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Section 1: 10-Q (10-Q)

trtx-10q_20170630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended June 30, 2017.

OR

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

For the transition period from            to           

Commission file number 001-38156

 

TPG RE Finance Trust, Inc.

(Exact name of registrant as specified in its charter)

 

 

Maryland

 

36-4796967

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

888 Seventh Avenue, 35th Floor

New York, New York 10106

(Address of principal executive offices)(Zip Code)

(212) 601-7400

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit and post such files).  YES   NO 

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

 

Large Accelerated Filer

 

Accelerated Filer

Non-accelerated Filer

(Do not check if a smaller reporting company)

Smaller Reporting Company

Emerging Growth Company

 

 

 

 

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

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

As of August 23, 2017, there were 60,100,787 shares of the registrant’s common stock, $0.001 par value per share, and 1,213,026 shares of the registrant’s Class A common stock, $0.001 par value per share, outstanding.

 

 


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

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

There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth under the heading “Risk Factors” in our prospectus dated July 19, 2017, filed with the Securities and Exchange Commission (the “SEC”) on July 21, 2017 pursuant to Rule 424(b)(4) under the Securities Act (the “Prospectus”), as such risk factors may be updated from time to time in our periodic filings with the SEC, which are accessible on the SEC’s website at www.sec.gov. Such risks and uncertainties include, but are not limited to, the following:

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

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

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

general volatility of the securities markets in which we participate; 

changes in our business, investment strategies or target assets; 

difficulty in obtaining financing or raising capital; 

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

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

deterioration in the performance of properties securing our investments that may cause deterioration in the performance of our investments and potentially principal losses to us; 

defaults by borrowers in paying debt service on outstanding indebtedness; 

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

adverse developments in the availability of desirable investment opportunities; 

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

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

the availability of qualified personnel and our relationship with TPG RE Finance Trust Management, L.P. (our “Manager”);

conflicts with our Manager or the personnel of TPG Global, LLC and its affiliates (“TPG”) providing services to us, including our officers, and certain funds managed by TPG; 

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

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

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


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

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


TABLE OF CONTENTS

 

Part I. Financial Information

1

 

 

 

Item 1.

Financial Statements

1

 

 

 

 

Consolidated Balance Sheets as of June 30, 2017 (unaudited) and December 31, 2016

1

 

 

 

 

Consolidated Statement Of Income and Comprehensive Income (unaudited) for the Three and Six Months ended June 30, 2017 and June 30, 2016

2

 

 

 

 

Consolidated Statements of Changes in Equity (unaudited) for the Six Months ended June 30, 2017 and June 30, 2016

3

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the Six Months ended June 30, 2017 and June 30, 2016

4

 

 

 

 

Notes to the Consolidated Financial Statements (unaudited)

5

 

 

 

Item 2. 

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

26

 

 

 

Item 3. 

Quantitative and Qualitative Disclosures About Market Risk

48

 

 

 

Item 4. 

Controls and Procedures

50

 

 

 

Part II. Other Information

51

 

 

Item 1. 

Legal Proceedings

51

 

 

 

Item 1A. 

Risk Factors

51

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

Item 3. 

Defaults Upon Senior Securities

51

 

 

 

Item 4. 

Mine Safety Disclosures

51

 

 

 

Item 5. 

Other Information

52

 

 

 

Item 6. 

Exhibits

53

 

 

 

Signatures

56

 

 


 

Part I. Financial Information

Item 1. Financial Statements

TPG RE Finance Trust, Inc.

