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TPG RE Finance Trust, Inc.  (NYSE:TRTX)
Q4 2018 Earnings Conference Call
Feb. 26, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to TPG RE Finance Trust's Fourth Quarter 2018 Earnings Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Deborah Ginsberg, General Counsel. Thank you. You may begin.

Deborah Ginsberg -- Vice President and Secretary

Good morning, and welcome to TPG Real Estate Finance Trust's fourth quarter 2018 conference call. I'm joined today by Greta Guggenheim, Chief Executive Officer; and Bob Foley, Chief Financial and Risk Officer. Greta and Bob will share some comments about the quarter, and then we'll open up the call for questions.

Yesterday evening we filed our Form 10-K and issued a press release with the presentation of our operating results. All of which are available on our website in the Investor Relations section.

I'd like to remind everyone today that today's call may include forward-looking statements, which are uncertain and outside of the company's control. Actual results may differ materially. For a discussion of some of the risks that could affect results, please see the Risk Factors section of our most recent 10-K. We do not undertake any duty to update these statements.

We'll also refer to certain non-GAAP measures on this call, and for reconciliations, you should refer to the press release and our 10-K.

With that, it is my pleasure to turn the call over to Greta Guggenheim, Chief Executive Officer of TPG Real Estate Finance Trust.

Greta Guggenheim -- Chief Executive Officer and President

Thank you, Deborah, and good morning to all who have dialed in. We had a great 2018 at TRTX. Originations and earning assets increased by 30% and 35% respectively. We reduced our borrowing spreads by 80 basis points by working with our lenders and issuing two CLOs. We increased our funding capacity by approximately $2.3 billion, most notably with $1.5 billion of issuance of the aforementioned CLOs, with a $750 million term loan facility and $160 million table funding secured facility and by executing in August a $139 million equity raise to fund our significant portfolio growth.

Also during the year, we opened a Chicago origination office to support our national origination program and enhance the scalability of our business. Our strong 2018 originations of $2.5 billion produced a $1 billion increase in earning assets to $4.3 billion, with a portfolio weighted average credit spread of 390 basis points and a weighted average loan to value of 64.5%.

Despite competitive headwinds, we achieved a weighted average credit spread of 356 basis points on our 2018 originations, while maintaining our focus on first mortgage loans on existing cash flowing assets in major markets. These factors combined with our increased funding capacity reduced financing cost and increased scale, leave us well positioned to drive earnings in 2019 and beyond.

For 2018, core earnings were 99.4% of dividends declared and paid. We target more robust dividend coverage in 2019. We intend to continue to deliver value to our shareholders by increasing book value per share and our dividend yield. Repayments remained unchanged in 2018 at approximately $1.2 billion. We believe repayments will moderate in 2019 for two reasons. One, all of our construction loans repaid in 2018, which represented 41% of our total prepayments. And secondly, we experienced a significant number of repayments LIBOR plus (ph), taking advantage of the continued spread tightening in 2018. The pace of spread compression appears to have slowed or at least we hope, so, we anticipate fewer of these types of early repayments to occur.

We can always be surprised to the upside by unexpected asset sales by our sponsors, but it feels like prepayments will ease. The composition of our 2019 -- 2018 loans by property type was predominantly office and multifamily, and by loan type primarily bridge and lease-up transitional loans with modest future fundings. Our in-place debt yield at closing was in the mid 6% range excluding one residential condo inventory loan. Our average loan size for 2018 originations was $97 million, which we believe is appropriate from a risk management standpoint, based on our current equity base of $1.3 billion.

During 2018, we originated no hotel loans and $185 million in hotel loans repaid. At year-end hotel loans represented only 10% of our loan portfolio. We are currently seeing interesting hotel lending opportunities in certain markets, however. All of our loan investments are performing and our weighted average loan risk rating remained stable at 2.8 on a scale of 1 the best to 5 the worst. We see no credit issues on the horizon. We monitor our loan portfolio vigilantly to anticipate credit issues and to head up our refinancing activity by working to retain loans we like at attractive risk adjusted returns.

