KKR Real Estate Finance Trust Q4 2024 Earnings Call Transcript

Quartr
Provided by Quartr
February 4, 2025
Skip to Participants
Operator

Good morning, and welcome to the KKR Real Estate Finance Trust Inc. 4th Quarter 2024 Financial Results Conference Call. All participants will be in listen only mode. Mode. Please note this event is being recorded.

Operator

And I would now like to turn the conference over to Jack Swetala of Investor Relations. Please go ahead.

Jack Switala
Jack Switala
Head Of Investor Relations at KKR Real Estate Finance Trust

Great. Thanks, operator, and welcome to the KKR Real Estate Finance Trust earnings call for the Q4 of 2024. As the operator mentioned, this is Jack Swatala. This morning, I'm joined on the call by our CEO, Matt Salem our President and COO, Patrick Matson and our CFO, Kendra Decius. 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.

Jack Switala
Jack Switala
Head Of Investor Relations at KKR Real Estate Finance Trust

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 ks for cautionary factors related to these statements. Before I turn the call over to Matt, I will go through our results. For the Q4 of 2024, we reported GAAP net income of $14,600,000 or $0.21 per share. Book value as of December 31, 2024 is $14.76 per share, which is relatively flat quarter over quarter.

Jack Switala
Jack Switala
Head Of Investor Relations at KKR Real Estate Finance Trust

Distributable loss this quarter was negative $14,700,000 or negative $0.21 per share. We have a $0.25 per share dividend, which yields 10% as of yesterday's closing price. With that, I'd now like to turn the call over to Matt.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Thank you, Jack. Good morning, everyone, and thank you for joining today. Before we begin, we first wanted to acknowledge the devastating wildfires in California. Our thoughts are with everyone that has been impacted, and our heartfelt thanks to all the first responders. Before going into our results, I thought I would discuss our 2024 achievements.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

First, I want to highlight KKR's ability to leverage KKR's significant resources and information. KKR manages approximately $80,000,000,000 of real estate assets globally. With approximately 140 professionals, we have been able to utilize all our resources across asset management, sourcing, underwriting and capital markets. Just within real estate credit at KKR, we are active across the United States and Europe in both loans and securities and we invest across the risk reward spectrum through our bank, insurance and transitional pools of capital. Our dedicated Kstar Asset Management platform now has over 55 individuals with expertise in asset management, special servicing, underwriting and REO.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

This team manages a portfolio of over $36,000,000,000 in loans and is named special servicer on an additional $45,000,000,000 of CMBS. Turning to KREF, this was the year of transition. Our posture during this challenging environment for real estate has been to transparently and proactively address issues and we think this approach has led to better asset management outcomes. Over the course of the year, we have decreased our watch list percentage from 13% as of Q4 of 2023 to 8% today. As for our REO assets, we've begun to see green shoots in the office and life science sectors.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

And it's reentering the market and we have responded to a number of RFPs. Investor sentiment is slowly rebounding and liquidity is beginning to return for the highest quality assets. The CMBS market has seen a number of large office transactions with over $3,500,000,000 of office SaaS B issuance in 2024 and a healthy 2025 pipeline. We think our patience on these high quality assets will optimize shareholder value. As a reminder, as we repatriate the equity in the REO portfolio, we believe we could generate an additional $0.12 per share on our distributable earnings per quarter.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

With the assistance of our KKR Capital Markets team, our liability structure remains a differentiator for the company. We have diversified financing and 79% of our financing is non mark to market. We have strong levels of liquidity with $685,000,000 available at the end of the 4th quarter. Although we don't have any corporate maturities until 2027, the debt capital markets are healthy and we continue to watch for opportunities to optimize our capital structure and further extend maturities. Since our last call, sentiment around commercial real estate has continued to improve and transaction volumes are increasing quarter over quarter.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

The higher U. S. Treasury market may dampen some acquisition activity, but we have a robust pipeline and there should be ample opportunity to lend on reset values. In January, we closed 2 loans for approximately $225,000,000 Looking ahead, we have consistently stated that while we are not fully out of the woods and anticipate further credit migration, we think we have dealt with the majority of the issues in the portfolio. Before I turn the call over to Patrick, I want to reiterate our optimism heading into 2025.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

