A new mortgage real estate investment trust (mREIT) will soon arrive on the scene, as TPG RE Finance Trust is about to launch an IPO. The company's shares are scheduled to start trading on Thursday, July 20. There are a host of mREITs on the market already; is this one different and attractive enough to consider?
Trusting in commercial real estate
REITs basically come in two flavors. Equity REITs buy and hold property and take in rental payments as the managers of those assets. Mortgage REITs, meanwhile, typically trade mortgage-backed securities (MBSes), the instruments that allow investors to put their money directly into property loans.
TPG RE Finance Trust is an mREIT with a focus on securities linked to commercial real estate. According to the company, as of March 31, roughly 73% of its holdings underpinned properties in the top 10 U.S. metropolitan areas.
The REIT is currently managed by an affiliate of TPG, a big veteran private-equity firm, and will continue to be after the IPO.
In its IPO prospectus, TPG RE Finance Trust says, "We believe TPG's investment experience, established infrastructure, and long-standing strategic relationships will help us operate efficiently as a publicly traded company and continue to generate an attractive pipeline of investment opportunities and access debt and equity capital to fund our operating and investing activity on favorable terms."
As the REIT was formed in late 2014, it doesn't have a very long set of financial statements. For the entirety of 2016, it booked $92.4 million in revenue, up from $81.1 million the previous year. Comprehensive income, the key profitability line item for mREITs, came in at $71.2 million, against the 2015 tally of $59.4 million.
This Fool's take
In the prospectus, TPG RE Finance Trust cites data showing that since 2009, transaction volume in U.S. commercial real estate has risen at a compound annual growth rate of 34%. It grew from $69 billion in that grim year to $546 billion in 2015, before sliding to $494 billion in 2016.
A still-rising economy and a stock market that continues to grow augur well for America's corporations, and in turn for the broader commercial real estate space. Meanwhile, interest rates -- which are a big concern for mREITS, as they're extremely sensitive to increases -- are being pushed up only incrementally.
The company says it will use its proceeds from the issue to purchase new assets. That's a refreshing shift from the many recent IPOs that have raised funds with the primary or sole purpose of retiring debt.
To maintain their status, REITs are required to distribute at least 90% of their net profits as shareholder distributions. TPG RE Finance intends to keep doing so. As a privately held entity, it handed out a total of $1.99 per share in 2016. If we mash that into the $20.50 midpoint of the company's expected IPO price, it would yield 10.3%.
That's more or less in line with the most prominent mREITs on the market. The king of the segment, Annaly Capital Management (NYSE:NLY), currently yields just under 10%. Unlike TPG RE Finance, Annaly leans heavily on "agency" MBSes (i.e., those backed by Fannie Mae, Freddie Mac, or Ginnie Mae), as does Two Harbors (NYSE:TWO), which yields 10.6%.
A more direct comparison is Starwood Property Trust (NYSE:STWD), which, like its soon-to-be-public peer, concentrates on commercial real estate paper. Starwood's latest yield figure is 8.7%.
I like that TPG RE Finance is competitive with its dividend against heavyweights and rivals such as Annaly, Two Harbors, and Starwood. I also believe the commercial segment still has a future, and I think this REIT can benefit from the support and experience of TPG and its associated entities. TPG RE Finance, then, is certainly worthy of consideration for those looking at the mREIT space.
Eleven million shares of TPG RE Finance Trust are being sold in the IPO for $20 to $21 per share. The stock is scheduled to begin trading on the New York Stock Exchange under the ticker symbol TRTX.
The roster of joint book-running managers for the issue is topped by Bank of America Merrill Lynch, Citigroup, Goldman Sachs, and Wells Fargo Securities.