We are encouraged by our strong start to 2019. Loans closed or in a process of closing totaled $630 million with a weighted average credit spread of 380 basis points and a weighted average loan to value of 66%. The earnings power an attracted risk-adjusted returns about an 100% first mortgage loan portfolio is a testament to the strength of our team and the TPG Real Estate equity group as well as the overall TPG platform.

Our strong origination start to this year, our growth in earning assets last year of over $1 billion and the significant improvement in our cost of funds and liability structure position us well to grow earnings in the first quarter and beyond.

Thank you. And I'll now turn it over to Bob.

Robert Foley -- Chief Financial and Risk Officer

Thanks Greta. Good morning, everyone. For the fourth quarter, we generated GAAP net income of $28.6 million or $0.43 per diluted share. That compares to $26.8 million or $0.42 per diluted share for the preceding quarter. Our quarter-over-quarter earnings growth of 6.7% was driven by net loan growth of $135 million, due to the closing of five loans with total commitments of $623.7 million and initial findings of $452.1 million, deferred fundings on existing loans of $50.7 million and repayments of $367.9 million, including the last of our construction loans, and a continued sharp quarter-over-quarter decline in our weighted average credit spread on borrowings against our loan portfolio, which declined 22 basis points or 12% to 165 basis points.

Operating expenses declined 35% quarter-over-quarter, due primarily to continued vigilance in controlling expenses and the initial benefits of a renegotiated loan servicing in loan asset management agreement, with our dedicated third-party service provider. For 2019 we expect our loan servicing and asset management expense line item to be in line with full year 2018, with potential for further reductions in 2020 and beyond.

Book value per share at year end was $19.76 versus $19.78 at the previous quarter end, due entirely to a mark-to-market adjustment relating to short-term fixed rate structured finance investments in two multifamily loan portfolios issued by Ginnie Mae. This principal and interest are guaranteed by the US government. Those investments have short weighted average lives of slightly less than three years.

We declared in mid-December and paid in January, a cash dividend of $0.43 per common share unchanged from the prior quarter. For the full year of 2018, our dividends declared and paid equal almost 100% of our GAAP net income. Our annualized dividend yield is 8.7% on book value per share at December 31st, an 8.6% on Monday's closing share price of $20.07.

We intend to announce our initial 2019 dividend per share in March. For the year key performance metrics include a GAAP income of $106.9 million or $1.70 per share, core earnings of $107.4 million or $1.70 per share and total dividends per share declared and paid of $1.71. Loan repayments for the year totaled $1.2 billion consistent with our expectations for 2018, and similar to preceding years. Our current expectations as Greta stated is for loan repayments in 2019 to decline based on vintage and underlying business plans.

In the fourth quarter our repayments were front ended and our originations were heavily back ended. Many of you assume the mid quarter convention for loan originations and repayments. And our originations adhere to that mid-quarter convention, we estimate our quarterly earnings would have been higher by slightly more than $0.01.

Fourth quarter repayments were spurred by $103.7 million of repayments on residential condominium construction loans. Repayments on construction loans totaled $508 million for the year reducing to zero hour construction loan exposure at year-end.

Portfoliowide loan leverage -- excuse me, loan level increased -- leverage increased to 72.8% from 69.6% in the prior quarter, because we reborrowed amounts temporarily repaid in August, using proceeds for our equity follow-on and closed in late November, our second CLO of the year and in advance rate of 79.5%. We expect this figure to increase further during the first quarter, especially in light of the $629 million of loans we closed are in the process of closing.

We continue to increase the use of non-recourse, non-mark-to-market, matched-term liabilities to prudently fund our loan portfolio and reduce our borrowing costs.

On November 29th, we closed our second CRE CLO of the year, increasing to $1.9 billion, our total CRE CLO issuance during the year, making us the top ranked issuer of CRE CLO liabilities in 2018. In December, we closed a private non-recourse, non-mark-to-market secured term loan facility. Our initial borrowing is $114.3 million secured by one pledged loan. This facility is structured to grow over time to $750 million.