Consolidated Balance Sheets (Unaudited)

(in thousands, except share and per share data)

 

 

 

June 30,

2017

 

 

December 31,

2016

 

ASSETS(1)

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

200,653

 

 

$

103,126

 

Restricted Cash

 

 

1,081

 

 

 

849

 

Accounts Receivable

 

 

382

 

 

 

644

 

Accounts Receivable from Servicer/Trustee

 

 

47,416

 

 

 

34,743

 

Accrued Interest Receivable

 

 

12,207

 

 

 

14,023

 

Loans Held for Investment (includes $1,462,300 and $1,397,610 pledged as collateral

   under repurchase agreements)

 

 

2,191,911

 

 

 

2,449,990

 

Investment in Commercial Mortgage-Backed Securities, Available-for-Sale (includes

   $128,298 and $51,305 pledged as collateral under repurchase agreements)

 

 

129,585

 

 

 

61,504

 

Other Assets, Net

 

 

3,427

 

 

 

704

 

Total Assets

 

$

2,586,662

 

 

$

2,665,583

 

LIABILITIES AND STOCKHOLDERS’ EQUITY(1)

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accrued Interest Payable

 

$

4,620

 

 

$

2,907

 

Accrued Expenses

 

 

9,407

 

 

 

6,555

 

Collateralized Loan Obligation (net of deferred financing costs of $1,208 and $2,541)

 

 

166,077

 

 

 

540,780

 

Repurchase Agreements (net of deferred financing costs of $8,939 and $8,159)

 

 

1,139,649

 

 

 

1,013,370

 

Notes Payable (net of deferred financing costs of $2,886 and $2,883)

 

 

235,525

 

 

 

108,499

 

Payable to Affiliates

 

 

6,536

 

 

 

3,955

 

Deferred Revenue

 

 

356

 

 

 

482

 

Dividend Payable

 

 

20,520

 

 

 

18,346

 

Total Liabilities

 

 

1,582,690

 

 

 

1,694,894

 

Commitments and Contingencies—See Note 14

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred Stock ($0.001 par value; 125 and 125 shares authorized;

   125 and 125 shares issued and outstanding, respectively)

 

 

 

 

 

 

Common Stock ($0.001 par value; 95,500,000 and 95,500,000 shares authorized;

   39,252,219 and 38,260,053 shares issued and outstanding, respectively)

 

 

40

 

 

 

39

 

Class A Common Stock ($0.001 par value; 2,500,000 and 2,500,000 shares authorized;

   982,211 and 967,500 shares issued and outstanding, respectively)

 

 

1

 

 

 

1

 

Additional Paid-in-Capital

 

 

1,004,466

 

 

 

979,467

 

Retained Earnings (Accumulated Deficit)

 

 

(3,073

)

 

 

(10,068

)

Accumulated Other Comprehensive Income

 

 

2,538

 

 

 

1,250

 

Total Stockholders' Equity

 

 

1,003,972

 

 

 

970,689

 

Total Liabilities and Stockholders' Equity

 

$

2,586,662

 

 

$

2,665,583

 

 

(1)

The Company’s consolidated Total Assets and Total Liabilities at June 30, 2017 and December 31, 2016 include VIE assets of $225.8 million and $743.5 million, respectively, and VIE liabilities of $166.6 million and $542.8 million, respectively. These assets can be used only to satisfy obligations of the VIE, and creditors of the VIE have recourse only to these assets and not to TPG RE Finance Trust, Inc. See Note 5 to the Consolidated Financial Statements for details.

See accompanying notes to the Consolidated Financial Statements

 

1


 

TPG RE Finance Trust, Inc.

Consolidated Statements of Income

and Comprehensive Income (Unaudited)

(in thousands, except share and per share data)

 

 

 

Three Months Ended

June 30,

 

 

Six Months Ended

June 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

$

51,736

 

 

$

38,400

 

 

$

99,677

 

 

$

72,132

 

Interest Expense

 

 

(19,635

)

 

 

(15,076

)

 

 

(37,435

)

 

 

(28,006

)

Net Interest Income

 

 

32,101

 

 

 

23,324

 

 

 

62,242

 

 

 

44,126

 

OTHER REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income, net

 

 

245

 

 

 

296

 

 

 

367

 

 

 

311

 

Total Other Revenue

 

 

245

 

 

 

