debt or equity securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing, nature or effect of our future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their stock holdings in us.

 

88


Table of Contents

Purchases of our common stock by Goldman Sachs & Co. LLC for us under the 10b5-1 Purchase Plan may result in the market price of our common stock being higher than the price that otherwise might exist in the open market.

We have entered into the 10b5-1 Purchase Plan with Goldman Sachs & Co. LLC, one of the underwriters in this offering. Pursuant to the 10b5-1 Purchase Plan, Goldman Sachs & Co. LLC, as our agent, will buy in the open market up to $35.0 million in shares of our common stock in the aggregate during the period beginning four full calendar weeks following the completion of this offering and ending 12 months thereafter or, if sooner, the date on which all the capital committed to the 10b5-1 Purchase Plan has been exhausted. See “Certain Relationships and Related Person Transactions” for additional details regarding the 10b5-1 Purchase Plan. Whether purchases will be made under the 10b5-1 Purchase Plan and how much will be purchased at any time is uncertain, dependent on prevailing market prices and trading volumes, all of which we cannot predict. These activities may have the effect of maintaining the market price of our common stock or retarding a decline in the market price of the common stock, and, as a result, the market price of our common stock may be higher than the price that otherwise might exist in the open market.

 

89


Table of Contents

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements that are subject to various risks and uncertainties, including, without limitation, statements relating to the performance of our investments and our financing needs and arrangements. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “endeavor,” “seek,” “anticipate,” “estimate,” “believe,” “could,” “project,” “predict,” “continue” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe existing or future plans and strategies, contain projections of results of operations, liquidity and/or financial condition or state other forward-looking information. Our ability to predict future events or conditions or their impact or the actual effect of existing or future plans or strategies is inherently uncertain. Although we believe that such forward-looking statements are based on reasonable assumptions, actual results and performance in the future could differ materially from those set forth in or implied by such forward-looking statements. Factors that could have a material adverse effect on future results and performance relative to those set forth in or implied by the related forward-looking statements, as well as on our business, financial condition, liquidity, results of operations and prospects, include, but are not limited to:

 

    the factors referenced in this prospectus, including those set forth under the section captioned “Risk Factors;”

 

    the effects of adverse conditions or developments in the financial markets and the economy upon our ability to originate and selectively acquire commercial mortgage loans and other commercial real estate-related debt instruments and to manage our investments;

 

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

 

    changes in our industry, interest rates, the debt or equity markets, the general economy or the commercial finance and the real estate markets specifically;

 

    changes in our business, investment strategy, target assets or financing strategy;

 

    general volatility of the markets in which we invest;

 

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

 

    our ability to obtain and maintain financing arrangements on favorable terms, or at all;

 

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

 

    the timing of cash flows, if any, from our investments;

 

    our ability to match the interest rates and maturities of our investments and indebtedness;

 

    the operating performance, liquidity and financial condition of borrowers;

 

    increased rates of default and/or decreased recovery rates on our investments;

 

    changes in prepayment rates on our investments;

 

    a downgrade in, or negative outlook on, the credit ratings assigned to our investments, or the anticipation of such action;

 

90


Table of Contents
    the availability of qualified personnel;

 

    conflicts with our Manager or the TPG personnel providing services to us, including our officers, and TPG Funds;

 

    events, contemplated or otherwise, such as acts of God, including hurricanes, earthquakes, and other natural disasters, acts of war and/or terrorism and others 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;

 

    impact of and changes in governmental regulations, tax laws and rates, accounting principles and policies and similar matters;

 

    our ability to make distributions to our stockholders in the future at the level contemplated by our stockholders or the market generally, or at all;

 

    our ability to maintain our qualification as a REIT for U.S. federal income tax purposes; and

 

    our ability to maintain our exclusion or exemption from registration under the Investment Company Act.

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this prospectus. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management’s views only as of the date of this prospectus. The risks summarized under “Risk Factors” and elsewhere in this prospectus could cause actual results and performance to differ materially from those set forth in or implied by our forward-looking statements.

Except as required by applicable law, we assume no obligation to update or otherwise revise any of our forward-looking statements after the date of this prospectus.

 

91


Table of Contents

USE OF PROCEEDS

We expect to receive net proceeds from this offering of approximately $199.9 million after deducting the underwriting discount and estimated offering expenses of approximately $6.9 million payable by us (or, if the underwriters exercise their option to purchase 1,650,000 additional shares of our common stock in full, approximately $230.9 million after deducting the underwriting discount and estimated offering expenses of approximately $6.9 million payable by us).

We intend to use the net proceeds from this offering to originate and acquire our target assets in a manner consistent with our investment strategy and investment guidelines described in this prospectus. We expect to fully deploy the net proceeds from this offering in our target assets by the end of the first quarter of 2018. However, there can be no assurance that we will use all or any of such proceeds to originate or acquire our target assets by such time. The allocation of our capital among our target assets will depend on prevailing market conditions and may change over time in response to opportunities available in different interest rate, economic and credit environments.

Until appropriate investments can be identified, our Manager may invest the net proceeds from this offering in money market funds, bank accounts, overnight repurchase agreements with primary federal reserve bank dealers collateralized by direct U.S. government obligations and other instruments or investments reasonably determined by our Manager to be of high quality and that are consistent with our intention to qualify as a REIT and maintain our exclusion or exemption from regulation under the Investment Company Act. These investments are expected to provide a lower net return than we seek to achieve from our target assets. In addition, prior to the time we have fully invested the net proceeds from this offering to originate or acquire our target assets, we may temporarily reduce amounts outstanding under our secured revolving repurchase facilities with a portion of the net proceeds from this offering. Affiliates of Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, Morgan Stanley & Co. LLC and Wells Fargo Securities, LLC, each an underwriter in this offering, are lenders under our secured revolving repurchase facilities and would receive a portion of the net proceeds from this offering to the extent amounts outstanding under the applicable secured revolving repurchase facilities are temporarily reduced with such net proceeds. See “Underwriting—Other Relationships.”

 

92


Table of Contents

DISTRIBUTION POLICY

Our Policy

Following the completion of this offering, we intend to make regular quarterly distributions to our stockholders, consistent with our intention to continue to qualify as a REIT for U.S. federal income tax purposes. U.S. federal income tax law generally requires that a REIT distribute annually at least 90% of its REIT taxable income, without regard to the deduction for dividends paid and excluding net capital gains, and that it pay tax at regular corporate rates to the extent that it annually distributes less than 100% of its REIT taxable income. As a result, in order to satisfy the requirements for us to continue to qualify as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all or substantially all of our REIT taxable income to our stockholders out of assets legally available therefor. REIT taxable income as computed for purposes of the foregoing tax rules will not necessarily correspond to our net income as determined for financial reporting purposes.

Distributions to our stockholders, if any, will be authorized by our board of directors in its sole discretion out of funds legally available therefor and will be dependent upon a number of factors, including our historical and projected results of operations, cash flows and financial condition, our financing covenants, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, our REIT taxable income, applicable provisions of the MGCL and such other factors as our board of directors deems relevant. Our results of operations, liquidity and financial condition will be affected by various factors, including the amount of our net interest income, our operating expenses and any other expenditures. The amount of the dividend declared per share of our common stock will determine the amount of the dividend declared per share of our Class A common stock. See “Risk Factors” and “Description of Capital Stock.”

To the extent that our cash available for distribution is less than the amount required to be distributed under the REIT provisions of the Internal Revenue Code, we may be required to fund distributions from working capital or through equity, equity-related or debt financings or, in certain circumstances, asset sales, as to which our ability to consummate transactions in a timely manner on favorable terms, or at all, cannot be assured. In addition, we may choose to make a portion of a required distribution in the form of a taxable stock dividend to preserve our cash balance.

Currently, we have no intention to use any net proceeds from this offering to make distributions to our stockholders or to make distributions to our stockholders using shares of our stock, other than our stock dividend to be paid upon the completion of this offering, as described under “Recent Developments—Stock Dividend.”