We continue to feel confident in our offensive positioning and look forward to the opportunity that we have in front of us. With that, Patrick can take it from here.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

Thanks, Matt. Good morning, everyone. 4th quarter repayments exceeded $450,000,000 comprised of 6 loans secured by multifamily and industrial properties as well as the par sale of a Dallas office loan. Full year repayments totaled 1,500,000,000 dollars representing approximately 19% of our portfolio. We reported 4th quarter distributable earnings prior to realized losses of $0.31 and DE of negative $0.21 per share, which includes the realized loss on the San Carlos Life Science loan.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

We now have 4 watchless loans in the portfolio, representing 8% of the loan portfolio compared to 13% a year ago. While additional watch list loans would not be surprising over the course of this year, we remain confident that we are well beyond the peak stress. With excess liquidity, a stabilizing portfolio and leverage at the low end of our target, we are actively looking to invest repayments into new loans. Repayments are expected to exceed $1,000,000,000 again this year. And given our current leverage levels, we anticipate originations to outpace repayments in the near term.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

We closed 2 loans for a total of $225,000,000 last month, including a 4 property multifamily portfolio of newer vintage and recently renovated assets with a business plan to improve physical occupancy and burn off current concessions. Turning to our CECL allowance and watch list. As we suggested in the previous earnings call, in Q4, we modified the San Carlos Life Science loan and subordinated a portion of the loan to new sponsor equity. The $36,000,000 subordinated note was written off and the corresponding CECL reserve was released. Subsequently, the restructured and reduced senior loan was upgraded to a risk rating of 3.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

Our total CECL reserve decreased to $120,000,000 or 92% the portfolio is risk rated 3 or better. On our watch list, we continue to make progress on our West Hollywood multifamily loan, and we are continuing down a path to ownership and subsequent condo sell out. We will keep you updated on the progress in the coming quarters. As of the Q4, our debt to equity ratio is 1.6 times and total leverage ratio is 3.6 times. KREF's leverage at this point is on the lower end of our target zone, so we are actively originating loans.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

As part of our investment allocation, we've continually looked to evaluate share repurchase opportunities. Prior to the Q4, we bought back almost $100,000,000 of stock since inception of the company. In the Q4, we added to that total, repurchasing $10,000,000 of KREF stock, representing a weighted average stock price of $11.64 We've made great progress on our watch list over the last 12 months and remain excited about the current market opportunity. This should be a strong repayment and origination year for KREF. The lending market is attractive and we plan to be active.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

We feel confident in our positioning from a portfolio quality, liability structure and leverage perspective and look forward to the opportunity ahead in 2025. Thank you again for joining us this morning. And now we're happy to take your questions.

Operator

We will now begin the question and answer session. And the first question will come from Tom Catherwood with BTIG. Please go ahead.

Tom Catherwood
Managing Director at BTIG

Thanks and good morning everybody. Maybe starting with repayments, Obviously, huge jump in 4Q. You had alluded to that obviously with 3Q earnings, just that you expected that pace to be accelerated. How has that pace trended with the steepening of the yield curve? Kind of has that slowed as we've begun 2025?

Tom Catherwood
Managing Director at BTIG

And how much of that do you kind of expect that the $1,000,000,000 plus of repayments, do you think that that's likely early 'twenty five event or should it come in

Tom Catherwood
Managing Director at BTIG

kind of evenly throughout the year?

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

Tom, good morning. It's Patrick. I'll take that question. So you're right, we did have a pretty meaningful acceleration in the Q4. As you know, our loans are pretty chunky.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

So we get a few more repayments in any one quarter and that can sort of drive the numbers. Obviously, that was at a time when we saw rates back up and there wasn't a meaningful impact in repayments. I don't see that as a main driver for the repayments. A lot of these loans have reached their business plans and it's about optimizing the refinance for our counterparties. So I don't see a material impact there.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

In terms of the forecast this year, again, difficult sort of quarter by quarter. We certainly think it's over $1,000,000,000 this year. If I had to sort of lean one way or another, I'd probably say that's middle to sort of back end it. But it's really difficult to forecast. What we saw in the 4th quarter was an acceleration of some repayments that we had forecasted to repay in 2026, and obviously came early.

Tom Catherwood
Managing Director at BTIG

Got it. Appreciate that. And Patrick, just want to make sure I heard you right. Did you say you expect originations to exceed repayments in the near term in your prepared remarks?

