TPG RE Finance Trust: Can this mREIT maintain its high yield? (NYSE: TRTX)

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About TPG RE Finance Trust Inc.

TPG RE Finance Trust Inc. (NYSE: TRTX) is a commercial real estate finance company. It originates, acquires and manages commercial mortgages and other commercial real estate-related debt securities. The company focuses mainly on floating rate first mortgage loans secured by high quality commercial real estate. The company:

…invests in commercial mortgages; subordinated mortgage interest, mezzanine loans, secured real estate securities, note financing, preferred stock and various debt instruments; and loan obligations secured by commercial real estate and commercial mortgage-backed securities secured by properties primarily in the office, multi-family, life sciences, mixed-use, hospitality, industrial real estate sectors and commercial.

Capital structure

TPG RE Finance Trust is a small-cap REIT with a market capitalization of $721 million, which derives its income from mortgage interest. However, the net worth (book value of equity investments) of this REIT is $1.5 billion, more than double its market value. This means the stock is trading at a price-to-book (P/B) ratio of less than 0.5.

TPG RE Finance Trust has total debt of approximately $4 billion, so it has a debt-to-equity (D/E) ratio of 2.7. The company has the ability to increase its debt and therefore improve its loan portfolio by another 20%. TRTX also has a relatively low cost of debt with a weighted average interest rate floor of 1.05%. The company has a diversified capital base and only 27.5% of its funds are financed at market value.

Dividend and price performance

This New York-based financial trust was incorporated in 2014 and has been paying regular quarterly dividends since 2017. The dividend yield is quite high. Its current yield is close to 10% and the REIT has generated a four-year average return of close to 12% over the past four years. However, the return is high only because the price has fallen. Otherwise, the present dollar value of the quarterly dividend is only 55% of the pre-pandemic value of quarterly dividends.

It may seem that the company is not doing well, and that is why its dividend and price have fallen so low. However, being a mortgage finance REIT, the return will always be determined by the level of interest it pays on its debt and the coupon it earns on its mortgage portfolio. It earns a weighted average coupon of almost 4.6%, while the weighted average credit spread is 3.44%. Since the market value of debt is nearly 5.6 times that of the market value of equity, this credit spread becomes large enough for this REIT to consistently deliver a high return to its shareholders.

TPG RE Finance Trust’s stock traded around $20 from its July 2017 listing until the pandemic hit the US stock market in March 2020. In late March 2020, the stock bottomed out at $2.5 and then slowly recovered to reach a price of $13.5 by November 2021. However, over the past 6 months the stock has trended lower again and is trading currently around $9. This is a drop of almost 33% from the peak in November 2021.

loan portfolio

One good thing about TPG RE Finance Trust is that geographically its loan portfolio is well diversified across all major markets located in different parts of the United States. The top 25 markets account for almost 80% of total loan commitments. The company also has “long-standing relationships with regular borrowers, developers, investors, national brokerage firms and financial institutions.”

TPG RE Finance Trust is also reducing its exposure to the office segment in all aspects, from originations, redemptions to proactive portfolio management. The company’s asset allocation in the office segment fell below 40% of its entire portfolio, from 52.3% a year earlier. The company also focused more on multi-family residential communities. The share of multi-family communities rose to 31% from 17% a year earlier.

Types of TRTX Loans

Types of TRTX Loans (Company Website)

The company has another exposure of 12% in hotels and 9% in the life sciences sector. TPG RE Finance Trust has a loan portfolio of $5.6 billion, primarily bridging loans and soft bridge loans. Of this $5.6 billion, $5.1 billion is the outstanding principal balance (UPB), thus having a very low proportion of unpaid interest, which means a better collection rate.

The entire loan portfolio is made up of variable rate loans, which has the advantage of not being affected by the series of interest rate increases. However, as the interest rate rises, this could likely affect the demand for new mortgages and restructured loans. Fortunately, over 38% of the total loan portfolio was created post-COVID-19, and the entire loan portfolio has a weighted average maturity somewhere in 2031.

TRTX loan portfolio

TRTX loan portfolio (Company Website)

Investment thesis

TPG RE Finance Trust Inc. can be considered as an investment option solely on the basis of a consistently high dividend yield. Hopefully the company will be able to sustain this high yield as it has a good credit spread, high D/E ratio and the entire loan portfolio is at variable interest rate. However, there is an extremely high risk of price loss. As a result, existing shareholders must cover their investments.

TPG RE Finance Trust four and seven month forward put options are available for an exercise date of October 21, 2022 and January 20, 2023, respectively. The lowest available strike price is $7.5, which is 16-18% lower than the current price. The $7.5 put option on these two dates is available at a very low premium ranging from $0.05 to $0.65. Existing investors may want to buy these put options at the lowest possible premium, say less than $0.25, to protect their investments and enjoy a double-digit return.

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