Q4 2020 KKR Real Estate Finance Trust Inc Earnings Call
Good morning, and welcome to the KKR Real estate Finance Trust incorporated fourth quarter and full year 2020 financial results conference call all participants.
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I would now like to turn the conference over to Ana Thomas Head of Investor Relations. Please go ahead.
Thank you operator, welcome to the KKR Real estate Finance Trust earnings call for the fourth quarter of 2020, we.
We hope that all of you and your families are continuing to stay safe and healthy today.
Today I am joined on the call by our CEO, Matt Salem, Our President and C O L. Patrick Mattson and our CFO the stop in the body.
I would 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 forward looking statements, which do not guarantee of future events or performance. Please.
For our Assortments recently filed 10-K for cautionary factors related to these statements of.
For I turn the call over to Matt I will provide a brief recap of our results.
For the fourth quarter 2020, we had GAAP net income of $28 $8 million for cause.
Two of the cents per share.
Which included a $3 4 million benefit from the lower seasonal provision.
Distributable earnings the quarter were $26 $5 million for 48 cents per share driven by the continued strong performance of our portfolio.
This quarter, we began using distributable earnings as of supplementary non-GAAP earnings metric to replace core earnings. Consequently, our prior quarter's results have been real labeled to reflect the change in presentation, but no change in the calculation for reported figures.
Book value per share as of December 31, 2020 increased to $18.76, which included the impact of a dollar of nine cents per share from Cecil as compared to 18 73 as of September 30.
Finally, I would note that in the January we paid a cash dividend of 43 cents per share with respect to the fourth quarter.
Based on the closing stock price on February 12th of the dividend reflects an annualized yield of 9.2 per cent with that I would now like to turn the call over to Matt.
Thank you Anna and good morning, and thank you for joining us today.
We hope you are all healthy and safe.
And of year, where we experienced the global pandemic.
And the resulting health and economic damage.
You have delivered its strongest performance to date.
With record distributable earnings of $1 of 95 cents a share.
We held our dividend constant.
Despite a significant decrease in interest rates.
In our earnings covered our dividend by 1.13 times.
The volatility throughout the year.
Put a spotlight on the industry.
Allowing us to showcase our defense of investing strategy.
And increase our Investor base.
Our financing.
Which is 83 per cent fully non mark to market.
Demonstrated its resilience.
The best in class liabilities structure.
Which was years in the making.
Demonstrates the tremendous effort across the KKR platform.
To differentiate K RAF.
And as transaction activity resumed in the market.
We were among the first lenders to take advantage of the new environment.
And originated $565 million in the fourth quarter.
As we look into the year ahead.
Okay, what will continue to benefit from our conservative of lending.
The liability strategy.
Turning to our portfolio as of December 31st.
The balance was approximately $5 billion.
With only $472 million or 9% of our total commitments.
Our future funding obligations.
Are almost exclusive senior loan portfolio.
Focuses on institutional real estate and sponsorship.
And the secured predominantly by class a lighter transitional multifamily and office properties.
Located in the most liquid real estate markets.
Our average loan size of $118 million.
And our investment portfolio is 98% senior loans.
No direct holdings of Securities.
The performance on the portfolio remains strong.
With the interest collected on approximately 98 per cent of the portfolio as of the fourth quarter.
Through our robust quarterly asset review process.
We evaluate every one of the portfolio to assign an updated risk rating.
Our portfolio has a weighted average risk rating of 3.1 on a five point scale.
Consistent with the weighted average risk rating at September 30th.
84 per cent of the portfolio was risk rated three or better and.
And we feel very confident about the performance on those properties.
As we did in the second and third quarters, we continue to provide a detailed breakout of our watch list loans.
Supplemental presentation.
While our watch list remains the same.
We are seeing improving trends in a number of properties.
We expect to lead to positive credit momentum in those assets.
Approximately 2% of our portfolio is rated a five and.
It is primarily comprised of our Portland retail loan.
This property remains challenged.
And we were in ongoing discussions with the sponsor.
We continue to believe the adequate seasonal reserves.
As mentioned during our last earnings call, we return to offense and originated a total of seven loans for $565 million during the fourth quarter.
Despite the yield compression in the broader market.
There continues to be good relative value in the sector.
With the opportunity to create.
Returns similar to pre Covid.
On loans with more structure.
I would characterize our lending is more of the same.
We continue to focus on high quality real estate.
In light transitional business plans.
For the fourth quarter 55 per cent of our originations by commitment.
We're secured by multifamily properties.