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

That's right. And that really stems from the fact that we're at the low end of our leverage target here. So as we start to redeploy the capital, we think there's an opportunity for us to get ahead of some of these repayments, but also get back into the mid range of our leverage ratio. So out of the gates, we had a pretty strong January to start with. There were no repayments that came in that month.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

So already in the Q1, we're seeing the trend that I was discussing.

Tom Catherwood
Managing Director at BTIG

Great. And then along those lines, can you talk about the kind of I mean, obviously, we appreciate the color on the hospitality loan in Tennessee and the multifamily loans in various locations. But as far as your pipeline looking forward, can you talk a bit about the asset classes that you're targeting and maybe how the scope of that pipeline might compare to pre pandemic or kind of early 2020 times?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Hey, Tom, it's Matt. Yes, I can jump in on that one. I think the first takeaway is largely the same in terms of what we're targeting. We're going to continue to target institutional sponsorship and really high quality real estate and major food groups. So we will continue to focus on multifamily, industrial, student housing.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

So we did a hotel deal this quarter. That's always been a little bit smaller part of what we've done, but an important piece of the portfolio. In terms of just what's different, I would say a couple of things. Number 1, for us, Europe, we'd hope to we've built a business in Europe over the last few years and we've been actively lending there. So we'd like to add that to the portfolio from a diversification perspective.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Again, similar property types and sponsors, but we will get that geographic diversity in the portfolio. And then secondly, I would say, from a business plan perspective, things tend to be a little bit more stabilized and I think the multifamily deal that we did this January is a good illustration of that where before the rate increase, we were doing a lot of kind of newly built construction takeout lending and providing that bridge to lease the asset up. And we still like that and we'll still do that. But this most recent deal is more a function of like the business plan is it's mostly leased assets and maybe burn off some concessions over time. But our loan is really just providing the sponsor with just a little bit more time to get into a little bit better rate environment and grow revenues a little bit, but not the same kind of dramatic increase in occupancy that we were lending on a few years back.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

So the underlying business plans have changed. And then from a property type perspective, the only thing I would add is just the data center sector continues to we continue to see a lot of demand for financing there. And so I think that would be a new area that we could potentially introduce into the portfolio.

Tom Catherwood
Managing Director at BTIG

Got it. Appreciate that, Matt. And last one for me, kind of sticking with you. For office, we would usually speak about the sector in hushed tones. Obviously, you mentioned in your prepared remarks some positive shifts recently in the sector, albeit off of a very low base.

Tom Catherwood
Managing Director at BTIG

But kind of how are you thinking of your office loans right now, both the ones on your in your loan book and the REO assets on your balance sheet?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Yes. I think there's 3 segments there probably I would highlight. On the REO, the green shoots that we're beginning to see in the sector are encouraging. It's early still and I think we have to be patient, but there's leasing activity and I think what we own both in the office and the life science sector is really high quality real estate. And the reason that we went to title on it and it's not without cost, let's be clear.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

But the reason that we did that was because we thought we had really good assets that would lease over time and now we're beginning to see some of those tenants come back into the market. Again early, but it's got to start somewhere and so that it's nice to kind of see that again. And then the second part of the portfolio I would comment on is just the 3 rated office loans. There it's a much more positive sign because the financing markets are back. So these are our 3 later office zones tend to have a long term they are well leased, they have long remaining lease terms and our leverage point is reasonable.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

So when as the financing markets come back, you can start to see some liquidity in those positions. So I'd say that's pretty encouraging on that component. And I think on the watch list side, it will still be we've got a risk weighted office loan in Minneapolis and it's still probably a little bit of a wait and see and let's keep working through it and we've modified that and have big reserves already. But again, we're not finished with the we're not out of that asset yet either. So a little bit of a mix depending on which group you're looking at.

Tom Catherwood
Managing Director at BTIG

Got it. Appreciate all your thoughts. Thanks everyone.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Thank you.

Operator

Next question will come from Don Fendetti with Wells Fargo. Please go ahead.