In July, we closed a $160 million secured revolving credit facility to table fund loans. These new financing arrangements established for us during the year and improve competitiveness and allowed us to sustain our asset level ROEs by reducing our weighted average spread for loan borrowings by 80 basis points. We reduced financing risk by boosting the proportion of our liabilities funded on a non-recourse, non-mark-to-market matched-term basis to 52.1% at the end of the year versus 16% at the end of the preceding year. And we enhanced our ability to be flexible, fast and efficient in delivering constructive financing solutions to our borrowers.

At year-end, our liquidity and capital positions were healthy, with cash balances of $39.7 million, $236.5 million of immediately available undrawn capacity under our various credit arrangements, a high-grade real estate debt securities portfolio convertible into approximately $38 million of cash net of debt and $2.4 billion of available financing capacity under our financing arrangements. And a targeted leverage of 3.5:1, our estimated capacity for new loan investments is approximately $1 billion, more than ample to fund our current loan pipeline.

We continue to require our borrowers to purchase interest rate caps to protect them and us from sharp rises in interest rates that might occur during the term of our loans. And we negotiate LIBOR floors (ph) on our loans to protect us against falling rates too.

Finally we underwrite and monitor our loans with conservative forward views of rates and credit spreads and evaluate their impact on future debt service coverage, cap rates, collateral value and eventual repayment of our loans via refinancing or sale of our loan collateral. We continue to emphasize capital preservation through a modest loan to value ratio, which has remained consistent by design. It was 64.8% for loans originated during the fourth quarter, 66.7% for loans originated during the year and 64.5% for the entire portfolio at year-end, emphasizing loans secured by properties with shorter business plans and modest amounts of deferred funding. At year-end 79.4% of our portfolio was comprised of bridge and light transitional loans, up from 64.2% at prior year-end, and funding 52.1% of our liabilities on a non-recourse matched-term basis to reduce our exposure to mark-to-market risk on our portfolio.

With that Greta and I will be happy to entertain your questions. Thanks very much. Operator?

Questions and Answers:

Operator

Thank you. (Operator Instructions) Our first question is from Arren Cyganovich with Citi. Please proceed with your question.

Arren Cyganovich -- Citigroup -- Analyst

Thanks. I guess just thinking about the environment overall, how strong do you think your originations could be in 2019, comparative to last year? It sounds like there maybe a little bit less competitive than it was maybe starting last year and there was a very strong origination year for the industry including yourself. What's your outlook look like for originations for the year?

Greta Guggenheim -- Chief Executive Officer and President

Well, based on the start -- our start to the year, we feel pretty encouraged. I would not say that competition has declined, it does still very -- still feel very robust out there. I think the fact that we have added to our team strategically last year, and that we are not trying to originate $10 billion a year, that we are able to pick our spots and find the best credit opportunities and the best risk adjusted returns. I mean, it's -- we are very defensive oriented. We want to protect capital. My team always gets upset when I try to say a sports analogy, but its a risk of having them, I mean, we're here to win the championship and not to sell tickets, and the championship really is preserving principal value over the long term.

Arren Cyganovich -- Citigroup -- Analyst

Okay. And the -- on the spread compression, I guess the deceleration that you mentioned in spread compression, how does that -- what's driving that and I would think that they would have or been some deceleration competition to help create that to happen? And do you expect without the capital it is still out there in the sidelines that you might see some further spread compression throughout the year?

Greta Guggenheim -- Chief Executive Officer and President

It doesn't feel like it's going to be at the pace that it was. I mean the tightest spread we originated last year was one loan at LIBOR plus 270 basis points and you saw that our weighted average spread was LIBOR plus 356 basis points. We have not closed another loan, tighter than 270 basis points or even at 270 basis points yet. Not to say we won't because I never say never. But it does feel like it has slowed, but there is the competitive pressures are robust. I mean, we are constantly competing with others particularly on the larger loans in the type of markets that we like to lend in. So, I can't say that spread compression has gone away, but it certainly feels like it's slowed down dramatically.

Arren Cyganovich -- Citigroup -- Analyst

Okay. And then just lastly on the leverage. I think for the industry spreads were wider couple of years ago and it seems like most folks didn't want to go above 3 times. Now that you've had some more attractive financing that the non-mark-to-market et cetera, if the leverage targets for a lot of commercial mortgage REITs are starting to creep higher, what gives you the comfort that you can operate at a higher level without adding a kind of a new layer of risk to the firm?