We've also started to see new opportunities.
Stemming from the Covid impact on real estate.
The demand for industrial space has accelerated.
And we are seeing increased opportunities to lend on industrial construction projects.
For example in December.
We originated of $95 $8 million loan.
For the construction of.
Of an industrial park located in Denver.
In terms of repayments.
We received 535 billion during the fourth quarter, Inc.
The repayment of one of our largest of our largest exposure for the New York City market.
Our forward pipeline pipeline remains active.
With two loans closed since year end and several loans under exclusivity totaling 497 million in aggregate.
All of which are expected to close in the next couple of months.
While the pipeline continues to grow.
Hey, Ralph it's effectively fully deployed.
Origination opportunities will likely exceed available capital.
And then the near term, we will need to manage the timing of originations to repayments.
Before turning the call over to Patrick.
I wanted to update everyone on the growth of KKR real estate platform.
Going back to our I P O.
I liked the benefits to K RAF of being part of the larger asset management platform with the culture of collaboration.
The contributes value across everything we do.
From sourcing and underwriting.
To liability management.
This is the only accelerated as.
As the business has scaled.
Today take yards of real estate business manages over $25 billion.
The strategies ranging from credit.
The opportunistic equity core plus equity and net lease.
Recently.
Thank you our acquired global Atlantic.
A leading provider of life and annuity products.
This addition, broadens the lending products, we can offer our clients.
Creating more opportunities to connect with borrowers and intermediaries Inc.
<unk> is well positioned.
To capitalize on the increased connectivity.
We remain excited about the competitive position of our franchise.
And the market to market opportunities ahead in 2021.
Now, let me turn the call over to Patrick.
Thank you Matt Good morning, everyone. We hope that you continue the stay safe.
As of quarter end of market, leading 83 per cent of our in place asset financing was completely non mark to market.
And the 17% remaining balance was only subject to credit marks.
Well, we will continue to prioritize non mark to market financing.
We expect to maintain a balanced and diversified approach to our secured financing.
And expect our credit facilities to continue to be an active and efficient form of financing within our capital structure.
However, it was our intense focus on non mark to market financing prior to the pandemic that allowed us to lower the risk of our liabilities.
At the same time, maintaining target leverage levels, despite the volatility last year.
As of quarter end.
Debt to equity ratio and total leverage ratio.
For 1.9 times and three six times respectively.
The leverage ratio reflects the slight decrease from the third quarter given some recent repayments.
As a reminder, we have generally targeted of three to four times leverage ratio for new senior loans.
Pending on the source of financing.
While we've been willing to finance loans at low Eighty's advance rates on our non mark to market financing.
We would expect our total leverage ratio to remain in this range in the coming quarters.
And expect our debt to equity ratio to be in the low two times area.
As Matt noted with the company near full deployment.
Payments will be a key driver of our near term origination pace.
And while it's always difficult to predict repayments with certainty.
Our current expectation is for the existing portfolio to have some additional duration this year.
With repayments weighted more towards the latter half of 'twenty 'twenty one.
In the near term K.
K Ref will continue to benefit from the in place LIBOR floors and elevate it effective net interest margins.
As a reminder, while the portfolio is almost entirely floating rate.
<unk> 85 per cent of the loan portfolio has a LIBOR floor of at least one per cent.
While only 2% of our liabilities, excluding the term loan b hub of floor above zero.
As we experience of rotation of our portfolio through loan repayments and new originations.
We expect LIBOR floors on new loans, the set close to spot rates.
And we expect our effective nims to compress over time.
Finally.
K reps liquidity position remains strong at over $480 million.
This total includes over $110 million of cash and.
And full access to our $335 million corporate revolver.
In addition to the reported liquidity.
At quarter end, we had approximately $275 million of unencumbered senior loans on the balance sheet.
And are able to provide additional liquidity when pledged to our existing financing facilities.
With that I'll turn.
Turned the corner of the call over to MS staffer to touch on some of the 'twenty 'twenty highlights.
Thank you Patrick and good morning.
Everyone.
Before I turn to the key financial highlights the thing.
The call out the change in our non-GAAP earnings measure.
Historically, we reported core earnings.
That's our key non-GAAP earnings metric.
Since the performance of the more business.
Well I think for the fourth quarter and based on updated guidance. One day you see what do you named the metric to distributable earnings.
The purpose of this metric.
Each serves as an indicator of our liabilities will cover and determine our dividend.
So the clear this change and the name of convention does not change the way, we historically calculated and reported this metric.