Don Fandetti
Don Fandetti
Analyst at Wells Fargo

Yes, Matt. So it seems like there are some crosscurrents in your business. You've got office getting a little bit better, but higher for longer might not be so great for apartments, multifamily. As you think about book value, should investors sort of view this is a more stable environment, maybe a little bit of migration from 3 to 4, but nothing too significant to where you're doing very large reserve builds and eating into that book? Or is that a reasonable kind of base case over the next 12 months?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

I mean, it's hard to look out. I'd say hard to look out into the future. I think we've like we try to make these comments that we're largely through what we think is going to come through the portfolio, but we're not done yet. So I don't know exactly what that means just because it's hard to look out a couple quarters and project what may happen. And obviously, it's a pretty volatile macro environment, but rate complex in the economy as well.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

So it's hard. I think we're entering this phase where we're going to see much more book value stability, but again hard objective for a few quarters or a handful of quarters like what else might come down the road.

Don Fandetti
Don Fandetti
Analyst at Wells Fargo

Got it. And what's your sense on multifamily in your portfolio? You've had a couple of rate cuts, but now it looks like maybe fewer. What are you hearing from borrowers? Are they sort of willing to hang in there?

Don Fandetti
Don Fandetti
Analyst at Wells Fargo

Is there still some hope? Or and if you do take real estate back, do you still feel like you can still monetize the value because there's liquidity in multifamily?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Yes. With the multifamily, I'll kind of start where you ended, which is there's a tremendous amount of liquidity across the capital structure, senior loans, mezzanine, preferred equity, there is a lot of demand for it. And if you just do the math of the change in kind of the forward curve, it would imply that values are down a little bit more. But there's a few things that are like offsetting that, I would say. Number 1, spreads have compressed, so the cost of capital has come in a little bit to offset some of that interest rate increase.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Number 2, we're further down the road, the supply pipeline road, which means we're closer to that moment in time where good or bad, these markets are going to be undersupplied again. We're not there yet, but we're closer to it and that impacts just your projections as it relates to rents over time. And then finally, it feels like this latest rate increase has been accompanied by more a higher degree of growth in the market. So perhaps investors are going to put a little bit more weight behind their rent assumptions or rent growth assumptions going forward. So there's kind of some puts and takes, I would say.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

As it relates to our portfolio, I honestly don't think we have like a lot of like rate sensitivity in our multifamily portfolio. We've got a couple of watch list loans. I don't think those are really rate sensitive. And then our overall portfolio, I don't think it really is impacted. There's still equity cushion there and for the most part, I don't think this rate move is really going to impact us that much.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

There were a lot of borrowers that elongated capital that elongated capital structures, paid down loans to try to get to a lower interest rate environment. And clearly, they're going to have to wait a little bit longer. My guess is within our portfolio and our the quality of the sponsorship we lend to, my guess is that they'll continue to play that forward and they'll delever us a little bit and buy some more time. Not every sponsor has got the liquidity to do that. So as you start to get into smaller sponsors that's where I think you could see a little bit more delinquencies.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

But I don't think values have changed that much over the last couple of quarters in multifamily. Thanks.

Operator

And our next question will come from Stephen Laws with Raymond James. Please go ahead.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Hi, good morning. Matt, I wanted

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

to circle back on you made a couple of comments to the Minneapolis office. I know you guys provided some color on the West Hollywood multi deal. But as you think about that Minneapolis office asset 5 rated, it looks like the maturity date is sometime in the first half this year. How do you expect any color you can provide on kind of the resolution path there? Do you think that's something that moves into the real estate portfolio?

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Do you expect something more aligned along with the San Carlos resolution? Kind of how do you anticipate that moving in the first half of this year?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Yes. We don't have a determined path yet. So we could go a couple of different ways. I think we have a little bit more time on an asset like that as well, because it continues to be pretty well leased. It's similar occupancy from over the last few years.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

It hasn't we've lost some tenants, we've got some tenants. So it's relatively well leased and cash flowing well and it competes well in the market. It's a difficult Minneapolis is really difficult market, but that asset competes fine, competes well in the market for tenants. So I'm not exactly sure what the path is, but there's probably more options there just given the cash flow and could potentially just try to push that forward again and see if we can buy some more time.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Great. Appreciate that color. As you think about originations and use of capital, how do you view additional stock repurchases in the current market, especially given kind of the sell off year to date? I guess, I assume that's a quiet period, but how do you think about repurchase activity versus new originations going forward?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Well, Patrick did a nice job of highlighting on the remarks that we've been very consistent buyers of our stock when we thought it was undervalued. And I think we will obviously continue to evaluate that opportunity here. But there needs to be a balance in my mind as well. And our business is to invest capital and make loans and I think it's important for us to for a lot of reasons, vintage exposure, portfolio diversification, duration to make sure that we're turned back

