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Section 1: 10-Q (10-Q)

trtx-10q_20170930.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 September 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 November 3, 2017, there were 59,618,302 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 occur or be achieved, and actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

There are a number of risks, uncertainties and other important factors that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Such risks, uncertainties and other important factors include, among others, the risks, uncertainties and factors set forth under the heading “Risk Factors” in 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, wildfires 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 September 30, 2017 (unaudited) and December 31, 2016

1

 

 

 

 

Consolidated Statements of Income and Comprehensive Income (unaudited) for the Three and Nine Months ended September 30, 2017 and September 30, 2016

2

 

 

 

 

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

3

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the Nine Months ended September 30, 2017 and September 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

47

 

 

 

Item 4. 

Controls and Procedures

49

 

 

 

Part II. Other Information

50

 

 

Item 1. 

Legal Proceedings

50

 

 

 

Item 1A. 

Risk Factors

50

 

 

 

Item 2. 

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

Item 3. 

Defaults Upon Senior Securities

51

 

 

 

Item 4. 

Mine Safety Disclosures

51

 

 

 

Item 5. 

Other Information

51

 

 

 

Item 6. 

Exhibits

52

 

 

 

Signatures

53

 

 


 

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)

 

 

 

September 30,

2017

 

 

December 31,

2016

 

ASSETS(1)

 

 

 

 

 

 

 

 

Cash and Cash Equivalents

 

$

64,801

 

 

$

103,126

 

Restricted Cash

 

 

499

 

 

 

849

 

Accounts Receivable

 

 

141

 

 

 

644

 

Accounts Receivable from Servicer/Trustee

 

 

51,076

 

 

 

34,743

 

Accrued Interest Receivable

 

 

13,764

 

 

 

14,023

 

Loans Held for Investment (includes $2,313,036 and $1,397,610 pledged as collateral

   under repurchase agreements)

 

 

2,824,713

 

 

 

2,449,990

 

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

   $48,029 and $51,305 pledged as collateral under repurchase agreements)

 

 

86,182

 

 

 

61,504

 

Other Assets, Net

 

 

1,506

 

 

 

704

 

Total Assets

 

$

3,042,682

 

 

$

2,665,583

 

LIABILITIES AND STOCKHOLDERS’ EQUITY(1)

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accrued Interest Payable

 

$

3,733

 

 

$

2,907

 

Accrued Expenses

 

 

8,091

 

 

 

6,555

 

Collateralized Loan Obligation (net of deferred financing costs of $0 and $2,541)

 

 

 

 

 

540,780

 

Repurchase and Senior Secured Agreements (net of deferred financing costs of $8,753

   and $8,159)

 

 

1,531,345

 

 

 

1,013,370

 

Notes Payable (net of deferred financing costs of $2,917 and $2,883)

 

 

261,875

 

 

 

108,499

 

Payable to Affiliates

 

 

9,148

 

 

 

3,955

 

Deferred Revenue

 

 

557

 

 

 

482

 

Dividends Payable

 

 

20,135

 

 

 

18,346

 

Total Liabilities

 

 

1,834,884

 

 

 

1,694,894

 

Commitments and Contingencies—See Note 14

 

 

 

 

 

 

 

 

Stockholders’ Equity:

 

 

 

 

 

 

 

 

Preferred Stock ($0.001 par value; 100,000,000 and 125 shares authorized;

   125 and 125 shares issued and outstanding, respectively)

 

 

 

 

 

 

Common Stock ($0.001 par value; 300,000,000 and 95,500,000 shares authorized;

   59,791,742 and 47,251,165 shares issued and outstanding, respectively)

 

 

60

 

 

 

39

 

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

   1,213,026 and 1,194,863 shares issued and outstanding, respectively)

 

 

1

 

 

 

1

 

Additional Paid-in-Capital

 

 

1,216,725

 

 

 

979,467

 

Accumulated Deficit

 

 

(8,968

)

 

 

(10,068

)

Accumulated Other Comprehensive (Loss) Income

 

 

(20

)

 

 

1,250

 

Total Stockholders' Equity(2)

 

 

1,207,798

 

 

 

970,689

 

Total Liabilities and Stockholders' Equity

 

$

3,042,682

 

 

$

2,665,583

 

 

(1)

At September 30, 2017 there were no VIE assets or liabilities recorded in the Company’s Total Assets and Total Liabilities. The Company’s consolidated Total Assets and Total Liabilities at December 31, 2016 include VIE assets and liabilities of $743.5 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.

