Q2 2021 KKR Real Estate Finance Trust Inc Earnings Call
[music].
Good morning, and welcome to the KKR Real estate Finance Trust, Inc. Second quarter 2021 financial results conference call.
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And I'm just being recorded I would now like to turn the conference over to Jack Switala. Please go ahead.
Thank you operator.
Welcome to the KKR Real estate Finance Trust earnings call for the second quarter of 2021, we hope that all of you and your families are safe and healthy as.
As the operator mentioned this.
As Jack Switala.
Today I'm joined on the call by our CEO, Matt Salem, Our President and C O O, Patrick Mattson, and our CFO and stuff and the Gotti.
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 and our earnings from.
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 will provide a brief recap of our results.
For the second quarter, 2020, 1 we had GAAP net income of $29.3 million for 52 per share.
Which included a 0.6 million dollar for <unk> per share benefit from a lower seasonal provision.
Provision.
Distributable earnings this quarter were $34 million for 54 per share driven by the growth of our portfolio benefits from in place rate floors and continued strong asset performance.
Book value per share as of June 30th 'twenty 'twenty 1.
Increased to $18.91.
Which includes the cumulative cecil impact of $1 and <unk> per share and 11 cents per share of offering cost incurred during the quarter in connection with our preferred stock offering.
As compared to $18.89 as of March 31.
Finally in mid July we paid a cash dividend of <unk> 43 per share with respect for the second quarter.
Just on yesterday's closing price the dividend reflects an annualized yield of 8%.
With that I would now like to turn the call over to Matt.
Jack Good morning, everyone and thank you for joining our call today.
And the second quarter, we harnessed the power of the KKR origination franchise.
To originate 8 loans for $967 million.
We have and additional pipeline of approximately $850 million and bonds, which are.
Thank you closed or under exclusivity subsequently subsequent to quarter and.
We also delivered another outstanding quarter on financial results with.
And with distributable earnings of.
And 54 cents per share covering the 43 cent dividend by 1.3 times.
<unk> earnings continue to benefit from strong credit performance.
Existing LIBOR floors, and net portfolio growth.
And today's active origination environment.
<unk> is benefiting from its position.
As the flagship transitional senior commercial real estate loan strategy.
Inside of a global asset manager.
With an established real estate platform.
We have unique access to economic views from our global macro team.
And real time market and property level information.
From our partners and the real estate equity team.
This market connectivity.
Supporting our real estate credit franchise that has grown meaningfully.
For perspective at the end of 2019.
Real estate credit franchise, which comprised of 20 for investment professionals.
Third to 46 today.
This.
The nation engine will be critical as we continue to see good progress on our sponsor's business plans.
Which we expect to lead to elevated repayments and the third and fourth quarters.
Our investment focus remains the same.
Senior loans on high quality real estate.
Owned by Institute.
And all sponsors.
Our second quarter originations of 8 loans totaling $967 million.
Included 3 industrial loans.
2 multifamily loans.
And 1 loan and each of the office.
Student housing.
Institute and single family rental sectors.
These 8 loans were underwritten and attractive low double digit weighted average IRR.
In line with.
With returns pre COVID-19.
Net loan fundings this quarter was $288 million.
And our portfolio grew to record size.
Totaling over $5.6 billion as of June 30.
Our pipeline remains robust with approximately $850 million of loans, either closed or under exclusivity and subsequent to quarter and.
We continue to be act.
Active and our historical segment of multifamily and.
And select office.
At the same time.
Our pipeline reflects our desire to capitalize on attractive opportunities in today's market environment.
And we are constructive on certain newer segments.
Such as life science.
Which is better.
<unk> benefited from an increase and tenant demand driving and need for new lab space.
And the industrial sector, we closed 3 loans this quarter.
For our committed loan amount of $410 million.
Secured by class a properties.
Our largest industrial loan this quarter was.
For a sponsor who has completed over 350 developments.
As always we will target the highest quality owners and operators.
Our industrial focus aligns with our activity and real estate equity, where we owned 65 million square feet across the industrial sector.
And access to their expertise market knowledge and relationships create differentiated outcomes for Kara.
With our focus on industrial development.
