2023-03-06 10:30:24 ET
Summary
- I recently wrote a more in-depth article regarding the common stock of TRTX.
- But I didn't even mention the preferred shares, which seemed to be of interest to readers.
- The shares are trading with a current dividend yield of 9.2% and well below par value.
- We circle back in this article to contextualize the preferreds more concretely for folks.
I recently wrote up TPG RE Finance Trust ( TRTX ) in a bullish take suggesting an additional 23% upside for the stock - an article that I managed to write without mentioning another security available to folks in the capital stack.
So in this article, I'm circling back to cover the preferred shares of this underfollowed commercial mREIT, their preferred Series C shares TRTX-C. A number of commenters in the previous article were discussing the shares so I thought it may be helpful to just dig in a bit more directly with these for readers.
TPG RE Finance Trust Capital Stack Review and Analysis
We can start by reviewing the company's balance sheet to understand exactly how the preferreds fit in the capital stack. Here's the most recent balance sheet from their 2022 10-K .
TRTX 2022 10-K: Balance Sheet.
Of immediate note is that the preferred shares are listed under " permanent equity " which implies management has a long-term view of these perpetual preferreds. There are 8.05 million of the Series C shares outstanding with par value of $25.00 per share. Totaling this we see the preferreds represent $201.25 million in liquidation preference.
If we subtract this amount from total stockholders' equity then we are left with the common stock equity value of $1,121 million. From this, we can observe that preferred equity is covered by common equity by over five times.
The company does have debt in various forms which totals to $4,160 million. The weighted average credit spread on their debt is 2.03% with 73.5% of it non-mark-to-market. When we compare the cost of debt to their weighted average all-in yield of 8.05% on their portfolio we can see that their investments are yielding nearly quadruple their cost of funds.
TRTX February 2023 Investor Presentation: TRTX Overview.
What's an interesting note here is that rather than considering the preferreds " permanent equity ", we may consider it a form of financing. If we view it that way then the preferred shares with their 6.25% annual coupon look to be the most expensive form of financing for them by a long margin. I don't think that means they will attempt to call these, especially given the first call date isn't until June 2026. But I note it as a general reflection regarding the company's cost of funds.
We can see that year-to-date dividend coverage on the commons is at 1.17x. From the perspective of the preferreds this dividend simply represents a canary in the proverbial mine in case there's trouble with the company. What I mean by this is that the first thing that management at TRTX can do to manage cash is to cut their common stock dividend. They don't necessarily need to give their coverage, but it represents an additional cushion for preferred owners.
For instance, if there's a cash crisis in the company and the common dividend is suspended entirely then they will see immediate savings of $0.96 per share a year. With 71.41 million shares outstanding that represents an amount of $68.55 million. That's a bit over one-third of the preferreds' liquidation value in annual savings just from cutting the common dividend - if an emergency called for such a thing.
The combination of stock equity covering preferred equity by 5x and the savings from a common dividend suggest that the preferred dividend is quite safe. Total expense for the preferred dividend annually is $12.56 million. That means savings from a common dividend cut alone could fund the preferred dividend over five times.
A Review of the TRTX-C Preferred Shares
With a bit of context on the capital stack and relative stability of the preferreds, let's turn to the details of these shares directly. Here are some of the basics:
Current Price | $16.99 |
Par Value | $25.00 |
Discount to Par | -32.04% |
Fixed Annual Rate | 6.25% |
Annual Dividend Amount | $1.56 |
Current Dividend Yield | 9.20% |
First Call Date | 6/14/2026 |
These shares are perpetual meaning they have no maturity date, and the dividends are cumulative on them regardless of whether they are paid. I don't think the discount to par matters much in this case as these preferreds are not likely to be called. What it does reflect though is a potential for upside if rates come down in the coming years making a 9.20% yield more attractive.
I pulled a data set of ~680 $25.00 preferred shares from the Innovative Income Investor's page here . Using that, I calculated that amongst this universe of preferreds the average yield right now is 7.92% - suggesting TRTX-C's yield is above average.
We can also compare the yield on TRTX-C to four different ETFs which invest in preferreds. From this comparison, it seems to suggest again that the 9.2% yield is high compared to the world of preferreds.
ETF | AUM | Dividend Yield |
iShares Preferred and Income Securities ETF ( PFF ) | $17b | 5.84% |
Invesco Preferred ETF ( PGX ) | $8b | 6.27% |
SPDR Wells Fargo Preferred Stock ETF ( PSK ) | $2b | 6.03% |
Global X SuperIncome Preferred ETF ( SPFF ) | $1b | 6.58% |
Another way to look at these preferred shares is in comparison to other preferreds offered by peer commercial mREITs. For example, peer ACRES Commercial Realty Corp. ( ACR ) has two preferred shares which yield over 9% currently, which I reviewed back in January : ACR.PC and ACR.PD. Granite Point Mortgage Trust ( GPMT ) and KKR Real Estate Finance Trust ( KREF ) also each has preferred shares. Take a look at this data comparing the preferreds of each.
Commercial mREIT peer Preferreds | Current Price | Par Value | Discount to Par | Initial Rate | Annual Dividend Amount | Current Dividend Yield | First Call Date |
TRTX.PC | $16.99 | $25.00 | -32.04% | 6.25% | $1.56 | 9.20% | 6/14/2026 |
ACR.PC | $22.37 | $25.00 | -10.52% | 8.63% | $2.16 | 9.66% | 7/30/2024 |
ACR.PD | $19.99 | $25.00 | -20.04% | 7.88% | $1.97 | 9.85% | 5/21/2026 |
GPMT.PA | $18.83 | $25.00 | -24.68% | 7.00% | $1.75 | 9.29% | 11/30/2026 |
KREF.PA | $19.92 | $25.00 | -20.32% | 6.50% | $1.63 | 8.18% | 4/16/2026 |
Average | -21.52% | 7.25% | 9.24% |
One thing I note from this is that despite having a rate well below the initial average, the current dividend yield is right in line with the average of its peers. I know from my review of the ACR preferreds that the TRTX shares are much better covered by common equity value suggesting more safety in these shares.
One thing to note here is that ACR.PC and GPMT.PA are both fixed-to-floating preferreds meaning their initial rate changes to a floating one after the first call date. This is a feature for both of these shares which makes them differentiated, but not necessarily more valuable.
A Brief Conclusion
From what we've covered here I'd argue that the preferreds are well-supported within the capital stack of TPG RE Finance Trust. Dividend coverage for the preferreds seems guaranteed unless there are cascading debt covenant issues. Even in the case of a cash crunch, we showed that cutting the dividend on common stock provides a significant amount of annual savings in relation to the preferreds - a layer of additional safety for owners.
It seems that the current 9.2% dividend yield on TRTX-C is not only sustainable but stands out as above average amongst hundreds of $25.00 preferred share peers. And from the context of the Feb. 2023 Fed rate at 4.57% , investors are being offered double that with these preferreds.
For income investors, these shares might provide a stable stream of cash in the coming years. And given the shares are at a fixed rate if rates start to come down again there may be price appreciation in the preferreds.
For further details see:
The Preferred Shares Of TPG RE Finance Trust: A 9% Well-Covered Dividend