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TPG Real Estate: High Returns from Transition Loans

08/17/2018 5:00 am EST

Focus: REITS

Tim Plaehn

Lead Income Analyst, The Dividend Hunter

TPG Real Estate Finance Trust (TRTX) is a finance REIT focused on commercial mortgage transition loans. The commercial loan REITs are especially attractive with interest rates on the rise, suggests Tim Plaehn, editor of The Dividend Hunter.

TPG is a private equity firm with $79 billion under management. The company has investment teams in 16 countries around the world. TPG Real Estate Finance Trust was formed in December 2014. The company became a publicly traded REIT with a July 2017 IPO.

The REIT focuses on the specific niche of commercial property transition loans. These are loans with one to three-year terms. The purpose of the financing is to allow the borrower to transition a property, such as time needed to complete capital improvements before a tenant can move in or the lease-up period of a multi-tenant property.

The lending targets large, $50 million plus loans, which are first mortgages with adjustable interest rates. The company wants to make loans in the top 25 commercial property markets. As of the end of 2017, 63% of loans were in the top 10 markets.

These types of REITs borrow money to finance their loan portfolios. Income comes from the net spread between the loan interest rates and the cost of borrowing. As of the end of 2017, TRTX was leveraged to 1.8 times equity.

Coming out as a new publicly traded REIT, the firm has a stated goal of dividend growth. Indeed, if you look up the last four payments you’ll see they’re increase each time starting at $0.33 per share, then $0.38, then $0.42, and most recently with the July 25 payment of $0.43.

Higher interest rates will also help net income. According to company presentations, a 1.0% increase in LIBOR will boost net income by $0.18 per share per year. The REIT currently yields 8.4%.

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