Dry Powder And CRE CLO Closure Will Secure Future Market Edge

Key Takeaways

• TRTX's liquidity strategy and CRE CLO closure enhance financing stability and net margins, leveraging market opportunities to boost revenue growth.
  
• Strategic share repurchases and market positioning aim to increase EPS and offer value with shares trading below book value.
  
• Economic uncertainty and potential trade conflicts could pressure TRTX's margins and profitability, with impacts on net income and shareholder returns.

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.

• TRTX is leveraging its strong liquidity position, with $457 million of 'dry powder' and a strategy to deploy this in an opportunity-rich market, potentially boosting revenue and earnings growth.
  
• The recent pricing and closure of the sixth CRE CLO (FL6) has enhanced TRTX's long-term financing stability by increasing non-mark-to-market exposure to 91% of total borrowings, potentially improving future net margins through reduced cost of capital.
  
• TRTX's strategic approach to repurchasing shares, totaling $9 million in the recent quarter, could increase earnings per share (EPS) by reducing the number of shares outstanding and boosting book value.
  
• The company's focus on deploying excess liquidity, utilizing untapped financing capacity, and recycling equity currently tied up in REO positions positions it to enhance growth in net earning assets and distributable earnings.
  
• TRTX's strong market position, evidenced by its investment pipeline expansion, offers a comparative advantage in the current dislocated real estate credit market, potentially increasing future revenue and creating a compelling value proposition with shares trading at a discount to book value.

TPG RE Finance Trust Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming TPG RE Finance Trust's revenue will decrease by 9.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 40.1% today to 72.7% in 3 years time.
• Analysts expect earnings to reach $80.0 million (and earnings per share of $0.9) by about May 2028, up from $59.7 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 13.5x on those 2028 earnings, up from 10.1x today. This future PE is greater than the current PE for the US Mortgage REITs industry at 13.4x.
• Analysts expect the number of shares outstanding to grow by 4.02% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.45%, as per the Simply Wall St company report.

TPG RE Finance Trust Future Earnings Per Share Growth

Risks

• The potential short
• and long-term effects of a protracted global trade war and the impact of tariffs on real estate credit markets could negatively impact TRTX's revenues and margins.
  
• The economic uncertainty and increased probability of a recession, as assumed in TRTX's loan loss forecasting model, may result in higher provisioning and affect net earnings.
  
• Prolonged periods of wider credit spreads in the market could increase cost of funds, pressuring TRTX's net interest margins and overall profitability.
  
• The timing and uncertainty related to the sale of the REO properties may impact TRTX's ability to optimize shareholder returns, thereby affecting net income and book value.
  
• The unresolved risks associated with potential losses or gains from the REO sales could create fluctuations in book value and earnings, introducing volatility to financial results.

Valuation

• The analysts have a consensus price target of $9.4 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 $7.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $110.0 million, earnings will come to $80.0 million, and it would be trading on a PE ratio of 13.5x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of $7.53, the analyst price target of $9.4 is 19.9% 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.