There's more future funding than we have had and the past.
Given the simplicity of construction and the industrial sector.
We expect those unfunded commitments to contribute to origination volumes over the next few quarters.
Our portfolio composition remains consistent with previous quarters.
And is comprised predominantly of lighter transitional floating rate senior loans.
83%.
And on the portfolio is comprised of loans secured by multifamily or office properties.
Retail loans continue to be underway and represent just 2% of the portfolio.
Industrial now comprises 3% of the portfolio on a funded basis.
Overall performance remained strong with interest.
Trust collected on over 97% of the portfolio and the second quarter.
To support our growing opportunity set.
We raised net proceeds of $167.1 million of perpetual preferred stock at a fixed for life life cost of 6.
And April.
This permanent capital allows us to take advantage of current market opportunities.
Service, our institutional clients and grow the portfolio.
Which should lead to improved operating leverage overtime.
Additionally, and early May we could.
And approximately $115 million secondary offering.
On behalf of our manager KKR.
1 of our goals has been to increase the trading volume and our stock.
And this sale added to the available float.
Cucchiara continues to be our largest shareholder with meaningful skin in the game at 26% ownership.
And a half for them.
This level of commitment is multiple times that of our peers.
And we expect KKR to remain the largest shareholder and K Ralph over the long term.
In summary, we achieved another strong quarter across originations.
Portfolio.
Ownership for performance and earnings.
Our broader relationship with KKR, and our scaled origination and asset management and franchise should.
It should benefit us and there's active origination and repayment environment.
As we head into the second half of 2021.
Leo for with that I will turn the call over to Patrick.
Thank you Matt good morning, everyone.
As of quarter, and a market, leading 76% of our asset financing remains fully non mark to market and.
The 24% remaining balance is only subject to credit marks.
This is similar to the financing mix, we had at the onset of the pandemic, which has served us well over the last 18 months.
As of quarter, and our debt to equity ratio and total leverage ratio dropped slightly to 1.
1.9 times and 3.3 times respectively.
Following.
SaaS, we had and the April raise of $167 million and net proceeds perpetual preferred stock.
At a fixed for life cost of 6.5%.
We continue to focus on optimizing our financing.
Just last week, we announced a new billion.
<unk>.
Sorry CLO.
The offering was well received allowing us to upsize by 30%.
And price for $1.3 billion transaction on Friday.
The CLO features a 2 year reinvestment period.
With an 84.
2.5% investment grade advance rate.
At a weighted average running cost of capital of LIBOR, plus 1.3%.
Before amortized expenses.
In conjunction with this transaction, we will call our first CLO.
But the larger size of the new <unk>.
Deal will increase the aggregate amount of match term financing on a non mark to market and non recourse basis.
The combination of our brand.
High quality loan portfolio and track record as a manager per.
<unk> us to achieve this attractive financing.
With a market leading cost of capital.
As we have discussed in the past we have a robust quarterly asset review process.
And we evaluate every loan and the portfolio to assign a current risk rating.
The current portfolio risk rating of 3.1 on a 5 point scale is.
And with the weighted average risk rating last quarter.
Notably 90% of our loans are now risk rated 3 or better.
Slightly from last quarter.
There were no changes to the composition of the watch list and the second quarter.
However, we are seeing improving trends.
And properties, which may lead to positive from credit momentum and other assets.
And the second quarter.
We saw $27.6 million and pay downs on our New York condo loan.
On our Brooklyn, and hospitality loan occupancy rates ticked up nicely in the second quarter.
Just a 77%.
Relative to occupancy rates of 53% and the first quarter.
Our Queens industrial alone is approaching its next maturity.
And we will most likely provide a short term extension to allow the sponsor to finalize their sale process.
As a reminder, we believe we have adequate seasonal reserves with respect to our watch list loans and the broader portfolio.
If a credit event does incur and our losses crystallize it will flow through our distributable earnings.
But we would not anticipate a meaningful impact to GAAP net income.
For book value.
We received approximately 271 million and repayments and the second quarter.
And while it's always difficult to predict repayments with certainty.
Our expectation remains for.
For elevated repayment activity and the second half of the year.
