Edited Transcript of TRTX.N earnings conference call or presentation 30-Jul-20 12:30pm GMT

Second, we are focused on liquidity. A key driver of liquidity is the timing of loan repayments. During the first half of the year, repayments were $321 million. Repayments in the last 2 years, prior to March, generally occurred significantly earlier than we had anticipated or wanted, driven in large part by the then continued spread tightening and borrowers’ ability to increase proceeds in a refinance. This phenomenon has stopped. Borrowers are not rushing to repay despite low LIBOR and treasury rates as they expect NOI will improve as COVID gets under control and the economy rebounds. Despite this, we are aware of several potential repayments in cases where borrowers are in the process of refinancing our loan or selling the underlying properties.

Our primary use of cash is to fund future draws for CapEx, tenant improvement and leasing commissions, and interest reserves on our existing book. We have only $15 million of construction loans future fundings under our 1 construction loan. And the remainder of our deferred fundings totaled $420 million through December 2021. As a reminder, we received financing from our lenders to finance up to approximately 65{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of these future funding draws.

During the quarter, we decided to pay down our whole loan credit facilities by approximately $158 million or 8{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}. This reduced our advance rate on loans pledged to our bank lenders from 76{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} to 68{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}. Our objective was to reduce risk in the portfolio, given the uncertainty of the timing of an economic recovery. Also, we continue to evaluate par sales of individual loans or interest in loans, where we believe it makes sense.

Third, we are zeroed in on asset management. Our senior and junior origination teams have joined with our asset managers to form a single team to manage our assets. Asset highlights include: 63 of our 65 loans are current on interest payments. This represents 97{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of interest payments. We are in the process of completing a loan modification that will bring this number of current loans to 64{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} in the — the number of current loans to 64 in the near term.

The 1 loan that will remain as not current is a loan on a portfolio of limited service hotels, and although the operations are certainly feeling the impact of COVID and shutdowns, it is in large part because of a dispute between the 2 owners that they have not come to the table with additional equity to effectuate a modification. The properties themselves are Marriott and Hilton branded limited service hotels and 6 of the 7 have been piped in the last year. Current occupancy is in the 40{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} range, which is approximately breakeven NOI. The properties are in drive to locations and are not dependent on corporate group convention business. This acquisition loan was originated in 2019 with significant new equity invested.

In the second quarter, we modified 6 loans with a $458 million unpaid principal balance. These modifications resulted in an accrual of $551,000 of interest in the second quarter. Other than the 1 hotel loan I referenced previously, our hotel sponsors have contributed substantial equity to support their properties. Most of the properties can support their operating costs from property cash flow.

Office property rental [collections] are averaging about 90{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} in our diversified office portfolio. Multifamily rent collections by our borrowers have also been strong and average over 90{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}. 86{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of the property securing our multifamily properties generally are in non-urban locations and/or are low-rise properties. Collections are strong, but we’ve seen a distinction between borrowers who have embraced virtual tours and other non-contact leasing strategies and those who have not.

We executed a nonbinding term sheet to provide acquisition financing for an office building in Brooklyn. This financing will repay an existing TRT loan, which was the subject of the deed in lieu request we disclosed last quarter. The acquirer of this asset and prospective borrower under a new loan is an existing borrower of TRT, with whom we have a long successful track record. This is a very experienced office property owner/operator in New York City as well as other markets. The new loan requires significant equity contributions from the borrower, including cash at closing and future guaranteed cash contributions.

Our core earnings for the quarter is $17.5 million or $0.23 a share, which reflects an $0.18 per share or $13.8 million loss on the sale of our $99.3 million loan on a Class A multifamily property in downtown Houston. The primary purpose of this 50{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} loan-to-cost loan was to provide lease-up financing and additional improvements. Since origination, the property stabilized to a 94{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} occupancy. However, due to significant rate concessions in the market, retail space vacancy and this property’s higher than underwritten OpEx relative to newly constructed properties, and in our view, the low prospects for meaningful NOI growth, we decided to sell the loan. While COVID and the resulting economic impacts, including lower oil prices have not helped the property, our decision to sell the loan was not motivated by COVID. This loan has been the subject of continued focus, and we were able to negotiate a price which we felt maximized value to us.