296

 

 

 

367

 

 

 

311

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional Fees

 

 

463

 

 

 

888

 

 

 

1,192

 

 

 

1,226

 

General and Administrative

 

 

720

 

 

 

1,190

 

 

 

1,189

 

 

 

1,446

 

Servicing and Asset Management Fees

 

 

1,205

 

 

 

648

 

 

 

2,341

 

 

 

1,510

 

Management Fee

 

 

2,768

 

 

 

2,149

 

 

 

5,356

 

 

 

4,133

 

Collateral Management Fee

 

 

71

 

 

 

219

 

 

 

202

 

 

 

493

 

Incentive Management Fee

 

 

1,805

 

 

 

1,266

 

 

 

3,386

 

 

 

2,074

 

Total Other Expenses

 

 

7,032

 

 

 

6,360

 

 

 

13,666

 

 

 

10,882

 

Income Before Income Taxes

 

 

25,314

 

 

 

17,260

 

 

 

48,943

 

 

 

33,555

 

Income Taxes

 

 

14

 

 

 

(144

)

 

 

(140

)

 

 

(190

)

Net Income

 

$

25,328

 

 

$

17,116

 

 

$

48,803

 

 

$

33,365

 

Preferred Stock Dividends

 

 

(8

)

 

 

(8

)

 

 

(8

)

 

 

(8

)

Net Income Attributable to Common Stockholders

 

$

25,320

 

 

$

17,108

 

 

$

48,795

 

 

$

33,357

 

Basic Earnings per Common Share

 

$

0.64

 

 

$

0.52

 

 

$

1.24

 

 

$

1.08

 

Diluted Earnings per Common Share

 

$

0.64

 

 

$

0.52

 

 

$

1.24

 

 

$

1.08

 

Weighted Average Number of Common Shares Outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

39,482,038

 

 

 

32,708,334

 

 

 

39,355,499

 

 

 

30,900,638

 

Diluted:

 

 

39,482,038

 

 

 

32,708,334

 

 

 

39,355,499

 

 

 

30,900,638

 

Dividends Declared per Common Share

 

$

0.51

 

 

$

0.53

 

 

$

1.05

 

 

$

0.53

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

25,328

 

 

$

17,116

 

 

$

48,803

 

 

$

33,365

 

Unrealized Gain on Commercial Mortgage-Backed Securities

 

 

56

 

 

 

809

 

 

 

1,288

 

 

 

1,037

 

Comprehensive Net Income

 

$

25,384

 

 

$

17,925

 

 

$

50,091

 

 

$

34,402

 

 

See accompanying notes to the Consolidated Financial Statements

 

 

2


 

TPG RE Finance Trust, Inc.

Consolidated Statements of

Changes in Equity (Unaudited)

(In thousands, except share data)

 

 

 

Preferred Stock

 

 

Common Stock

 

 

Class A Common

Stock

 

 

Additional

 

 

Retained

Earnings/

 

 

Accumulated

Other

 

 

 

 

 

 

 

Shares

 

 

Par

Value

 

 

Shares

 

 

Par

Value

 

 

Shares

 

 

Par

Value

 

 

Paid-

in-Capital

 

 

(Accumulated

Deficit)

 

 

Comprehensive

Income

 

 

Total

Equity

 

Balance at December 31, 2015

 

 

125

 

 

$

 

 

 

28,309,783

 

 

$

29

 

 

 

783,158

 

 

$

1

 

 

$

729,477

 

 

$

(13,157

)

 

$

 

 

$

716,350

 

Issuance of Class A Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74,401

 

 

 

 

 

 

1,832

 

 

 

 

 

 

 

 

 

1,832

 

Issuance of Common Stock

 

 

 

 

 

 

 

 

3,987,337

 

 

 

4

 

 

 

 

 

 

 

 

 

98,164

 

 

 

 

 

 

 

 

 

98,168

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33,365

 

 

 

 

 

 