And our.
Our current projections are around a $1 billion and each quarter.
And the near term <unk> should continue to benefit from the in place LIBOR floors and elevated effective net interest margins.
But this will decrease as the portfolio transitions to new loans at spot LIBOR.
Finally <unk>.
<unk> finished the quarter with a strong liquidity position of over $630 million.
This total included a $119 million of cash and.
And $335 million and Undrawn corporate revolver capacity available to us.
In light of our liquidity position and the potential.
<unk> for elevated repayments and the second half of the year.
We feel well positioned to capitalize on the growing pipeline of investment opportunities.
In summary, and.
And another strong quarter with elevated distributable earnings of 54 per share covering our 40 <unk> dividend by 1.3 <unk>.
<unk>.
Robust originations across 8 loans totaling $967 million.
And and additional pipeline of approximately $850 million under exclusivity or closed subsequent to quarter and.
We grew the portfolio to a record $5.6 billion, which compares to.
$5 billion at the start of 2021.
Lastly, we completed and inaugural perpetual preferred stock issuance.
And and permanent capital that positions <unk> for portfolio growth and improved operating leverage.
Thank you for joining us today 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 1 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 2.
At this time, we will pause momentarily to assemble our roster.
And our first question will come from Jade Rahmani of <unk>. Please go ahead.
Thank you very much and I appreciate the detailed commentary on.
Starting with the dividend.
You mentioned distributable EPS running 30% ahead of the current dividend and then you mentioned your expectations.
And are starting repayments, which would be elevated as well as a normalization over time and it and the net interest income margin. So.
I was wondering if you think once things normalize there could be room for Ah.
And increasing the dividend.
And if there were excess distributable earnings.
Is it your expectation that for this year 2021, there would be there could be a special dividend.
Hey, Jade, it's Matt and I appreciate you joining the call and thank you for the for the question.
Yes, I would say right now we're focused on just the current dividend obviously.
We will readjust that after we.
Future quarters meeting with the board.
But from everything we see now, especially given the low interest rate environment and I think our target is still trying to meet the current dividend.
And based on where distributable EPS has been running do you think there is.
Excess REIT taxable earnings that might require a special dividend.
Not not at this point.
Yeah, we're not really focused on a special dividend and if theres a number a number of factors that we'll take into consideration towards the end of the year as we meet.
We meet with the board but.
Certainly.
Focused on that.
Yes.
The $1 billion of repayments, you expect and each quarter for the third quarter and fourth quarter.
Would that produce early prepayment income.
Well have you I mean, we will have some pull forward on the OID.
To the extent there.
Prepaying before their initial maturity, which which we expect that that will generate a little bit more income most of them have run through.
There are prepayment penalties or.
Other call protection and May have in place, but you can get a little bit about OID. So.
Yes that can drive earnings obviously, we don't originate alone the exact day alone pays off so there'll be some cash drag associated and the interim with a heavy repayment schedule as we ramp up and meet that with our with our new originations.
Thank you and lastly, just on credit could you give.
And on the Portland retail loan and what's your expectation for that loan over the next few months.
Yeah happy to.
I'd say, we're making we're making good progress there as it relates to.
Working with the next sponsor and the next phase of that investment and.
Our goal and we hope to come back to you next quarter with a broader update on where we stand so stay tuned on that 1.
So you say next sponsor has the property gone through foreclosure or what is the current status.
It's on non accrual.
No it same status and it has not been foreclosed on and take into Oreo that were in the middle of all of those discussions right now.
Okay. Thanks for taking the questions.
Thank you Jay.
The next question comes from Steve Delaney of JMP Securities. Please.
Pat.
Thanks, Good morning, everyone and congratulations on another another strong quarter.
And Matt and and Patrick I was wondering you know we've been through so much with COVID-19 and the demographic shifts that that and some economic things have have highlighted is your equity group.
Number 1 and then your sponsors that you are lending to are you seeing any type of definitive shifts and to what geographic markets.
Capital is flowing from the real estate equity side.
Specifically and are there any markets that it how dramatic is that.
You know, it's it's kind of what we hear about the license plates, and Texas and things like this and maybe just give us a sense for where is the money going from the real estate equity and and on the other side where is it not going thank you.