Bolstering earnings is our 167 basis point LIBOR floor on loans, which is 150 basis points in the money. Our asset WACC is 5.06{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} versus our liabilities WACC of approximately 1.86{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}.

To conclude, we are committed to maximizing the performance of our loan book and continue to focus on maintaining and increasing liquidity in these uncertain times. I will now turn the call over to Bob.

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Robert R. Foley, TPG RE Finance Trust, Inc. – Chief Financial & Risk Officer [4]

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Thanks, Greta, and good morning, everyone. A quick review of our operating results. For the second quarter, we generated GAAP net income of $42.9 million or $0.52 per diluted common share. Net income available to TRTX common shareholders was $40.1 million, also $0.52 per common share, and core earnings was $17.5 million or $0.23 per diluted common share.

Our net interest margin was $44.2 million, up 2.1{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} from the prior quarter. We had no loans on non-accrual at June 30. We paid on July 14, the $0.43 per share dividend relating to the first quarter of this year, and we paid last week on July 24, the $0.20 per share dividend declared on June 16. Book value at quarter end was $16.55 per share, an increase of $0.49 per share due primarily to the issuance of warrants in connection with the Series B preferred stock we issued on May 28 to a fund managed by Starwood Capital Group and GAAP earnings in excess of our $0.20 per share common dividend.

Our second quarter results had several drivers. First, net interest margin. NIM grew quarter-over-quarter by 2.1{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}, due largely to the positive benefit of our in the money LIBOR floors on 100{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of our loans, combined with non 0 LIBOR floors on only 5{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of our liabilities. And that combination remains an important driver of our net interest margin. All of our assets and liabilities are at floating rate. At quarter end, our weighted average LIBOR floor was 1.67{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}. In comparison, LIBOR at quarter end was 16 basis points.

We continue to explore strategies to cost effectively preserve this positive margin against fluctuations in rates. Expenses were up 26{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} quarter-over-quarter, due primarily to nonrecurring COVID related expenses of approximately $2.9 million. We continue to manage tightly our controllable expenses, but we recognize the need for professional services to help us manage the business. The base management fee was virtually unchanged from the first quarter. We paid no incentive management fee in the second quarter, nor did we in the first, and we will not until we earn back over time the loss sustained in the first quarter.

Loan loss expense was actually a benefit or income during the second quarter of $10.5 million because the decline in our CECL reserve of $24.3 million net outstripped the loss on sale of $13.8 million incurred from the sale of that first mortgage loan that Greta described. In summary, the loan’s realized loss was materially less than its CECL related loss reserve that we booked at March 31.

We held higher than normal cash balances during the quarter for defensive purposes, ending the quarter with roughly $300 million of available liquidity, including $173 million of cash on hand, net of cash we are required to hold for covenant compliance. $46.2 million of immediately available funds under our credit facilities and $81.3 million available for reinvestment from our second CLO FL 2.

It was a very busy quarter for us on the capital markets front, where we raised $225 million of preferred stock, deleveraged aggregate borrowings under our existing secured credit facilities by $157.7 million or roughly 7.7{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of the outstandings. We extended maturities on 3 existing credit facilities, while simultaneously rightsizing the commitment amounts of 2 of those 3 facilities. We moved certain existing loans to our CLOs and borrowed and repaid regularly with our repo lenders in the normal course of business.

We issued $225 million of Series B, 11{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} cumulative preferred stock, and we hold an option to issue up to $100 million more before year-end in 2 tranches of $50 million each. This capital buttresses our capital base during these uncertain times, was sized to address our expected capital needs, and aligns us with the Starwood Capital Group, one of the strongest investors in the commercial real estate space.