Greta Guggenheim -- Chief Executive Officer and President

Well, we will lever the more cash flowing, more stable assets, slightly higher than we will assets with more transition. And I think as you see us in a defensive mode gravitate to more and more cash flowing assets, you will see leverage come up a bit because those asset types warranted. For those originators that have a very high percentage of construction loans or subordinate debt, their stated leverage will appear lower, in my mind it doesn't mean the risk is any different.

Arren Cyganovich -- Citigroup -- Analyst

Right. Okay. Thank you.

Operator

Our next question is from Steve DeLaney with JMP Securities. Please proceed with your question.

Steve Delaney -- JMP Securities -- Analyst

Thanks, good morning, Greta and Bob, How are you? I want to ask a question about the size of your portfolio and sort of your outlook for where that would end up. So the $2.5 billion to queue up to just under $5 billion at the end of the year, and we look across the peer group, the largest senior floating rate portfolio in the group is $15 billion, as you see your overall market opportunity and your specific targeted products, do you have in mind sort of an optimal size of the portfolio that you would like to reach and maintain over the next few years? Thanks.

Greta Guggenheim -- Chief Executive Officer and President

Well, I think we with a $1.3 billion equity base are going to be -- we're going to grow slowly, because, I think, it's inappropriate from a risk perspective for us to try to do $500 million loans and have averaged loan sort of significant part of our equity. So we -- our growth will be constrained by having -- by focusing on the prudent size loans for our equity base. But the optimal size some day, we would love to aspire to give those who are doing $600 million loans a little more competition, but we're not going to be doing that in the near term, and I know that's not really answering your question, but yes, we would -- we believe in growth in creating portfolio value and but we're going to do growth in an accretive way that bills book value and earnings.

Steve Delaney -- JMP Securities -- Analyst

Okay. And that you did kind of answer it Greta, in that you're making $100 million loans now and what I heard is you might make an occasional $150 million or even $200 million, but we're not going to see you consistently making $300 million, $500 million loans, just to get to $10 billion in a hurry. Did I hear you correctly?

Greta Guggenheim -- Chief Executive Officer and President

Yes sir.

Steve Delaney -- JMP Securities -- Analyst

Okay, fantastic. And the other thing that we're starting to see and I assume this is really a function of the spread compression that we've been talking about the last two years really. But starting to see, what I would call a little bit of style drift in terms of the investment menu and where people are allocating capital, can you comment on that and should we assume looking out over the next year or two that its your plan to stick with your knitting (ph) and stick with your senior floating rate strategy?

Greta Guggenheim -- Chief Executive Officer and President

Yes. We have no plans presently to change our strategy. A few years ago we had said that we were slowing down on construction loans or maybe three years ago, but that was in part because of where we were in a cycle and also in part because we had construction loans on our books. Those have all come off. I'm not going to say we're going to run into the construction loan market because we do feel we are still a bit late cycle and want to be exceedingly cautious on construction loans that would be delivered three to four years out in an unknown economic environment, and also we will be cautious on other types of properties that are sensitive to the economic environment such as hotel. But we don't intend to -- I don't see us really doing -- experiencing any strategy drift.

Steve Delaney -- JMP Securities -- Analyst

Well, thank you for the comments. Bob. I'm sorry, were you going to say something.

Robert Foley -- Chief Financial and Risk Officer

I was just going to add one point which is so much of the work that the entire team did this last year. On the right hand side of the balance sheet in terms of extending the tenure of our liabilities and reducing their cost, was to magnify the strategy that Greta articulated, which is, good sized loans, strong institutional borrowers, short business plans, limited construction and that kind of financing and the strong capital base that the team has put together, our ability to win those loans is enhanced with the most competitive cost of capital and the longest tenure liabilities that we can find. So everything we're doing is to encourage the strategy that was defined several years ago and that we have steadily executed since then.

Steve Delaney -- JMP Securities -- Analyst

Great. Thank you both for the comments.

Robert Foley -- Chief Financial and Risk Officer

Thank you, Steve.