(2)

Shares issued and shares outstanding reflect the impact of the common stock and Class A common stock dividend which was paid upon completion of the Company’s initial public offering on July 25, 2017 to holders of record as of July 3, 2017. See Note 12 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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

INTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest Income

 

$

46,734

 

 

$

40,419

 

 

$

146,411

 

 

$

112,551

 

Interest Expense

 

 

(19,150

)

 

 

(16,937

)

 

 

(56,585

)

 

 

(44,943

)

Net Interest Income

 

 

27,584

 

 

 

23,482

 

 

 

89,826

 

 

 

67,608

 

OTHER REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Income, net

 

 

669

 

 

 

15

 

 

 

1,036

 

 

 

326

 

Total Other Revenue

 

 

669

 

 

 

15

 

 

 

1,036

 

 

 

326

 

OTHER EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Professional Fees

 

 

1,256

 

 

 

1,133

 

 

 

2,448

 

 

 

2,359

 

General and Administrative

 

 

1,003

 

 

 

387

 

 

 

2,192

 

 

 

1,833

 

Servicing and Asset Management Fees

 

 

720

 

 

 

1,232

 

 

 

3,061

 

 

 

2,742

 

Management Fee

 

 

4,133

 

 

 

2,244

 

 

 

9,489

 

 

 

6,377

 

Collateral Management Fee

 

 

23

 

 

 

207

 

 

 

225

 

 

 

700

 

Incentive Management Fee

 

 

327

 

 

 

716

 

 

 

3,713

 

 

 

2,790

 

Total Other Expenses

 

 

7,462

 

 

 

5,919

 

 

 

21,128

 

 

 

16,801

 

Income Before Income Taxes

 

 

20,791

 

 

 

17,578

 

 

 

69,734

 

 

 

51,133

 

Income Taxes

 

 

 

 

 

(136

)

 

 

(140

)

 

 

(326

)

Net Income

 

$

20,791

 

 

$

17,442

 

 

$

69,594

 

 

$

50,807

 

Preferred Stock Dividends

 

 

(4

)

 

 

(3

)

 

 

(12

)

 

 

(11

)

Net Income Attributable to Common Stockholders

 

$

20,787

 

 

$

17,439

 

 

$

69,582

 

 

$

50,796

 

Basic Earnings per Common Share(1)

 

$

0.35

 

 

$

0.43

 

 

$

1.34

 

 

$

1.30

 

Diluted Earnings per Common Share(1)

 

$

0.35

 

 

$

0.43

 

 

$

1.34

 

 

$

1.30

 

Weighted Average Number of Common Shares Outstanding(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic:

 

 

58,685,979

 

 

 

40,946,029

 

 

 

51,969,733

 

 

 

39,096,974

 

Diluted:

 

 

58,685,979

 

 

 

40,946,029

 

 

 

51,969,733

 

 

 

39,096,974

 

Dividends Declared per Common Share(1)

 

$

0.33

 

 

$

0.41

 

 

$

1.02

 

 

$

1.18

 

OTHER COMPREHENSIVE INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income

 

$

20,791

 

 

$

17,442

 

 

$

69,594

 

 

$

50,807

 

Unrealized (Loss) Gain on Commercial Mortgage-Backed Securities

 

 

(2,558

)

 

 

1,542

 

 

 

(1,270

)

 

 

2,579

 

Comprehensive Net Income

 

$

18,233

 

 

$

18,984

 

 

$

68,324

 

 

$

53,386

 

 

(1)

Share and per share data reflect the impact of the common stock and Class A common stock dividend which was paid upon completion of the Company’s initial public offering on July 25, 2017 to holders of record as of July 3, 2017. See Note 12 to the Consolidated Financial Statements for details.

