TPG Real Estate Finance sells off $1B worth of CRE debt

Nonbank lender made the move to fight off margin calls from coronavirus-fueled cash crunch

Greta Guggenheim, CEO and President of TPG (Credit: Sean Zanni/Patrick McMullan via Getty Images)
Greta Guggenheim, CEO and President of TPG (Credit: Sean Zanni/Patrick McMullan via Getty Images)

Nonbank mortgage lender TPG Real Estate Finance Trust has sold off nearly $1 billion worth of commercial real estate debt to fight off margin calls, as it faces a coronavirus-fueled cash crisis.

TPG RE Finance made the disclosure at its first quarter earnings call Tuesday, saying liquidity constraints raise substantial doubt about its ability to continue “as a going concern.” The announcement also follows a lawsuit New York real estate developer Somera Road filed against the lender that alleges it is skipping out on loan payments due to liquidity issues.

In order to add cash to its balance sheet, TPG RE Finance said it had unload 49 separate commercial real estate debt securities investments, amounting to its entire portfolio. The company sold off these investments — with a $961 million face value — to meet a $722 million debt payment, according to its Q1 report.

Still, TPG RE Finance — which is sponsored by investment giant TPG — said it projects that the company “will not have sufficient liquidity to repay maturing debt balances of $432.2 million and meet its obligations as they become due to sustain operations through at least one year.” The company said it is in discussions with its lenders to gain extensions and expects “that such extensions are probable to occur.”

Additionally, the company extended for another year its repurchase agreement with Morgan Stanley, which is providing a commitment of $500 million. TPG RE Finance also announced the deferral of its dividend payments until July 14.

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For the quarter, TPG RE Finance reported a net loss of $233.1 million compared to net income of $28.3 million in the first quarter of 2019. Most of the loss is attributable to an impairment charge of $167.3 million related to the sale of its debt securities. The company’s stock price fell 10 percent to $6.61 on the late-morning news.

During the conference call with analysts, TPG RE Finance executives projected that the impacts to certain sectors of real estate could be felt for some time.

“The economic strain experienced by tenants and landlords will not disappear,” said Greta Guggenheim, CEO of TPG RE Finance.

The company said a number of its loans are now reclassified to riskier categories. Among the hardest hit are hotels, which have been decimated during the pandemic. It moved nine hotel loans to Category 4 risk — Category 5 is the highest — due to “operating challenges in the lodging industry caused by the Covid-19 pandemic and the travel and social-distancing policies that ensued.”

Real estate investment trusts like TPG RE Finance, hedge funds and private equity firms that have issued billions in construction loans, mortgages and bonds backed by property debt are now facing a cash crunch. They borrow short-term debt from banks in the form of repurchase agreements, which they use to buy mortgages with relatively little cash and pool them into commercial mortgage-backed securities, which it sells to bond investors. But when the coronavirus hit, prices for CMBS loans fell. Mortgage REITs had to mark down the assets on their books and their repo lenders instituted margin calls that required the companies to add cash to their accounts in order to keep them in balance.

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