KKR Real Estate Finance Trust : Transcript (kref 1q25 transcript)

Published: 2025-05-02 19:09:29 ET KREF

Published on 05/02/2025 at 19:09, updated on 05/02/2025 at 19:05

KKR Real Estate Finance Trust

Q1 2025 Earnings Conference Call April 24, 2025, at 9:00 a.m. Eastern

Good morning and welcome to the KKR Real Estate Finance Trust, Inc., First Quarter 2025 Financial Results Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star, then two. Please note this event is being recorded.

I would now like to turn the conference over to Jack Switala. Please go ahead.

Great. Thanks, operator. And welcome to the KKR Real Estate Finance Trust Earnings Call for the first quarter of 2025. As the operator mentioned, this is Jack Switala. This morning, I'm joined on the call by our CEO, Matt Salem, our President and COO Patrick Mattson, and our CFO Kendra Decious. I'd like to remind everyone that we will refer to certain non-GAAP financial measures on the call, which are reconciled to GAAP figures in our earnings release and in the supplementary presentation, both of which are available on the Investor Relations portion of our website. This call will also contain certain forward-looking statements which do not guarantee future events or performance. Please refer to our most recently filed 10-Q for cautionary factors related to these statements.

Before I turn the call over to Matt, I'll go through our results. For the first quarter of 2025, we reported a GAAP net loss of $10.6 million or $0.15 per share. Book value as of March 31stis $14.44 per share. Distributable earnings this quarter was $17 million or $0.25 cents per share, which is in line with our $0.25 per share dividend.

With that, I'd now like to turn the call over to Matt,

Thank you, Jack. Good morning, and thanks for joining our call today. Since our last earnings call and tariff implementations, market volatility and recession expectations have increased significantly, creating uncertainty for both businesses and households. The early recovery of real estate has likely been put on hold until we have more clarity on the scale and impact of the tariff regime. That said, we do believe real estate is better positioned for this environment compared to past cycles and other asset classes, given the reset in values over the last three years. In times like this, the first thing we think about is defense. It's a get your house in order mentality. And to that end, we are in a very good position. We have no corporate maturities until 2030, having just upsized and extended our corporate revolver for a new five year term and refinanced our Term Loan B, with a new seven year facility. We have ample liquidity, with over $700 million today. Given this secure position, we will remain on offense, actively looking to reinvest repayments into new originations.

In terms of what we are seeing in the real estate credit market, it is still functioning, and all market participants remain active, including the banking sector. Warehouse financing and senior loan spreads are approximately 10 to 15 basis points wider, while the transitional loan sector spreads are approximately 15 to 20 basis points wider. The CMBS spreads have been more volatile and are currently 50 to 75 basis points wider. Many owners are now coming to us for a balance sheet solution to avoid the capital markets volatility.

From an opportunity perspective, it's significant. Our pipeline is the largest it's ever been, totaling over

$30 billion and is very high quality. I expect this market will lead our sponsors to seek out more short term bridge loans instead of testing the investment sales market. Interestingly, our repayment expectations

have increased since our last call. As we articulated last quarter, repayments are expected to exceed $1 billion this year, and we are tracking well above that. We had an active quarter and closed four loans for a total of $376 million, 80% of which were secured by Class A, multifamily properties. It had a weighted average LTV of 69% and a coupon of SOFR plus 277 basis points.

Repayments in the quarter were $184 million, and along with future funding from existing loans, our net fundings total $222 million. We are actively looking at opportunities to diversify our portfolio and add duration. To that end, we are focused on the European lending market. We have built a strong team over the last few years. We are also looking at new issue, CMBS, conduit B pieces, where we can leverage our position as one of the largest market participants, as well as K-Star, which is our rated special servicer.

Turning next to risk ratings, we downgraded two loans this quarter, first, a Raleigh, North Carolina multifamily loan, from a four rated loan to a five rated loan. We are still evaluating numerous scenarios for this loan, and are engaged in workout discussions which could lead to an ownership position. Second, Boston Life Science, from a three rated to a four rated loan due to current occupancy trends. With the two downgrades in the quarter, and therefore increased CECL provisions, book value per share is $14.44, down approximately 2% compared to the prior quarter. We will continue to be transparent and proactive in managing the KREF portfolio, and we'll provide updates on those two loans in the coming quarters.