Distributions to our stockholders, if any, will be generally taxable to them as ordinary income, although a portion of our distributions may be designated by us as capital gain or qualified dividend income, or may constitute a return of capital. We will furnish annually to each of our stockholders a statement setting forth the amount of distributions paid during the preceding year and their characterization as ordinary income, return of capital, qualified dividend income or capital gain. For a more complete discussion of the tax treatment of distributions to holders of shares of our common stock, see “U.S. Federal Income Tax Considerations—Taxation of Stockholders.”

Our current financing arrangements contain, and our future financing arrangements likely will contain, various financial and operational covenants affecting our ability and, in certain cases, our subsidiaries’ ability, to incur additional debt, make certain investments, reduce liquidity below certain levels, make distributions to our stockholders and otherwise affect our operating policies. The secured revolving repurchase facilities and guarantee agreements contain various affirmative and negative covenants, including financial covenants applicable to Holdco based on: (1) ratio of earnings before interest, taxes, depreciation and amortization (“EBITDA”) to interest expense; (2) tangible net worth; (3) cash liquidity; (4) indebtedness as a percentage of total equity; and (5) unrestricted cash.

 

93


Table of Contents

Dividends Declared

The table below sets forth information with respect to the per share cash dividends declared on our stock during the fiscal years ended December 31, 2015 and 2016 and the six months ended June 30, 2017.

 

    

Date Declared

  

Payment Date

  

Cash Dividend
Per Share

   

Book Value Per
Share(1)

   

Annualized
Dividend
Yield(2)

 

2015(3)

            

First Quarter

   April 14, 2015    April 15, 2015    $ 0.5882     $ 25.22       9.3

Second Quarter

   July 14, 2015    July 15, 2015    $ 0.6792     $ 25.25       10.8

Third Quarter

   October 27, 2015    October 28, 2015    $ 0.2415     $ 25.13       3.8

Fourth Quarter

   December 31, 2015    January 25,2016    $ 0.8456     $ 24.62       13.7

2016(3)

            

First Quarter

   April 8, 2016    April 25, 2016    $ 0.5254     $ 25.18       8.3

Second Quarter

   July 22, 2016    July 26, 2016    $ 0.4903     $ 25.20       7.8

Third Quarter

   September 29, 2016    October 26, 2016    $ 0.5120     $ 24.77       8.3

Fourth Quarter(4)

   December 23, 2016    January 25, 2017    $ 0.1020     $ 24.74       1.7

Fourth Quarter(4)

   December 23, 2016    February 1, 2017    $ 0.3657     $ 24.74       5.9

2017(3)

            

First Quarter

   March 31, 2017    April 25, 2017    $ 0.5425     $ 24.83       8.7

Second Quarter

   June 30, 2017    July 25, 2017    $ 0.5100 (5)    $ 24.89 (6)      8.2 %(6) 

 

(1) As of the end of the most recently completed calendar quarter prior to the dividend payment date.

 

(2) Represents annualized cash dividends paid per share divided by book value per share.

 

(3) Period for which the dividend was declared.

 

(4) Our dividend declared during the fourth quarter of 2016 was distributed to our stockholders in two installments on January 25, 2017 and February 1, 2017. The combined dividend yield for the fourth quarter of 2016 was 7.6%.

 

(5) On June 30, 2017, we declared a dividend for the second quarter of 2017 in the amount of $0.51 per share of common stock and Class A common stock, or $20.5 million in the aggregate, which dividend is payable on July 25, 2017 to holders of record of our common stock and Class A common stock as of June 30, 2017. Accordingly, investors in this offering will not be entitled to receive this dividend.

 

(6) We anticipate the book value per share of our common stock and Class A common stock will be between approximately $24.85 and $24.93 per share as of June 30, 2017. The amount shown in the table above represents the mid-point of this estimated range. Our estimated range of book value per share of our common stock and Class A common stock does not reflect the stock dividend we declared on July 3, 2017 to holders of record on that date that will result in the issuance of an additional 9,224,268 shares of our common stock and 230,814 shares of our Class A common stock upon the completion of this offering, which is discussed under “Recent Developments—Stock Dividend,” or the completion of this offering. Our estimated range of the book value per share of our common stock and Class A common stock is preliminary and subject to completion of our normal quarterly closing and review procedures for the quarter ended June 30, 2017, which we have commenced. Given the timing of our estimate, however, the actual book value per share of our common stock and Class A common stock as of June 30, 2017 may differ materially, including as a result of our quarter-end closing procedures, review adjustments and other developments that may arise between now and the time our financial results for the three months ended June 30, 2017 are finalized. Accordingly, you should not place undue reliance on our estimate. This estimated range has been prepared by, and is the responsibility of, our management and has not been reviewed or audited or subjected to any other procedures by our independent registered public accounting firm. Accordingly, our independent registered public accounting firm does not express an opinion or any other form of assurance with respect to this estimate.

 

94


Table of Contents

CAPITALIZATION

The following table sets forth our cash and cash equivalents and our capitalization at March 31, 2017:

 

    on an actual basis;

 

    on an as adjusted basis after giving effect to (1) the amendment and restatement of our charter prior to the completion of this offering, (2) our June 15, 2017 drawdown of $25 million of equity capital commitments (992,166 shares of common stock and 14,711 shares of Class A common stock issued at a purchase price of $24.83 per share, which was the book value per share of our common stock and Class A common stock as of March 31, 2017), (3) our dividend for the second quarter of 2017 in the amount of $0.51 per share of common stock and Class A common stock, or $20.5 million in the aggregate, which dividend is payable on July 25, 2017 to holders of record of our common stock and Class A common stock as of June 30, 2017 (such adjustment impacts retained earnings (accumulated deficit) but not cash and cash equivalents), and (4) changes in our long-term debt as a result of our investing and financing activities from April 1, 2017 to June 30, 2017; and

 

    on an as further adjusted basis to give effect to (1) our issuance of 9,224,268 shares of our common stock and 230,814 shares of our Class A common stock pursuant to a stock dividend that will be paid upon the completion of this offering to holders of record of our common stock and Class A common stock as of July 3, 2017, and (2) our issuance and sale of 11,000,000 shares of our common stock in this offering at the initial public offering price of $20.00 per share, after deducting the underwriting discount and estimated offering expenses payable by us, assuming the underwriters’ option to purchase additional shares of our common stock is not exercised.

The following table assumes no repayment of outstanding borrowings drawn on our secured revolving repurchase facilities with proceeds from this offering and does not include adjustments to cash and cash equivalents for loan repayments in excess of proceeds used to retire our borrowings or our operating or investing activities subsequent to March 31, 2017 (except as otherwise described above).

 

95


Table of Contents

This table is unaudited and should be read in conjunction with “Prospectus Summary—Recent Developments,” “Use of Proceeds,” “Selected Financial Information,” “Recent Developments,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our consolidated financial statements and notes thereto, included elsewhere in this prospectus.

 

    As of March 31, 2017  
   

Actual

   

As Adjusted

   

As Further

Adjusted(1)

 
   

(dollars in thousands, except share and

per share amounts)

 

Cash and Cash Equivalents

  $ 82,282     $ 107,282     $ 307,182  
 

 

 

   

 

 

   

 

 

 

Long Term Debt:

     

Collateralized Loan Obligation

  $ 523,927     $ 166,077     $ 166,077  

Secured Financing Agreements

    1,126,750       1,143,019       1,143,019  

Other Secured Financing Agreements

    201,533       234,435       234,435  
 

 

 

   

 

 

   

 

 

 

Total Long Term Debt

    1,852,210       1,543,531       1,543,531  
 

 

 

   

 

 

   

 

 

 

Stockholders’ Equity:

     

Preferred Stock ($0.001 par value; 125 shares, 100,000,000 shares and 100,000,000 shares authorized, actual, as adjusted and as further adjusted, respectively; 125 shares issued and outstanding, actual, as adjusted and as further adjusted)

    —         —         —    

Common Stock ($0.001 par value; 95,500,000 shares, 300,000,000 shares and 300,000,000 shares authorized, actual, as adjusted and as further adjusted, respectively; 38,260,053 shares, 39,252,219 shares and 59,476,487 shares issued and outstanding, actual, as adjusted and as further adjusted, respectively)