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

on

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

and making new loans. So it's I don't like to think about it like one or the other, but I think as you saw us do over the course of the last few months, a balanced approach is kind of what we've taken in the past.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Great. And Patrick, one for you on CECL. As you think about the new originations coming on that originated current environment, current cap rates, new underwriting standards versus a few years ago, how do you think about the right level of reserves on the new originations this year? I mean, is it 75 bps, 100 bps? Like how do we think about the normalized return level as we move back to a portfolio that is increasingly originated in this current environment?

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

It's a good question, Steve. Certainly, as we're originating new loans, just on the margin, I'd expect CECL to go up a bit because it's model driven for these 3 rated loans. And the model for a short duration loan, like many of the loans on the book today, have a lower CECL than newly originated 5 year loan. So I would expect that marginally we'd sort of go up. Certainly, that's something that we're going to be evaluating as we're making new loans.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

And I think part of your question is what's a minimum CECL that should be expected. And I think that's something that we continue to do work around. But I do think the margin over the course of this year, absent any other movement, we would expect that there's slightly greater CECL.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

But to clarify, that says an absolute number, right? And not necessarily and that's largely driven by the portfolio growth because of the new originations? Or are you referring to some basis points of the portfolio?

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

A little bit of both. 1, because I think from a portfolio growth, there's a growth opportunity here just where we've got capital and where we're at a leverage level. And then at the margin, putting aside resolutions, clearly, if we resolve some of the 4s and the 5s, we'd expect CECL as a percentage to come down. But as I think about our 3 rated assets and think about the percentage of CECL against those, I would expect that to go up not only in nominal dollars, but in percentage terms.

Stephen Laws
Stephen Laws
Managing Director at Raymond James Financial

Okay, great. That's helpful color. I appreciate that Patrick. Appreciate your time today. Thanks.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

Thank you.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Thank you.

Operator

Next question will come from Steve DeLaney with Citizens JMP. Please go ahead.

Steve Delaney
Director of Mortgage at Citizens JMP Securities, LLC

Thanks. Good morning, everyone. Look, first, we just want to applaud the buyback activity. It's very shareholder friendly and it's something frankly that it's not always seen among the externally managed companies. Your average price was $11.64 We're down to 14%, it's about $10.05 now or around $10 range.

Steve Delaney
Director of Mortgage at Citizens JMP Securities, LLC

And so we should assume that you continue to view that regardless of the volume in the leverage. I mean, I assume you still look at buybacks as being a very attractive opportunity. Is that correct?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Hey, Steve. Thanks for the questions, Matt. I think like I said earlier, like we're evaluating both buybacks and new loans and I think like we've done in the past, we really go down a balanced approach.

Steve Delaney
Director of Mortgage at Citizens JMP Securities, LLC

Sure. Okay. And to that point, Matt, about the portfolio, just curious, looking at the portfolio at $5,900,000,000 obviously, activity has been a little slow over the last year or 2. It's been more a credit issue. The high was like $7,600,000,000 at the end of in early 'twenty three.

Steve Delaney
Director of Mortgage at Citizens JMP Securities, LLC

You've got $124,000,000,000 of equity at year end 'twenty four. Do you have in mind sort of a round number or range for where you think the portfolio could grow over the next year?

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

Steve, it's Patrick. I'm happy to take that.

Steve Delaney
Director of Mortgage at Citizens JMP Securities, LLC

Thank

Steve Delaney
Director of Mortgage at Citizens JMP Securities, LLC

you.

Patrick Mattson
Patrick Mattson
President and COO at KKR Real Estate Finance Trust

Welcome. So yes, as we think about the portfolio and think about our target leverage range, this is absent resolution of some of the REO assets because that changes a little bit of that number. But just on the current portfolio, we think that number is in the kind of $6,600,000,000 to $6,700,000,000 range.

Steve Delaney
Director of Mortgage at Citizens JMP Securities, LLC

Very helpful. Well, thanks for the comments. A lot's been covered and I think I'm good.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Thank you, Steve.