Sure, Steve It's Matt I can take that and thank you for the for the question and joining us.
Yes.
And I think that if you think about what Covid dead it accelerated some things and it dislocated.
And the market.
And certainly.
And the geographic.
Question that you're asking I think theres been some pretty big acceleration and.
The growth and the growth markets, particularly in the.
And the southeast and certainly some of the tech and some of the tech cities.
And I think the capital going into that is pretty pronounced and.
I mean, it's very tangible.
And we.
We've seen good what what you know, whether it's multifamily or off.
Yes, I mean, you see very good.
Leasing velocity and those markets still.
And and again it was a theme before COVID-19 and so I just think it's been accelerated and we will continue to focus on those markets from a lending perspective, and we're very active on on.
On the real estate equity side is as you would suggest and.
I think we put it in our commentary every every quarter, but the power of being able to sit alongside that underwrite deals together and get that market information real time as it's very powerful.
Are there any markets that you know, we we all hear about Austin.
Austin, right, and and Phoenix, and Denver and those places.
Are there any sleeper market is coming down and maybe you know second second tier cities that.
You see emerging that maybe aren't on the tip of everybody's tongue.
I mean, nothing that's not obvious and Charlotte.
<unk>, Okay, I mean, I wouldn't call it a second tier city, but Charlotte is obviously another growth area and.
And the Florida markets again.
Similar theme pre COVID-19, but I would say those are particularly strong as well the southern Florida markets.
And I should probably use the term non gateway rather than.
Describe them a little better Okay, and then just to close the the comments about the platform our portfolio and were $6.5 billion at June and based on the commentary about pipeline and closings and it seems to me that we should just model essentially a flat portfolio you know over the second half of the year does.
Does that sound reasonable to you guys.
Steve Good morning, It's Patrick that's right Patrick.
I think that as we think about the course of the repayments here and our origination capacity and and our ability to match that we're assuming that we're gonna be in that.
6 billion dollar.
For the portfolio size.
Yeah got it understand it can be lumpy month to month as we go through that the next 6 months. Thank you both for your comments.
Thank you Steve Thank you.
The next question comes from Stephen Laws of Raymond James. Please go ahead.
Hi, good morning.
To follow up on Steve's question, good spot for me actually.
As we think about redeploying that capital Patrick can you can you touch on anticipated cash drag I mean, I want to make sure I don't overestimate my interest income just using spot quarter and leverage it does it takes 2 weeks to turn over the capital.
And with with roughly.
And third of the portfolio I guess turning over in the next 6 months I'm curious, how we should think about cash drag or of our average leverage through the quarter or what what how you with term debt.
Steve Good morning. Thanks for the question, Yeah, I think that's right I think.
What we're trying to highlight is if you looked at the past couple of quarters. We haven't had a lot of turnover. So we've gotten the benefit of collecting full quarter's interest on a pretty robust portfolio size here.
As we think about the latter half there is going to be.
Some amount of drag.
<unk>.
It wouldn't be unreasonable to have.
On a month or so GAAP rate between some of those repayments and when sort of new closings.
Come and so.
It's difficult to quantify it because it really depends on the time lag between it but we would certainly.
I think for there to be something so when you're thinking about it from a modeling standpoint, I would certainly factor in some amount of drag.
Great that's helpful.
On your comments and prepared remarks, Patrick on the CLO.
And most of 2018, that's all 1 being called can you can you give us a number on.
On the any any transaction expenses and they're going to hit in Q3, 1.1 time I assume that it will go into the quarter and then I I would think we would add that number back for distributable earnings but can you talk about the 1 time expenses around the CLO call.
Sure Steve as it relates to the F N 1.
Non transaction all of those deferred financing cost have been amortized through.
So we actually didn't incur any and this quarter and when we close or the second quarter and when we close the transaction and the third quarter.
Likewise there'll be there'll be nothing that has to get accelerated the only thing that will happen is upon.
Upon closing we will have a set of cost that will need to be amortized for the for the new transaction that will need to be factored in but theres no drag from.
And from calling the first deal.
Great Thanks for that color.
