Light at the end of the tunnel?
TPG Real Estate Finance (a big mortgage REIT) issued its 10K yesterday, providing fresh context around two big industry questions:
1. How bad are loan defaults and losses?
2. Are we headed for the CRE apocalypse that many pundits are calling for?
----- Loan losses -----
TPG sold five loans in 2023 ($570M par value) at a $200M loss:
-- $152M office loan sold for $79M
-- $85M office loan sold for $29M
-- $129M mixed-use loan sold for $95M
-- $127M multifamily loan sold for $99M
-- $71M office loan sold for $48M
TPG also foreclosed on another $270M of loans but didn't report losses on the foreclosures.
Historical TPG loan losses:
-- 2020: $70M
-- 2021: ($6M)
-- 2022: $173M
-- 2023: $190M
The last two years were obviously pretty challenging for TPG, but 2023 wasn't apocalyptic.
We're more interested in the outlook.
----- Reserves for future loan losses -----
Accountants require lenders to hold reserves when there's good reason to expect future credit losses. "Good reason" can be loan-specific or portfolio-related.
These loan loss estimates are tricky, especially for mortgage REITs and debt funds, which account for about 10% of the CRE debt market and are outside of the regulatory frameworks that monitor banks, insurance companies, and CMBS lenders.
From TPG's 10K:
"Real estate valuation is inherently subjective and uncertain, and is subject to change, especially during periods of volatility. Our allowance for loan losses may prove inadequate."
"The estimation of ultimate loan losses, allowance for loan losses, and credit loss expense is a complex and subjective process."
"...if our future allowance for loan losses prove inadequate, we may recognize additional losses, which could have a material adverse effect on us."
Our take on loan loss reserves (especially MREITs' and debt funds'): Caveat emptor.
Historical TPG reserves:
-- 2020: $63M
-- 2021: $46M
-- 2022: $215M
-- 2023: $70M
----- Takeaways / Questions -----
It's easy for pundits to knock on debt funds like TPG because...
--> $4B portfolio of risky-ish, all floating-rate loans.
--> 30% of its office loans were sold in 2023 at 40% losses.
--> Some multifamily challenges are emerging.
But maybe it's not as bad as advertised because...
--> Losses haven't outpaced historical benchmarks.
--> 2023's reserves were adequate.
--> No additional loan-specific loss reserves = silver lining?
--> Falling reserves could be a leading indicator.
Possible outcomes...
1. TPG is accurately predicting a light at the end of the tunnel.
2. The light at the end of the tunnel is a train.
What's your call? 1 or 2.
PS - Loan sales seem pretty lucrative for some brokers. i.e., $5M of commissions from TPG's 2023 loan sales. It'll be interesting to see if loan sale commissions move the needle for brokers with high-profile teams (e.g., Newmark).
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