Before turning it over to Patrick, I will touch on our life science exposure. This is a sector that we believe has long term positive fundamentals, but faces cyclical headwinds, which could be exacerbated by an economic downturn or NIH funding cuts. As a reminder, 12% of our loan portfolio is life science, and we have one REO property. We thought it'd be helpful to provide additional details in our supplemental which is on page 10 of the presentation. At a high level, 100% of our loan exposure is located in the top two life science markets, Boston and South San Francisco, and we provided construction financing for over half of our exposure. So these are very high quality and purpose built for life science. We've seen some green shoots as well. In March, we executed a 32,000 square foot lease in our Seattle life science REO property to the Institute for Protein Design at the University of Washington. The tenant has created AI technologies and computationally designed protein medicines, and is led by a recent Nobel Prize winner for chemistry.

With that, I'll turn it over to Patrick.

Thanks, Matt. Good morning, everyone. This quarter, we worked closely with our KKR Capital Markets team to maintain our best in class financing. In March, we closed on a new $550 million Term Loan B, upsizing from the prior loan of $340 million and resetting the term for seven years. Proceeds were used to repay indebtedness, including our existing Term Loan B, and for general corporate purposes. The new Term Loan B priced at 99.875% and bears interest at SOFR plus 325 basis points. This loan further bolsters our liquidity position and enables us to continue to focus on offense. In the quarter, we also upsized our corporate revolver to $660 million and extended the maturity for a new five year term to March 2030, eliminating corporate liability maturities over the next several years.

Additionally, we added a new non mark to market secured loan facility this quarter, with an initial funded size of $122 million, and the ability to grow as new loans are included, further diversifying our financing capacity. Our financing availability now sits at $8.3 billion, including $3.1 billion of undrawn capacity. At quarter end, we had $720 million of liquidity available, including $106 million of cash on hand and $570 million of undrawn corporate revolver capacity. 78% of our financing is non mark to market, and KREF has no final facility maturities until 2026, and no corporate debt due until 2030.

In addition to originations this quarter, we also invested capital in share repurchases. In the first quarter,

we repurchased $10 million of KREF stock, representing a weighted average price of $11.03. This raises our total shares repurchased in the past two quarters to $20 million, at a weighted average price of

$11.33. Our CECL reserve increased to $144 million, with two rating downgrades Matt mentioned. Our loan portfolio remains relatively stable, with 90% of the portfolio risk rated three or better.

As an update on our West Hollywood multifamily loan risk rated five as of quarter end, we took title to the asset earlier this month and are proceeding on our condo execution strategy with unit closings anticipated for late summer. As a result of the assignment in lieu of foreclosure, we expect to realize the loss tied to this investment of approximately $21 million to distributable earnings in 2Q, which is consistent with our CECL reserve as of 1Q.

As a reminder, our REO assets could generate an additional $0.12 per share per quarter on our distributable earnings, as we effectuate our business plans, repatriate capital and reinvest into performing loans. As of the first quarter¸ KREF's debt to equity ratio is 1.9x, and our leverage ratio is 3.9x.

Following two repayments totaling $283 million early in the second quarter, on a spot basis, the current leverage ratio is 3.7x, which is the midpoint of our target range.

In closing, we're positioned well for this market environment, given steps that we've taken over the years to manage our liabilities, including our most recent activity in the first quarter, to increase and extend our corporate facilities. We're continuing to make progress on our REO assets, and are supported by a deep, and experienced credit team of over 110 associates, and who, together with K-Star, manage $37 billion of CRE loans and are named special servicer on over $46 billion of CMBS.

Origination activity is picking up speed, and we're expanding our investment opportunity into the European loan market and the U.S. CMBS market.

Finally, the portfolio grew 4% quarter over quarter, and we expect to recycle capital into new opportunities throughout the balance of this year. Thank you for joining us, and now we're happy to take your questions.

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Rick Shane with JPMorgan. Please go ahead.