The voluntary deleveraging payments we made in late May, which totaled $157 million, reduced our average advance rate on repo borrowings to 68{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} from 76{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}, which implies a lender look through LTV of a very modest 44{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}. In exchange for these payments, we will have a holiday from margin calls for certain defined periods. And our work continues to increase from 51{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} share of total borrowings that are non mark-to-market, nonrecourse and equal or longer-dated than our loan investments.

We exercised existing extension options on our credit facilities with Morgan Stanley, Goldman Sachs and Bank of America to add at least 12 months of term to each arrangement, additional extensions are available to us. With Goldman and Bank of America, we reduced the financing commitments to avoid unnecessary fees, but we did retain options to increase each facility to $500 million at a future date. The weighted average final maturity of our secured credit facilities is now 2.3 years, and these facilities represent 49{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of our current borrowings. Nonrecourse non mark-to-market borrowings represent 51{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of our borrowings. Our 2 CLOs represent almost 48{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of current borrowings have final rated maturities of 2034 and 2037, but their true maturity dates are tied to the repayment behavior of the underlying loans. Across both CLOS, the weighted average extended maturity of the loan so financed is about 4.3 years.

During the quarter, we borrowed a total of $23.5 million from 4 of our repo lenders in connection with the funding of $62.5 million of pre-existing loan commitments to our borrowers. During the quarter, we recycled $64.6 million of CLO reinvestment capacity, generating $22.6 million of cash for TRTX, net of debt repayment on the loans contributed. That capacity was created by a partial principal payment of $15 million on one of our hotel loans and the removal and refinancing outside of our CLOs of an existing loan. This recycling will remain available to us until the CLO reinvestment periods expire in the fourth quarter of 2020 for FL 2 and the fourth quarter of 2021 for FL 3, all subject to loan repayments that create the capacity I just mentioned.

And finally, with respect to leverage at quarter end, our debt-to-equity ratio was 2.8:1, which is consistent with our long-term historical trends and comfortably below our financial covenants.

Regarding CECL, at June 30, our CECL reserve was $58.7 million or $0.76 per share, a net reduction of $24.3 million over the prior quarter. The principal cause of the decline was the sale in early June of a $99.3 million first mortgage loan that created a realized loss of $13.8 million. The removal of that loan from our portfolio and its related CECL estimates of loan loss reserves resulted in a reduction in the CECL reserve of $24.8 million. The net impact of these offsetting factors, plus a net increase in the general CECL reserve of $0.5 million was to increase our net income by $10.5 million. Expressed in basis points against the total commitment amount of our portfolio, the CECL reserve was 104 basis points as compared to 144 basis points at March 31. On a same-store basis, our CECL reserve is slightly higher, in the 101 basis points at March 31, which reflects our continuing caution regarding the COVID impacted economy and its impact on commercial real estate performance and values.

We independently assessed 1 of our 65 loans, which is a hotel loan that Greta described earlier because it met the GAAP guidance for doing so. This collateral dependent loan’s contribution to the CECL reserve was less than $2 million and was estimated using discounted cash flow analysis. The macroeconomic assumptions embedded in our CECL analysis remain very conservative. We’re 3 months deeper into this COVID crisis, but our analysis assumes we’re no closer to a recovery. We do expect quarter-over-quarter changes in the reserve may continue to change materially in responses to COVID macroeconomic assumptions, observed transactions in the investment sales and loan sales markets and the actual operating performance of our loan collateral.

Our weighted average risk rating, measured on the amortized cost, declined quarter-over-quarter to 3.1 from 3.2, reflecting the sale of one 5 rated loan, the classification to 5 from 4 of the hotel portfolio loan, Greta described. And the upgrade to 2 from 3 of a multifamily loan based on performance that exceeds underwriting. We modified 6 loans during the second quarter to allow, among other things, borrowers to accrue 50{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of interest due for up to 6 months.