    39       40       60  

Class A Common Stock ($0.001 par value; 2,500,000 shares authorized, actual, as adjusted and as further adjusted; 967,500 shares, 982,211 shares and 1,213,025 shares issued and outstanding, actual, as adjusted and as further adjusted, respectively)

    1       1       1  

Additional Paid-in-Capital

    979,467       1,004,466       1,213,801  

Retained Earnings (Accumulated Deficit)

    (7,874     (28,394     (37,849

Accumulated Other Comprehensive Income (Loss)

    2,482       2,482       2,482  
 

 

 

   

 

 

   

 

 

 

Total Stockholders’ Equity

    974,115       978,595       1,178,495  
 

 

 

   

 

 

   

 

 

 

Total Capitalization

  $ 2,826,325     $ 2,522,126     $ 2,722,026  
 

 

 

   

 

 

   

 

 

 

 

(1) Excludes: (i) 1,650,000 shares of our common stock issuable upon exercise of the underwriters’ option to purchase additional shares of our common stock; and (ii) 4,551,713 shares of our common stock reserved for future issuance under our equity incentive plan (assuming no exercise of the underwriters’ option to purchase additional shares of our common stock). Following the drawdown of $25 million of equity capital commitments on June 15, 2017, we have undrawn capital commitments (i.e., obligations of our existing stockholders to purchase additional shares of our stock) of approximately $198.9 million. Our existing stockholders’ obligations to purchase additional shares of stock using the undrawn portion of their capital commitments will terminate upon the completion of this offering.

 

96


Table of Contents

DILUTION

The dilution information presented in this prospectus reflects outstanding shares of our common stock and Class A common stock.

Purchasers of shares of our common stock in this offering will incur an immediate and substantial dilution in net tangible book value per share of their shares of our common stock from the initial public offering price of $20.00 per share, assuming no exercise by the underwriters of their option to purchase additional shares of our common stock.

Dilution in net tangible book value per share is equal to the difference between (i) the initial public offering price per share paid by purchasers of our common stock in this offering and (ii) the net tangible book value per share of our common stock and Class A common stock after giving effect to all of the adjustments described below and this offering. Net tangible book value per share is determined by dividing our net tangible book value, which is the book value of our total tangible assets less total liabilities, by the number of outstanding shares of our common stock and Class A common stock. Our net tangible book value as of March 31, 2017 was approximately $974.1 million, or $24.83 per share of our common stock and Class A common stock.

On June 15, 2017, we completed a drawdown of $25 million of equity capital commitments from existing stockholders, resulting in the issuance of 992,166 shares of common stock and 14,711 shares of Class A common stock to existing stockholders at a price of $24.83 per share, which was the book value per share of our common stock and Class A common stock as of March 31, 2017. Since the shares of our common stock issued in connection with this drawdown were issued at book value, the issuance was not dilutive.

On June 30, 2017, we declared a dividend for the second quarter of 2017 in the amount of $0.51 per share of common stock and Class A common stock, or $20.5 million in the aggregate, which dividend is payable on July 25, 2017 to holders of record of our common stock and Class A common stock as of June 30, 2017. Accordingly, investors in this offering will not be entitled to receive this dividend.

After giving effect to (1) our June 15, 2017 drawdown of $25 million of equity capital commitments and (2) our cash dividend for the second quarter of 2017 to be paid on July 25, 2017 to holders of record of our common stock and Class A common stock as of June 30, 2017, our as adjusted net tangible book value immediately prior to our stock dividend, which is discussed below, and this offering would have been approximately $978.6 million, or $24.32 per share.

On July 3, 2017, we declared a stock dividend that will result in the issuance of 9,224,268 shares of our common stock and 230,814 shares of our Class A common stock. The stock dividend will be paid upon the completion of this offering to holders of record of our common stock and Class A common stock as of July 3, 2017. The payment of the stock dividend is contingent on the completion of this offering. Accordingly, investors in this offering will not be entitled to receive this stock dividend.

After giving effect to (1) our stock dividend to be paid upon the completion of this offering to holders of record of our common stock and Class A common stock as of July 3, 2017, and (2) our sale of 11,000,000 shares of our common stock in this offering (assuming no exercise by the underwriters of their option to purchase additional shares in this offering) at the initial public offering price of $20.00 per share, our as further adjusted net tangible book value would have been approximately $1.18 billion, or $19.42 per share. This amount represents an immediate dilution in net tangible book value of $0.58 per share of our common stock to investors in this offering at the initial public offering price of $20.00 per share.

 

97


Table of Contents

The following table illustrates the dilution to investors in this offering on a per share basis:

 

Initial public offering price per share

     $ 20.00  

Net tangible book value per share as of March 31, 2017

   $ 24.83    

Decrease in net tangible book value per share attributable to our drawdown of equity capital commitments in the second quarter of 2017

     —      

Decrease in net tangible book value per share attributable to our cash dividend payable in the second quarter of 2017

     (0.51  
  

 

 

   

As adjusted net tangible book value per share immediately prior to our stock dividend payable upon the completion of this offering and this offering

     24.32    

Decrease in net tangible book value per share attributable to our stock dividend payable upon the completion of this offering

     (4.63  

Decrease in net tangible book value per share attributable to investors in this offering

     (0.27  
  

 

 

   

As further adjusted net tangible book value per share immediately after our stock dividend and this offering

       19.42  
    

 

 

 

Dilution per share to investors in this offering at the initial public offering price of $20.00 per share

     $ 0.58  
    

 

 

 

The following table summarizes, as of March 31, 2017, on the as further adjusted basis described above, the differences between the average price per share paid by our existing common and Class A common stockholders and by investors in this offering at the initial public offering price of $20.00 per share, before deducting the underwriting discount and estimated offering expenses payable by us in this offering:

 

    

Shares
Purchased(1)

   

Total Consideration

   

Average Price

Per Share

 
    

Number

    

%

   

Amount

    

%

   

Shares purchased by existing common and Class A common stockholders

     49,689,512        81.9   $ 978,595,409        81.6   $ 19.69  

Investors in this offering

     11,000,000        18.1     220,000,000        18.4     20.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total / Weighted Average

     60,689,512        100   $ 1,198,595,409        100   $ 19.75  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

(1) Assumes no exercise of the underwriters’ option to purchase up to an additional 1,650,000 shares of our common stock.

If the underwriters’ option to purchase additional shares of our common stock is exercised in full, the following will occur:

 

    the number of shares of our common stock held by investors in this offering will increase to 12,650,000 shares, or approximately 20.3% of the total number of issued and outstanding shares of our stock; and

 

    the as further adjusted net tangible book value per share immediately after our stock dividend and this offering will be approximately $19.40 per share and the immediate dilution experienced by investors in this offering will be approximately $0.60 per share.

 

98


Table of Contents

SELECTED FINANCIAL INFORMATION

You should read the following selected financial information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited and audited consolidated financial statements and the notes thereto. The selected consolidated income statement information for the three months ended March 31, 2017 and 2016 and the selected consolidated balance sheet information as of March 31, 2017 have been derived from our unaudited consolidated financial statements, included elsewhere in this prospectus, which, in the opinion of our management, have been prepared on a basis consistent with our audited consolidated financial statements and reflect all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of our results of operations and financial condition for these periods. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any future period. The selected consolidated income statement information for the years ended December 31, 2016 and 2015 and for the period from December 18, 2014 (inception) to December 31, 2014 and the selected consolidated balance sheet information as of December 31, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements, included elsewhere in this prospectus.