33,365

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,037

 

 

 

1,037

 

Dividends on Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

(8

)

Dividends on Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,890

)

 

 

 

 

 

(14,890

)

Dividends on Class A Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(395

)

 

 

 

 

 

(395

)

Balance at June 30, 2016

 

 

125

 

 

$

 

 

 

32,297,120

 

 

$

33

 

 

 

857,559

 

 

$

1

 

 

$

829,473

 

 

$

4,915

 

 

$

1,037

 

 

$

835,459

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

 

125

 

 

$

 

 

 

38,260,053

 

 

$

39

 

 

 

967,500

 

 

$

1

 

 

$

979,467

 

 

$

(10,068

)

 

$

1,250

 

 

$

970,689

 

Issuance of Class A Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,711

 

 

 

 

 

 

365

 

 

 

 

 

 

 

 

 

365

 

Issuance of Common Stock

 

 

 

 

 

 

 

 

992,166

 

 

 

1

 

 

 

 

 

 

 

 

 

24,634

 

 

 

 

 

 

 

 

 

24,635

 

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

48,803

 

 

 

 

 

 

48,803

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,288

 

 

 

1,288

 

Dividends on Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

 

 

 

 

(8

)

Dividends on Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(40,803

)

 

 

 

 

 

(40,803

)

Dividends on Class A Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(997

)

 

 

 

 

 

(997

)

Balance at June 30, 2017

 

 

125

 

 

$

 

 

 

39,252,219

 

 

$

40

 

 

 

982,211

 

 

$

1

 

 

$

1,004,466

 

 

$

(3,073

)

 

$

2,538

 

 

$

1,003,972

 

 

See accompanying notes to the Consolidated Financial Statements

 

 

3


 

TPG RE Finance Trust, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

Six Months Ended

June 30,

 

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net Income

 

$

48,803

 

 

$

33,365

 

Adjustment to Reconcile Net Income to Net Cash Provided by (Used in)

   Operating Activities:

 

 

 

 

 

 

 

 

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

 

 

(9,805

)

 

 

(1,922

)

Amortization of Deferred Financing Costs

 

 

5,453

 

 

 

4,289

 

Decrease (Increase) in Capitalized Accrued Interest

 

 

2,456

 

 

 

(583

)

Cash Flows Due to Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts Receivable

 

 

262

 

 

 

2,488

 

Accrued Interest Receivable

 

 

1,816

 

 

 

(3,323

)

Accrued Expenses

 

 

(671

)

 

 

6,020

 

Accrued Interest Payable

 

 

1,713

 

 

 

646

 

Payable to Affiliates

 

 

2,581

 

 

 

(1,553

)

Deferred Income / Gain

 

 

(126

)

 

 

 

Change in Other Assets

 

 

143

 

 

 

 

Net Cash Provided by Operating Activities

 

 

52,625

 

 

 

39,427

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Restricted Cash

 

 

(232

)

 

 

(548

)

Origination of Loans Held for Investment

 

 

(524,725

)

 

 

(252,348

)

Purchase of Loans Held for Investment

 

 

 

 

 

(358,636

)

Advances on Loans Held for Investment

 

 

(154,566

)

 

 

(152,666

)

Principal Advances Held by Servicer/Trustee

 

 

 

 

 

(566

)

Principal Repayments of Loans Held for Investment

 

 

883,146

 

 

 

265,431

 

Proceeds from Sales of Loans Held for Investment

 

 

52,443

 

 

 

 

Purchase of Commercial Mortgage-Backed Securities

 

 

(96,610

)

 

 

(49,754

)

Principal Repayments of Mortgage-Backed Securities

 

 

29,666

 

 

 

 

Purchases and Disposals of Fixed Assets

 

 

(218

)

 

 

 

Net Cash Provided by (Used in) Investing Activities

 

 

188,904

 

 

 

(549,087

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Payments on Collateralized Loan Obligation

 

 

(392,289

)

 

 

(191,158

)