At June 30, we accrued approximately $551,000 of payment in kind or PIK interest. Interest collections during the quarter were strong, and we had no nonaccrual loans at quarter end. Future performance will depend on many factors, especially the pace and the strength of the reopening of our national economy.

And with that, we’ll turn the floor — excuse me, we’ll open the floor to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Stephen Laws from Raymond James.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division – Research Analyst [2]

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First, Greta, if you could talk maybe a little bit about the 6 loan modifications, how that — those discussions go, what the give and takes are? I would assume the existing LIBOR floors will remain in those loans as is through the new duration. But could you maybe provide a little bit of color around that and how many more modifications from here? I know you mentioned one in process. But additional color on those conversations would be great.

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [3]

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Sure. Of the loans that we modified in the second quarter, which — we mentioned there were 6 of them, 4 involved some element of deferral of interest. And in no case, was the deferral of interest greater than 50{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of the monthly debt service due. And in no case, was the period that we allowed any deferral of interest greater than 6 months. And in many cases, it was significantly less. These were all hotel loans. And 2 of the 6 have no deferral of interest. And they each required the sponsor making significant equity contributions to the property, either upfront or on an ongoing basis to cover all the other cost and expenses associated with the hotel. Plus, of course, the 50{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} — up to 50{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of deferral of interest. In the — in one case, the borrower contributed equity, representing 13{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of the loan amount. Of which 2/3 of that went to pay down the loan, and the rest of that went to fund an interest reserve. And in the — and in other case — and in many cases, the flags of these hotels have allowed the borrowers to access FF&E reserves to cover operating costs and debt service. And we allowed that as well pursuant to these modifications.

We are working on, as we mentioned, one modification, and we have completed a couple of modifications post the end of the second quarter, and these are generally for hotel properties, which are having the most stress.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division – Research Analyst [4]

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Great. And I guess switching property just from those hotel loan, you mentioned all hotel loans, to office, your largest property type exposure. Can you give us any color just on discussions with borrowers? However you would like to dissect it, whether it’s gateway city versus non gateway or maybe central business district versus more outside the downtown area of business office complexes. Can you talk maybe a little bit about what those borrowers are seeing, how those discussions are going and differences in demand and maybe how you expect performance to be inside that property type?

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [5]

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Sure. Well, the — I guess the cities, people are most concerned about, the urban cores. And in New York City, we have 2 main office properties and — well, really 3. One is classified as mixed-use because there is a component of retail. But the primary use of that property is office. And of these 3 — for the purpose of this call, I’ll refer to them as office. Of these 3 office properties, one is 100{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} leased to a very strong tenant for 15 years. The other is 100{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} leased and 50{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} of the tenancy — or 47 to be precise, is leased to one of the most successful online streaming movie companies for a long period of time, and it’s doing quite well that tenant. And then we have 1 that is a mixed use property. So, we have really 1 mixed-use property in Manhattan that has more of a diverse tenancy. It happens to be institutionally owned by one of the top 3 largest insurance companies and a very, very strong office focused private equity operator of the property.

So that’s really our New York exposure. We don’t really have downtown exposure in some of the other major cities that people are focused on, like San Francisco, Los Angeles, Chicago. Our properties are pretty diverse. We have some properties in sort of Silicon Valley, outside San Francisco that is 1 loan that is life science. We have 1 outside San Diego that’s life science. But I would say that it’s pretty diverse markets and not a tremendous amount of the cities that people are concerned about, locations in at least in the urban core. I don’t know if that helps you.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division – Research Analyst [6]

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That’s helpful. A lot of discussions seem to be taking place on the office category and location clearly being at the center of that discussion.