 

     Three Months Ended March 31,     Year Ended December 31,     Period from
December 18,
2014 (inception)
to December 31,
2014
 
(Dollars in thousands, except per share data)   

        2017         

   

        2016         

   

        2016         

   

        2015         

   

OPERATING DATA:

      

INTEREST INCOME

          

Interest Income

   $ 47,941     $ 33,732     $ 153,631     $ 128,647     $ 1,847  

Interest Expense

     (17,800     (12,930     (61,649     (47,564     (1,518
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Interest Income

     30,141       20,802       91,982       81,083       329  

Other Income

     122       15       416       54       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

OTHER EXPENSES

          

Professional Fees

     729       338       3,260       5,224       7,719  

General and Administrative

     469       256       2,199       784       764  

Servicing Fees

     1,136       862       3,625       4,011       22  

Management Fee

     2,588       1,984       8,816       6,902       61  

Collateral Management Fee

     131       274       849       1,257       11  

Incentive Management Fee

     1,581       808       3,687       1,992       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Other Expenses

     6,634       4,522       22,436       20,170       8,577  

Net Income (Loss) Before Taxes

     23,629       16,295       69,962       60,967       (8,248

Income Taxes

     (154     (46     5       (1,612     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Income (Loss)

     23,475       16,249       69,967       59,355       (8,248

Preferred Stock Dividends

     —         —         (16     (15     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 23,475     $ 16,249     $ 69,951     $ 59,340     $ (8,248
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Per Share Information:

          

Basic Earnings per Share

   $ 0.60     $ 0.56     $ 2.09     $ 2.23     $ (0.35

Diluted Earnings per Share

   $ 0.60     $ 0.56     $ 2.09     $ 2.23     $ (0.35

Dividends Declared Per Share

   $ 0.54     $ —   (2)    $ 1.99     $ 2.41     $ —    

Weighted Average Number of Shares Outstanding, Basic and Diluted:

          

Common Stock

     38,260,053       28,309,783       32,663,085       26,121,077       23,865,684  

Class A Common Stock

     967,500       783,158       864,062       492,663       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

     39,227,553       29,092,941       33,527,147       26,613,740       23,865,684  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

99


Table of Contents
     March 31,      December 31,  
(Dollars in thousands, except per share data)    2017      2016      2016      2015      2014  

BALANCE SHEET DATA (at period end):

              

Total Assets

   $ 2,863,902      $ 2,217,599      $ 2,665,583      $ 2,119,753      $ 1,952,147  

Total Liabilities

   $ 1,889,787      $ 1,484,772      $ 1,694,894      $ 1,403,403      $ 1,363,753  

Total Equity

   $ 974,115      $ 732,827      $ 970,689      $ 716,350      $ 588,394  

Preferred Stock

   $ 125      $ 125      $ 125      $ 125        —    

Stockholders’ Equity, Net of Preferred Stock

   $ 973,990      $ 732,702      $ 970,564      $ 716,225      $ 588,394  

Number of Shares Outstanding at Period End(3)

     39,227,553        29,092,941        39,227,553        29,092,941        23,865,684  

Book Value per Share

   $ 24.83      $ 25.18      $ 24.74      $ 24.62      $ 24.65  

 

(1) Represents net income attributable to holders of our common stock and Class A common stock.

 

(2) We declared a dividend associated with the first quarter of 2016 of $0.53 per share. This dividend was declared on April 8, 2016 and paid on April 25, 2016.

 

(3) Includes shares of common stock and Class A common stock.

 

100


Table of Contents

RECENT DEVELOPMENTS

The information in this section, and elsewhere in this prospectus, as of June 30, 2017 is preliminary and subject to change.

 

Our Portfolio

Closed Originations

During the three months ended March 31, 2017, we originated five first mortgage loans, including two non-consolidated senior interests, and two mezzanine loans with an aggregate commitment amount of $343.4 million, an aggregate initial funding amount of $194.8 million, an aggregate deferred funding commitment of $57.1 million, a weighted average credit spread of LIBOR plus 5.6%, a weighted average term to extended maturity of 4.9 years (assuming all extension options have been exercised by borrowers), and a weighted average LTV of 63.6%. These loans were funded with a combination of cash on hand, borrowings of approximately $129.0 million under our secured revolving repurchase facilities and note-on-note financing arrangements and the sale of non-consolidated senior interests of $91.5 million. The following table sets forth information regarding these originations (dollars in thousands):

 

Loan #

  Origination
Date
    Total
Loan
    Non-
Consolidated

Senior
Interest(1)
    Net
Commitment(2)
    Initial
Principal

Funding
    Credit
Spread(3)
    Extended
Maturity(4)
    City, State     Property
Type
    Loan Type     LTV(5)  

First Mortgage Loans:

                     

Loan 1

    1/19/2017     $ 37,500     $ (37,500   $ —       $ —         L+ 6.0%       4.0 yrs       Savannah, GA       Hotel       Construction       —    

Loan 2

    2/1/2017       82,250       —         82,250       72,250       L+ 4.7%       5.0 yrs      
St. Pete
Beach, FL
 
 
    Hotel      
Light
Transition
 
 
    60.7

Loan 3

    2/2/2017       54,000       (54,000     —   (6)      —         L+ 3.0%       4.0 yrs       Orlando, FL       Multifamily       Bridge       61.6

Loan 4

    2/13/2017       90,500       —         90,500       60,500       L+ 4.8%       5.0 yrs       Torrance, CA       Office      
Moderate
Transition
 
 
    64.4

Loan 5

    3/21/2017       45,000       —         45,000       45,000       L+ 5.3%       5.0 yrs       Chicago, IL       Hotel       Bridge       60.2
   

 

 

   

 

 

   

 

 

   

 

 

             

Subtotal / Wtd. Avg.

      309,250       (91,500     217,750       177,750       L+ 4.8%       5.0 yrs             61.9

Mezzanine Loans:

 

                   

Loan 6

    1/19/2017       16,500       —         16,500       —         L+ 14.0%       4.0 yrs       Savannah, GA       Hotel       Construction       —    

Loan 7

    2/2/2017       17,600       —         17,600       17,004       L+ 13.4%       4.0 yrs       Orlando, FL       Multifamily       Bridge       81.8
   

 

 

   

 

 

   

 

 

   

 

 

             

Subtotal / Wtd. Avg.

      34,100       —         34,100       17,004       L+ 13.4%       4.0 yrs             81.8
   

 

 

   

 

 

   

 

 

   

 

 

             

Total / Wtd. Avg.

    $ 343,350     $ (91,500   $ 251,850     $ 194,754       L+ 5.6%       4.9 yrs             63.6
   

 

 

   

 

 

   

 

 

   

 

 

             

 

(1) In certain instances, we originate our mezzanine loans in connection with the contemporaneous issuance of a first mortgage loan to a third-party lender or the non-recourse transfer of a first mortgage loan originated by us. In either case, the senior mortgage loan is not included on our balance sheet, and we refer to such senior loan interest as a “non-consolidated senior interest.” When we originate a loan in connection with the contemporaneous issuance or the non-recourse transfer of a non-consolidated senior interest, we retain on our balance sheet a mezzanine loan.

 

(2) Represents the total loan commitment less the non-consolidated senior interest, if any.

 

(3) Represents the formula pursuant to which our right to receive a cash coupon on a loan is determined.

 

(4) Extended maturity assumes all extension options are exercised by the borrower; provided, however, that our loans may be repaid prior to such date.

 

(5)

LTV is calculated as the total outstanding principal balance of a loan or participation interest in a loan plus any financing that is pari passu with or senior to such loan or participation interest at the time of origination or acquisition, divided by the applicable as-is real estate value at the time of origination or acquisition of such loan or participation interest in a loan. The as-is real estate value reflects our Manager’s estimates, at the time of origination or acquisition of a loan or participation interest in a loan, of the real estate value

 

101


Table of Contents
  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.

 

(6) $52.4 million of this loan was funded during the three months ended March 31, 2017. The loan was subsequently sold during the quarter to a third party.