Which are just GAAP net income exclude certain noncash items.
If anything on the 'twenty 'twenty.
And the very challenging and unprecedented here, we have achieved the record of distributable earnings over the other 95 per share.
Comfortably.
Covering all of our dividend of $1 72 per share for the year.
We've conservatively managed our strong liquidity position for the initial COVID-19 volatility.
And ended the year with over 480 million of liquidity.
Because of the 100 million term loan b of.
The 500 million warehouse facility.
Increased the borrowing capacity of what would be warmer two of $335 million, which remained undrawn at year end.
And maintain the best in class liability structure, although about 80% of our secured financing for non mark to market for silicon.
We actually used the leading purchased 2 million shares of out of stock totaling 25 million at an average price of $12 27 per share.
We also return to the old sense pulling of market shut down for.
Of the originations of over $565 million across seven loans in the fourth quarter.
We look forward to continuing to deliver attractive risk adjusted returns and strong results our shareholders.
Thank you again for joining us this morning, and with that we're happy to take your questions.
We will now begin the question and answer the session.
To ask a question you May press Star then one on your Touchtone phone. If you were 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 Jade Rahmani with K B W. Please go ahead.
Thank you very much for taking the questions.
Terms of your comments surrounding capital management and the companies are being in a position of full deployment.
With the stock trading at about 99% of GAAP book value and below book value of extra seats of reserves.
What options might you consider I assume that the unencumbered assets do you want to keep as of the liquidity.
The insurance.
And.
I'm wondering if perhaps you could pursue of CLO at some of your peers are reported to be looking at.
I'm wondering if you might consider issuing some form of unsecured debt whether it be of convert.
Perhaps a preferred.
What what are you currently considering.
Hey, Jay it's Matt.
Thank you for joining us I appreciate the question.
You know I'd say right now we're primarily focused.
On.
You know managing in the origination through repayments.
Obviously I think.
As we look at the stock price and you know you mentioned.
Where we are versus the book value and with and without Seesaw will continue to track that and think about raising capital. If we can do so accretively certainly the pipeline is very big right now it feels like theres been some pent up demand.
Over the course of the last year of six to nine months and so we're seeing good opportunities there.
I think from the debt side, we're gonna take advantage of some of the things you mentioned yeah of the markets are very strong right now on the liability side of the equation certainly.
The CLO market.
Has been very active in and is pricing a bit of very attractive levels.
But I think from of total debt perspective, Oh, we weren't of good perspective, where the good place we don't expect to add debt, but you know obviously, we can change forms of debt or refinance existing facilities to take advantage of some of the the current environment.
So right now I think we're again most focused on repayments and you know potential equity to the extent are you know you can do so accretively.
Thank you very much looking at the watch list of assets, Yeah, I would agree with your commentary that overall there.
There seems to be the potential for improvement.
The.
Quarters ahead.
The New York condo market is the meaningful uptick in sales over the last two months.
Everyone knows that Florida is seeing very strong occupancy rates in hotels, so I assume the Fort Lauderdale Hotel will do well.
Even the Brooklyn Hotel I believe as of recently constructed of asset so.
So it could be in good position industrial is doing well, so queens industrial I assume would also the going well.
Diego multifamily I also believe as of recently developed properties in Chicago in the stage of lease up so that may be just a timing factor and there's lots of liquidity.
That leaves the Portland retail alone, which is total principal of $110 million.
$100, a square foot basis seems low and known in the past you've indicated you're comfortable with the location, but it does seem to be potentially of redevelopment. So I'm wondering if you feel that there is the risk of impairment.
I'm not for you know.
How do you think we should evaluate that risk.
Yeah, well I think it's Matt again I think.
First of all.
As you walk kind of tick through the watch list loans I think we have a similar view too much of what you said we've seen.
Continued improvement in the hotel sector and the.
Certainly the condo sector. The theres been a number of sales at that property post COVID-19 and including one of the fourth quarter. So are we.
Continuing the progress there.
And as I alluded to on the call I think some of these you could see.
Positive credit migration over time, we've had some modifications recently in one of our hotel loans and.
Comedy the pay down on the loan came came with that of principal pay down the alone. So.
So things are definitely the proceeding in a positive manner on the on the watch list.
So let's start the Lloyd Center.
I think first of all of its its only two per cent of the overall portfolio of switches put it in perspective.
Currently where we are granting called short term extensions, while we continue discussions with the borrower.
It's a complicated asset it's a complicated business plan.
As you mentioned kind of good location, there's real demand drivers around it.