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [7]

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But also, I’m sorry to interject, but I think you asked how the discussions are going with these borrowers. And really, the — the borrower — the — as I mentioned, the office rent collections are in the 90{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} range, and our office borrowers have not really — there’s — they haven’t come to us like our hotel borrowers have, asking for some type of interest deferral or other types of modifications.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division – Research Analyst [8]

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Bob, at the risk of asking a question that may need a call by itself, CECL and the assumptions behind that. Clearly, the reserve in March was a bigger number for the loan that was sold than what was realized on sale. Can you talk about those assumptions? Is it simply conservatism? Did something change from March to May — or March to the sale that makes a unique situation? Or is there likely conservatism across all the assumptions in CECL. So maybe — I know that’s a very general, broad question, but any color there would be great.

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Robert R. Foley, TPG RE Finance Trust, Inc. – Chief Financial & Risk Officer [9]

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Sure. Good morning, Steve and let’s — if we can break that down into 2 topics and take the second one first. I would say that the results of the sale of the loan, when compared to the CECL reserve, in our view, largely reflect the team’s ability to identify a buyer for that note that had a materially rosier view of Houston and of CBD Houston multifamily than we did. So in that regard, we found the outlier and executed with it.

With respect to our views on the conservatism of our economic assumptions and everything else, all the other judgmental factors that are involved in the CECL reserve, we came out of the box in March on a conservative bent. You had prepared a schedule in your research that lined up reserves measured in basis points across the space. And ours were near the high end of the range, frankly. At this quarter end, net of the loan that was sold, it appears that our reserves are more in line relationship wise with our competitors. But we were conservative out of the box from higher levels to 4 all but 1 of the hotel loans in our portfolio at March end, and risk ratings are an important driver of loss reserve estimates.

So I think that quarter-over-quarter, we remain very conservative on our macroeconomic assumptions. But I think the market should evaluate our seasonal reserve in the context of us having adopted a very conservative stance beginning in March.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division – Research Analyst [10]

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That’s helpful because — you’re correct, the reserve levels certainly are pretty wide range across the sector. Last question, I think, a quick one. The loan that went from a 4 to a 5 nonaccrual, how much interest income did that contribute in Q2 that we — I assume, going forward, will go to pay down the carrying value of the loan?

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Robert R. Foley, TPG RE Finance Trust, Inc. – Chief Financial & Risk Officer [11]

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Yes. And generally speaking, we use the cost recovery method. The GAAP permits different approaches. And we can come back to you on the precise amount. It’s not material in comparison to the company’s NIM as a whole.

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Operator [12]

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And our next question is from Steve Delaney from JMP Securities.

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Steven Cole Delaney, JMP Securities LLC, Research Division – MD, Director of Specialty Finance Research & Equity Research Analyst [13]

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If I could start, you mentioned that there was an impact on core EPS from the Houston loan sale. I apologize that I wasn’t writing fast enough to keep up with that.

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [14]

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Yes. The loss on that was — the realized loss was $13.8 million, which impacted core earnings by $0.18.

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Steven Cole Delaney, JMP Securities LLC, Research Division – MD, Director of Specialty Finance Research & Equity Research Analyst [15]

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$0.18. Okay. And I think this is correct, as far as the impact on core, we should always just focus on realized losses rather than anything that’s going on within CECL, whether that would be general or specific. Is that correct?

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [16]

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Yes.

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Robert R. Foley, TPG RE Finance Trust, Inc. – Chief Financial & Risk Officer [17]

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Yes.

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Steven Cole Delaney, JMP Securities LLC, Research Division – MD, Director of Specialty Finance Research & Equity Research Analyst [18]

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And you’ll highlight for us, I guess, each quarter, when you actually have a realized loss? Okay. Thanks for the clarity there. I guess on LIBOR floors, really helping out a lot for the group as we — you all worked so hard to work through these credit issues. But 167 basis points, $0.15, it sounded like a impact to quarterly earnings. You’re sitting down maybe beyond just the hotel, Greta, you were describing how you met with your hotel borrowers and worked through modifications. But just on a broader general sense, should we assume that part of the ask on behalf of a borrower, as you’re going through discussions for modifications, should we expect that you’ll be getting — you’ll be receiving requests to either lower or remove LIBOR floors? And as we go forward, you expect that weighted average floor to decline, say, over the next 6 to 12 months?