And that 1 for you.
Did the preferred equity raise.
You've got some converts outstanding.
And you've got and ATM available that you haven't used and certainly what the stock above above equity you could raise.
Our capital and be accretive to book I know Theres, a lot of turnover coming and the next 6 months, but so probably less.
The less relevant but how do you think about your capital stack, what the right mix is and how you look at the.
Standard for.
Cost of capital for those various options.
Okay.
Yes, Thanks Stephen.
Happy to have it and take that 1.
Well, let's just having the diversified.
Options, especially as it relates to the equity I think it's been quite powerful.
Yeah.
And we were able to access the preferred equity market at a moment in time, where it wasn't really accretive from a common equity perspective, and we had a big pipeline and obviously a client base that we wanted to serve so.
And we thought that was particularly attractive as we.
We grow from here.
I think we're looking at both.
On the common and preferred as as good options.
And obviously, we need to we need to keep the sizing appropriate for those and so that's really kind of the mix of those is something we are focused on but I would say that both viable at this at this point and time.
And that being said and to highlight your comment.
With the repayment pipeline that we have we're probably a little bit more focused on using our origination pipeline to fund those repayments.
And so the need for equity currently is relatively low now.
Range. If our pipeline grows are these repayments started to get pushed out a little bit we may need it.
The pipeline side of the equation is very very high right now, but again so is the repayment. So just trying to match those up and.
Predicting the future is difficult, but we're kind of ramped up expecting and what.
What we talked about.
Great I appreciate the comments this morning take care. Thank.
Thank you Steve.
The next question comes from Don and Betty of.
Of Wells Fargo. Please go ahead.
Hey, Matt.
And so pretty striking increase and occupancy at your Brooklyn Hotel.
Which.
Obviously reflects new York coming back and I'm just curious what your current thoughts are you know just given the delta.
And in terms of.
Interest and putting capital to work and New York and.
Are there a lot of opportunities.
And Youre seeing and.
And obviously your watch list and several New York properties.
And so maybe you're talking.
Cognizant it on as well.
Well done on thanks for the question.
You know as it relates to the Delta vary and.
And we're monitoring it very closely and clearly our first.
THAAD as always to our employees' health.
And and safety. So we're watching it from from that perspective, we are in the office.
Working together and.
And and so we want to make sure we're on top of it.
As it relates to the portfolio and investment risk.
And clearly it could have an impact on the cyclical nature of the hotels.
And I think we've seen our portfolio through the depths of the initial COVID-19 volatility would be pretty resilient.
So I think that.
And we'll watch it but it's not something that's giving us over and making us overly concern for our existing portfolio.
I would say on the New York City comment.
We've seen a very big.
Increase in activity and leasing not only at the at the hotel and Brooklyn, but through the multifamily properties that we've had over the course of the last year, we've had some pretty sizable repayments and and our multifamily portfolio and.
And by the Tri State region.
So.
I don't think we're.
Any more hesitant to lend on on the multifamily sector and in New York outside of the outside of the fact that you just have to be more conservative on your lease up assumptions and.
And your concession assumptions, but.
And.
We will still focus on on this market and.
And and look for look for good opportunities.
And on top of it.
You did a single family housing loan in the quarter.
I was just curious your thoughts on that market.
Youll be more active there.
And at all.
Yes, no. It's a good point to bring up.
On the on the.
Real estate private equity side of our of the KKR business, we're very active and all things housing.
And we have a single family rental equity platform. There. So we're very.
While you are with the sector.
Obviously.
And the need for housing is quite dramatic and.
And you've seen that sector really.
Become.
And institutional institutional ownership.
And this particular case we.
And kind of service.
1 of our existing institutional clients that is and that particular business and we did it out and Phoenix, which is clearly a growing market.
And I wouldn't call it a 1 off and we like the sector, we'd like to do more.
We're seeing a number of opportunities.
And that are attractive.
I'm not sure how.
For me it will be as a part of the portfolio.
Cuz, the commercial banks are very active and that sector. So.
I think it's unclear how much of the opportunities that they will take versus.
Lenders like ourselves so.
And it's something we're following and hope to do more of but.