For both multifamily office and mixed use.
The question is how do you get there and in what format, it's going to take time so.
I think we're at the stage now in discussions where its probably most appropriate to keep those go direct with the with the sponsor at this point in time, but.
We'll try to give more details when we have a little bit more clarity on the path on the path forward, but.
Again, I think when you look at that the all comes back to kind of what we reserved for to some extent and we still feel comfortable with with the existing seats of reserve on that particular loan.
Thank you I'll get back in the queue.
For the next question excuse me. The next question is from Stephen laws with Raymond James. Please go ahead.
Hi, Good morning can you talk.
The more active on the origination of Brian can you spend some time talking.
So what's changed what hasn't changed as you underwrite these new loans versus 12 months ago.
Sure.
You know I said on the call it's that again and thank you for the call Stephen I think.
Where we're focused as a symbol of place.
Predominately multifamily lighter transitional properties, including office.
The biggest change of the underwriting is really in.
The timing for how long, it's going to take the borrowers to implement their business plans.
We're clearly in the cylinder.
The economic environment for many retail for me real estate properties.
And so.
There's going to be a timing element to how quickly you can ramp cash flow is back up and then there's obviously the kind of concessions as we think about multifamily and rental rates and what the impact of COVID-19 could be in and what the future holds as you burn off concessions in <unk> and you potentially see a rise of it.
The rental rates in some of these larger markets.
So I'd say, that's the biggest difference of the underwriting is really around.
You have some of the concessions of the rental rates and again the timing but.
There's lots of opportunity as I mentioned, there was pent up demand pipeline has never been never been bigger and then segue.
Segue to the there are new opportunities.
That come from Covid. So we are seeing.
Increased interest and demand.
On the industrial sector as you would imagine and.
In the life science sector.
So some of the some of the how some of the winners.
And the real estate property.
Certainly.
Certainly our need of of financing and and to create new space that.
That can really take advantage of that demand for some of the things coming out of Covid.
Great. Thanks for the color, Matt the Massawa could you touch on the G&A. It looks like we're we're kind of back of the level, we saw pre COVID-19 and kind of how do we think about that moving forward.
Hello, Yes, so I think we had.
Excluding stock.
The stock comp for Q4, we had a lower G&A load compared to Q3.
That's mainly driven by a higher non recurring items that took place in Q2 of Q3.
In connection with the with the Covid disruption.
So going forward I'm looking into 'twenty and 'twenty, one we expect the our G&A load to be for nickel assistance what would the what's.
What you have seen in 'twenty 'twenty.
Well the little bit of a spike expecting the spike you know.
In the first quarter for a consistence with the.
The some of the Q1 work with the proxy and made the cost.
Great. Thanks for the color on that I. Appreciate you taking my questions for that.
Yeah.
The next question is from is from Steve Delaney with JMP Securities. Please go ahead.
Thanks for taking my question this morning, and Hello, everyone.
Matt sure wanted to ask you about your co origination strategy.
You did that on a number of six or six of the loans or so in the in the fourth quarter.
You've certainly got the of demonstrated the ability to make $150 billion alone you know on your own.
Talk about why you know you would split them 50, 50, and how that fits into.
Yeah.
Adding to the diversification in and reduced exposure to any one project any one borrower.
How you view co origination versus you know putting alone on your books of 100% funded by K Ras. Thanks.
Yes, David Thanks for the X for a question I'm good to hear from you.
Well, let's first start out with allocation and.
For the things that.
U K RAF does from the.
Primarily does so think about senior lending on transitional properties.
Okay Rep has a priority.
The first shot at all of the opportunities that that fit that segment of the market.
And so then it just becomes a question of you know for K RAF Ah Okay.
And how much capital do we have and how do we optimize some of the other things like you said diversity of the portfolio for the financing availability returns.
As we look at each.
Individual opportunity.
I think youre right to say that if the $150 million loan comes in and.
We have available capital that most likely will go to 100 per cent of K RAF I think that there are some timing differences in what we did in the fourth quarter of round.
I mean, some repayments when we issued of term loan b.
You know et cetera, where you know some of those early closers it was unclear.
The amount of capital that was available at that particular moment in time and so.
Those where we're effectively allocated across the other pools of capital.
So okay, Ralph will continue to take that priority and then you know I think about it as a real positive because from a risk management perspective and from a financing.
The optimization and ultimately Roe.
Mm Hmm, Okay, Ralph can effectively use other pools of capital to originate larger loans. So if we could do of 400 and $500 million loan you know, it's very helpful to have other pools of capital available. So that we can show up as a one stop solution to our clients.