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [19]

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In none of our modifications, have we changed the interest rate or the floor on our loans. And if anything the spread goes up. If there’s — like some of the negotiations, maybe can you give us some relief on the extension tests that we have in 1.5 years. And if we may trade that off for more spread, certainly try to get as big a pay down. That’s the priority as we can, as much as we can is the priority. But in some cases, we might actually increase the spread.

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Steven Cole Delaney, JMP Securities LLC, Research Division – MD, Director of Specialty Finance Research & Equity Research Analyst [20]

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The loan sales, it sounded like the Houston situation was sort of a one-off in that you found a strategic — a local strategic buyer who had market intel. But just more broadly, is there — would you consider further loan sales, I guess, just to maybe take — lower your asset management burden? Do you expect the market will develop — a secondary market will develop there, given what we read about all these private equity funds raising distressed debt money?

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [21]

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Well, we would consider par sales. So, we would look at a — if someone approached us to buy a loan at par. Regarding our hotel loans, we don’t feel now is the time to be selling hotel exposure. We think most of the distress that’s going on with hotels is COVID and economic shutdown related. And our hotels’ occupancy really is varying across the board. We have 1 hotel that has not reopened that will open — supposed to be opening within the next 30 to 60 days. I haven’t seen the latest update. It may be sooner than that. But it was scheduled to open in July, and then I believe that got pushed back to August. And so it has 0{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} occupancy. On the other end of the spectrum, we have a hotel that has 77{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} occupancy; and then a lot in between. In general, for limited service hotels, breakeven occupancy is around 35{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} to cover operating costs. And if you have a union hotel in an urban market like New York City, which we don’t happen to have, but that would be at the higher extreme, maybe 50{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}-55{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49}, occupancy. But we don’t believe now is the time to be selling these hotel loans because the people are using a discount rate today and looking at an IRR that reflects the uncertainty regarding the timing of the recovery. So, once that uncertainty diminishes through medical achievements for a vaccine or therapeutic —

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Steven Cole Delaney, JMP Securities LLC, Research Division – MD, Director of Specialty Finance Research & Equity Research Analyst [22]

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Sure, a vaccine, yes.

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [23]

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— then we believe the discount rate that investors would require drops materially, and you’ll realize a better result from a sale.

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Operator [24]

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Our next question is from Rick Shane from JPMorgan.

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Richard Barry Shane, JPMorgan Chase & Co, Research Division – Senior Equity Analyst [25]

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Interesting comments related to the incentive fee. And I appreciate that you guys have high watermarks and that, that’s fair for investors. I am curious how you guys think about that, given the difficulty, given just sort of the nature of the economic model of regaining that high watermark in the incent and the ability to capture the incentive fee going forward. How do we think about that? And I hate to reuse the word incentive, but from an incentive perspective, I do think it’s a good sign and welcome that TPG has — is reiterating their commitment to the vehicle. But I do wonder the challenges with incentive fees being reduced probably for a very long time.

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Robert R. Foley, TPG RE Finance Trust, Inc. – Chief Financial & Risk Officer [26]

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Well, Rick, it’s a good question. From an analytical standpoint, the provisions of our management agreement, which, as you know, are very, very similar to those of everyone else in the publicly traded space. For us, to be in the money on the incentive fee, or the manager to be in the money on the incentive fee and for the REIT to be obligated to pay it, several tests need to be met. One of them is that cumulative core earnings needs to be positive as measured over the preceding 12 quarters. So the simple math there would be to take a look at what our cumulative core earnings were assuming that last quarter, the first quarter was [T equals 0]. And then divide that by what you think our run rate core earnings are going forward. And it’s not immediate, but it’s close enough that I think that TPG and the employees of the manager can see it. And they know that it’s there, and they know that by doing the work that Greta articulated earlier with some cooperation from the macro economy that we can get there. But in the interim, our duty is to our shareholders and to maximize the value of the company. And that’s largely about ensuring that the credit outcomes on our portfolio are as positive as they can be. And that we continue to maintain a strong liability and liquidity profile.