During the three months ended June 30, 2017, we originated three first mortgage loans with an aggregate commitment amount of $332.4 million, an aggregate initial funding amount of $283.1 million, an aggregate deferred funding commitment of $49.3 million, a weighted average credit spread of LIBOR plus 3.9%, a weighted average term to extended maturity of 4.3 years (assuming all extension options have been exercised by borrowers), and a weighted average LTV of 66.8%. These loans were funded with a combination of cash on hand and borrowings of approximately $154.5 million under our secured revolving repurchase facilities. With respect to one of these loans (Loan 2 in the table below), we expect to borrow approximately $60.9 million under one of our secured revolving repurchase facilities, although there can be no assurance that this borrowing will occur in the size contemplated, or at all. The following table sets forth information regarding these originations (dollars in thousands):

 

Loan #

  Origination
Date
    Total
Loan
    Non-
Consolidated
Senior
Interest(1)
    Net
Commitment(2)
    Initial
Principal
Funding
    Credit
Spread(3)
    Extended
Maturity(4)
    City, State     Property
Type
    Loan Type     LTV(5)  

First Mortgage Loans:

                     

Loan 1

    4/28/2017     $ 188,000     $     —       $ 188,000     $ 142,000       L+ 4.1%       4.5 yrs       Nashville, TN       Mixed-Use       Bridge       60.7%  

Loan 2

    6/13/2017           84,400             —         84,400       81,138       L+ 3.8%       5.0 yrs       Jersey City, NJ       Multifamily       Bridge       81.0%  

Loan 3

    6/14/2017           60,000             —         60,000       60,000       L+ 3.9%       3.0 yrs       Newark, NJ       Mixed-Use       Bridge       62.2%  
   

 

 

   

 

 

   

 

 

   

 

 

             

Total / Wtd. Avg.

      $332,400       $    —       $ 332,400     $ 283,138       L+ 3.9%       4.3 yrs             66.8%  
   

 

 

   

 

 

   

 

 

   

 

 

             

 

(1) In certain instances, we originate our mezzanine loans in connection with the contemporaneous issuance of a first mortgage loan to a third-party lender or the non-recourse transfer of a first mortgage loan originated by us. In either case, the senior mortgage loan is not included on our balance sheet, and we refer to such senior loan interest as a “non-consolidated senior interest.” When we originate a loan in connection with the contemporaneous issuance or the non-recourse transfer of a non-consolidated senior interest, we retain on our balance sheet a mezzanine loan.

 

(2) Represents the total loan commitment less the non-consolidated senior interest, if any.

 

(3) Represents the formula pursuant to which our right to receive a cash coupon on a loan is determined.

 

(4) Extended maturity assumes all extension options are exercised by the borrower; provided, however, that our loans may be repaid prior to such date.

 

(5) LTV is calculated as the total outstanding principal balance of a loan or participation interest in a loan plus any financing that is pari passu with or senior to such loan or participation interest at the time of origination or acquisition, divided by the applicable as-is real estate value at the time of origination or acquisition of such loan or participation interest in a loan. The as-is real estate value reflects our Manager’s estimates, at the time of origination or acquisition of a 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.

During the three months ended June 30, 2017, we purchased four CMBS investments with an aggregate face amount of $59.6 million and a weighted average yield to final maturity of 2.1%. Two of the CMBS investments with an aggregate face amount of $19.8 million had a rating of AAA/AAA. The remaining two CMBS investments with an aggregate face amount of $39.8 million are bonds supported by project loans that are backed by the full faith and credit of the U.S. Treasury. These investments were funded with a combination of cash on hand and borrowings of $18.4 million.

 

102


Table of Contents

Repayments

During the three months ended June 30, 2017, we received principal repayments totaling $762.7 million with respect to ten first mortgage loans that were repaid in full. The weighted average credit spread of these loans, based on unpaid principal balance at the time of repayment in full, was 5.3%. Proceeds from these loan repayments were utilized to retire approximately $359.1 million of borrowings under our CLO and approximately $184.3 million of borrowings under our secured revolving repurchase facilities. Amounts so repaid under our secured revolving repurchase facilities create additional borrowing capacity for new loan originations, subject to approval rights reserved to our lenders. The difference between aggregate loan repayments in full and aggregate repayments under our borrowing arrangements of approximately $219.3 million represents cash available to us to fund new loan investments. The following table sets forth information regarding these repayments in full (dollars in thousands):

 

Loan #

   Total Principal
Repayments
     City, State      Credit Spread(1)     Property Type      Loan Type  

First Mortgage Loans:

             

Loan 1

   $ 191,952        Los Angeles, CA        L+ 7.0     Office        Moderate Transition  

Loan 2

     150,000        Manhattan, NY        L+ 4.7     Hotel        Bridge  

Loan 3

     91,110        New York, NY        L+ 6.0     Multifamily        Construction  

Loan 4

     75,000        Manhattan, NY        L+ 4.9     Multifamily        Bridge  

Loan 5

     48,188        Los Angeles, CA        L+ 4.5     Hotel        Bridge  

Loan 6

     33,918        Phoenix, AZ        L+ 2.0     Office        Bridge  

Loan 7

     32,999        Manhattan, NY        L+ 7.0     Hotel        Moderate Transition  

Loan 8

     29,309        Lansing, MI        6.2     Industrial        Bridge  

Loan 9

     85,000        Issaquah (Seattle), WA        L+3.0     Office        Bridge  

Loan 10

     25,185        Manhattan, NY        L+ 6.5     Condominium        Mixed Use  
  

 

 

            

Total / Wtd. Avg.

   $ 762,661           5.3     
  

 

 

            

 

(1) Represents the formula pursuant to which our right to receive a cash coupon on a loan is determined.

During the three months ended June 30, 2017, we also received partial repayments of $39.7 million in connection with ten loans with a weighted average credit spread of 5.0%.

During the three months ended June 30, 2017, we received principal repayments totaling $28.0 million, consisting of $71,000 in partial repayments and $27.9 million in repayments in full, in connection with four CMBS investments. Proceeds from these repayments were utilized to retire $19.2 million of borrowings under our secured revolving repurchase facilities. The difference between aggregate CMBS repayments and repayments under our secured revolving repurchase facilities of approximately $8.8 million represents cash available to us to fund new investments.

Portfolio Composition

Our loan portfolio was broadly diversified by property type as of March 31, 2017 and May 31, 2017:

 

As of March 31, 2017

          

As of May 31, 2017

 

Property Type

   % of Commitments           

Property Type

   % of Commitments  

Office

     26.2      Office      26.8

Hotel

     25.8      Condominium      25.8

Condominium

     24.1      Hotel      19.8

Multifamily

     10.2      Mixed-Use      10.1

Retail

     6.1      Multifamily      7.6

Industrial

     3.7      Retail      6.6

Mixed-Use

     3.6      Industrial      2.9

Other

     0.3      Other      0.3
  

 

 

         

 

 

 

Total

     100.0 %(1)       Total      100.0 %(1) 
  

 

 

         

 

 

 

 

(1) Amounts may not sum to 100% due to rounding.

 

103


Table of Contents

Our Loan Origination Pipeline

From January 1, 2017 through June 30, 2017, our team of experienced investment professionals has:

 

    evaluated 295 potential commercial real estate loan financings totaling approximately $30.6 billion of loan commitments to determine if they qualified as target assets and satisfied our current investment strategy;

 

    selected for further evaluation 97 potential transactions comprising approximately $10.4 billion of loan commitments;

 

    issued financing proposals with respect to 53 loans totaling approximately $5.6 billion of loan commitments;

 

    signed term sheets with prospective borrowers with respect to 13 loans totaling approximately $1.2 billion of loan commitments; and

 

    closed eight loans with aggregate loan commitments of $676 million.

As of June 30, 2017, our loan origination pipeline consisted of 41 potential new commercial mortgage loan investments representing anticipated total loan commitments of approximately $3.8 billion. We are in various stages of our evaluation process with respect to these loans. We are reviewing but have not yet issued term sheets with respect to 29 of these potential loans. We have issued term sheets with respect to seven of these potential loans comprising $629.9 million of loan commitments which have not been executed by the potential borrowers. There can be no assurance that we will enter into definitive documentation with respect to any of these loans.