Operator

The next

Operator

question will come from Rick Shane with JPMorgan. Please go ahead.

Rick Shane
Rick Shane
Analyst at JP Morgan

Good morning, everybody. Hey, look, a lot's been covered here. But I guess I really have two questions. First is, we've seen movement in rates. I am curious, the comment was made implicitly that puts a little bit of downward pressure on valuations.

Rick Shane
Rick Shane
Analyst at JP Morgan

When you look at what is transacting in the market, is market sentiment and the ability for the market to clear a function of price or is it a function of buyers and sellers developing greater confidence about where we are it's sort of at the end of the cycle? Like are people less concerned about, hey, we spent $100,000,000 on this and yes, it's going to be miserable to trade out at $50,000,000 Or is it, hey, we're now trading out at $50,000,000 and we're a lot less worried about it being worth $40,000,000 next week?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Hi, Rick, it's Matt. Thanks for the question. Let me answer it this way and hopefully what you're looking for comes through. I think it's a function of like over the last few years or couple of years, it's been a function of who are the sellers. Because a lot of these assets are fundamentally strong.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

And setting offices aside, they're well leased, they're cash flowing, and they have a valuation issue around cost of capital. And so there just haven't been that many willing sellers in the market. And the larger sellers have been it's been really around liquidity and not around it's really been they have to sell to repatriate capital. That's been where most of the sales have been. Now as we start to enter this next phase, you have I think there's more certainty within locally with where values are.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

So there's the bid offer has definitely compressed. And then it's just a question of like, okay, do the existing owners do they just want to keep buying a little bit more time and playing it forward and trying to get into a little bit lower cost of capital environment, let growth continue to build in their portfolio, let some of these supply pipelines within the multifamily sector burn off and get into a larger rent increase dynamic. So that's really what I think is happening. And then the overlay again is like this capital structures are becoming short. Because you think about all the acquisitions that happened in 2021 2022, a lot of those were financed with 5 year loans.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

So people are just like running a little bit short on time and there's a little bit more acute decision I think that they have to make. So that's how I see it. And quarter over quarter for the last 4 or 5 quarters like we've seen volumes build, transaction volumes continue to increase. And I think it's a function of just what I described like reality setting in, capital structures, getting maturing and people needing liquidity. So I personally think it will be a little bit more of a continuation of that.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

I don't think there's going to be a huge change in transaction volumes this year. We're just in this very slow deleveraging process for the industry.

Rick Shane
Rick Shane
Analyst at JP Morgan

Got it. Hey, Matt, first of all, thank you. I know it's a little bit of an amorphous question and thank you for swinging at the pitch. I appreciate that. I said one more question, but I'm actually going to follow-up and then ask the second question.

Rick Shane
Rick Shane
Analyst at JP Morgan

Is what you just described the explanation for the Minneapolis office loan, you've described it as well leased and alluded to the possibility of extending that a little bit longer. Is it just giving that giving everybody time to let cash flows align a little bit better if the rate environment improves?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Well, I would put office as a little bit of a separate category where there's been liquidity for all these other sectors throughout the last couple of years. There's nobody really wanted to sell at the price that there was liquidity. People just would rather hold out. I think with office, there was in my mind like very little to 0 liquidity. Now you're starting to see some of that liquidity come back into the market.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

So it's a little bit different dynamic there where not only could the rate market help improve the valuation of those assets, but just like more buyers in the market and some level of interest in owning office can really help that. I just don't think office was a liquid asset class over the last couple of years. And now you're starting with the best, like I'm not I don't want to like overstate it like the highest quality stuff first, but that's where of course that's where it's going to start and I think that's begun.

Rick Shane
Rick Shane
Analyst at JP Morgan

Got it. Thank you. And then the other question I had is this. We tend to take a pretty high level top down view of the space. And one of the observations I would make is that you guys make 3 year loans that never last 3 years.

Rick Shane
Rick Shane
Analyst at JP Morgan

When times are good, they last 18 months or 24 months and when times are bad, they these 3 year loans that have 5 year terms or 5 year extensions go 6 or 7 years. And we saw the pendulum swing wildly in the last 3 years or 4 years on that. You talked about a repayment in the Q4 that was something you didn't expect until 2026. I realize it's just one loan and everything is super idiosyncratic. Is there any indication that some of the newer loans that things are swinging a little bit back in the other direction?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

In terms of the portfolio

Rick Shane
Rick Shane
Analyst at JP Morgan

Going for we went from 2 years to 7 years. Is there anything that we're starting to see stuff anything out there execute a lot faster than we've been seeing over the last 3 or 4 years?