Greta, anything that you’d want to amplify?

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [27]

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I think you covered it very well, thank you.

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Richard Barry Shane, JPMorgan Chase & Co, Research Division – Senior Equity Analyst [28]

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Yes. Look, and I appreciate that. Obviously, we’ve all known each other for a long time, and I am highly, highly aware of your individual personal commitments and integrity (inaudible) around that. It’s an interesting question in terms of motivating sort of the next level of managers and employees. And certainly, an important consideration. And it sounds like TPG is being supportive, which is good.

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Robert R. Foley, TPG RE Finance Trust, Inc. – Chief Financial & Risk Officer [29]

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Yes, the last point, Rick, I’m sorry to interject, but I think it warrants emphasis. TRTX is strategically, it remains a very important part of the larger TPG investment platform. We are not the only permanent capital vehicle that the firm has sponsored, TSLX, the business lender, the BDC type lender is a very important and a very successful platform as well. But this is an area of true commitment and emphasis by TPG as a global firm. Of that, all of us can assure you and everybody else on the call.

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Richard Barry Shane, JPMorgan Chase & Co, Research Division – Senior Equity Analyst [30]

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And the other thing I just wanted to circle back on is, last quarter, you guys had discussed a property, where the sponsor had presented to you the notion of a [delo]. And that loan is still on the books exactly the way it was carried last quarter. I’m assuming that those conversations have taken a different course. But I am curious, as you’re in conversations with your sponsors, if you’re finding any other sort of surprising scenarios. That was a loan that, at least on paper, looked like a really good situation, on a relative basis. And I’m just curious if you’re finding strange incentives or motivations that are driving unexpected conversations.

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [31]

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I — we’re not seeing that in the portfolio. That was — you’re correct that this one was not something we anticipated. And I think it was related to perhaps divergent views among the ownership. But yes, this asset is the one I mentioned in my comments that is being acquired by a borrower that we’ve had experience with and that is quite capable in operating office properties and turning situations around. We — the only other property, I think, that would come to mind would be the one that is we rated #5. That is the only hotel property that the borrowers have not come to us with a meaningful proposal for a modification. And it really surprises us because we think that these being limited service and drive to locations that it would be in their economic best interest to enter into a modification on this property as opposed to letting it go past due for 3 months. So that would be the only other one that I would call a surprise. The rest of the portfolio, so far, no unexpected news.

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Richard Barry Shane, JPMorgan Chase & Co, Research Division – Senior Equity Analyst [32]

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Great. Yes, that definitely sounds like the sort of prototypical idiosyncratic situation. So that’s a good example.

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Operator [33]

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(Operator Instructions) And our next question is from George Bahamondes from Deutsche Bank.

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George Bahamondes, Deutsche Bank AG, Research Division – Senior Research Analyst [34]

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Just a question, I wanted to follow-up on Stephen’s earlier question regarding loan modifications. As we think about the world beyond the next 6 months or the agreed-upon period between TRTX and the borrowers that you’ve been having discussions with more recently. Should there be a need for an extension of the modification beyond the agreed upon period? Could we see further loan modifications at that point, or is it likely that those loans would be put into some sort of default process? Just kind of curious to what your thoughts are kind of beyond the agreed-upon period? Ideally, the loans are in better shape then. But just wondering what that might look like.

