TPG RE Finance Trust's Performance Overview
TPG RE Finance Trust (NYSE:TRTX) has experienced a notable 26% rally over the past year, bringing its shares to $8.50. This performance should be viewed in the context of a book value of $11.40 per share as of the end of its fiscal 2024 second quarter. The mortgage REIT primarily invests in debt collateralized by U.S. real estate, with a significant focus on multifamily properties. The company's total loan commitments were $3.3 billion at the end of the quarter, with 52.5% allocated to multifamily properties and 18.4% to office properties, which is its second-largest position.
Strategic Transition in Loan Portfolio
The rally in TRTX's shares has been largely driven by a strategic reduction in its office loan allocations. During the second quarter, TRTX originated $116.3 million in new multifamily loans while allowing full repayments of $373.8 million. Approximately a quarter of these repayments were from office loans, leading to an increase in cash reserves and a significant reduction in leverage ratios. The REIT's debt-to-equity ratio decreased to 2.02x from 2.6x three quarters ago, enhancing the safety of its common stock and making a strong case for investing in its 6.25% Series C Preferreds (NYSE:TRTX.PR.C).
Understanding Preferred Shares and Their Benefits
Preferred shares, such as TRTX's Series C, have a unique advantage: they are cumulative. This means that if dividends are not paid, they accumulate as a liability to be paid in the future. The creditworthiness of TRTX has improved due to increased liquidity and reduced leverage. With $244.2 million in cash ready for investment, TRTX is poised for future growth, especially if interest rate cuts occur. Market predictions suggest the next Federal Open Market Committee (FOMC) meeting may introduce the first rate cut since the hikes began in 2022.
Impact of Interest Rate Cuts on TRTX
A rate cut would have a multi-layered impact on TRTX. While it could slightly decrease net interest income—losing $0.01 per share for every 50 basis point decrease in Term SOFR—the REIT's strategy remains robust. 99.7% of its loans are floating rate with a weighted average yield of 9.3%. Despite potential income dips, TRTX reported a substantial improvement in earnings with a second-quarter GAAP net income of $21 million, or $0.26 per share, compared to a net loss of $72.7 million a year ago. This improvement was due to a previous CECL expense impact of $81.3 million.
Future Outlook and Dividend Safety
TRTX's strategy over the past few years has focused on reducing exposure to office loans, reflecting a broader market shift as remote work becomes more common. The REIT's office loan exposure has decreased significantly from $2.27 billion in fiscal 2021 to $614.5 million recently, with the potential to fall to single digits in fiscal 2025 if the trend continues. While the loan portfolio has been shrinking, continued rate cuts could pressure the common share dividend, despite strong liquidity.
Investment Perspective: Preferreds vs. Commons
TRTX's conservative approach has been successful, but there may be a need to adopt a more aggressive strategy soon. Preferred shares are particularly attractive at this time; they have risen by $1 since last coverage and offer an 8.7% yield on cost. Trading at $17.95 per share, they are at a 28% discount to their liquidation value, making them a compelling investment in anticipation of rate cuts.