I figure that was the cause of a net positive, but hopefully that gives you a little bit more color on you know, how we think about it.
Yeah, No that's helpful, especially the part about you know if you have the capacity of neat, but 150 million to work that you're not in any situation, where you're required to split it with anyone else. So that that's what I really wanted to hear that it's going to be really at your discretion, how you choose to to split it up.
And then one quick thing for Patrick So obviously financing probably that's the story of of 2020 of.
Those that had good financing versus those that did not and 83% is exceptional for fully non mark to market.
Let me just ask this is hypothetical but in the extreme so okay no no.
No market no credit no like capital markets, Mark Snow actual credit marks on those but the hypothetical of alone going non accrual, maybe just take Portland, and I don't even know the Portland may not even be be financed on the on a lot but at some point you may have to it for.
On the property at what point in that whole process, when you've got a loan finance with the bank would the bank come to you and say, Okay. We don't finance already up and I'm just I'm just curious how far that.
That no call actually goes in the workout.
Thanks, Steve that's a it's a good question. So when I think about it obviously depends on the financing facility that that you're talking about and even on the non mark to market facilities.
There are differences in how alone that's in default might be might be treated.
I would say what's typical on the credit facilities of the repo facilities is that defaulted loans are not meant to be financed on those facilities and so.
You're generally required after some period of time to per.
Purchased the asset you know off of the facility, obviously, if its on something like a CLO or another facility.
There's no requirement to purchase that back, but if you get enough of those types of the default it might start to impact your ability the cash flow back to the equity.
Some of your triggers May may trip and you may end up flipping to something that's more of a sequential pay where all of the lenders are going to get.
Sort of paid back and obviously it depends ultimately on the asset right that that's being financed on there you know obviously not all assets are equal and you know for our multifamily that's gonna be treated different than let's say another property type.
Yep. Thanks.
For you both for your comments I appreciate it.
The next question is from Charlie arrest deal with J P. Morgan. Please go ahead.
Hey, good morning, guys. Thanks for taking the questions today I wanted to ask about the corporate loan I thought that was interesting given the sort.
As you know near exclusively on senior loans in recent years.
I'm just wondering if you could give a little more color on the decision process on that loan the underlying business plan I mean, LIBOR plus 12 definitely come out of either.
And I'm wondering is the underlying real estate portfolio of their entirely multifamily.
Yeah. Thanks for the question for Matt I can I can jump in there.
It's a little different than what we've done in the past and the unique situation, but first of all of us at existing sponsor for us someone who we blend to more multiple times.
And so we've got a great relationship there.
And.
No no how excellent they are at.
Operating assets.
And what we call the of corporate loan I think that's a good description you know if you want to translate that into.
A couple of real estate speak it it's really more of a mezzanine type position.
And.
But we were able to do that across the entire portfolio of the company.
Obviously, creating a pretty strong collateral package for the loan and diversifying.
Across the entire asset base.
And the underlying collateral is as all the all multifamily properties majority of which are.
And some level of stabilization built assets that are in some of my level of of stabilization. So.
The overall, it's a strong we think of a great credit and certainly one we were highly focused on coming out of Covid just tried to take advantage of.
Some of the pricing in the market or something unique situations of the market and this isn't the sponsor again, we knew very well liked a lot of we're.
We're happy to be able to get something done with them.
Okay got it and I'm getting the sense that this was relatively opportunistic and in kind of a unique situation do you think going forward that you guys will.
And of the diversified.
Diversify the loans that you make in 'twenty and 'twenty, one where or is this kind of like a one off situation.
I think it's more one off there was kind of a unique.
No capital markets activity for the company there that created the opportunity.
And of market like this.
And obviously, you know going back to pre COVID-19 as well the wheel.
Like the senior lending market for a number of reasons.
The first of all of our clients like it because we're showing up with the entire solution to them and they don't need to worry about the senior sub you know relationships or closing issues. So it gives them certainty of execution a.
Number two it allows us to capture all of the economics.
And then figure out what the best how to optimize the financing and create the best Roe.
And then obviously, there's the security package that goes along with that that we thought we might be in a in the senior loan. So I think that's going to continue.
Going forward for those reasons.
Understood. Thanks, very much for the color.
The next question is from Tim Hayes with B T. I G. Please go ahead.
Hey, Good morning, guys hope you're doing well my first question here just on the comments around net interest margin can you give us a little color on the all in coupons on the pipeline today versus the existing portfolio and then kind of part B of my question. There is you mentioned.