How big of how big we can grow it.
Thank you.
Thanks.
And next question comes from Rick Shane of J P. Morgan. Please go ahead.
Hey, guys. Thanks for taking my questions. This morning, I'm curious when you think about the dividend policy and we look at the.
Impact of floor income.
And obviously there is a potential headwind as rates rise, but you guys are also talking about $2 billion of repayments and.
The second half of the year I'm, assuming that that brings us that day.
Moves us along.
And that floor income scale.
You lose a lot of floor income how much is that impacting the dividend policy.
Ric Good morning, it's Patrick I'll take that 1.
So as we think about whats likely to transpire right over this next couple of quarters.
We think that repayments will be elevated as Matt indicated we will get some pull through on OID acceleration for those quarters, we will start to lose some of that.
Excess NIM that we've been able to capture through the through the LIBOR floors.
<unk> side of that is.
We're setting new loans at coupons that are almost entirely spread because spot LIBOR at less than 10 basis points means that we're earning all of that income through spread and so we're we're setting ourselves up well for the coming years. If you anticipate that there could be some.
Rising rates over time will be much more positively correlated to that then than we are today because of the benefit that debt, we're getting it's difficult to sort of quantify exactly the the change or the or the quantum of lot of that will depend on the timing over.
Sort of a quarter or 2 and sort of which loans actually repay.
Got it okay and 1 of the things that's interesting is and again this is very back and the envelope math, but if we compare the percentage of loans in the first quarter, which was 60.
9%.
Floors above 1%.
And the percentage this quarter, which I believe is 57% it looks like there was about a $465 million decline and loans with a 1% and LIBOR floors, but that's substantially above the repayments that.
You guys experienced during the quarter. So I'm wondering are there loans that are terms that are being renegotiated to reduce floors is that something we need to consider as well.
Okay.
Yes, Ricky you highlight a good point.
And that's a that's a very detailed point that you're sort of pulling out.
There have been some instances where as loans have come up to initial maturities or as we've provided any form of accommodation to the sponsors we've recast the coupon and a lot of cases. The coupon has stayed the same but the mix of LIBOR and spread.
Has changed and so where we had perhaps a very and the money floor, we reset closer to a spot LIBOR and took again a lot of that income the remaining income in spread.
Just to again, if the loan is extended longer make sure that we're going to benefit from and.
And LIBOR rates so.
Yes, that's a good find and certainly something that we have been focused on.
Got it and so that is actually long term and I apologize for the.
Third for a second follow up question, but that ultimately should turn into.
And increasing wider spreads and that's the trade off you're you're getting and by giving up some of that floor.
All right.
And it's wider spreads and you see that.
And the loans that we're making relative to some of the loans that.
Are paying off I think importantly, the last thing I just would highlight here is if.
If you look.
Quarter over quarter over the last several quarters.
And we started the year.
Our weighted average coupon was about $4.8 it's gone down about 10 basis points.
And the last 2 quarters, but.
Still at $4.6 is a pretty strong number relative to our cost.
Slide <unk>.
Got it okay. Thank you guys very much I appreciate all the questions.
The answer to all my questions.
Thank you Rick.
The next question comes from Tim Hayes of BT and EE. Please go ahead.
Hey, good morning, guys.
Congrats on a nice quarter here.
Lot of my questions have been asked and answered, but just maybe a couple more on the pipeline.
I think you mentioned and about $850 million of loans closed or under exclusivity since quarter end can you, maybe just provide a little bit of color there on on Ltvs and <unk>.
The volume and how that compares to maybe what you closed and the previous quarter and then I think you talked a little bit about <unk>.
Seeing more construction loans.
And your pipeline as well so just wondering if all 50 were to close this quarter the expectations for fundings.
And in closing for those loans.
Okay.
Hey, Tim It's Matt I can give you a little bit of color around that.
And the pipelines.
Consistent.
And what we've been doing and the path there is some construction.
And our.
Spreads for pipeline.
And there's there's life science, so some of that some of the newer sectors that we're looking at and then again and some of the traditional multifamily as well.
And I don't have the exact breakout of committed versus expectations around initial funding in front of me right right.
Our current but.