As of June 30, 2017, in connection with five loans representing $494.2 million of anticipated loan commitments, prospective borrowers have executed non-binding term sheets, entered into a period of exclusivity with us with respect to the proposed loans, and paid to us expense deposits to cover the direct costs of our due diligence and underwriting process. These five potential loan investments have the following attributes, in the aggregate: $494.2 million of loan commitments; $424.9 million of estimated initial funding amount; an estimated LTV of 71.0%; and an expected weighted average credit spread of LIBOR plus 4.2%. These loans are secured by the following property types, weighted by anticipated loan commitments: multifamily: 81%; and mixed use: 19%. We are currently completing our underwriting and negotiating definitive loan documents for each of these five potential loan investments. These five potential loans remain subject to satisfactory completion of our underwriting and due diligence, definitive documentation and final approval by our Manager’s investment committee. As a result, no assurance can be given that any of these five potential loans will close on the anticipated terms or at all. We intend to fund these five potential loans using capacity under our existing secured revolving repurchase facilities, existing cash and, depending upon the timing of closing, uncalled capital commitments, net proceeds from loan repayments, or net proceeds from this offering.

Debt Financing Arrangements

On June 8, 2017, we closed an amendment to our existing secured revolving repurchase facility with Wells Fargo Bank, National Association, an affiliate of one of the underwriters in this offering, to increase the maximum facility amount to $750 million from $500 million. The current extended maturity of this facility is May 2021. Additionally, on June 12, 2017, we closed an amendment to our existing secured revolving repurchase facility with Goldman Sachs Bank USA, an affiliate of one of the underwriters in this offering, to increase the maximum facility amount to $750 million from $500 million. The current extended maturity of this facility is August 2019.

 

104


Table of Contents

We are currently negotiating an amendment to our existing secured revolving repurchase facility with Morgan Stanley Bank, N.A., an affiliate of one of the underwriters in this offering, to increase the maximum facility amount to $500 million from $250 million. The initial maturity of this facility is May 2019 and can be extended by us for additional one year periods, subject to approval by the lender. The number of extension options is not limited by the terms of this facility. We have not received a commitment to amend this facility and there can be no assurance that we will receive any such commitment or enter into a definitive agreement to amend the facility upon the terms contemplated or other terms, or at all.

We have executed a term sheet and are completing documentation with Bank of America, N.A., an affiliate of one of the underwriters in this offering, to provide a secured revolving repurchase facility of up to $500 million, although we have not received a commitment with respect to this facility and there can be no assurance that we will receive any such commitment or enter into a definitive agreement for the facility upon the terms contemplated or other terms, or at all. We have negotiated a term sheet with Citibank, N.A., an affiliate of one of the underwriters in this offering, to provide a secured revolving repurchase facility of $250 million, although we have not received a commitment with respect to this facility and there can be no assurance that we will receive any such commitment or enter into a definitive agreement for the facility upon the terms contemplated or other terms, or at all.

Cash Dividends

On April 25, 2017, we paid a dividend of $21.3 million, or $0.5425 per share, to our Class A common and common stockholders of record as of March 31, 2017 (the declaration date) with respect to the first quarter of 2017.

On June 30, 2017, we declared a cash dividend for the second quarter of 2017 in the amount of $0.51 per share of common stock and Class A common stock, or $20.5 million in the aggregate, which dividend is payable on July 25, 2017 to holders of record of our common stock and Class A common stock as of June 30, 2017. Accordingly, investors in this offering will not be entitled to receive this dividend.

Drawdown of Equity Capital Commitments

On June 15, 2017, we completed a drawdown of $25 million of equity capital commitments from existing stockholders, resulting in the issuance of 992,166 shares of common stock and 14,711 shares of Class A common stock to existing stockholders at a price of $24.83 per share, which was the book value per share of our common stock and Class A common stock as of March 31, 2017. As of the date of this prospectus, we have drawn approximately $1.0 billion of capital commitments from our existing stockholders and have approximately $198.9 million of undrawn capital commitments. Our existing stockholders’ obligations to purchase additional shares of our stock using the undrawn portion of their capital commitments will terminate upon the completion of this offering.

Other Balance Sheet Information

As of June 30, 2017:

 

    the approximate aggregate unpaid principal balance of our loan portfolio was $2.2 billion and we had approximately $502.7 million of unfunded loan commitments;

 

    the approximate weighted average credit spread of our loan portfolio was 5.09%;

 

    the approximate weighted average LTV of our loan portfolio was 60.2%;

 

    we had cash and cash equivalents of approximately $201.0 million;

 

    there have been no loan impairments or loan loss reserves recorded since March 31, 2017, and there have been no material changes in our loan risk ratings since March 31, 2017; and

 

105


Table of Contents
    the approximate unpaid principal balance of borrowings used to finance our loan portfolio was $1.6 billion, comprised of:

 

    CLO borrowings of approximately $167.3 million;

 

    borrowings under our secured revolving repurchase facilities of approximately $1.1 billion; and

 

    borrowings under note-on-note financing arrangements of approximately $238.4 million.

Stock Dividend

On July 3, 2017, we declared a stock dividend that will result in the issuance of 9,224,268 shares of our common stock and 230,814 shares of our Class A common stock. The stock dividend will be paid upon the completion of this offering to holders of record of our common stock and Class A common stock as of July 3, 2017. The payment of the stock dividend is contingent on the completion of this offering. Accordingly, investors in this offering will not be entitled to receive this stock dividend.

Preliminary Estimate of Book Value Per Share

As a result of our operating activities during the three months ended June 30, 2017, including our closed loan originations and repayments described above under “—Our Portfolio—Closed Originations” and “—Repayments,” and based on our management’s expectation that our operating results for the three months ended June 30, 2017 will be comparable to our operating results for the three months ended March 31, 2017, we anticipate the book value per share of our common stock and Class A common stock, which is computed in accordance with GAAP, will be between approximately $24.85 and $24.93 per share as of June 30, 2017.

On June 15, 2017, we completed a drawdown of $25 million of equity capital commitments from our existing stockholders, resulting in the issuance of 992,166 shares of common stock and 14,711 shares of Class A common stock to existing stockholders at a price of $24.83 per share, which was the book value per share of our common stock and Class A common stock as of March 31, 2017. In addition, on June 30, 2017, we declared a cash dividend for the second quarter of 2017 in the amount of $0.51 per share of common stock and Class A common stock, or $20.5 million in the aggregate. See “—Drawdown of Equity Capital Commitments” and “—Cash Dividends” above. Our estimated range of book value per share does not give effect to the dilutive impact of the stock dividend we declared on July 3, 2017 to holders of record of our common stock and Class A common stock on that date. The stock dividend, which is discussed above under “—Stock Dividend,” will result in the issuance of an additional 9,224,268 shares of our common stock and an additional 230,814 shares of our Class A common stock upon the completion of this offering. In addition, our estimated range of book value per share as of June 30, 2017 does not give effect to the dilutive impact of this offering. For information relating to the dilutive impact of the cash dividend, the stock dividend and this offering, please see “Dilution” in this prospectus.

Our estimated range of book value per share is preliminary and subject to completion of our normal quarterly closing and review procedures for the quarter ended June 30, 2017, which we have commenced. Given the timing of our estimate, however, the actual book value per share of our common stock and Class A common stock as of June 30, 2017 may differ materially, including as a result of our quarter-end closing procedures, review adjustments and other developments that may arise between now and the time our financial results for the three months ended June 30, 2017 are finalized. Accordingly, you should not place undue reliance on our estimate. This estimated range has been prepared by, and is the responsibility of, our management and has not been reviewed or audited or subjected to any other procedures by our independent registered public accounting firm. Accordingly, our independent registered public accounting firm does not express an opinion or any other form of assurance with respect to this estimate.

 

106


Table of Contents

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing elsewhere in this prospectus. In addition to historical data, this discussion contains forward-looking statements about our business, results of operations, cash flows, financial condition and prospects based on current expectations that involve risks, uncertainties and assumptions. See “Cautionary Statement 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 “Risk Factors” in this prospectus.

Introduction

We are a commercial real estate finance company sponsored by TPG. We directly originate, acquire and manage commercial mortgage loans and other commercial real estate-related debt instruments 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. As of March 31, 2017, approximately 73% of our loans (measured by commitment) were secured by properties located in the ten largest U.S. metropolitan areas, and approximately 88% of our loans (measured by commitment) were secured by properties located in the 25 largest U.S. metropolitan areas.