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Yes. I think there's more liquidity in the debt markets today than there has been, which is allowing some of our sponsors to refinance earlier. And I think the new loans that we're making now, I hear your point. I mean, I think the new loans we're making now are pretty strong. I mean, we have got reset basis, got good terms.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

And I think I agree with you. I think those are likely going to be on the shorter end as I think people are getting good buys today and if it's a refinance then they probably don't want all 5 years. They probably only want a couple of years to before they repatriate capital. And then part of it is just a function of like where we are today is like they've had our sponsors have largely had a few years to implement their business plan. So they've executed on it and now they can they have the cash flows that they can either sell or go refinance.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

So we've been thinking more about duration to your point around just always on the treadmill and on short duration loans and the portfolio exposure that can create. So it's something that's on our mind as well.

Rick Shane
Rick Shane
Analyst at JP Morgan

Got it. Okay.

Rick Shane
Rick Shane
Analyst at JP Morgan

Really appreciate it. And sorry for all the questions, but I realize we're sort of at the end of this and hopefully that's okay. Thank you, guys.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Sure. Thank you.

Operator

Our next question will come from Jason Zapschian with KBW. Please go ahead.

Jason Sabshon
Associate - Equity Research at Keefe, Bruyette & Woods (KBW)

Hi, good morning. Could you please give an update on KRF's life science deals and the outlook for leasing and ultimately value in those assets? That's probably the number one area of pushback that we hear. So addressing that would be helpful. And is that where you could see the potential credit migration in the portfolio that you alluded to

Jason Sabshon
Associate - Equity Research at Keefe, Bruyette & Woods (KBW)

previously? Thanks.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

Yes, I'll try to cover some of that without going into too much detail. First of all, we've made some progress on the life science piece of it. We foreclosed on an asset. We've modified obviously, last quarter, we had that big modification, which hopefully dealt with that. And then a lot of our remaining exposure is on really construct there were construction loans.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

So these are really high quality, very well located, trophy like in some cases assets, where when I commented on the green shoots, a lot of it is related to those types of exposures. And we think the tenants are coming back into these markets and they're really looking for the best assets in the market and we have our exposure is not 100%, but largely in that type of space and with that type of quality. And our sponsors, I think, are excited about what they're seeing in terms of just the tenants coming back into the market. Why don't I stop there without going loan by loan?

Jason Sabshon
Associate - Equity Research at Keefe, Bruyette & Woods (KBW)

Great. Thank you. And on the multifamily watch list assets, it would be helpful to hear about what the issues there are. Is it basis, rent, supply or something else? Thanks.

Matt Salem
Matt Salem
CEO at KKR Real Estate Finance Trust

I think it's a little bit depends on the asset. A couple of them are more supply driven markets where you've just seen that impact a little bit occupancies, but certainly rental levels. So that's some of it. I'd say that West our West Hollywood multifamily is a different it's a different deal that was just a very peak of the market acquisition, more financing, so more of a value really more of a value issue there at the end of the day from a multifamily perspective, which is why we're continuing to move it down the path of a condo sale out there because it was really built for condo. So a little bit of a mix depending on which asset we are looking at.

Jason Sabshon
Associate - Equity Research at Keefe, Bruyette & Woods (KBW)

Thanks.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Jack Svetala for any closing remarks.

Jack Switala
Jack Switala
Head Of Investor Relations at KKR Real Estate Finance Trust

Well, great. Thanks, operator, and thanks everyone for joining today. Please feel free to reach out to me or the team here if you have any questions. Take care.

Operator

The conference has concluded. Thank you for attending today's presentation. You may now disconnect.

Executives
    • Jack Switala
      Jack Switala
      Head Of Investor Relations
    • Matt Salem
      Matt Salem
      CEO
    • Patrick Mattson
      Patrick Mattson
      President and COO
Analysts
Powered by Quartr
Earnings Conference Call
KKR Real Estate Finance Trust Q4 2024
00:00 / 00:00

Transcript Sections