I would expect something in line with the current quarter, just because we do have some construction component and that origination pipeline.
And I don't think the Mark just a market commentary.
And cover your questions around spread the market's been.
Now pretty consistent the last few quarters or last couple of quarters, I should say in terms of spread and.
And competitive dynamic.
So.
Depending on the property type and whether it's construction or not.
And our coupons are largely in line with what we did this passing them on.
Got it that's all.
Helpful. Thanks, Matt.
But I guess just from a high level.
Keeping on the same team of construction lending.
And what percentage of the portfolio consisted of construction loans today and and.
Or do you see that going I know that your level of unfunded commitments jumped up a bit this quarter I think it's at about 13%.
Of the total portfolio, where do you feel comfortable with that number going to and your liquidity position seems pretty solid today, especially considering the repayments expected repayments over the next couple of quarters, but the pipeline is pretty solid too. So just wondering if you feel pretty good about where your liquidity is today relative.
And to you.
And your pipeline and and unfunded commitments.
Yes, I'd say a couple of things.
A lot of the construction that we've done today.
And the industrial sector.
So.
Yeah.
And we will go into the ground pretty quickly and so you don't it's not going to be out there for that long and it's almost just like forward originations for the next couple of quarters or few quarters, So, it's a little bit easier to predict.
But that would be 1.
Given our expectation.
That round the repayments.
Building some future funding over the next couple of quarters is going to be helpful to us.
And then in terms of the size.
A day of R. R.
Our construction budget.
It's.
And.
Small and there's less and 5%.
And so we have a certainly a ways to go before we would ever had anything from a risk management perspective portfolio perspective portfolio management perspective that would give us any.
And a cause for concern.
And Theres, just a lot of activity and that particular part of the market today, especially as it relates to demand from e-commerce on it.
On the industrial sector. So.
And I think we'll continue to focus on and over the next couple of quarters.
And the returns are in line with where we see them today, but I understand.
Understand your point around managing that future funding vis vis the liquidity of the overall company.
Okay.
Okay, and then just on the industrial sector you highlighted how active KKR is there and the resources that brings.
To you guys.
And.
Yes, I think.
We've heard and I think you guys have talked about in the past, it's not always easy for you to find and.
Industrial loans, given the size of the loans, you're focusing on versus where.
That market generally tends to be so and obviously, it's a very competitive asset class. So I guess my questions here just around.
How how big you see that segment, becoming as a percentage of your portfolio overtime. If if the if it's easy I guess quote unquote to find those loans given the broader KKR footprint and then what impact that should have on Roe.
It is a competitive asset class.
Right.
And.
It's a good point you bring up it's historically been difficult to drive overall.
Volumes and.
Portfolio.
And allocation to industrial just given the granular size of them.
A couple of points to make would be 1 we are seeing some larger opportunities.
Amazon and some of the other big.
E Commerce players and the market do have bigger footprints.
Footprints.
And so that's creating some need for larger loan sizes.
1.
1 of the deals we did this quarter was on more granular boxes. However.
We did it on a portfolio wide basis and will be effectively a financing and entire.
Years' worth of pipeline for National developer. So that's another way we can we can.
Alright.
You know to think that.
If you think about our portfolio round numbers today of $5.5 billion could we get it up into the low double digits in terms of portfolio size and I think it's possible, but it obviously won't be for 1 will be our largest exposure by by any stretch but.
Come out and you could see it growing to that much from.
From an ROE perspective, we're doing these at slightly they are slightly more accretive than obviously and what we're doing on like a multifamily loan.
But.
On a portfolio level, maybe it's a it's a slight.
Slightly additive, but I wouldn't think.
Think about this is like real.
Driving the overall ROE for the business just think about it as like as if.
If it becomes a 10% part of the portfolio, it's earning slightly more than.
Maybe the other the other sectors that we're lending on.
Yes.
Yeah.
Got it got it okay great.
Thanks for taking my questions.
Thank you Tim.
This concludes our question and answer session I would like to turn the conference back over to Jack Taylor for any closing remarks.
Great. Thanks for joining everyone. Please reach out to me or the team if you have any questions.
Have a great day.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.
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