 

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

 

 

 

 

 

 

Accumulated

Other

 

 

 

 

 

 

 

Shares

 

 

Par

Value

 

 

Shares

 

 

Par

Value

 

 

 

 

Shares

 

 

Par

Value

 

 

Paid-

in-Capital

 

 

Accumulated

Deficit

 

 

Comprehensive

(Loss) 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

50,807

 

 

 

 

 

 

50,807

 

Other Comprehensive Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,579

 

 

 

2,579

 

Dividends on Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(11

)

 

 

 

 

 

(11

)

Dividends on Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(47,292

)

 

 

 

 

 

(47,292

)

Dividends on Class A Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,224

)

 

 

 

 

 

(1,224

)

Balance at September 30, 2016

 

 

125

 

 

$

-

 

 

 

32,297,120

 

 

$

33

 

 

 

 

 

857,559

 

 

$

1

 

 

$

829,473

 

 

$

(10,877

)

 

$

2,579

 

 

$

821,209

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

12,642,166

 

 

 

12

 

 

 

 

 

 

 

 

 

 

 

257,622

 

 

 

 

 

 

 

 

 

257,634

 

Common Stock and Class A Common Stock Dividend

 

 

 

 

 

 

 

 

9,224,268

 

 

 

9

 

 

 

 

 

230,815

 

 

 

 

 

 

(9

)

 

 

 

 

 

 

 

 

 

Retired Common Stock

 

 

 

 

 

 

 

 

(334,745

)

 

 

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

 

(6,551

)

 

 

 

 

 

(6,558

)

Initial Public Offering Transaction Costs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,713

)

 

 

 

 

 

 

 

 

(20,713

)

Net Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69,594

 

 

 

 

 

 

69,594

 

Other Comprehensive (Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,270

)

 

 

(1,270

)

Dividends on Preferred Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12

)

 

 

 

 

 

(12

)

Dividends on Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(60,566

)

 

 

 

 

 

(60,566

)

Dividends on Class A Common Stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,365

)

 

 

 

 

 

(1,365

)

Balance at September 30, 2017

 

 

125

 

 

$

 

 

 

59,791,742

 

 

$

60

 

 

 

 

 

1,213,026

 

 

$

1

 

 

$

1,216,725

 

 

$

(8,968

)

 

$

(20

)

 

$

1,207,798

 

 

See accompanying notes to the Consolidated Financial Statements

 

 

3


 

TPG RE Finance Trust, Inc.

Consolidated Statements of Cash Flows (Unaudited)

(In thousands)

 

 

 

Nine Months Ended

September 30,

 

 

 

2017

 

 

2016

 

Cash Flows from Operating Activities:

 

 

 

 

 

 

 

 

Net Income

 

$

69,594

 

 

$

50,807

 

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

 

 

(15,867

)

 

 

(5,327

)

Amortization of Deferred Financing Costs

 

 

9,160

 

 

 

6,843

 

Capitalized Accrued Interest

 

 

1,865

 

 

 

13,098

 

Gain on Sales of Loans Held for Investment and Commercial Mortgage-Backed Securities, net

 

 

(185

)

 

 

 

Cash Flows Due to Changes in Operating Assets and Liabilities:

 

 

 

 

 

 

 

 

Accounts Receivable

 

 

503

 

 

 

2,699

 

Accrued Interest Receivable

 

 

(776

)

 

 

(3,792

)

Accrued Expenses

 

 

(2,454

)

 

 

787

 

Accrued Interest Payable

 

 

826

 

 

 

1,062

 

Payable to Affiliates

 

 

5,193

 

 

 

1,650

 

Deferred Fee Income / Gain

 

 

75

 

 

 

 

Other Assets

 

 

(694

)

 

 

 

Net Cash Provided by (Used in) Operating Activities

 

 

67,240

 

 

 

67,827

 

Cash Flows from Investing Activities:

 

 