And we all know just how accommodated the capital markets are right now in it and I'm curious if that you know if there are options for you to lower your cost of funds through execution on the capital market side or if you're seeing any pressure on banks to take down your repo costs given the.
The execution, there and so I know that's a couple of questions there, but I appreciate the comments.
Hey, Tim Good morning, I'll take that one of them and welcome to the call. Good. The have you got the happy with us here today.
So I guess first just thinking about the the.
The the existing I guess cost of of capital clearly on the market's improved.
From financing standpoint, so we're seeing we're seeing that.
You know across the liabilities were seeing the tightening on the credit facilities and we can see demonstrations of this in the CLO market.
When I think about our net interest margins. If you look at our coupons on our existing portfolio. The around for 80 at the end of last year, that's down 20 basis points from the beginning of the year.
So that just demonstrates a little bit of the benefit that we had from the LIBOR floors and the LIBOR dropped from about 175 basis points to around 11 basis points today, well, we only saw around the 20 basis point drop in our asset spread so pretty remarkable.
And effectively took what was floating rate loans and essentially made them almost fixed rate loans at that point, our liabilities, obviously dropped and so if you look at our effective for them today.
It's something north of 2.5%.
Now pre COVID-19 some of those loans were being quoted in the low one hundreds type.
Type of area.
And I would say today that that market is probably closer to a mid one hundreds to the high one hundreds and so if you think about the walk a little bit we've got around of 480 coupon in the portfolio look at all of our senior loans that we originated in the fourth quarter that was somewhere in the mid force.
And I would say with the pipeline today, that's somewhere probably on the blended basis in the.
The around the high threes to low 4% area just to give them some some context there.
And so as I look at our liabilities were pretty efficient at the moment, just given our existing structure in place our existing CLO was was priced at a pretty attractive level two years ago, we continue to get none of them in there and our other facilities equally are attractive attractively priced pretty.
Normally in the kind of one hundreds over spreads and then LIBOR again today, it's sort of 11 basis points. So.
We're getting a lot of pull through with that now the that interest income.
Okay, No that's of Great walk through I appreciate it so I guess, maybe to kind of recap all of that you know U S.
I'm calculating about of core ROE of just over 10%. This quarter I'm curious you know how you feel about K wrap the ability to achieve of double digit ROE given the type of environment and we're going to keep rates static in you know in this.
Example of being able to stay in the vacuum. So just curious how you feel about the the the dollar of where you're able to achieve.
Yeah, I think at the moment, we feel good I mean, if you look at the force corridor and we look at what our underwritten Irr's are there. We've got a number now this is again the sort of blended with some of those.
The non senior loans that we talked about but you were talking about an IRR. That's in the kind of the 14% context. So we're getting.
Pretty good return on that profile of deals obviously as we continue to see some asset compression in the market.
We will see further pressure on that level, but at the moment, it's been a pretty good environment to make new loans. So obviously, where we're happy to have gotten back on the offense and obviously as we said the pipeline looks it looks really good for us and so at the moment, we feel like we're in a good we're in a good spot.
Yeah.
Okay I appreciate those comments there and then just one more from me back to the Portland retail alone.
You know if you could just remind me I know obviously it was placed on non accrual status this quarter versus last quarter, but was there any major impact in the actual earnings collection that you were accruing for that loan quarter over quarter.
I would say, it's Patrick again, I would say when we think about kind of third quarter of the fourth quarter earnings.
That was certainly one of the impacts the kind of flowed through in this quarter.
The other impact being repaid.
The repayments that we you know we received earlier in the fourth quarter. We obviously had a good origination quarter, but a lot of those originations were more back ended and then obviously as we've been talking about some of that rotation down in spread or in coupon from call. It the upper.
Our force to the sort of mid force. So those are really the kind of driving force is you know over this quarter. Obviously, we're really pleased with with where we ended up but those of those were the areas where.
We saw some impact quarter over quarter.
Okay. Thanks, again for taking my questions.
The next question is from Matthew Howlett with Wolfe Research. Please go ahead.
Oh, Hey, guys. Thanks for taking my question just on the modeling question model. The question for me I know you don't provide forecast on distributed earnings, but he's got great coverage on the dividend you had that for a couple of quarters I hear you with the the NIM coming in.
But it sounds like you were a little bit under deployed in the fourth quarter and then what's your comments on the IRR is can we assume that that cushing to the dividend.
It's going to be maintained and at what point would you think about distributing.