Proceeds from Collateralized Loan Obligation

 

 

16,254

 

 

 

53,464

 

Payments on Secured Financing Agreements

 

 

(547,820

)

 

 

(101,288

)

Proceeds from Secured Financing Agreements

 

 

798,514

 

 

 

616,246

 

Payment of Deferred Financing Costs

 

 

(4,027

)

 

 

(9,577

)

Proceeds from Issuance of Common Stock

 

 

24,635

 

 

 

98,168

 

Proceeds from Issuance of Class A Common Stock

 

 

365

 

 

 

1,832

 

Dividends Paid on Common Stock

 

 

(38,177

)

 

 

(38,836

)

Dividends Paid on Class A Common Stock

 

 

(1,449

)

 

 

(1,050

)

Dividends Paid on Preferred Stock

 

 

(8

)

 

 

(8

)

Net Cash Provided by (Used in) Financing Activities

 

 

(144,002

)

 

 

427,793

 

Net Change in Cash and Cash Equivalents

 

 

97,527

 

 

 

(81,867

)

Cash and Cash Equivalents at Beginning of Period

 

 

103,126

 

 

 

104,936

 

Cash and Cash Equivalents at End of Period

 

$

200,653

 

 

$

23,069

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest Paid

 

$

30,270

 

 

$

22,556

 

Taxes Paid

 

 

140

 

 

 

69

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

Dividends Declared, not paid

 

$

20,520

 

 

$

 

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

 

 

44,024

 

 

 

3,618

 

Unrealized Gain on Commercial Mortgage-Backed Securities, Available-for-Sale

 

 

1,288

 

 

 

1,037

 

Proceeds from Secured Financing Agreements Held by Trustee

 

 

3,392

 

 

 

 

Accrued Deferred Financing Costs

 

 

2,125

 

 

 

2,373

 

Accrued Other Assets

 

 

2,648

 

 

 

 

 

See accompanying notes to the Consolidated Financial Statements

4


 

TPG RE Finance Trust, Inc.

Notes to the Consolidated Financial Statements

(Unaudited)

(1) Business and Organization

TPG RE Finance Trust, Inc., together with its consolidated subsidiaries (“we”, “us”, “our”, or the “Company”), is a Maryland company incorporated on October 24, 2014 and commenced operations on December 18, 2014 (“Inception”). We are organized as a holding company and conduct our operations primarily through our various subsidiaries. We conduct our operations as a real estate investment trust (“REIT”) for U.S. federal income tax purposes. We generally will not be subject to U.S. federal income taxes on our taxable income to the extent that we annually distribute all of our net taxable income to stockholders and maintain our qualification as a REIT. We also operate our business in a manner that permits us to maintain an exclusion from registration under the Investment Company Act of 1940, as amended.

The Company’s principal business activity is to directly originate and acquire a diversified portfolio of commercial real estate related assets, primarily consisting of first mortgage loans and senior participation interests in first mortgage loans secured by institutional-quality properties in primary and select secondary markets in the United States, and commercial mortgage-backed securities. As of June 30, 2017 and December 31, 2016, the Company conducted substantially all of its operations through a limited liability company, TPG RE Finance Trust Holdco, LLC (“Holdco”), and the Company’s other wholly-owned subsidiaries.

(2) Summary of Significant Accounting Policies

Basis of Presentation

The interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The interim consolidated financial statements include the Company’s accounts, the consolidated variable interest entity for which the Company is the primary beneficiary, and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated.

Use of Estimates

The preparation of the interim consolidated financial statements in conformity with GAAP requires estimates of assets, liabilities, revenues, expenses and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Actual results could differ from management’s estimates and such differences could be material. Significant estimates made in the interim consolidated financial statements include, but are not limited to: impairment, adequacy of provisions for loan losses and valuation of financial instruments.