As of March 31, 2017, our portfolio consisted of 54 first mortgage loans (or interests therein) with an aggregate unpaid principal balance of $2.6 billion and four mezzanine loans with an aggregate unpaid principal balance of $58.5 million, and collectively having a weighted average credit spread of 5.2%, a weighted average all-in yield of 6.6%, a weighted average term to extended maturity (assuming all extension options have been exercised by borrowers) of 3.0 years and a weighted average LTV of 58.3%. As of March 31, 2017, 97.2% of the loan commitments in our portfolio consisted of floating rate loans, and 97.6% of the loan commitments in our portfolio consisted of first mortgage loans (or interests therein). We also had $577.5 million of unfunded loan commitments as of March 31, 2017, our funding of which is subject to satisfaction of borrower milestones. In addition, as of March 31, 2017, we held six CMBS investments, with an aggregate face amount of $97.9 million and a weighted average yield to final maturity of 4.4%.

We believe that favorable market conditions have provided attractive opportunities for non-bank lenders such as us to finance commercial real estate properties that exhibit strong fundamentals but require more customized financing structures and loan products than regulated financial institutions can provide in today’s market. We intend to continue our track record of capitalizing on these opportunities and growing the size of our portfolio.

We believe our relationship with our Manager, TPG RE Finance Trust Management, L.P., an affiliate of TPG, and its access to the full TPG platform, including TPG Real Estate, TPG’s real estate investment platform, will allow us to achieve our objective. TPG is a leading global private investment firm that has discrete investment platforms focused on a wide range of alternative investment products, including real estate. Founded in 1992, TPG had assets under management of over $72 billion as of December 31, 2016. TPG Real Estate and the other TPG platforms provide us with a breadth of resources, relationships and expertise.

We operate our business as one segment which directly originates and acquires commercial mortgage loans and other commercial real estate-related debt instruments. 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

 

107


Table of Contents

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 current organization 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.

First Quarter 2017 Highlights

Operating Results:

 

    Generated net income of $23.5 million in the first quarter of 2017, a $7.2 million, or 44.5%, increase compared to the first quarter of 2016, driven by a 23.8% increase in the unpaid principal balance of our loan portfolio and the increased scale of our origination business. Net income per share of $0.60 in the first quarter of 2017 increased 7.1% from net income per share of $0.56 in the first quarter of 2016.

 

    Declared dividends of $21.3 million in the first quarter of 2017, an increase of $6.0 million, or 39.2%, over the dividend associated with the first quarter of 2016, which represented dividends per share of $0.5425 in the first quarter of 2017 compared to $0.5254 for the first quarter of 2016.

Portfolio Activity:

 

    Originated five loans with a total loan commitment of $343.4 million, of which we funded $247.2 million.

 

    Funded $55.1 million in connection with loans having future funding obligations, which loans were originated as of December 31, 2016.

 

    Received proceeds of $142.2 million from maturities, sales and principal prepayments on loans.

Portfolio Financing:

 

    At March 31, 2017, we had unrestricted cash available for investment of $82.3 million.

 

    As of March 31, 2017, we had undrawn capacity (liquidity available to us without the need to pledge more collateral to our lenders) of $229.6 million under secured revolving repurchase facilities with six lenders, a non-recourse CLO financing and asset-specific financings:

 

    $3.3 million of undrawn capacity on account of our secured revolving repurchase facilities, with a maximum facility commitment of $1.9 billion and a weighted average credit spread of LIBOR plus 2.3% as of March 31, 2017, providing stable financing, with mark-to-market provisions limited to asset and market specific events and a weighted average term to extended maturity (assuming we have exercised all extension options and term out provisions) of 3.6 years.

 

    $31.6 million of undrawn capacity on account of our non-recourse CLO financing with an aggregate unpaid principal balance of $525.7 million outstanding at an annual interest rate of LIBOR plus 2.75%, which will become due September 10, 2023.

 

    $194.7 million of undrawn capacity on account of asset-specific financings with a maximum commitment amount of $399.2 million at a weighted average credit spread of 3.7% and a weighted average term to extended maturity (assuming we have exercised all extension options and term out provisions) of 3.2 years.  

 

108


Table of Contents
    As of March 31, 2017, we had $776.0 million of financing capacity under secured revolving repurchase facilities provided by six lenders. Our ability to draw on this capacity is dependent upon our lenders’ willingness to accept as collateral loans or CMBS we pledge to them to secure additional borrowings.

 

    $639.2 million of financing capacity is available under our secured revolving repurchase facilities for loan originations and acquisitions, with a maximum facility commitment of $1.7 billion and a weighted average credit spread of LIBOR plus 2.4%, providing stable financing, with mark-to-market provisions generally limited to asset and market specific events, and a weighted average term to extended maturity (assuming we have exercised all extension options and term out provisions) of 3.6 years. These facilities are 25% recourse to Holdco.

 

    $136.8 million of financing capacity is available for CMBS investments, with a maximum facility commitment of $200 million, a weighted average credit spread of LIBOR plus 1.8% and a weighted average term to extended maturity (assuming we have exercised all extension options and term out provisions and have obtained the consent of our lenders) of 3.9 years. These facilities are 100% recourse to Holdco.

Recent Developments

For a discussion of recent developments with respect to our business subsequent to the end of the first quarter of 2017, see “Recent Developments.”

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 share and book value per share. For the three months ended March 31, 2017, we recorded earnings per share of $0.60, and declared dividends of $0.5425 per share. In addition, the book value per share of our common stock and Class A common stock as of March 31, 2017 was $24.83. For the year ended December 31, 2016, we recorded earnings per share of $2.09, and declared dividends of $1.99 per share. In addition, our book value per share as of December 31, 2016 was $24.74.

Earnings Per Share and Dividends Declared Per Share

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

 

     Three Months Ended
March 31,
    Year Ended
December 31,
    

Period from
December 18,
2014
(inception) to
December 31,

 
             2017                      2016                     2016                      2015                      2014          

Net Income Attributable to Common Stockholders(1)

   $ 23,475      $ 16,249     $ 69,951      $ 59,340      $ (8,248

Weighted Average Number of Shares Outstanding, Basic and Diluted(2)

     39,227,553        29,092,941       33,527,147        26,613,740        23,865,684  

Basic and Diluted Earnings per Share

   $ 0.60      $ 0.56     $ 2.09      $ 2.23      $ (0.35

Dividends Declared per Share

   $ 0.54      $ —   (3)    $ 1.99      $ 2.41      $ —    

 

(1) Represents net income attributable to holders of our common stock and Class A common stock.

 

(2) Weighted average number of shares outstanding includes common stock and Class A common stock.

 

109


Table of Contents
(3) We declared a dividend associated with the first quarter of 2016 of $0.53 per share. This dividend was declared on April 8, 2016 and paid on April 25, 2016.

Book Value Per Share

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

 

     Three Months Ended
March 31,
    Year Ended
December 31,
   

Period from
December 18,
2014
(inception) to
December 31,

2014

 
     2017     2016     2016     2015    

Total Stockholders’ Equity

   $ 974,115     $ 732,827     $ 970,689     $ 716,350     $ 588,394  

Preferred Stock

     (125     (125     (125     (125     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ Equity, Net of Preferred Stock

   $ 973,990     $ 732,702     $ 970,564     $ 716,225     $ 588,394  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Number of Shares Outstanding at Period End(1)

     39,227,553       29,092,941       39,227,553       29,092,941       23,865,684  

Book Value per Share

   $ 24.83     $ 25.18     $ 24.74     $ 24.62     $ 24.65  

 

(1) Includes shares of common stock and Class A common stock.

Portfolio Overview

Loan Portfolio

During the three months ended March 31, 2017, we directly originated loans with a total loan commitment amount of $343.4 million, of which $247.2 million was funded during the quarter. Other loan fundings included $55.1 million of deferred fundings related to loan commitments outstanding at December 31, 2016. Proceeds from loan repayments and sales during the quarter totaled $142.2 million. We generated interest income of $47.9 million and incurred interest expense of $17.8 million during the quarter, which resulted in $30.1 million of net interest income in the three months ended March 31, 2017.