100% of your distributed earnings.
It's Matt I can I can jump in there I'd say.
You know I think that the the two major factors do we think about the go the go forward right now are.
Repayments as we'd mentioned and then obviously you know what the yield on the new on the new loans that are.
The existing portfolio as is.
You can see in this quarter of previous quarters and for the year concerning the substantial amount given the the LIBOR floors.
Patrick described so I think that's kind of first order of business is to try to understand what that repayment can look like before we get into more normalized historically pre COVID-19 type of earnings level and as we mentioned on the call.
The.
Difficult to predict repayments, but from what we can see now as we go through this portfolio of every quarter and kind of update our assumptions not only from a.
Credit perspective.
But also just from of when do we think these when we pay you know perspective also.
Yeah, we think that repayments are going to be more back.
Half of the year.
So that creates some sustainability to the earnings of that if that plays out. So you know given of of other things.
Staying the same so that gives us a little bit of confidence in the go forward here.
And then you know as Patrick mentioned, we're still able to create I think good returns on the new loans that we're making albeit not at the same earnings level, we've seen over the last couple of quarters here.
Given the power of those LIBOR floors.
So in terms of your last question like we'll continue to look at them.
If you look at our earnings and book of the dividend we're living in a zero.
In fact, we have zero interest rate world right now on the shorthand for ichor.
And so you know, we'll make the determination of the board will make that determination as we move forward here, but right.
Right now, we're comfortable with where we're at.
And then just on the visibility with prepayments of or you're just seeing really strong lease up rates and access to the you know.
The other parts of the market is that how you sort of forecast of what you think is going to get repaid.
I mean, we're looking at a number of factors because of the capital markets as a part of that but I think what COVID-19 has done. The some of you have to think about the transitional business plan. It's the elongated that that business plan and it's kind of take a little bit more time, even on what we learned on the simple you can.
The thing about a simple lease up of AR.
Multifamily property, well, that's going to take a little bit longer to lease that up you're you're gonna give away.
You know more concessions in the market like this to accomplish that lease up and therefore, the sponsors may they may wait another quarter or two.
The lease it up a little bit more ore to burn off some of those concessions. So it's just it's just pushed things out things are progressing well, but it's just going to take a little bit more time, and you know quite frankly will be the beneficiary of that again given.
You know the LIBOR floors, where some of the liabilities of the NIM that we've got in the portfolio today.
Yeah. So I think that that's really what's what we're seeing of on the ground.
Great and then just one last one in terms of the loan.
Dissipation sales, taking on more structural leverage any.
What's the appetite even done many of them, what's the appetite to do that.
I mean, Patrick you can feel free to jump in after I go I think it's.
For us we take a we make a loan and then.
We figure out what.
What the.
How to optimize the ROE through the financing.
So it's really not driving the decisions.
At all in terms of do we do in a note sales do we.
Do we finance it on the CLO one of our.
The spoke financing facilities that we've spent so much time putting in place.
Each of those options has different.
Requirements.
And we kind of look at each loan and see where it fits best on the different financing options that we have.
And so I think it's hard to sit right today, and say hey, we're going to pick where you're more a note sales of what we're going to put them at one of the CLO. It it's hard to say it really depends on what the pipeline looks like what the originations look like and then ultimately you know where that.
The puzzle piece of it then.
But if that makes sense.
No it does.
Appreciate it thank you.
The next question is a follow up from Jade Rahmani with K B W. Please go ahead.
Thank you very much besides the loans on the watch list are there any others.
That jump out in terms of you know areas that investors should be focused on in terms of risks.
No I don't think so.
You know for the last quarterly again through our last quarterly review process of of each loan.
Think war, we made this comment in the prepared remarks, we feel pretty good about the other non watchlist loans and the stability there from a from a credit of ratings perspective.
And you know we already cover where we are on the watch list songs you could potentially have some positive migration from the few of those.
Thanks, You mentioned that you are seeing increased opportunities on the industrial side and that seems to be one of the most heated if not the most hated sectors. So are you building in protections additional protections into your underwriting I know that historically light warehouse definitely is one of the easiest.
The assets to develop.
So there's a there's a risk that that market could be oversupplied.
I assume that that's something that you're factoring into your underwriting.
Yeah of course, I mean, I think it's.
I don't think of our underwriting has changed materially from pre COVID-19 to today are outside of just adjusting for that.
That increased demand, but of course with industrial.
You know as you suggested.
It's not the hardest thing to build its relatively straightforward and so you really got to think about replacement cost as you're entering these or any of these projects but.