Principles of Consolidation

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

At each reporting date, the Company reconsiders its primary beneficiary conclusion to determine if its obligation to absorb losses of, or its rights to receive benefits from, the VIE could potentially be more than insignificant and will consolidate or not consolidate accordingly.

Revenue Recognition

Interest income on loans is accrued using the interest method based on the contractual terms of the loan, adjusted for credit impairment, if any. The objective of the interest method is to arrive at periodic interest income including recognition of fees and costs at a constant effective yield. Premiums, discounts, origination fees and exit fees are amortized or accreted into interest income over the

5


 

lives of the loans using the interest method, or on a straight line basis which approximates the interest method. Extension fees are amortized into income over the extension period to which they relate using a straight line basis which approximates the interest method. Prepayment penalties from borrowers are recognized as interest income when received. Certain of the Company’s investments may provide for additional interest based on the borrower’s operating cash flow or appreciation of the underlying collateral. Such amounts are considered contingent interest and are reflected as interest income only upon certainty of collection.

The Company considers a loan to be non-performing and places loans on non-accrual status at such time as: (1) management determines the borrower is incapable of, or has ceased efforts toward, curing the cause of an impairment; (2) the loan becomes 90 days delinquent; or (3) the loan has a maturity default. While on non-accrual status, based on the Company’s judgment as to collectability of principal, loans are either accounted for on a cash basis, where interest income is recognized only upon receipt of cash for principal and interest payments, or on a cost-recovery basis, where all cash receipts reduce a loan’s carrying value, and interest income is only recorded when such carrying value has been fully recovered.

Loans Held for Investment

Loans that the Company has the intent and ability to hold for the foreseeable future, or until maturity or payoff, are reported at their outstanding principal balances net of any premiums, discounts, loan origination fees and an allowance for loan losses. Loan origination fees and direct loan origination costs are deferred and recognized in interest income over the estimated life of the loans using the interest method, or on a straight line method which approximates the interest method, adjusted for actual prepayments.

The Company evaluates each loan classified as a loan receivable held for investment for impairment on a quarterly basis. Impairment occurs when it is deemed probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. If the loan is considered to be impaired, an allowance is recorded to reduce the carrying value of the loan to the present value of the expected future cash flows discounted at the loan’s contractual effective rate, or the fair value of the collateral, less estimated costs to sell, if recovery of the Company’s investment is expected solely from the sale of the collateral. As part of the quarterly impairment review, we evaluate the risk of each loan and assign a risk rating based on a variety of factors, grouped as follows to include (without limitation): (i) loan and credit structure, including the as-is loan-to-value (“LTV”) and structural features; (ii) quality and stability of real estate value and operating cash flow, including debt yield, property type, dynamics of the geographic, property-type and local market, physical condition, stability of cash flow, leasing velocity and quality and diversity of tenancy; (iii) performance against underwritten business plan; and (iv) quality, experience and financial condition of sponsor, borrower and guarantor(s). Based on a 5-point scale, our loans are rated “1” through “5,” from least risk to greatest risk, respectively, which ratings are defined as follows:

 

1-

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

 

2-

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

 

3-

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

 

4-

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

 

5-

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

Since Inception, the Company has not recorded asset-specific loan loss reserves, nor has it recognized any impairments on its loan portfolio. Our determination of asset-specific loan loss reserves, should such reserves be necessary, relies on material estimates regarding the fair value of any loan collateral. 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. Significant judgment is required when evaluating loans for impairment.

The Company’s loans are typically collateralized by real estate or a partnership, or similar, equity interest in an entity that owns real estate. As a result, the Company regularly evaluates on a loan-by-loan basis the extent and impact of any credit deterioration associated with the performance and/or value of the underlying collateral property as well as the financial and operating capability of the borrower/sponsor. The Company also evaluates the financial wherewithal of any loan guarantors and the borrower’s competency

6


 

in managing and operating the properties. In addition, the Company considers the overall economic environment, real estate sector, and geographic sub-market in which the borrower operates. Such impairment analyses are completed and reviewed by asset management personnel and evaluated by senior management, who utilize various data sources, including (i) periodic financial data such as property occupancy, tenant profile, rental rates, operating expenses, the borrower’s exit plan, and capitalization and discount rates, (ii) site inspections, (iii) sales and financing comparables, (iv) current credit spreads for refinancing and (v) other market data.