Operator

Our next question is from Ben Zucker with BTIG. Please proceed with your question.

Benjamin Zucker -- BTIG -- Analyst

Good morning, Bob and Greta. Thanks for taking my question.

Robert Foley -- Chief Financial and Risk Officer

Good morning, Ben.

Benjamin Zucker -- BTIG -- Analyst

The subsequent pipeline looks really good, but I'm wondering if you could provide an expected initial funding balance off of that total. And I'll tell you, I normally wouldn't ask that, but in 4Q '18 It looks like your fundings as a percent of the total commitment value was kind of the lowest levels since your IPO at around 72% versus historical average maybe that I calculate around 85%. So I'm just trying to understand with the subsequent loans, do you think like the funding dynamic is similar to what we saw in 4Q '18 or going back to your historical funding average? That might be helpful.

Robert Foley -- Chief Financial and Risk Officer

Great question and good diligence spend. So you're correct with respect to the observations regarding the percentage of initial fundings to total commitment amount for the fourth quarter, it was a twitch lower about 5 points lower than it has been the preceding several quarters. That was largely related to a particular loan that we originated for a very strong sponsor on an existing office property, where they are basically adding on about a third of the base building office space. They occupy virtually the entire building. So it's a really interesting credit dynamic and a very strong sponsor, but because, a significant portion of those proceeds, about a third of it will be used to expand the existing building our initial funding overall was a little bit lower. But I would characterize that as being the exception to the rule. To specifically answer the second part of your question, for the existing pipeline that we disclosed, the percentage of initial fundings to total commitment is in the area of 90%, so 10% deferred.

That's a little more consistent correct with what you've observed from us the last four to six quarters and that's largely a function of of Greta's strategy of shortening business plans for the loans that we -- for the business strategies that we financed, and those typically have fewer deferred fundings. The other advantage of that clearly is it allows us to deploy more capital earlier and increase the dollar profits of our loan investments.

Benjamin Zucker -- BTIG -- Analyst

That's very helpful Bob, and that definitely seems like a fundings percentage that were more accustomed to seeing. And then just following up on that because, I don't want people to hear that and get too carried away with the growth expectations necessarily for the first quarter. Is there any kind of call out with repayments that you'd like to make. I know, we expect the overall volume to moderate here in 2019 versus 2018. But anything bigger outside, that we should be aware of just to help us not get a little too aggressive in our growth here in 1Q?

Robert Foley -- Chief Financial and Risk Officer

Yes, sure. The first thing is if -- we have disclosed just a subsequent event in the K, the repayments that we've received thus far this quarter, which were in the neighborhood of of $260 million, and borrowing a surprise, we don't expect any further material repayments in this quarter.

Benjamin Zucker -- BTIG -- Analyst

And then if I could. Sorry, sorry, go ahead, Bob.

Robert Foley -- Chief Financial and Risk Officer

No. Please continue.

Benjamin Zucker -- BTIG -- Analyst

If I could just turn to the operating expense side, heard your comment about servicing being similar to 2018. It's nice to know that arrangement was renegotiated. Looking at just professional fees quickly that $0.5 million looked pretty light in 4Q '18, is that -- should we view that as a go-forward number or is that going to normalize back a little bit?

Robert Foley -- Chief Financial and Risk Officer

Well. I appreciate your comment about it looking light, we always try to -- the entire team here is always very focused on getting good value for our professional service expenditures and MG&A generally. I think the team has done a great job of managing expenses. I think the fourth quarter, -- I think the run rate might be slightly higher than that, but not materially higher.

So I think that's, I think that's a decent number. I think you should focus -- if you look at 2018 numbers in comparison to '19 and beyond, I think you should focus on the year as a whole, as a pretty good guide to where we are heading. And the only possible exception to that would be servicing and asset management. And I think we provided extremely clear guidance on where we see that number going. That is a really, -- that is a -- just one last thing if I may, that servicing and asset management platform is central to the effectiveness of our business. You've heard Greta to go on about this time and time again, but in terms of borrower service, risk mitigation, generating new business and providing a valuable feedback loop as we underwrite new loans, controlling that effectively in-house, although we use the third-party provider who works only for us is a really -- it's a real competitive advantage for us.