Clearly as you get more infill and you know.
Some of the deals we've done of been.
Relatively infill.
You know the those costs are still pretty high.
And we're.
Were active on the equity side of our business and the index in the industrial sector.
We went on from within K RAF.
Yeah, that's really the demand we're seeing there is quite strong.
And the lease up rates are very good. So I think it's the sector will continue to you know to focus on them, we like and Oh.
And hopefully we can do more of.
On the Portland Zone is one of the options potentially a joint venture in which K RAF takes an equity stake in a redevelopment of the building or otherwise bring then one of KKR as vehicles to.
Assume some kind of interest.
Yeah.
I think we've we haven't ruled out any options.
At this point in time, and it's going to be of redevelopment of some sort and the question is who's going to.
You know who's going to be a part of that so that's a possibility for us I don't think we would partner up with the other.
Capital within within KKR from of conflicts perspective.
But I think theres a lot of interest.
You know from developers.
The large masterplan developers in the market that for that particular site that particular location you know.
So we'll see how it plays forward, but you know at this point in time, where we're trying to keep all our options available.
Okay and just last question something of asked some of your peers and a couple of them have been kind enough to provide the answer.
Do you have.
The percentage of loans in the portfolio of that to date have been modified.
Since the pandemic.
And I know the sector has the habit of giving the interest collections percentage, but if you modify alone.
And you can be able to maintain a high per cent of interest collections. So do you know also the percentage interest collections relative to say a snapshot of the pre pandemic portfolio, just how that 98% compares to.
You know what it would've been.
Previous.
Hi, Jade, it's Patrick let me, let me take that one so I think in terms of modifications I think the watch list pages of good place to look at.
<unk>, there's only been a handful of loans that I would think about this kind of material modifications modifications are a part of business plans right is as things are progressing whether you're in the pandemic or or not but I think as we've talked about in the past.
Where I was sort of focus on is what's happened for certainly on the interest rate side Theres been no cuts in interest rates on any of our loans.
There has been as we've talked about on the hotel side, two loans, where we did partial deferments of interest or partial forbearance is.
Matt mentioned on one of those we've subsequent to yearend have done another modification to that loan, but this modification brought the deferred interest current.
Setup of carry the reserve and it had a partial pay down on the loan so.
We would consider that a pretty major modification, but clearly I don't think that's the area that you're you're sort of focused on.
So when I think about that 98% number what it really is is the two loans that are on non accrual.
We've talked about both of those the the <unk>.
The named small mezzanine loan and then the Portland retail asset so even when you look at our percentage is kind of in the fourth quarter.
And in the first quarter number that we quoted.
There isn't a change in.
In sort of the performance, it's a change of the denominator.
But it's it's still those two same loans that are on non accrual everything else is paying current.
And no other loan has been sort of reduced from an interest rate standpoint. So I think that's really when you think about when we think about modifications and obviously.
We think that's a pretty strong track record.
Yeah. Thank you very much and I appreciate the clarity there.
Definitely it sounds like the portfolios are performing well.
And certainly on the relative basis also lastly.
Lastly, with the comment around the scarce capital and the companies.
The management team's historical experience that in the <unk> space.
If you could comment as to one whether the sale of the the MBS portfolio that equity interest I think it's $34 million or so could.
It could be a source of funds, although that's modest but also whether you would consider forming of see MBS kind of at the clearly the company has a lot of multifamily.
And I think that collateral is probably in high demand in the MBS market are.
The GSE is our highly competitive but that could also be contributed to the MBS securitization would you consider or are you considering the formation of a.
C N b S kind of it to be able to provide you know longer duration loans on stabilized assets.
And that would also supplement in the company's earnings stream.
Hey, Jade from a capital perspective.
They have an interest of fund that we manage the investments the N b S. The small position. So I don't think about that which you mentioned is like really of.
Source of capital for Us if we were to sell that I think.
That'd be invested that in that fund them.
Obviously, there's different liquidity.
That's the gonna for him and directly in the security so.
As it relates to the conduit.
You know origination business you know, it's not something we're contemplating currently so.
There's been a lot of changes of that market, where a very large investor in that space.
Still think that the best way to play that has on the investing side as opposed to the origination contribution of loans to two deals.
Thanks, very much for taking the questions.
This concludes our question and answer session I would like to turn the conference back over to Ana Thomas for any closing remarks.
Hi, everyone. Thank you for joining our call today feel free to reach out to me or the team with any follow ups. Thanks.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
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