Commercial Mortgage-Backed Securities

The Company invests in commercial mortgage-backed securities for cash management and investment purposes. The Company designates as available-for-sale its commercial mortgage-backed securities investments on the date of acquisition of the investment. Commercial mortgage-backed securities that are not classified as held-to-maturity and which the Company does not hold for the purpose of selling in the near-term, but may dispose of prior to maturity, are also designated as available-for-sale and are carried at estimated fair value. The Company’s recognition of interest income from its commercial mortgage-backed securities, including its amortization of premium and discount, follows the Company’s revenue recognition policy. The Company uses a specific identification method when determining the cost of security sold and the amount reclassified out of accumulated other comprehensive income into earnings. Unrealized losses on securities that, in the judgment of management, are other than temporary are charged against earnings as a loss in the consolidated statements of income. Significant valuation inputs are Level II as described under “Fair Value Measurements”.

Portfolio Financing Arrangements

The Company finances certain of its loan and CMBS investments using secured revolving repurchase agreements, asset-specific financing arrangements (notes payable on the consolidated balance sheets), and its private collateralized loan obligation (“CLO”). The related borrowings are recorded as separate liabilities on its consolidated balance sheets. Interest income earned on the investments and interest expense incurred on the related borrowings are reported separately on the Company’s consolidated statements of income and comprehensive income.

In certain instances, the Company creates structural leverage through the co-origination or non-recourse syndication of a senior loan interest to a third party. For all such syndications the Company has completed through June 30, 2017, the Company has transferred 100% of the senior mortgage loan the Company originated on a non-recourse basis to a third-party lender and has retained as a loan investment a separate mezzanine loan investment secured by a pledge of the equity in the mortgage borrower. With respect to the senior mortgage loan transferred, the Company retains: no control over the mortgage loan; no economic interest in the mortgage loan; and no recourse to the purchaser or the borrower. Consequently, based on these circumstances and because the Company does not have any continuing involvement with the transferred senior mortgage loan, these syndications are accounted for as sales under GAAP and are removed from the Company’s consolidated financial statements at the time of transfer. The Company’s consolidated balance sheets only include the separate mezzanine loan remaining after the transfer and not the non-consolidated senior loan interest sold or co-originated that the Company transferred.

Fair Value Measurements

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

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

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

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

7


 

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

Income Taxes

The Company qualifies and has elected to be taxed as a REIT for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended December 31, 2014. To the extent that it annually distributes at least 90% of its REIT taxable income to stockholders and complies with various other requirements as a REIT, the Company generally will not be subject to U.S. federal income taxes on its distributed REIT taxable income. If the Company fails to continue to qualify as a REIT in any taxable year and does not qualify for certain statutory relief provisions, the Company will be subject to U.S. federal and state income taxes at regular corporate rates (including any applicable alternative minimum tax) beginning with the year in which it fails to qualify and may be precluded from being able to elect to be treated as a REIT for the Company’s four subsequent taxable years. Even though the Company currently qualifies for taxation as a REIT, the Company may be subject to certain U.S. federal, state, local and foreign taxes on the Company’s income and property and to U.S. federal income and excise taxes on the Company’s undistributed REIT taxable income.

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

Earnings per Common Share

The Company utilizes the two-class method when assessing participating securities to calculate earnings per common share. Basic and diluted earnings per common share is computed by dividing net income available to common stockholders (i.e., holders of common stock and Class A common stock), divided by the weighted-average number of common shares (both common stock and Class A common stock) outstanding during the period. The Company’s common stock and Class A common stock have the same preferences and rights to dividends and other distributions. Diluted earnings per common share is calculated by including the effect of dilutive securities. The Company currently does not have any outstanding participating securities.