Benjamin Zucker -- BTIG -- Analyst

Very helpful Bob. Appreciate all your comments. Thanks again.

Robert Foley -- Chief Financial and Risk Officer

Thank you.

Operator

Our next question is from Rick Shane with JP Morgan. Please proceed with your question.

Richard Shane -- JP Morgan -- Analyst

Hey guys. Thanks for taking my question this morning.

Robert Foley -- Chief Financial and Risk Officer

Good morning Rick.

Richard Shane -- JP Morgan -- Analyst

And just to sort of finalize the you were just making, you made the comment that in 2020 and beyond you expect the debt servicing fee could go down. Is that a renegotiation of the existing contract, or what drives that?

Robert Foley -- Chief Financial and Risk Officer

Well, I think two things. It's a good question. One is it's the arrangement that we've struck with our counter-party. The other is that we continue to inject technology for lack of a better term into the ample (ph) business and there are significant productivity gains to be achieved from that. And as a consequence, we believe that as our scale grows to Greta's earlier comment, we can continue to maintain the same level of credit rigor and maintenance of our portfolio and client service, without spending materially more money in absolute dollar terms.

Richard Shane -- JP Morgan -- Analyst

Got it. Okay, great. And then sort of a more strategic or conceptual question, the two themes that sort of in terms of pushback that we get are spread compression and concerns about late cycle, and Greta's spoken about spreads throughout the call. I'm curious giving you're collective collective experience, what are you guys looking for? What are the data points and signs that you're looking for to indicate the inflection in terms of credit?

Greta Guggenheim -- Chief Executive Officer and President

Well, I can give you a couple examples. You may have noticed that we still very much like office and multifamily, although our multifamily originations last year as a percentage declined slightly -- somewhat from the year before, and that's -- and we really do like multifamily particularly workforce housing and affordable housing. But what we noticed was that many of the deals that come to as non-banks and mortgage rates are, as you know, transitional, coming off construction loans and we noticed a trend of the proceeds level to refinance loans are construction loans, were stressing the stabilized debt yield. So you had to make some pretty aggressive assumptions about future rent growth to get to a stabilized debt yield that you were comfortable with.

We didn't buy off on a lot of those scenarios and therefore, really declined numerous loans because we do our own underwriting and want to see a healthy stabilize debt yield. Particularly, if you think there is a chance that interest rates may rise in the next two to three years. So perhaps that's the late cycle phenomenon. In Manhattan, boutique hotels, we've seen a ton of requests for boutique hotels, there are 100 to 200 rooms, they're often South of 42nd Street and we're seeing them run at 85% to 95% occupancy levels. Yet their debt yields are 5% or less, and they're looking for power refinance or no cash in refinance, and in some cases, giving it to me that's, a late cycle phenomenon.

And it's hard to imagine how you can drive NOI and drive debt yield when you're already running around 90% occupancy. You have to count on major ADR growth and with new construction coming online consistently or continuing to come online in Manhattan, the numbers are still pretty high. It's hard to imagine that these operators can drive room growth -- rate growth, excuse me.

Richard Shane -- JP Morgan -- Analyst

Hey, Greta that's a great answer to -- a very specific answer to a open-ended question. Thank you very much.

Greta Guggenheim -- Chief Executive Officer and President

You are welcome.

Operator

(Operator Instructions) Our next question is from Ken Bruce with Bank of America Merrill Lynch. Please proceed with your question.

Kenneth Bruce -- Bank of America Merrill Lynch -- Analyst

Thanks and good morning everyone.

Robert Foley -- Chief Financial and Risk Officer

Good morning.

Kenneth Bruce -- Bank of America Merrill Lynch -- Analyst

I guess I would like to -- good morning. I like to build off of that last point, that Greta was making. Maybe you could just help us reconcile if you will, that late cycle phenomenon that you're seeing with the spread compression and is this something that you think that can persist in this backdrop, or would you expect that independent of what you're hoping for to kind of address in your prepared remarks, that is it something you would expect to start to reverse at some point?

