Delayed Real Estate Recovery Presents Attractive Valuations For Future Investments

Key Takeaways

• TRTX can benefit from real estate value recovery and declining bank competition, enhancing revenue through attractive lending opportunities.
  
• Strategic capital deployment using strong liquidity and REO sales could boost earnings and return on equity through new high-yield investments.
  
• Increased leverage and concentration in specific property types could elevate financial risk, affect revenue stability, and necessitate additional reserves, impacting net earnings.

Catalysts

A commercial real estate finance company, originates, acquires, and manages commercial mortgage loans and other commercial real estate-related debt instruments in the United States.

• The anticipated real estate value recovery, lagging behind corporate value growth, provides an opportunity for TRTX to invest at attractive valuations, potentially enhancing future revenue from increased loan demand.
  
• A retreat by banks from direct lending presents a favorable environment for TRTX in the nonbank lending market, likely improving future net margins due to reduced competition and better terms on back leverage.
  
• The expectation of declining short-term interest rates should increase demand for floating rate loans, contributing to revenue growth and potentially improving net interest margin.
  
• TRTX plans to deploy its strong liquidity position and leverage untapped financing capacity to fund new investments, which could drive earnings growth.
  
• The cautious recycling of capital from REO sales into higher yield loan investments will likely increase future returns on equity, positively impacting earnings.

TPG RE Finance Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TPG RE Finance Trust's revenue will decrease by 7.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 41.6% today to 81.7% in 3 years time.
• Analysts expect earnings to reach $87.0 million (and earnings per share of $1.05) by about February 2028, up from $55.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.7x on those 2028 earnings, which is the same as it is today today. This future PE is greater than the current PE for the US Mortgage REITs industry at 11.6x.
• Analysts expect the number of shares outstanding to grow by 3.92% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.91%, as per the Simply Wall St company report.

TPG RE Finance Trust Future Earnings Per Share Growth

Risks

• The anticipated increase in leverage as the company deploys more capital into new investments may elevate financial risk if market conditions deteriorate or unexpected defaults occur, which could negatively impact net margins.
  
• The continued decrease in book value per share, despite a 27% discount, may indicate underlying valuation or market confidence issues that could affect investor perception and ultimately, the share price, reflecting on earnings.
  
• The over-concentration in specific property types, such as multifamily and industrial, could expose the company to sector-specific downturns, potentially affecting revenue stability.
  
• Migration of loans to riskier categories, such as from 3 to 4 ratings, could necessitate additional reserves, impacting net earnings due to higher perceived credit risk.
  
• Potential for life sciences loans to become problematic, as seen with peers, indicates a sector vulnerability that might require increased reserves or impairments, affecting overall earnings.

Valuation

• The analysts have a consensus price target of $9.75 for TPG RE Finance Trust based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $11.0, and the most bearish reporting a price target of just $8.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $106.4 million, earnings will come to $87.0 million, and it would be trading on a PE ratio of 12.7x, assuming you use a discount rate of 7.9%.
  
• Given the current share price of $8.68, the analyst price target of $9.75 is 11.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.