Loan Origination Fees

Loan origination fees are reflected in loans held for investment on the consolidated balance sheets and include fees charged to borrowers. These fees are amortized into interest income over the life of the related loans held.

Deferred Financing Costs

Deferred financing costs are reflected net of collateralized loan obligation and secured financing agreements on the Company’s consolidated balance sheets. These costs are amortized in interest expense using the interest method or on a straight line basis which approximates the interest method over the life of the related obligations.

Cash and Cash Equivalents

Cash and cash equivalents include cash held in banks or invested in money market funds with original maturities of less than 90 days. The Company deposits its cash and cash equivalents with high credit quality institutions to minimize credit risk exposure. The Company maintains cash accounts at several financial institutions, which are insured up to a maximum of $250,000 per account as of June 30, 2017 and December 31, 2016. The balances in these accounts may exceed the insured limits.

8


 

Restricted Cash

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

Recently Issued and Adopted Accounting Pronouncements

In March 2017, FASB issued ASU 2017-08, Receivables (Topic 310): Receivables – Nonrefundable Fees and Other Costs (“ASU 2017-08”). ASU 2017-08 shortens the amortization period for certain callable debt securities held at a premium. Specifically, the amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; discounts continue to be amortized through maturity. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. The Company early adopted this update during the quarter ended March 31, 2017. There was no effect on our consolidated financial statements.

(3) Loans Held for Investment

The Company currently originates and acquires first mortgage and mezzanine loans secured by commercial properties. These loans can potentially subject the Company to concentrations of credit risk as measured by various metrics, including the property type collateralizing the loan, loan size, loans to a single sponsor and loans in a single geographic area, among others. The Company’s loans held for investment are accounted for at amortized cost.

During the six months ended June 30, 2017, the Company’s subsidiaries originated or acquired eight loans with a total commitment of approximately $675.8 million, an unpaid principal balance of $488.2 million, and unfunded commitments of $96.1 million. To fund these originations, the Company employed financing methods that included repurchase and secured financings, notes payable, and the non-recourse syndication of senior loan interests to third parties that were recognized as sales. Total commitments related to non-recourse senior loan interest syndications for the six months ended June 30, 2017 were $91.5 million.

During the six months ended June 30, 2016, the Company’s subsidiaries originated or acquired 13 loans with a total commitment of approximately $728.9 million, an unpaid principal balance of $628.9 million, and unfunded commitments of $100.0 million.

The following tables present an overview of the loan investment portfolio as of June 30, 2017 and December 31, 2016 (in thousands):

 

 

 

June 30, 2017

 

Loans Receivable

 

Outstanding

Principal

 

 

Unamortized

Premium

(Discount),

Loan

Origination

Fees, net

 

 

Carrying

Amount

 

Senior loans

 

$

2,144,683

 

 

$

(16,673

)

 

$

2,128,010

 

Subordinated and mezzanine loans

 

 

64,306

 

 

 

(405

)

 

 

63,901

 

Subtotal before allowance

 

 

2,208,989

 

 

 

(17,078

)

 

 

2,191,911

 

Allowance for loan losses

 

 

 

 

 

 

 

 

 

Total

 

$

2,208,989

 

 

$

(17,078

)

 

$

2,191,911

 

 

 

 

December 31, 2016

 

Loans Receivable

 

Outstanding

Principal

 

 

Unamortized

Premium

(Discount),

Loan

Origination

Fees, net

 

 

Carrying

Amount

 

Senior loans

 

$

2,429,632

 

 

$

(20,931

)

 

$

2,408,701

 

Subordinated and mezzanine loans

 

 

41,446

 

 

 

(157

)

 

 

41,289

 

Subtotal before allowance

 

 

2,471,078

 

 

 

(21,088

)

 

 

2,449,990

 

Allowance for loan losses