Greta Guggenheim -- Chief Executive Officer and President

I would expect it to start to reverse, and we saw a couple of examples, not enough of them, but examples of private debt funds that started approximately one to two years ago, who have thrown in the tail (ph) and said, we're not doing this. We can't originate at the yields we indicated to our investors and we can't cover our costs of the manager. So we would like to see that trend continue. But there are a couple of examples of that. So I do expect it to reverse.

Yesterday we were quoting a nice Class A multifamily deal and the sponsor was like, you have to tighten, your competition has tightened and we just said, I'm sorry. We are, we can't tighten. We've given you everything we could and we really thought we were going to lose that loan and he called us back and said OK, send us your term sheet. So we'll see.

Kenneth Bruce -- Bank of America Merrill Lynch -- Analyst

Right. So not exactly a flighted capital, but it sounds like at least maybe there is some pause on the competition side from more money coming in?

Greta Guggenheim -- Chief Executive Officer and President

Well the -- if you look at some of the pension fund data that some of the research organizations put out, the fundraising for private debt funds slowed down dramatically in the second half of 2018. The first half was very, very strong as well as 2017, but they saw a slowdown and they cited the reasons being that a lot of the LPs that invest in private equity -- real estate equity and debt funds, really don't want too many different sponsors or GP relationships in the debt strategy. If they have one large one, they are not going to increase it, whereas in equity there was enough differentiation among sponsors that they could invest in numerous funds and with numerous sponsors. But they are less likely to -- in the debt fund. I hope that is the case.

Kenneth Bruce -- Bank of America Merrill Lynch -- Analyst

Interesting. Okay. And then my only other question, and thank you for all your comments this morning. But the -- you made a kind of a curious comment in terms of book value growth and you kind of pointed out that you're earning and paying out your dividends, I guess I'm just interested in kind of the thoughts around the book value growth, given kind of the nature of the mortgage REITs and how earnings gets paid out. So if you could just maybe elaborate a little bit on that, if it's -- that would be helpful. Thank you.

Greta Guggenheim -- Chief Executive Officer and President

I think, the goal is to have more full from dividend coverage and retained earnings and just to grow book value, and that is our goal.

Robert Foley -- Chief Financial and Risk Officer

So, look, well, we've been pretty clear and consistent from the get go as to what our dividend policy is, which is we're always going to dividend, not less than 100% of taxable income, subject to the spill back and spill forward arrangements available in the code. And the differences between book and tax income in our company have been largely eliminated, as we move farther and farther away from the original formation transaction.

So, for us building book value is a function of driving base GAAP earnings. You will see a slight increase in the spread between core and GAAP income as we move forward just as some non-cash items, including stock compensation expense grow over the years. And then as we continue to issue equity prudently and at the right times and then at the right values, but at levels of our book value, that's another way to grow book value.

So here, your point, there are natural constraints to book value growth given the dividend requirements of the code, but within that envelope, we think that strong performers with strong credit quality portfolios and a stable capital base that can function in rising markets and in challenging markets, those are the platforms that over time will be rewarded with book value growth and hopefully growth in trading value as well.

Kenneth Bruce -- Bank of America Merrill Lynch -- Analyst

Well. That's the answer I was looking for. So, thank you very much.

Robert Foley -- Chief Financial and Risk Officer

First time all day. Thank you, Ken.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the conference back over to management for closing remarks.

Greta Guggenheim -- Chief Executive Officer and President

Well. Thank you all for calling in this morning. We're very much looking forward to a productive and exciting 2019. Thank you.

Operator

This concludes today's conference. You may disconnect your lines at this time. And thank you for your participation.

Duration: 40 minutes

Call participants:

Deborah Ginsberg -- Vice President and Secretary

Greta Guggenheim -- Chief Executive Officer and President

Robert Foley -- Chief Financial and Risk Officer

Arren Cyganovich -- Citigroup -- Analyst

Steve Delaney -- JMP Securities -- Analyst

Benjamin Zucker -- BTIG -- Analyst

Richard Shane -- JP Morgan -- Analyst

Kenneth Bruce -- Bank of America Merrill Lynch -- Analyst

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