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [35]

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Well, that is the key question, and that is why we highlight how uncertain these times are. And due to the fact that we just don’t know the pace of the recovery, and when travel will improve to help these properties. However, the modifications that we’ve entered into have required very, very significant equity contributions from the borrower. So, I think since they are still contributing their own cash to these properties each month to keep them open, to pay debt service, and cover operating costs, and any other property-related expense, we would like to think that they will continue to support the property. That’s usually a good indicator of future behavior is how they’re treating the property presently in terms of cash contributions. So, if this — if the virus spread continues and this current decrease in the rising cases reverses and case rises — starts increasing. Yes, I think it’s quite possible. There’ll be a need for further modifications, and we will work with borrowers who continue to support their properties.

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George Bahamondes, Deutsche Bank AG, Research Division – Senior Research Analyst [36]

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Understood. And I’d imagine that would just require additional kind of cash on their part? Kind of — what may be some scenarios that you could think of, hypothetical situation, if you’re able to share?

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [37]

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Well, I mean, what we’ve been willing to do to date is to defer up to a total of 3 months interest. I mean, the way we get there is we defer 50{09c3c849cf64d23af04bfef51e68a1f749678453f0f72e4bb3c75fcb14e04d49} interest over — at most 6 months. And in many cases, it is significantly less than that. There’s other reserves available to the borrower to — such that they don’t need us to defer the interest payment. But — so I would expect them to be similar to that. We believe that these properties will recover with the economy. Yes, corporate business hotels will rebound less quickly. It will take longer for a recovery. But our leisure oriented properties, our limited service oriented properties, which is the majority of our properties that secure our loans, we think will recover as quickly as — with the economy, broadly speaking. We do sense that corporate business travel may be affected long term, if not permanently. I think people’s attitudes to travel has changed a bit, but time will tell how lasting that sentiment is.

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Operator [38]

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And our next question is from Stephen Laws from Raymond James.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division – Research Analyst [39]

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A couple of follow-ups, if you guys don’t mind. Greta, I guess, first, with your borrowers, how many are — have been able to receive some type of funding, either to furlough employees or something that they’re leaning on? Do they need additional support from the government? Or are these largely borrowers that really don’t qualify for anything under these programs? Can you provide any color around that?

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [40]

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Well, most of our hotel borrowers did qualify for the PPP funds and have already received it. I don’t know if they’re qualified for additional future funds. We haven’t heard of them receiving more funds. But the rest of our borrowers, we’re not aware of them taking advantage or benefiting from the governmental programs. Many of our borrowers are large institutional type entities and have not, frankly, have not needed assistance.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division – Research Analyst [41]

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And then lastly, on the Starwood Capital Group. I know you’ve got the second and third options. How should we think about that? I’m guessing it’s unlikely that would be drawn down for offensive reasons. So I mean, is there a threshold you’re willing to share, or some color as you think about what would prompt you to look to take down that second round? Is it liquidity on your balance sheet? Is it something in the portfolio? Is it a shift in the long-term outlook? Maybe — what is the thought process that would go behind drawing down the second and possibly third options on that financing?

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [42]

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Yes. We negotiated to have those because of the tremendous amount of uncertainty and opaqueness in how this economic recovery will pan out. And at this point, we haven’t made any decision to draw it or not to draw it. But as you pointed out, it would not be for offensive reasons. It would be for defensive reasons. If we found the economy taking a really severe turn to the negative, it’s there to help us. But at this point, we haven’t made a decision on how we’re going to proceed with that.

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Stephen Albert Laws, Raymond James & Associates, Inc., Research Division – Research Analyst [43]

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Great. Well, certainly a valuable options but cannot take the dilution or the high cost of financing unless you — we feel like you need it.

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Operator [44]

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We have reached the end of the question-and-answer session. And I will now turn the call over to Greta Guggenheim for closing remarks.

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Greta Guggenheim, TPG RE Finance Trust, Inc. – CEO & Director [45]

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Well, thank you all for joining us today, and we look forward to another eventful quarter and speaking with you at the end of the third quarter.

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Operator [46]

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This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.