During the three months ended March 31, 2016, we directly originated and acquired loans with a total loan commitment amount of $253.6 million, of which $194.1 million was funded during the quarter. Other loan fundings included $71.5 million of deferred fundings related to loan commitments outstanding at December 31, 2015. Proceeds from loan repayments and sales during the quarter totaled $86.2 million. We generated interest income of $33.7 million and incurred interest expense of $12.9 million during the quarter, which resulted in $20.8 million of net interest income in the three months ended March 31, 2016.

During the year ended December 31, 2016, we directly originated and acquired loans with a total loan commitment amount of $1.2 billion, of which $968.7 million was funded during 2016. Other loan fundings included $319.0 million of deferred fundings related to loan commitments outstanding at December 31, 2015. Proceeds from loan repayments and sales during the year totaled $744.9 million. We generated interest income of $153.6 million and incurred interest expense of $61.6 million during the year, which resulted in $92.0 million of net interest income in the year ended December 31, 2016.

During the year ended December 31, 2015, we directly originated and acquired loans with a total loan commitment amount of $1.1 billion, of which $708.4 million was funded during 2015. Other loan fundings included $183.7 million of deferred fundings related to loan commitments outstanding at December 31, 2014. Proceeds from loan repayments and sales during the year totaled $695.4 million. We generated interest income of

 

110


Table of Contents

$128.6 million and incurred interest expense of $47.6 million during the year, which resulted in $81.1 million of net interest income in the year ended December 31, 2015.

During the period from December 18, 2014 (inception) to December 31, 2014 (the “Stub Period”), we acquired loans with a total loan commitment amount of $2.3 billion, of which $1.9 billion was funded upon acquisition. No other loan fundings occurred during the Stub Period. Proceeds from loan repayments during the Stub Period totaled $126.0 million in connection with a single loan, the repayment of which was expected. During the Stub Period, we generated interest income of $1.8 million, incurred interest expense of $1.5 million and generated $0.3 million of net interest income.

The following table details our loan activity (dollars in thousands):

 

    

Three Months Ended
March 31,

   

Year Ended
December 31,

   

Period from
December 18,
2014
(inception) to
December 31,

2014

 
    

2017

   

2016

   

2016

   

2015

   

Loan originations—funded

   $ 247,217     $ 194,051   $ 629,579     $ 692,121     $ —    

Loan acquisitions—funded

     —         —         339,118       16,312       1,852,062  

Other loan fundings(1)

     55,090       71,515       318,996       183,712       —    

Loan repayments

     (89,725     (86,176     (601,129     (621,604     (126,000

Loan sales(2)

     (52,443     —         (143,793     (73,813     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net fundings (repayments)

   $ 160,139     $ 179,390     $ 542,771     $ 196,728     $ 1,726,062  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Additional fundings made under existing loan commitments.

 

(2) In certain instances, we originate our mezzanine loans through the use of non-consolidated senior interests—the contemporaneous issuance of a first mortgage loan to a third-party lender or the non-recourse transfer of a first mortgage loan originated by us. In either case, the senior mortgage loan (i.e., the non-consolidated senior interest) is not included on our balance sheet. When we originate a loan in connection with the contemporaneous issuance or the non-recourse transfer of a non-consolidated senior interest, we retain on our balance sheet a mezzanine loan. As of March 31, 2017, such amount includes $52.4 million from the sale of two non-consolidated senior interests. As of December 31, 2015, such amount includes $44.0 million from the sale of non-consolidated senior interests in one loan. See “—Portfolio Financing—Non-Consolidated Senior Interests” for additional information.

The following table details overall statistics for our loan portfolio as of March 31, 2017 (dollars in thousands):

 

    

Balance Sheet
Portfolio

    Total Loan Exposure(1)  
    

Total Loan
     Portfolio     

   

Floating Rate
Loans

   

Fixed Rate
Loans

 

Number of loans

     57       60       55       5  

% of portfolio (by unpaid principal balance)

     100     100     96.7     3.3

Total loan commitment

   $ 3,203,220     $ 3,338,721     $ 3,248,876     $ 89,845  

Unpaid principal balance

   $ 2,628,244     $ 2,763,745     $ 2,673,900     $ 89,845  

Unfunded loan commitments(2)

   $ 577,521     $ 577,521     $ 577,521     $ —    

Carrying value

   $ 2,606,472     $ 2,741,972     $ 2,652,247     $ 89,725  

Weighted average credit spread(3)

     5.2     5.2     5.1     6.1

Weighted average all-in yield(3)

     6.6     6.1     6.6     7.7

Weighted average term to extended maturity (years)(4)

     3.0       3.0       3.0       0.6  

Weighted average LTV(5)

     58.3     58.5     58.0     71.5

 

111


Table of Contents

 

(1) In certain instances, we originate our mezzanine loans through the use of non-consolidated senior interests—the contemporaneous issuance of a first mortgage loan to a third-party lender or the non-recourse transfer of a first mortgage loan originated by us. In either case, the senior mortgage loan (i.e., the non-consolidated senior interest) is not included on our balance sheet. When we originate a loan in connection with the contemporaneous issuance or the non-recourse transfer of a non-consolidated senior interest, we retain on our balance sheet a mezzanine loan. Total loan commitment encompasses the entire loan portfolio we originated or acquired and financed, including $135.5 million of such non-consolidated senior interests in three loans that are not included in our balance sheet portfolio. See “—Portfolio Financing—Non-Consolidated Senior Interests” for additional information.

 

(2) 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 development, property improvements or lease-related expenditures by our borrowers, and in some instances to finance operating deficits during renovation and lease-up.

 

(3) As of March 31, 2017, 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, 2017 for weighted average calculations.

 

(4) 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, 2017, based on the unpaid principal balance of our total loan exposure, 49.8% of our loans were subject to yield maintenance or other prepayment restrictions and 50.2% were open to repayment by the borrower without penalty.

 

(5) LTV is calculated 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, 2017, divided by the applicable as-is real estate value at the time of origination or acquisition of such loan or participation interest in a loan. The as-is real estate value reflects our Manager’s estimates, at the time of origination or acquisition of a 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.

Please refer to “Business—Our Portfolio” in this prospectus for details of the loans in our portfolio as of March 31, 2017 on a loan-by-loan basis.

CMBS Portfolio

The following table details overall statistics for our CMBS portfolio as of March 31, 2017 (dollars in thousands):

 

     CMBS Portfolio  
   Total     Floating Rate     Fixed Rate  

Number of securities

     6       2       4  

% of portfolio

     100     10.9     89.1

Par value

   $ 100,968     $         11,050     $ 89,918  

Face amount(1)

   $ 97,929     $ 8,085     $ 89,844  

Weighted average coupon(2)

     4.8     5.5     4.7

Weighted average yield to final maturity(2)

     4.4     4.6     4.4

Final maturity (years)

     3.3       3.9       3.3  

Ratings range

     BB- to AAA       BBB- to A-       BB- to AAA  

 

112


Table of Contents

 

(1) Amounts disclosed are before giving effect to unamortized purchase price premium and discount and unrealized gains or losses.

 

(2) Weighted by market value as of March 31, 2017.

Asset Management

We proactively manage the assets in our portfolio from closing to final repayment. We are party to an agreement with Situs, one of the largest commercial mortgage loan servicers, pursuant to which Situs 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. Please refer to “Business—Risk Management—Asset Management” for a more detailed description of our asset management process.

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 “—Critical Accounting Policies—Loans Receivable and Provision for Loan Losses” for a discussion regarding the risk rating system that we use in connection with our portfolio. The following table allocates the carrying value of our loan portfolio as of March 31, 2017 based on our internal risk ratings (dollars in thousands):

 

     March 31, 2017  

Risk Rating

   Carrying Value     

Number of Loans

 

1

   $ 261,394        3  

2

     792,207        19