Good morning. Thanks for taking my question today. Look, I think there are two things that are going on here. You're working through some of the portfolio issues that you've identified previously. You've raised concerns related to the macro environment. Two things, one, when you think about the macro issues, are you looking at this from a big picture perspective and just saying, hey, risk and uncertainty is increasing, or are there specific properties within the portfolio that you identify is, for whatever reason, being at greater risk? And then the second part of the question is, given the return on capital that it appears that you're going to generate in '25, how do you think about the dividend policy as we move through the year?

Well, good morning, Rick. It's Matt. Thank you for the question and for joining us. I could start off and take both those pieces. As it relates to the economic environment, I'd say we're probably thinking about

both sides of it, from a macro perspective. Just trying to think through what is the impact to really jobs, right? How much is it going to slow the economy, and then what's the flow through into the job market? And will it be significant? Will there be a significant impact there? And obviously, if so, that could be felt through the broader economy, and have a little bit bigger impact on the real estate sector.

That's probably not our base case. Certainly here at KKR, we're not calling for a recession. We think growth will slow down to somewhere between zero and 1% from a GDP perspective. So we are kind of watching the broader macro and unemployment pretty carefully. I don't expect that to have a very big impact on real estate, because values have obviously declined a lot already, and from a supply perspective, we're getting through the big supply wave. We all know construction starts are down across every property type, somewhere between 60% and 70%. I think that's why in our opening remarks we make the comment about real estate's a little bit different position than other asset classes. But if we are going to enter a recession and we see that unemployment rate go up, you're going to have impacts kind of broadly, but again, we're pretty well positioned for that, but more concerned about what you're talking about and how will it impact individual properties. The two things that come to mind are some of the port markets for industrial, especially on the West Coast, obviously, if you think about the slowdown in trade from China. So we're clearly watching that sector more. I don't think there's any one asset in our portfolio that we're like particularly concerned about, but we have heightened just awareness of the potential market impact there. The second is just around decision making. In this kind of uncertain market, I think you could see decision making slowdown, which could impact capex. It could impact leasing decisions, and so some of our assets are still in lease up mode, and are looking for larger, larger tenants, and just a little bit concerned that there's going to be a kind of a pause in that decision making around some of these leasing. So those are really the two things I would say we're focused on.

Got it. And I really appreciate that answer there. It's very thoughtful, and I realize there's no easy answer to that. Do you mind circling back on the dividend policy? And I do want to acknowledge having asked the question about buying back stock for probably every quarter, for ages that you guys were in the market this quarter, and I think that's constructive for shareholders. But can you talk a little bit about dividend policy in light of the ROE characteristics right now?

Yes, happy to. So I think on the dividend, when we initially cut it, we had a number of different scenarios in mind, and a big part of that, clearly, was thinking through the REO and giving us time to just effectuate those business plans. There's been a lot of change since we initially set that dividend. But I think when we kind of net-net it all together, we still feel pretty comfortable where we set it. Of course, it's a Board decision, and we'll evaluate it every quarter. But I don't think we feel a lot of pressure right now to do anything different. And from where we sit, we have all that upside in the REO as well, and we know at some point in time we're going to sell those assets, repatriate that capital. And Patrick mentioned in his section that if we did all that, we could reinvest that into new loans and can drive earnings by $0.12 a share per quarter. So even though our current earnings rate is right around that dividend level, we know there's like this embedded earnings power within the company that will unlock at some point in time. And, keep in mind, we calculate those numbers on our existing cost basis. And we think we're going to do better than that as we implement these business plans. So that's a little bit how we're thinking about the dividend now. You asked about the share buybacks, similar to last quarter, I think we need to be balanced. The stock where it trades right now, it's very attractive. So you saw us buying it back, and we've got a long track record of buying back stock when we thought it was trading at attractive prices. It's very accretive to our book value per share. So I think we'll have to continue to evaluate that as an option for capital, especially kind of given where it is today, but the same time, and similar to, like you saw us in the first quarter, we need to invest in our portfolio as well. We need to make loans. We need to continue to diversify the portfolio, from a vintage perspective. We talked about potentially adding Europe and

Disclaimer

KKR Real Estate Finance Trust Inc. published this content on May 02, 2025, and is solely responsible for the information contained herein. Distributed via Public Technologies (PUBT), unedited and unaltered, on May 02, 2025 at 23:05 UTC.