 

 

 

 

 

 

Restricted Cash

 

 

350

 

 

 

(644

)

Origination of Loans Held for Investment

 

 

(1,149,911

)

 

 

(333,885

)

Purchase of Loans Held for Investment

 

 

 

 

 

(339,118

)

Advances on Loans Held for Investment

 

 

(226,187

)

 

 

(234,397

)

Principal Advances Held by Servicer/Trustee

 

 

496

 

 

 

3,021

 

Principal Repayments of Loans Held for Investment

 

 

975,258

 

 

 

362,314

 

Proceeds from Sales of Loans Held for Investment

 

 

65,054

 

 

 

 

Purchase of Commercial Mortgage-Backed Securities

 

 

(96,294

)

 

 

(49,549

)

Principal Repayments of Mortgage-Backed Securities

 

 

29,802

 

 

 

1,166

 

Purchases of Fixed Assets

 

 

(108

)

 

 

 

Net Cash Provided by (Used in) Investing Activities

 

 

(401,540

)

 

 

(591,092

)

Cash Flows from Financing Activities:

 

 

 

 

 

 

 

 

Payments on Collateralized Loan Obligation

 

 

(559,574

)

 

 

(269,561

)

Proceeds from Collateralized Loan Obligation

 

 

16,254

 

 

 

68,827

 

Payments on Secured Financing Agreements

 

 

(621,552

)

 

 

(282,044

)

Proceeds from Secured Financing Agreements

 

 

1,293,530

 

 

 

907,573

 

Payment of Deferred Financing Costs

 

 

(6,207

)

 

 

(5,776

)

Capital Calls Received in Advance

 

 

 

 

 

34,732

 

Proceeds from Issuance of Common Stock

 

 

243,654

 

 

 

98,168

 

Payment to Retire Common Stock

 

 

(6,000

)

 

 

 

Proceeds from Issuance of Class A Common Stock

 

 

365

 

 

 

1,832

 

Payment of Initial Public Offering Transaction Costs

 

 

(4,341

)

 

 

 

Dividends Paid on Common Stock

 

 

(58,743

)

 

 

(54,680

)

Dividends Paid on Class A Common Stock

 

 

(1,403

)

 

 

(1,463

)

Dividends Paid on Preferred Stock

 

 

(8

)

 

 

(7

)

Net Cash Provided by (Used in) Financing Activities

 

 

295,975

 

 

 

497,601

 

Net Change in Cash and Cash Equivalents

 

 

(38,325

)

 

 

(25,664

)

Cash and Cash Equivalents at Beginning of Period

 

 

103,126

 

 

 

104,936

 

Cash and Cash Equivalents at End of Period

 

$

64,801

 

 

$

79,272

 

Supplemental Disclosure of Cash Flow Information:

 

 

 

 

 

 

 

 

Interest Paid

 

$

46,600

 

 

$

36,391

 

Taxes Paid

 

 

141

 

 

 

326

 

Supplemental Disclosure of Non-Cash Investing and Financing Activities:

 

 

 

 

 

 

 

 

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

 

$

51,076

 

 

$

131,118

 

Dividends Declared, not paid

 

 

20,135

 

 

 

16,978

 

Accrued Initial Public Offering Transaction Costs

 

 

2,391

 

 

 

 

Accrued Deferred Financing Costs

 

 

2,290

 

 

 

2,748

 

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

 

 

1,270

 

 

 

2,579

 

Accrued Common Stock Retirement Costs

 

 

559

 

 

 

 

 

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 (“CMBS”). As of September 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, a consolidated variable interest entity for which the Company was the primary beneficiary through August 23, 2017, and its wholly-owned subsidiaries (see Note 5 for details). 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.

5


 

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 lives of the loans using the interest method, or on a straight line basis when it 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, when the extension fee can be waived by the Company or a co-lender in connection with their refinancing of the loan. 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 a default; (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 basis when it 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 any 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.

6


 

The Company’s loans are typically collateralized by real estate or a partnership, or similar, equity interest in an entity that owns real estat